American Pacific (APFC) 10-Q 2007 Q2 Quarterly report

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 001-08137

AMERICAN PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	59-6490478
(State of Incorporation)	(I.R.S. Employer Identification No.)

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

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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. YESþ Noo

     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 filero      Accelerated filero      Non-accelerated filerþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     The number of shares of the registrant’s common stock outstanding as of April 30, 2007 was 7,355,671.

AMERICAN PACIFIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

DEFINITIONS	ii
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	19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	30
ITEM 4. Controls and Procedures	30
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	32
ITEM 1A. Risk Factors	32
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
ITEM 3. Defaults Upon Senior Securities	43
ITEM 4. Submission of Matters to a Vote of Security Holders	43
ITEM 5. Other Information	43
ITEM 6. Exhibits	43
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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DEFINITIONS, abbreviations or acronyms as used in this Form 10-Q

Abbreviation	Definition
AFC	Ampac Fine Chemicals LLC
AFC Business	fine chemicals business of GenCorp, Inc. acquired through acquisition in November, 2005
AICPA	American Institute of Certified Public Accountants
ATK	Alliant Techsystems, Inc.
Ampac Henderson Site	Perchlorate chemicals manufacturing facility in Henderson, Nevada from 1958 until the facility was destroyed in May 1988.
AP	ammonium perchlorate
APIs	active pharmaceutical ingredients
CERCLA	Comprehensive Environmental Response Compensation and Liability Act
cGMP	current good manufacturing practices
Company	American Pacific Corporation
DOD	Department of Defense
DWEL	Drinking Water Equivalent Level
EMEA	European Agency for the Evaluation of Medical Products
EPA	U.S. Environmental Protection Agency
ESI	Energetic Systems Inc., LLC
FASB	Financial Accounting Standards Board
FDA	U.S. Food and Drug Administration
FIN	Financial Interpretation Number
GenCorp	GenCorp, Inc.
ISB	in situ bioremediation
ISP	Ampac In-Space Propulsion or our Aerospace Equipment segment
KMCC	Kerr-McGee Chemical Corp.
MCL	Maximum Contaminate Level
NAS	National Academy of Sciences
NASA	National Aeronautics and Space Administration
NDEP	Nevada Division of Environmental Protection
our	American Pacific Corporation
PIK Interest	payment-in-kind interest
ppb	parts per billion
registrant	American Pacific Corporation
SAB	Securities and Exchange Commission Staff Accounting Bulletin
SEC	Securities and Exchange Commission
Securities Act	Securities and Exchange Commission Securities Act of 1933, as amended
SERP	supplemental executive retirement plan
SFAS	Statement of Financial Accounting Standards
SMB	simulated moving bed
SNWA	Southern Nevada Water Authority
us	American Pacific Corporation
we	American Pacific Corporation

-ii-

PART I. FINANCIAL STATEMENTS

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2007		2006			2007		2006
Revenues	$	43,589	$	39,777		$	78,477	$	56,262
Cost of Revenues		27,378		27,218			49,358		39,357
Gross Profit		16,211		12,559			29,119		16,905
Operating Expenses		10,091		10,816			18,604		16,281
Environmental Remediation Charge		—		2,800			—		2,800
Operating Income (Loss)		6,120		(1,057	)		10,515		(2,176	)
Interest and Other Income		90		48			184		923
Interest Expense		3,157		3,056			6,460		4,125
Debt Repayment Charges		2,714		—			2,714		—
Income Loss from Continuing Operations before Income Tax		339		(4,065	)		1,525		(5,378	)
Income Tax Expense (Benefit)		221		(1,459	)		768		(1,982	)
Income (Loss) from Continuing Operations		118		(2,606	)		757		(3,396	)
Income (Loss) from Discontinued Operations, Net of Tax		—		268			—		(247	)
Net Income (Loss)	$	118	$	(2,338	)	$	757	$	(3,643	)
Basic Earnings (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.02	$	(0.36	)	$	0.10	$	(0.47	)
Discontinued Operations, Net of Tax		—		0.04			—		(0.03	)
Net Income (Loss)	$	0.02	$	(0.32	)	$	0.10	$	(0.50	)
Diluted Earnings (Loss) Per Share:
Income (Loss) from Continuing Operations	$	0.02	$	(0.36	)	$	0.10	$	(0.47	)
Discontinued Operations, Net of Tax		—		0.04			—		(0.03	)
Net Income (Loss)	$	0.02	$	(0.32	)	$	0.10	$	(0.50	)
Weighted Average Shares Outstanding:
Basic		7,335,000		7,297,000			7,330,000		7,297,000
Diluted		7,429,000		7,297,000			7,398,000		7,297,000

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited, Dollars in Thousands)

	March 31,			September 30,
	2007			2006
ASSETS
Current Assets:
Cash and Cash Equivalents	$	9,613		$	6,872
Accounts Receivable		15,603			19,474
Notes Receivable		—			7,510
Inventories		55,732			39,755
Prepaid Expenses and Other Current Assets		1,989			1,845
Deferred Income Taxes		1,887			1,887
Total Current Assets		84,824			77,343
Property, Plant and Equipment, Net		117,652			119,746
Intangible Assets, Net		8,682			14,237
Deferred Income Taxes		21,701			21,701
Other Assets		8,355			6,428
TOTAL ASSETS	$	241,214		$	239,455
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	9,756		$	11,158
Accrued Liabilities		6,619			11,257
Employee Related Liabilities		4,509			4,600
Environmental Remediation Reserves		589			1,631
Deferred Revenues		10,901			5,683
Current Portion of Debt		229			9,593
Total Current Liabilities		32,603			43,922
Long-Term Debt		110,485			97,771
Environmental Remediation Reserves		15,468			15,880
Pension Obligations and Other Long-Term Liabilities		9,686			9,998
Total Liabilities		168,242			167,571
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock — No par value; 3,000,000 authorized; none outstanding		—			—
Common Stock — $.10 par value; 20,000,000 shares authorized, 9,387,541 and 9,359,041 issued		936			933
Capital in Excess of Par Value		87,025			86,724
Retained Earnings		3,069			2,312
Treasury Stock - 2,034,870 shares		(16,982	)		(16,982	)
Accumulated Other Comprehensive Loss		(1,076	)		(1,103	)
Total Shareholders’ Equity		72,972			71,884
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	241,214		$	239,455

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Statements of Cash Flow

(Unaudited, Dollars in Thousands)

	Six Months Ended
	March 31,
	2007			2006
Cash Flows from Operating Activities:
Net Income (Loss)	$	757		$	(3,643	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities:
Depreciation and amortization		9,643			8,232
Non-cash interest expense		1,819			1,294
Share-based compensation		67			233
Non-cash component of debt repayment charge		2,309			—
Gain on sale of assets		—			(630	)
Changes in operating assets and liabilities:
Accounts receivable		3,893			(3,192	)
Inventories		(15,977	)		(5,853	)
Prepaid expenses and other current assets		(144	)		(2,418	)
Accounts payable, accrued liabilities, and employee related liabilities		766			2,727
Deferred revenues		5,218			(344	)
Environmental remediation reserves		(1,454	)		(1,197	)
Pension obligations, net		19			(367	)
Discontinued operations, net		—			675
Other		(269	)		657
Net Cash Provided (Used) by Operating Activities		6,647			(3,826	)
Cash Flows from Investing Activities:
Acquisition of business and earnout payment		(6,000	)		(108,451	)
Capital expenditures		(2,565	)		(7,904	)
Proceeds from sale of assets		—			2,395
Discontinued operations, net		7,510			(347	)
Net Cash Used by Investing Activities		(1,055	)		(114,307	)
Cash Flows from Financing Activities:
Proceeds from the issuance of long-term debt		110,000			85,000
Payments of long-term debt		(108,472	)		(325	)
Short-term borrowings, net		—			5,995
Debt issuance costs		(4,574	)		(1,716	)
Issuances of common stock		195			31
Discontinued operations, net		—			(68	)
Net Cash Provided (Used) by Financing Activities		(2,851	)		88,917
Net Change in Cash and cash Equivalents		2,741			(29,216	)
Cash and Cash Equivalents, Beginning of Period		6,872			37,213
Cash and Cash Equivalents, End of Period	$	9,613		$	7,997
Cash Paid For:
Interest	$	3,260		$	2,713
Income taxes		81			(353	)
Non-Cash Transactions:
Capital leases originated	$	321		$	—

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 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, 2006. The operating results for the three-month and six-month periods ended March 31, 2007 and cash flows for the six-month period ended March 31, 2007 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, 2006.

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, 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 or AFC on November 30, 2005 (See Note 2). All intercompany accounts have been eliminated.

Discontinued Operations:In June 2006, our board of directors approved and we committed to a plan to sell our 50% interest in the ESI joint venture based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. We consolidated ESI in accordance with 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. Revenues, expenses and cash flows associated with ESI’s operations are presented as discontinued operations for all periods presented. Effective September 30, 2006, we completed the sale of our interest in ESI. ESI was formerly reported within our Specialty Chemicals segment. See Note 12.

Recently Issued or Adopted Accounting Standards:In July 2006, the FASB issued 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. We are currently evaluating the impact of this standard on our consolidated financial statements.

In September 2006, the SEC issued SAB 108, which documents the SEC staff’s views regarding the process of quantifying financial statement misstatements. Under SAB 108, we must evaluate the materiality of an identified unadjusted error by considering the impact of both the current year error and the cumulative error, if applicable. This also means that both the impact on the current period income statement and the period-end balance sheet must be considered. SAB 108 is effective for fiscal years ending after November 15, 2006. Any past adjustments required to be recorded as a result of adopting SAB 108 will be recorded as a cumulative effect adjustment to the opening balance

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of retained earnings. We do not believe the adoption of SAB 108 will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 will be first effective for our financial statements issued for the year ended September 30, 2008, and interim periods within that year. We are currently evaluating the impact that the adoption of SFAS No. 157 will have on our consolidated financial statements.

In September 2006, FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, which requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement becomes effective for us on September 30, 2007. We are currently evaluating the impact the adoption of SFAS 158 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS No. 159 permits all companies to choose to measure eligible items at fair value at specified election dates. At each subsequent reporting date, a company shall report in earnings any unrealized gains and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of our first fiscal year that begins on October 1, 2008. We are currently evaluating whether to adopt the fair value option under SFAS No. 159 and evaluating what impact adoption would have on our consolidated financial statements.

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 the FDA’s current good manufacturing practices or “cGMP” guidelines for customers in the pharmaceutical industry. Its facilities in California offer specialized engineering capabilities including high containment for high potency compounds, energetic and nucleoside chemistries, and chiral separation using the first commercial-scale simulated moving bed in the United States.

The 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	)
Earnout adjustment		5,000
Other direct acquisition costs		4,348
Total purchase price	$	133,411

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. This note was paid in full in February 2007, See Note 7.

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.

Earnout and EBITDAP Adjustments– The acquisition agreements included 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. In addition to the amounts paid at closing, the purchase price was 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. If the full Earnout Adjustment became payable to GenCorp, the EBITDAP Adjustment also became refundable to GenCorp. During the year ended September 30, 2006, the AFC financial performance target was exceeded. Accordingly, we recorded a $6,000 payable to GenCorp as of September 30, 2006 (classified as accrued liabilities) comprised of the $5,000 Earnout Payment and the $1,000 refund of the EBITDAP Adjustment. We paid GenCorp $6,000 in February 2007.

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Direct Acquisition Costs– Total direct acquisition costs, consisting primarily of legal and due diligence fees, were $4,348.

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 $81,881, the Seller Subordinated Note of $25,500 and existing cash.

This acquisition was accounted for using the purchase method of accounting, under which the total purchase price was allocated to the fair values of the assets acquired and liabilities assumed. We engaged outside consultants to assist in the valuation of property, plant and equipment and intangible assets. As of September 30, 2006, the allocation of the purchase price and the related determination of the useful lives of property, plant and equipment were preliminary and subject to change based on the then pending final valuation report. As a result of the final valuation report, during the first quarter of fiscal 2007, we recorded a reclassification of $2,986 of assigned purchase price from intangible assets to property, plant and equipment, and finalized our estimates of the related remaining useful lives.

The following table indicates the amounts assigned to each major asset and liability caption of AFC as of the acquisition date:

Accounts Receivable	$	7,746
Inventories		15,941
Other Current Assets		123
Property, Plant and Equipment		114,494
Customer relationships, average life of 5.5 years		7,957
Backlog, average life of 1.5 years		2,287
Other Assets		382
Total Assets Acquired		148,930
Accounts Payable and Accrued Liabilities		11,967
Deferred Revenues and Customer Deposits		2,549
Long-Term Liabilities		1,003
Total Liabilities Assumed		15,519
Purchase Price	$	133,411

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.

3. SHARE-BASED COMPENSATION

On October 1, 2005, we adopted SFAS No. 123R, “Share-Based Payment”, 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 recognize share-based compensation for all current award grants and for the unvested portion of previous award grants based on grant date fair values. Prior to fiscal 2006, we accounted for share-based awards under the Accounting Principles Board Opinion No. 25 intrinsic value method, under which no compensation expense was recognized because all historical options granted were at an exercise price equal to the market value of our stock on the grant date. Prior period financial statements have not been adjusted to reflect fair value share-based compensation expense under SFAS No. 123R.

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

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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 March 31, 2007, there were 20,000 shares available for grant under the 2001 Plan. This plan was approved by our shareholders.

The American Pacific Corporation 2002 Directors Stock Option Plan (the “2002 Directors Plan”) compensates outside directors with annual grants of stock options or upon other discretionary events. Options are granted to each eligible director at a price equal to the fair market value of our common stock on the date of the grant. Options granted under the 2002 Directors Plan generally vest 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire in ten years. As of March 31, 2007, there were 25,000 shares available for grant under the 2002 Directors Plan. This plan was approved by our shareholders.

A summary of our outstanding and vested stock option activity for the six months ended March 31, 2007 is as follows:

	Total Outstanding					Non Vested
				Weighted					Weighted
				Average					Average
				Exercise					Fair
				Price					Value
	Shares			Per Share		Shares			Per Share
Balance, September 30, 2006		515,500		$	6.95		18,750		$	1.95
Granted		19,000			7.64		19,000			3.63
Vested		—			—		(28,250	)		2.51
Exercised		(28,500	)		6.83		—			—
Expired / Cancelled		—			—		—			—
Balance, March 31, 2007		506,000			6.98		9,500			3.63

A summary of our exercisable stock options as of March 31, 2007 is as follows:

Number of vested stock options		496,500
Weighted-average exercise price per share	$	6.97
Aggregate intrinsic value	$	2,172
Weighted-average remaining contractual term in years		7.2

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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.

	Six Months Ended
	March 31,
	2007			2006
Weighted-average grant date fair value per share of options granted	$	3.68		$	2.00
Significant fair value assumptions:
Expected term in years		5.25			4.75
Expected volatility		47.0	%		50.0	%
Expected dividends		0.0	%		0.0	%
Risk-free interest rates		4.7	%		4.4	%
Total intrinsic value of options exercised	$	108		$	18
Aggregate cash received for option exercises	$	195		$	31
Total compensation cost (included in operating expenses)	$	67		$	233
Tax benefit recognized		28			86
Net compensation cost	$	39		$	147
As of period end date:
Total compensation cost for non-vested awards not yet recognized	$	10		$	191
Weighted-average years to be recognized		0.5			0.5

4. SELECTED BALANCE SHEET DATA

     Inventories:Inventories consist of the following:

	March 31,			September 30,
	2007			2006
Finished goods	$	9,562		$	7,170
Work-in-process		31,125			20,196
Raw materials and supplies		15,424			12,664
Allowance for obsolete inventory		(379	)		(275	)
Total	$	55,732		$	39,755

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

	March 31,			September 30,
	2007			2006
Perchlorate customer list	$	38,697		$	38,697
Less accumulated amortization		(35,230	)		(33,280	)
		3,467			5,417
Customer relationships and backlog		10,244			13,230
Less accumulated amortization		(5,375	)		(4,756	)
		4,869			8,474
Pension-related intangible		346			346
Total	$	8,682		$	14,237

The perchlorate customer list is an asset of our Specialty Chemicals segment and is subject to amortization. Amortization expense was $975 for each of the three-month periods ended March 31, 2007 and 2006, and $1,950 for each of the six-month periods ended March 31, 2007 and 2006.

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 fair values of $7,957 for customer relationships and $2,287 for existing customer backlog. These assets have definite lives and are assigned to our Fine Chemicals segment. Amortization expense for the three

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months ended March 31, 2007 and 2006 was $309 and $1,426, respectively. Amortization expense for the six months ended March 31, 2007 and 2006 was $619 and $1,902, respectively.

5. COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) consists of the following:

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2007		2006			2007		2006
Net Income (Loss)	$	118	$	(2,338	)	$	757	$	(3,643	)
Other Comprehensive Income (Loss) -
Foreign currency translation adjustment		5		5			27		(41	)
Comprehensive Income (Loss)	$	123	$	(2,333	)	$	784	$	(3,684	)

6. EARNINGS (LOSS) PER SHARE

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

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2007		2006			2007		2006
Income (Loss) from Continuing Operations	$	118	$	(2,606	)	$	757	$	(3,396	)
Basic:
Weighted average shares		7,335,000		7,297,000			7,330,000		7,297,000
Diluted:
Weighted average shares, basic		7,335,000		7,297,000			7,330,000		7,297,000
Dilutive effect of stock options		94,000		—			68,000		—
Weighted average shares, diluted		7,429,000		7,297,000			7,398,000		7,297,000
Basic (income) loss per share from continuing operations	$	0.02	$	(0.36	)	$	0.10	$	(0.47	)
Diluted (income) loss per share from continuing operations	$	0.02	$	(0.36	)	$	0.10	$	(0.47	)

As of March 31, 2007, we had no antidilutive options outstanding. As of March 31, 2006, we had 555,500 antidilutive options outstanding. Stock options are antidilutive because we reported a loss from continuing operations or 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 or our stock price increases.

7. DEBT

     Our outstanding debt balances consist of the following:

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	March 31,			September 30,
	2007			2006
Senior Notes, 9%, due 2015	$	110,000		$	—
Credit Facilities:
First Lien Term Loan, 9.4%, due through 2010		—			64,350
First Lien Revolving Credit		—			—
Second Lien Term Loan plus accrued PIK Interest of $170, 14.4%, due 2011		—			20,170
Subordinated Seller Note plus accrued PIK Interest of $2,226, 10.4%,
Net of Discount of $5,424, due 2012		—			22,304
Capital Leases		714			540
Total Debt		110,714			107,364
Less Current Portion		(229	)		(9,593	)
Total Long-term Debt	$	110,485		$	97,771

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 Bank, National Association 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 Bank, National Association, and certain other lenders. The Credit Facilities are collateralized by substantially all of our assets and the assets of our domestic subsidiaries. Concurrent with the issuance of our Senior Notes in February 2007, we repaid our first lien term loan, amended our First Lien Credit Facility and repaid and terminated our Second Lien Credit Facility.

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 accrued payment-in-kind interest (“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. The note was subordinated to the senior debt under or related to the Credit Facilities and certain other indebtedness, subject to certain terms and conditions.

In connection with our February 2007 refinancing activities, we negotiated an early retirement of the Seller Subordinated Note at a discount of approximately $5,000 from the face amount of the note. On February 6, 2007, we paid GenCorp $23,735 representing full settlement of the Seller Subordinated Note and accrued interest.

Senior Notes:On February 6, 2007, we issued and sold $110,000 aggregate principal amount of 9.0% Senior Notes due February 1, 2015 (the “Senior Notes”). The Senior Notes accrue interest at a rate per annum equal to 9.0%, to be payable semi-annually in arrears on each February 1 and August 1, beginning on August 1, 2007. The Senior Notes are guaranteed on a senior unsecured basis by all of our existing and future material U.S. subsidiaries. The Senior Notes are:

• ranked equally in right of payment with all of our existing and future senior indebtedness;

• ranked senior in right of payment to all of our existing and future senior subordinated and subordinated indebtedness;

• effectively junior to our existing and future secured debt to the extent of the value of the assets securing such debt; and

• structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Senior Notes.

The Senior Notes may be redeemed, in whole or in part, under the following circumstances:

• at any time prior to February 1, 2011 at a price equal to 100% of the purchase amount of the Senior Notes plus a “make-whole” premium as defined in the related indenture;

• at any time on or after February 1, 2011 at redemption prices beginning at 104.5% and reducing to 100% by February 1, 2013; and

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• until February 1, 2010, up to 35% of the principal amount of the Senior Notes with the proceeds of certain sales of its equity securities.

In addition, if we experience certain changes of control, we must offer to purchase the Notes at 101% of their aggregate principal amount, plus accrued interest.

The Senior Notes were issued pursuant to an Indenture (the “Indenture”) that contains certain covenants limiting, subject to exceptions, carve-outs and qualifications, our ability to:

• incur additional debt;

• pay dividends or make other restricted payments;

• create liens on assets to secure debt;

• incur dividend or other payment restrictions with regard to restricted subsidiaries;

• transfer or sell assets;

• enter into transactions with affiliates;

• enter into sale and leaseback transactions;

• create an unrestricted subsidiary;

• enter into certain business activities; or

• effect a consolidation, merger or sale of all or substantially all of our assets.

The Indenture also contains certain customary events of default.

In connection with the closing of the sale of the Senior Notes, we entered into a registration rights agreement and agreed to use our reasonable best efforts to:

• file a registration statement with respect to an offer to exchange the Senior Notes for notes that have substantially identical terms as the Senior Notes and are registered under the Securities Act;

• cause the registration statement to become effective within 210 days after the closing; and

• consummate the exchange offer within 240 days after the closing.

If we cannot effect an exchange offer within the time periods listed above, we have agreed to file a shelf registration statement for the resale of the Senior Notes. If we do not comply with certain of our obligations under the registration rights agreement (a “Registration Default”), the annual interest rate on the Senior Notes will increase by 0.25%. The annual interest rate on the Senior Notes will increase by an additional 0.25% for any subsequent 90-day period during which the Registration Default continues, up to a maximum additional interest rate of 1.00% per year. If we correct the Registration Default, the interest rate on the Senior Notes will revert immediately to the original rate.

Revolving Credit Facility: On February 6, 2007, we entered into an Amended and Restated Credit Agreement which provides a secured Revolving Credit Facility in an aggregate principal amount of up to $20,000 with an initial maturity in 5 years. We may prepay and terminate the Revolving Credit Facility at any time. The annual interest rates applicable to loans under the Revolving Credit Facility will be at our option, the Alternate Base Rate or LIBOR Rate (each as defined in the Revolving Credit Facility) plus, in each case, an applicable margin. The applicable margin will be tied to our total leverage ratio (as defined in the Revolving Credit Facility). In addition, we will pay commitment fees, other fees related to the issuance and maintenance of the letters of credit, and certain agency fees.

The Revolving Credit Facility is guaranteed by and secured by substantially all of the assets of our current and future domestic subsidiaries, subject to certain exceptions as set forth in the Revolving Credit Facility. The Revolving Credit Facility contains certain negative covenants restricting and limiting our ability to, among other things:

• incur debt, incur contingent obligations and issue certain types of preferred stock;

• create liens;

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• 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 Revolving Credit Facility include quarterly requirements for total leverage ratio of less than or equal to 5.25 to 1.00, and interest coverage ratio of at least 2.50 to 1.00. The Revolving Credit Facility also contains 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 Revolving Credit Facility prior to its stated maturity and the related commitments may be terminated.

As of March 31, 2007, under our Revolving Credit Facility, we had no borrowings outstanding, availability of $17,668, and we were in compliance with its various financial covenants. Availability is computed as the total commitment of $20,000 less outstanding borrowings and outstanding letters of credit, if any.

Letters of Credit:As of March 31, 2007, we had $2,332 in outstanding standby letters of credit which mature through May 2012. These letters of credit principally secure performance of certain water treatment 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, we paid fixed rate interest and received variable rate interest based on a specific spread over three-month LIBOR. The differential to be paid or received was recorded as an adjustment to interest expense. The swap agreements do not qualify for hedge accounting treatment. We recorded 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 values of the swap agreements at September 30, 2006, which was recorded as other long-term liabilities, was $314. In connection with the refinancing of our Credit Facilities, we terminated our swap agreements at a cost of $268, which resulted in a gain of $46 that is recorded as a reduction of interest expense.

Debt Issue Costs and Debt Repayment Charges:In connection with the repayment of our Credit Facilities, we recorded a charge for approximately $2,300 to write-off the unamortized balance of debt issue costs associated with those facilities. In addition, we paid a pre-payment penalty of approximately $400 to terminate the Second Lien Credit Facility. These charges are presented as Debt Repayment Charges in our statement of operations. In connection with the issuance of the Senior Notes, we incurred debt issuance costs of approximately $4,600 which were capitalized and classified as other assets on the balance sheet. These costs will be amortized as additional interest expense over the eight year term on the Senior Notes.

8. COMMITMENTS AND CONTINGENCIES

Environmental Matters:

Review of Perchlorate Toxicity by the EPA –

Perchlorate (the “anion”) is not currently included in the list of hazardous substances compiled by the EPA, but it is on the EPA’s Contaminant Candidate List. The EPA has conducted a risk assessment relating to perchlorate, two drafts of which were subject to formal peer reviews held in 1999 and 2002. Following the 2002 peer review, the EPA perchlorate risk assessment together with other perchlorate related science was reviewed by the National Academy of Sciences or 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

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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 DWEL of 24.5 ppb. A decision as to whether or not to establish a 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 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. KMCC also operated a perchlorate production facility in Henderson, Nevada from 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 in 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 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. The 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 NDEP, we engaged in an 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 employed 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 the EPA, we conducted an 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 or ISB. ISB 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 remediation facility near the Ampac Henderson Site. The conditional approval of the work plan by NDEP in our third quarter of fiscal 2005 allowed us to generate estimated costs for the installation and operation of the remediation facility to address perchlorate at the Ampac Henderson Site. We commenced construction in July 2005. In December 2006, we began operations, reducing perchlorate concentrations in system extracted groundwater in Henderson.

Henderson Site Environmental Remediation Reserve –

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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. During our fiscal 2006, we increased our total cost estimate of probable costs for the construction phase by $3,600 due primarily to changes in the engineering designs, delays in receiving permits and the resulting extension of construction time. We commenced the construction phase in late fiscal 2005, completed an interim system in June 2006, and completed the permanent facility in December 2006. In addition, to the operating and maintenance costs, certain remediation activities are conducted on public lands under operating permits. In general, these permits require us to return the land to its original condition at the end of the permit period. Estimated costs associated with removal of remediation equipment from the land are not material and are included in our range of estimated costs. 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.

We accrue for anticipated costs associated with environmental remediation that are probable and estimable. On a quarterly basis, we review our estimates of future costs that could be incurred for remediation activities. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used; otherwise, we accrue the minimum amount of the range. As of March 31, 2007, the aggregate range of anticipated environmental remediation costs was from approximately $13,000 to approximately $19,500, and the accrued amount was $16,057.

A summary of our environmental reserve activity for the six months ended March 31, 2007 is shown below:

Balance, September 30, 2006	$	17,511
Additions or adjustments		—
Expenditures		(1,454	)
Balance, March 31, 2007	$	16,057

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 AFC 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.

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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. On December 6, 2006, we reached a settlement with Dr. Van Voorhees under which we paid Dr. Van Voorhees $600 and both parties entered into a standard mutual release.

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.

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.

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.

Aerospace Equipment:The Aerospace Equipment, or 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.

Our revenues are characterized by individually significant orders and relatively few customers. As a result, in any given reporting period, certain customers account for more than ten percent of our consolidated revenues. The following table provides disclosure of the percentage of our consolidated revenues attributed to customers that exceed ten percent of the total in each of the given periods.

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Specialty chemicals customer		18	%		26	%		14	%		20	%
Specialty chemicals customer		11	%					13	%
Fine chemicals customer		26	%					15	%
Fine chemicals customer		12	%					16	%
Fine chemicals customer					27	%					20	%

The following provides financial information about our segment operations:

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	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Revenues:
Specialty Chemicals	$	16,132		$	16,479		$	27,922		$	21,184
Fine Chemicals		22,366			18,931			39,957			24,103
Aerospace Equipment		4,465			3,489			8,441			8,134
Other Businesses		626			878			2,157			2,841
Total Revenues	$	43,589		$	39,777		$	78,477		$	56,262
Segment Operating Income:
Specialty Chemicals	$	6,418		$	6,532		$	9,911		$	6,952
Fine Chemicals		2,926			(275	)		5,845			676
Aerospace Equipment		111			58			297			319
Other Businesses		154			154			747			671
Total Segment Operating Income		9,609			6,469			16,800			8,618
Corporate Expenses		(3,489	)		(4,726	)		(6,285	)		(7,994	)
Environmental Remediation Charges		—			(2,800	)		—			(2,800	)
Operating Income (Loss)	$	6,120		$	(1,057	)	$	10,515		$	(2,176	)
Depreciation and Amortization:
Specialty Chemicals	$	1,286		$	1,283		$	2,568		$	2,562
Fine Chemicals		3,048			4,048			6,745			5,348
Aerospace Equipment		34			18			66			35
Other Businesses		3			3			6			6
Corporate		128			140			258			281
Total Depreciation and Amortization	$	4,499		$	5,492		$	9,643		$	8,232

10. INTEREST AND OTHER INCOME

     Interest and other income consist of the following:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2007		2006		2007		2006
Interest income	$	90	$	48	$	184	$	294
Gain on sale of Hughes Parkway		—		—		—		580
Other		—		—		—		49
	$	90	$	48	$	184	$	923

We owned a 70% interest as general and limited partner in a real estate development limited partnership (the “Partnership”). The remaining 30% limited partners included certain current and former members of our board of directors. The Partnership, in turn, owned a 33% limited partnership interest in 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.

11. DEFINED BENEFIT PLANS

We maintain three defined benefit pension plans which cover substantially all of our U.S. employees, excluding employees of our Aerospace Equipment Segment: the American Pacific Corporation Defined Benefit Pension Plan, the Ampac Fine Chemicals LLC Pension Plan for Salaried Employees,

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and the Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees. Collectively, these three plans are referred to as the “Pension Plans”. The AFC related plans were established in connection with our acquisition of the AFC business and include the assumed liabilities for pension benefits to existing employees at the acquisition date. In addition, we have a supplemental executive retirement plan or SERP that includes our former and current Chief Executive Officer.

Net periodic pension cost related to the Pension Plans consists of the following:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Pension Plans:
Service Cost	$	487		$	309		$	974		$	535
Interest Cost		529			477			1,058			827
Expected Return on Plan Assets		(468	)		(393	)		(936	)		(682	)
Recognized Actuarial Losses		15			16			30			29
Amortization of Prior Service Costs		153			134			305			232
Net Periodic Pension Cost	$	716		$	543		$	1,431		$	941
Supplemental Executive Retirement Plan:
Service Cost	$	—		$	—		$	—		$	—
Interest Cost		35			38			70			74
Expected Return on Plan Assets		—			—			—			—
Recognized Actuarial Losses		11			11			22			21
Amortization of Prior Service Costs		6			7			12			16
Net Periodic Pension Cost	$	52		$	56		$	104		$	111

For the six months ended March 31, 2007, we contributed $1,107 to the Pension Plans to fund benefit payments and anticipate making approximately $1,598 in additional contributions through September 30, 2007. For the six months ended March 31, 2007, we contributed $63 to the SERP to fund benefit payments and anticipate making approximately $64 in additional contributions through September 30, 2007.

12. DISCONTINUED OPERATIONS

In June 2006, our board of directors approved and we committed to a plan to sell our interest in 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 segment.

Effective September 30, 2006, we completed the sale of our interest in ESI for $7,510, which, after deducting direct expenses, resulted in a gain on the sale before income taxes of $258. The ESI sale proceeds are reflected as a note receivable as of September 30, 2006 and we collected the amount in full in October 2006.

Summarized financial information for ESI is as follows:

	Three Months		Six Months
	Ended March 31, 2006
Revenues	$	4,147	$	6,779
Discontinued Operations:
Operating income (loss) before tax		439		(405	)
Provision (benefit) for income taxes		171		(158	)
Net income (loss) from discontinued operations	$	268	$	(247	)

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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 beliefs about the sufficiency of our reserves for estimated environmental liabilities, our expectation that our working capital may vary in the future, our potential incurrence of additional debt in the future, our belief that our cash flows will be adequate for the foreseeable future to satisfy the needs of our operations, our expectation regarding cash expenditures for environmental remediation at our former Henderson, Nevada site over the next several years, our belief that our amended contract with ATK provides our Specialty Chemicals segment significant stability, our belief that over the next several years overall demand for AP will be relatively level as compared to fiscal 2006, the expectation that the aerospace equipment market will grow over the next several years 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 this 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 this Quarterly Report on Form 10-Q in Item 1A below 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, 2006.

OUR COMPANY

We are a leading manufacturer of specialty and fine chemicals within our focused markets. Our specialty chemicals and aerospace equipment products are utilized in national defense programs and provide access to, and movement in, space, via solid propellant rockets and propulsion thrusters. Our fine chemicals products represent the key active ingredient in certain anti-viral, oncology and central nervous system drug applications. Our technical and manufacturing expertise and customer service focus has gained us a reputation for quality, reliability, technical performance and innovation. Given the mission critical nature of our products, we maintain long-standing strategic customer relationships. We work collaboratively with our customers to develop customized solutions that meet rigorous federal regulatory standards. We generally sell our products through long-term contracts under which we are the sole-source or dual-source supplier.

We are the exclusive North American provider of Grade I AP, which is the predominant oxidizing agent for solid propellant rockets, booster motors and missiles used in space exploration, commercial satellite transportation and national defense programs. In order to diversify our business and leverage our strong technical and manufacturing capabilities, we have made two strategic acquisitions over the last two fiscal years. Each of these acquisitions provided long-term customer relationships with sole-source and dual-source contracts and a leadership position in a growing market. On October 1, 2004, we acquired Aerojet-General Corporation’s in-space propulsion business, which is now our Aerospace Equipment segment. Our Aerospace Equipment segment is one of only two North American manufacturers of in-

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space liquid propulsion systems and propellant tanks. On November 30, 2005, we acquired the AFC Business, which is now our Fine Chemicals segment. Our Fine Chemicals segment is a leading manufacturer of certain APIs and registered intermediates for pharmaceutical and biotechnology companies.

OUR BUSINESS SEGMENTS

Our operations comprise four reportable business segments: (i) Specialty Chemicals, (ii) Fine Chemicals, (iii) Aerospace Equipment and (iv) Other Businesses. The following table reflects the revenue contribution percentage from our business segments and each of their major product lines:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Specialty Chemicals:
Perchlorates		34	%		36	%		32	%		32	%
Sodium Azide		1	%		2	%		1	%		2	%
Halotron		2	%		3	%		2	%		4	%
Total Specialty Chemicals		37	%		41	%		35	%		38	%
Fine Chemicals		51	%		48	%		51	%		43	%
Aerospace Equipment		10	%		9	%		11	%		14	%
Other Businesses:
Real Estate		1	%		1	%		1	%		1	%
Water Treatment Equipment		1	%		1	%		2	%		4	%
Total Other Businesses		2	%		2	%		3	%		5	%
Total Revenues		100	%		100	%		100	%		100	%

Specialty Chemicals:Our Specialty Chemicals segment is principally engaged in the production of AP, which is a type of perchlorate. In addition, we produce and sell sodium azide, a chemical used in pharmaceutical manufacturing and historically the primary component of gas generators 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 have supplied AP for use in space and defense programs for over 40 years and have been the exclusive AP supplier in North America since 1998. A significant number of existing and planned space launch vehicles use solid propellant and thus depend, in part, upon our AP. Many of the rockets and missiles used in national defense programs are also powered by solid propellant. Currently, our largest programs are the Minuteman missile, the Standard missile and the Atlas family of commercial rockets.

ATK is our largest AP customer. We sell Grade I AP to ATK under a long-term contract that requires us to maintain a ready and qualified capacity for Grade I AP and that ATK will purchase its Grade I AP requirements from us, subject to certain terms and conditions. The contract, which expires in 2013, provides fixed pricing in the form of a price volume matrix for annual Grade I AP volumes ranging from 3 million to 20 million pounds. Prices vary inversely to volume and include annual escalations.

We believe that over the next several years overall demand for AP will be relatively level as compared to our fiscal 2006 based on current U.S. DOD production programs.

Fine Chemicals.November 30, 2005, we acquired the AFC Business through our newly-formed, wholly-owned subsidiary AFC. Our Fine Chemicals segment is a manufacturer of APIs and registered intermediates. The pharmaceutical ingredients that we manufacture are used by our customers in drugs with indications in three primary areas: anti-viral, oncology, and central nervous system. We generate nearly all of our Fine Chemicals sales from manufacturing chemical compounds that are proprietary to our customers. We operate in compliance with the FDA’s cGMP.

We have distinctive competencies and specialized engineering capabilities in chiral separation, highly potent/cytotoxic compounds and energetic and nucleoside chemistries and have invested significant

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resources in our facilities and technology base. We believe we are the U.S. leader in chiral compound production using the first commercial-scale SMB technology in the U.S. and own and operate two large-scale SMB machines, one of which is among the largest in the world operating under cGMP. Currently we use SMB technology to produce compounds used in drugs treating central nervous system disorders. We have distinctive competency in handling energetic and toxic chemicals using our specialized high containment facilities in applications such as drugs used for oncology. We have significant experience and specially engineered facilities for energetic chemistry on a commercial-scale under cGMP. We use this capability in development and production of anti-viral drugs, including HIV-related and influenza-combating drugs.

We have established long-term, sole-source and dual-source contracts. In addition, the inherent nature of custom pharmaceutical fine chemical manufacturing encourages long-term customer relationships. We work collaboratively with our customers to develop reliable, cost-effective, custom solutions.

Aerospace Equipment:On October 1, 2004, we acquired Aerojet-General Corporation’s in-space propulsion business. Our Aerospace Equipment segment is one of two North American manufacturers of monopropellant or bipropellant propulsion systems and thrusters for satellites and launch vehicles, and is one of the world’s major producers of bipropellant thrusters for satellites. Our products are utilized on various satellite and launch vehicle programs such as Space Systems/Loral’s 1300 series geostationary satellites.

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.

Discontinued Operations: We also held a 50% ownership stake in ESI, an entity we consolidated 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 segment. Effective September 30, 2006, we completed the sale of our interest in ESI for $7,510, which, after deducting direct expenses, resulted in a gain on the sale before income taxes of $258.

RESULTS OF OPERATIONS

Revenues

	March 31,				Increase			Percentage
	2007		2006		(Decrease)			Change
Three Months Ended:
Specialty Chemicals	$	16,132	$	16,479	$	(347	)		(2	%)
Fine Chemicals		22,366		18,931		3,435			18	%
Aerospace Equipment		4,465		3,489		976			28	%
Other Businesses		626		878		(252	)		(29	%)
Total Revenues	$	43,589	$	39,777	$	3,812			10	%
Six Months Ended:
Specialty Chemicals	$	27,922	$	21,184	$	6,738			32	%
Fine Chemicals		39,957		24,103		15,854			66	%
Aerospace Equipment		8,441		8,134		307			4	%
Other Businesses		2,157		2,841		(684	)		(24	%)
Total Revenues	$	78,477	$	56,262	$	22,215			39	%

Specialty Chemicals revenues decreased modestly during our fiscal 2007 second quarter compared to the prior year quarter largely due to timing of orders. Revenues from Grade I AP experienced a net increase, comprised of an 11% increase in the average price per pound offset by an 8% decrease in volume compared to the prior year quarter. The increase in Grade I AP revenues was offset by Sodium Azide revenue declines of $459 and Halotron revenue declines of $199, each due to lower product volume.

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For the six months ended March 31, 2007, Specialty Chemicals revenues have increased 32% driven primarily by Grade I AP sales which reported a 14% increase in average price per pound and a 32% increase in volume.

There are numerous variations of Grade I AP that we produce for our customers at different prices. The increases in averages prices for Grade I AP are due to a change in the mix of Grade I AP products sold during the periods. The increases in volume are due to timing between the various periods. We continue to believe that overall volume for fiscal 2007 will be consistent with fiscal 2006.

Fine Chemicals revenues for the second quarter increased $3.4 million versus the prior year second quarter. The increase in revenue is substantially due to production from our new chiral separation facility that was placed in service in the later part of fiscal 2006.

The increase in Fine Chemicals revenues for the six months ended March 31, 2007 compared to the prior year period is a result of the inclusion of six months of operations from AFC in the fiscal 2007 period while the prior year period includes four months. AFC was acquired on November 30, 2005.

The increases in Aerospace Equipment revenues for both the fiscal 2007 second quarter and six month periods are due to higher volumes of production under long-term contracts resulting from strong backlog at the beginning of fiscal 2007. Because our Aerospace Equipment segment records revenue on a percentage-complete basis, revenues typically vary based on the timing of material or sub-assembly receipts for the various contracts.

Cost of Revenues and Gross Margin

	March 31,						Increase		Percentage
	2007			2006			(Decrease)		Change
Three Months Ended:
Revenues	$	43,589		$	39,777		$	3,812		10	%
Cost of Revenues		27,378			27,218			160		1	%
								��
Gross Margin		16,211			12,559			3,652		29	%
Gross Margin Percentage		37	%		32	%
Six Months Ended:
Revenues	$	78,477		$	56,262		$	22,215		39	%
Cost of Revenues		49,358			39,357			10,001		25	%
Gross Margin		29,119			16,905			12,214		72	%
Gross Margin Percentage		37	%		30	%

Cost of sales increased during the quarter and six months ended March 31, 2007 compared to the prior year periods due to the increase in sales. However, cost of revenues increased at a lower rate than revenues, and as a result, our consolidated gross margin percentages improved. The following factors contributed to the changes in gross margin percentages:

• Specialty Chemicals segment gross margin percentage improved three points for the quarter and four points for the six months ended March 31, 2007 compared to the prior year periods due to product mix. During the 2007 periods, our more profitable perchlorate products accounted for a greater percentage of volume than in the prior year periods.

• Fine Chemicals segment gross margin percentage improved ten points for the quarter and eleven points for the six months ended March 31, 2007 compared to the prior year periods due to better production efficiency that resulted from the segment’s continuous improvement initiatives.

• Aerospace Equipment segment gross margin improved four points for the quarter and five points for the six months ended March 31, 2007 compared to the prior year periods primarily due to the fiscal 2007 periods included a greater volume of standard production thruster work compared to the prior periods that included more development activities.

• Gross margin dollars from our Other Businesses segment was consistent for the periods presented.

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Operating Expenses

	March 31,						Increase			Percentage
	2007			2006			(Decrease)			Change
Three Months Ended:
Operating Expenses	$	10,091		$	10,816		$	(725	)		(7	%)
Percentage of Revenues		23	%		27	%
Six Months Ended:
Operating Expenses	$	18,604		$	16,281		$	2,323			14	%
Percentage of Revenues		24	%		29	%

For the quarter ended March 31, 2007, the decrease in operating expenses compared to the prior year period is attributed to a decreased in corporate expenses of $1,237. The most significant component of the decline in corporate expenses is a reduction in legal expenses of approximately $900. The prior year quarter included additional legal expenses associated with the renegotiation of our long-term contract with ATK.

For the six months ended March 31, 2007, the increase in operating expenses of $2,323 compared to the prior period includes:

• An increase in Fine Chemicals segment operating expenses of $2,603 because the 2007 period includes six months of operations compared to four months of operations in the prior year period.

• An increase in Aerospace equipment segment operating expenses of $507. The most significant factor contributing to the increase was higher bid and proposal costs on potential new contract awards.

• An increase in Specialty Chemical operating cost, with most significant components being an increase in insurance of $287 and contract administration costs of $456.

• A decrease in corporate expenses of $1,709 due to the above mentioned reduction in legal expenses.

Segment Operating Profit (Loss)

	March 31,						Increase			Percentage
	2007			2006			(Decrease)			Change
Three Months Ended:
Specialty Chemicals	$	6,418		$	6,532		$	(114	)		(2	%)
Fine Chemicals		2,926			(275	)		3,201			NM
Aerospace Equipment		111			58			53			91	%
Other Businesses		154			154			—			0	%
Segment Operating Profit		9,609			6,469			3,140			49	%
Corporate Expenses		(3,489	)		(4,726	)		(1,237	)		26	%
Environmental Remediation Charges		—			(2,800	)		(2,800	)		100	%
Operating Income (Loss)	$	6,120		$	(1,057	)	$	7,177			NM
Six Months Ended:
Specialty Chemicals	$	9,911		$	6,952		$	2,959			43	%
Fine Chemicals		5,845			676			5,169			765	%
Aerospace Equipment		297			319			(22	)		(7	%)
Other Businesses		747			671			76			11	%
Segment Operating Profit		16,800			8,618			8,182			95	%
Corporate Expenses		(6,285	)		(7,994	)		(1,709	)		21	%
Environmental Remediation Charges		—			(2,800	)		(2,800	)		100	%
Operating Income (Loss)	$	10,515		$	(2,176	)	$	12,691			NM

NM = Not Meaningful

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. Fluctuations in segment operating profit are driven by changes in segment revenues, gross margins and operating expenses, each of which is discussed in greater detail above.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

	Six Months Ended March 31,						Increase			Percentage
	2007			2006			(Decrease)			Change
Cash Provided (Used) By:
Operating activities	$	6,647		$	(3,826	)	$	10,473			274	%
Financing activities		(1,055	)		(114,307	)		113,252			99	%
Investing activities		(2,851	)		88,917			(91,768	)		(103	%)
Net change in cash for period	$	2,741		$	(29,216	)		31,957			109	%

Operating Activities:Cash flows from operating activities improved by $10,473. Significant components of the change in cash flow from operating activities include:

• An increase in cash due to improved profitability of our operations of $10,397.

• A decrease in cash used to fund working capital increases of $858, excluding the effect of interest and income taxes.

• An increase in cash used for interest payments of $547.

• An increase in cash used for income taxes of $434.

• A reduction in cash used for environmental remediation of $2,543.

• Other increases in cash used for operating activities of $628.

The decrease in cash used to fund working capital reflects increases in cash provided by changes in accounts receivable and deferred revenues balances, offset by an increase of $10,124 in cash used to fund increases in inventories, primarily for our Fine Chemicals segment. We consider these working capital changes to be routine and within the normal production cycle of our products. The production of certain fine chemical products requires a length of time that exceeds one quarter. Therefore, in any given quarter, work-in-progress inventory can increase significantly. We expect that our working capital may vary normally by as much as $10,000 from quarter to quarter.

Cash used for interest payments increased because our credit facilities were outstanding for six months in the fiscal 2007 period compared to four months in the fiscal 2006 period. Cash used for environmental remediation decreased because during fiscal 2006 we were in the construction phase of the project compared to the lower cash requirements of the operating and maintenance phase in fiscal 2007.

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

Six months ended March 31, 2007

• Cash received from the sale of ESI of $7,510.

• Cash used to fund the AFC acquisition earnout adjustment of $6,000.

• Cash used for capital expenditures of $2,565.

Six months ended March 31, 2006

• Cash used for our acquisition of AFC of $108,451.

• Cash used for capital expenditures of $7,904.

• Cash provided by proceeds from the sale of our interest in a real estate partnership of $2,395.

Financing Activities:Financing cash flows for the six months ended March 31, 2007 and 2006 are primarily related to the credit facilities we secured in connection with our acquisition of AFC in November 2005, and the subsequent repayment of these facilities and issuance of Senior Notes in February 2007. These financing instruments are discussed in further detail under the heading Long-Term Debt and Credit Facilities below.

Liquidity and Capital Resources

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As of March 31, 2007, we had cash of $9,613. Our primary source of working capital is cash flow from our operations and our revolving credit line which had availability of approximately $17,668 as of March 31, 2007. Availability is computed as the total commitment of $20,000 less outstanding borrowings and letters of credit, if any. 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. From time to time, we may explore options to refinance our material borrowings.

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, which may place demands on our short-term liquidity. As a result of litigation or other contingencies, we have incurred legal and other costs, and we may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. If such costs are material, to the extent not covered 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.

Long Term Debt and Revolving Credit Facilities

Credit Facilities:In connection with our acquisition of the AFC Business, on November 30, 2005, we entered into the First Lien Credit Facility with Wachovia Bank, National Association and other lenders. We also entered into the Second Lien Credit Facility, with Wachovia Bank, National Association and certain other lenders. These Credit Facilities were collateralized by substantially all of our assets and the assets of our domestic subsidiaries. Concurrent with the issuance of our Senior Notes in February 2007, we amended our First Lien Credit Facility and repaid and terminated our Second Lien Credit Facility.

Seller Subordinated Note:In connection with our acquisition of the AFC Business, we issued an unsecured subordinated seller note in the principal amount of $25,500 to Aerojet-General Corporation, a subsidiary of GenCorp. The note accrued 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. The note was subordinated to the senior debt under or related to the Credit Facilities and certain other indebtedness, subject to certain terms and conditions.

In connection with our February 2007 refinancing activities, we negotiated an early retirement of the Seller Subordinated Note at a discount of approximately $5,000 from the face amount of the note. On February 6, 2007, we paid GenCorp $23,735 representing full settlement of the Seller Subordinated Note and accrued interest.

Senior Notes: On February 6, 2007, we issued and sold $110,000 aggregate principal amount of 9.0% Senior Notes due February 1, 2015. The Senior Notes accrue interest at a rate per annum equal to 9.0%, to be payable semi-annually in arrears on each February 1 and August 1, beginning on August 1, 2007. The Senior Notes are guaranteed on a senior unsecured basis by all of our existing and future material U.S. subsidiaries. The Senior Notes are:

• ranked equally in right of payment with all of our existing and future senior indebtedness;

• ranked senior in right of payment to all of our existing and future senior subordinated and subordinated indebtedness;

• effectively junior to our existing and future secured debt to the extent of the value of the assets securing such debt; and

• structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Senior Notes.

The Senior Notes may be redeemed, in whole or in part, under the following circumstances:

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• at any time prior to February 1, 2011 at a price equal to 100% of the purchase amount of the Senior Notes plus a “make-whole” premium as defined in the related indenture;

• at any time on or after February 1, 2011 at redemption prices beginning at 104.5% and reducing to 100% by February 1, 2013; and

• until February 1, 2010, up to 35% of the principal amount of the Senior Notes with the proceeds of certain sales of its equity securities.

In addition, if we experience certain changes of control, we must offer to purchase the Senior Notes at 101% of their aggregate principal amount, plus accrued interest.

The Senior Notes were issued pursuant to an Indenture that contains certain covenants limiting, subject to exceptions, carve-outs and qualifications, our ability to:

• incur additional debt;

• pay dividends or make other restricted payments;

• create liens on assets to secure debt;

• incur dividend or other payment restrictions with regard to restricted subsidiaries;

• transfer or sell assets;

• enter into transactions with affiliates;

• enter into sale and leaseback transactions;

• create an unrestricted subsidiary;

• enter into certain business activities; or

• effect a consolidation, merger or sale of all or substantially all of our assets.

The Indenture also contains certain customary events of default.

In connection with the closing of the sale of the Senior Notes, we entered into a registration rights agreement and agreed to use our reasonable best efforts to:

• file a registration statement with respect to an offer to exchange the Senior Notes for notes that have substantially identical terms as the Senior Notes and are registered under the Securities Act;

• cause the registration statement to become effective within 210 days after the closing; and

• consummate the exchange offer within 240 days after the closing.

If we cannot effect an exchange offer within the time periods listed above, we have agreed to file a shelf registration statement for the resale of the Senior Notes. If we do not comply with certain of our obligations under the registration rights agreement, the annual interest rate on the Senior Notes will increase by 0.25%. The annual interest rate on the Senior Notes will increase by an additional 0.25% for any subsequent 90-day period during which the Registration Default continues, up to a maximum additional interest rate of 1.00% per year. If we correct the Registration Default, the interest rate on the Senior Notes will revert immediately to the original rate.

Revolving Credit Facility: On February 6, 2007, we entered into an Amended and Restated Credit Agreement which provides a secured revolving credit facility in an aggregate principal amount of up to $20,000 with an initial maturity in 5 years. We may prepay and terminate the Revolving Credit Facility at any time. The annual interest rates applicable to loans under the Revolving Credit Facility will be at our option, the Alternate Base Rate or LIBOR Rate (each as defined in the Revolving Credit Facility) plus, in each case, an applicable margin. The applicable margin will be tied to our total leverage ratio (as defined in the Revolving Credit Facility). In addition, we will pay commitment fees, other fees related to the issuance and maintenance of the letters of credit, and certain agency fees.

The Revolving Credit Facility is guaranteed by and secured by substantially all of the assets of our current and future domestic subsidiaries, subject to certain exceptions as set forth in the Revolving Credit Facility.

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The Revolving Credit Facility contains certain negative covenants restricting and 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 Revolving Credit Facility include quarterly requirements for total leverage ratio of less than or equal to 5.25 to 1.00, and interest coverage ratio of at least 2.50 to 1.00. The Revolving Credit Facility also contains 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 Revolving Credit Facility prior to its stated maturity and the related commitments may be terminated.

As of March 31, 2007, we had no borrowings outstanding under our Revolving Credit Facility and we were in compliance with its various financial covenants.

Debt Issue Costs and Debt Repayment Charges:In connection with the repayment of our Credit Facilities, we recorded a charge for approximately $2,300 to write-off the unamortized balance of debt issue costs associated those facilities. In addition, we paid a pre-payment penalty of approximately $400 to terminate the Second Lien Credit Facility. These charges are presented as Debt Repayment Charges in our statement of operations. In connection with the issuance of the Senior Notes, we incurred debt issuance costs of approximately $4,600 which were capitalized and classified as other assets on the balance sheet. These costs will be amortized as additional interest expense over the eight year term on the Senior Notes.

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, we paid fixed rate interest and received variable rate interest based on a specific spread over three-month LIBOR. The differential to be paid or received was recorded as an adjustment to interest expense. The swap agreements do not qualify for hedge accounting treatment. We recorded 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 values of the swap agreements at September 30, 2006, which was recorded as other long-term liabilities, was $314. In connection with the refinancing of our Credit Facilities, we terminated our swap agreements at a cost of $268, which resulted in a gain of $46 that is recorded as a reduction of interest expense.

Environmental Remediation – Henderson Site

During our fiscal years 2005 and 2006, we recorded charges totaling $26,000 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 completed the permanent facility in

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December 2006. In fiscal year 2007, we began the operating and maintenance phase and expect cash spending to decline to less than $1,000 per year annually for the next several years.

Contractual Obligations and Off-Balance Sheet Arrangements

As discussed above, in February 2007, we refinanced our long-term debt through the issuance of Senior Notes. The following table summarizes our fiscal year contractual obligations and commitments after giving effect to these refinancing activities:

	Payments Due by Year Ending September 30,
	2007		2008-09		2010-11		Thereafter		Total
Senior Notes, due 2015	$	—	$	—	$	—	$	110,000	$	110,000
Interest on Senior Notes (a)		6,401		19,800		19,800		33,199		79,200
Capital Leases		171		369		—		—		540
Interest on Capital Leases		36		15		—		—		51
Operating Leases		1,013		1,430		76		4		2,523
Total	$	7,621	$	21,614	$	19,876	$	143,203	$	192,314

(a) 2007 amount represents interest obligation from the issuance date on February 6, 2007 through September 30, 2007.

In addition, we have obligations and other off-balance sheet arrangements relating to pension benefits, environmental remediation, letters of credit, and employee agreements, which have not changed materially from our disclosures in our Annual Report on Form 10-K for the year ended September 30, 2006.

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.

Sales and 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. Certain products shipped by our Fine Chemicals segment are subject to customer acceptance periods. We record deferred revenues upon shipment of the product and recognize these revenues in the period when the acceptance period lapses or acceptance has occurred. Some of our perchlorate and fine chemical products customers have requested that we store materials purchased from us in our facilities. 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 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

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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 asset exceeds its fair value.

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

Environmental Costs

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

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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 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.

Recently Issued or Adopted Accounting Standards

In July 2006, the FASB issued 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. We are currently evaluating the impact of this standard on our consolidated financial statements.

In September 2006, the SEC issued SAB 108, which documents the SEC staff’s views regarding the process of quantifying financial statement misstatements. Under SAB 108, we must evaluate the materiality of an identified unadjusted error by considering the impact of both the current year error and the cumulative error, if applicable. This also means that both the impact on the current period income statement and the period-end balance sheet must be considered. SAB 108 is effective for fiscal years ending after November 15, 2006. Any past adjustments required to be recorded as a result of adopting SAB 108 will be recorded as a cumulative effect adjustment to the opening balance of retained earnings. We do not believe the adoption of SAB 108 will have a material impact on our consolidated financial statements.

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In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 will be first effective for our financial statements issued for the year ended September 30, 2008, and interim periods within that year. We are currently evaluating the impact that the adoption of SFAS No. 157 will have on our consolidated financial statements.

In September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, which requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement becomes effective for us on September 30, 2007. We are currently evaluating the impact the adoption of SFAS 158 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS No. 159 permits all companies to choose to measure eligible items at fair value at specified election dates. At each subsequent reporting date, a company shall report in earnings any unrealized gains and losses on items for which the fair value option has been elected. SFAS No. 159 is effective as of the beginning of our first fiscal year that begins on October 1, 2008. We are currently evaluating whether to adopt the fair value option under SFAS No. 159 and evaluating what impact adoption would have on our consolidated financial statements.

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

We are exposed to interest rate risk primarily due to changes in market interest rates as compared to the fixed rate for our long-term debt. As of March 31, 2007, our outstanding debt is comprised primarily of $110,000 aggregate principal of 9% fixed rate, unsecured senior notes.

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. In connection with the refinancing of our Credit Facilities, we terminated our swap agreements at a cost of $268, which resulted in a gain of $46 that is recorded as a reduction of interest expense.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Based on their evaluation as of March 31, 2007, 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 by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the Securities & Exchange Commission’s rules and forms.

(b) Changes in internal controls

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 material legal proceedings, see Note 8 to our condensed consolidated financial statements.

ITEM 1A. RISK FACTORS (Dollars in Thousands)

There have been no material changes in our assessment of risk factors affecting our business since those presented in our Annual Report on Form 10-K, Item 1A, for the fiscal year ended September 30, 2006. For your convenience, our updated risk factors are included below in this Item 1A.

We can be adversely impacted by reductions or changes in NASA or U.S. government military spending.

Both our Specialty Chemicals and Aerospace Equipment segments conduct business, directly or indirectly, with NASA and the U.S. government. Our perchlorate chemicals, as part of our Specialty Chemicals segment, accounted for approximately 28%, 65% and 85% of our revenues during fiscal 2006, 2005 and 2004, respectively. AP is the predominant oxidizing agent for solid propellant rockets, booster motors and missiles used in space exploration. Our principal space customers are Alliant Techsystems, Inc., or “ATK,” for the Space Shuttle Program and the Delta family of commercial rockets, and Aerojet General Corporation, or “Aerojet” for the Atlas family of commercial rockets. We also supply AP for use in a number of defense programs, including the Minuteman, Navy Standard Missile, Patriot and Multiple Launch Rocket System programs. As a majority of our sales are to the U.S. government and its prime contractors, we depend heavily on the contracts underlying these programs. Also, significant portions of our sales come from a small number of customers. ATK accounted for 18%, 50% and 51% of our revenues during fiscal 2006, 2005 and 2004, respectively. We have supplied AP for use in space and defense programs for over 40 years. We have supplied AP to various foreign defense programs and commercial space programs, although AP is subject to strict export license controls.

Since the 1990s, 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 highest propellant grade AP, or “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 relatively level as compared to fiscal 2006 demand and 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, 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, and the number of crew launch vehicle launches,

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and the development and testing of the new heavy launch vehicle, used to transport materials and supplies to the International Space Station and the Moon, and the number of heavy launch vehicle launches.

Our revenues, operating income and cash flows from operating activities are negatively impacted by these lower sales volume levels. In addition, demand for Grade I AP is program specific and dependent upon, among other things, governmental appropriations.

If the use of AP as the oxidizing agent for solid propellant rockets or the use of solid propellant rockets in NASA’s space exploration programs are discontinued or significantly reduced, it could have a material adverse effect on our operating results, financial condition, or cash flows.

We depend on a limited number of customers for most of our sales in our Specialty Chemicals, Aerospace Equipment and Fine Chemicals segments and the loss of one or more of these customers could have a material adverse affect on our revenues.

Our perchlorate chemicals, as part of our Specialty Chemicals segment, accounted for approximately 28%, 65% and 85% of our consolidated revenues during fiscal 2006, 2005 and 2004, respectively. ATK accounted for 18%, 50% and 51% of our consolidated revenues during fiscal 2006, 2005 and 2004, respectively. Should our relationship with one or more of our major Specialty Chemicals or Aerospace Equipment customers change adversely, the resulting loss of business could have a material adverse effect on our financial position, results of operations or cash flows. In addition, if one or more of our major Specialty Chemicals or Aerospace Equipment customers substantially reduced their volume of purchases from us, it could have a material adverse effect on our financial position, results of operations or cash flows. Should one of our major Specialty Chemicals or Aerospace Equipment customers encounter financial difficulties, the exposure on uncollectible receivables and unusable inventory could have a material adverse effect on our financial position, results of operations or cash flows.

Furthermore, our Fine Chemicals segment’s success is largely dependent upon AFC’s contract manufacturing of a limited number of intermediates or APIs for a limited number of key customers. One customer of AFC accounted for 28% of our consolidated revenue and the top five customers of AFC accounted for approximately 97% of its revenues in fiscal 2006. Furthermore, AFC’s top three products generated approximately 78% of its revenues in fiscal 2006. Any negative development in these customer contracts or relationships or in the customer’s business may have a material adverse effect on the results of operations of AFC. In addition, if the pharmaceutical products that AFC’s customers produce using its compounds experience any problems, including problems related to their safety or efficacy, filing with the FDA or is not successful in the market, these customers may substantially reduce or cease to purchase AFC’s compounds, which will have a material adverse effect on the revenues and results of operations of AFC. Finally, certain customers have agreed to reimburse AFC for all or a portion of the substantial cost of acquiring or installing certain production equipment. Due to the relative size of these customers, their contracts and the capital investment required, failure of the customer to reimburse AFC for these capital investments could have a material adverse effect on the our operating results.

Our existing U.S. government contracts and contracts based on U.S. government contracts are subject to continued appropriations by Congress and may be terminated if future funding is not made available.

U.S. government contracts are dependent on the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. As a result, at the outset of a major program, the contract is usually incrementally funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations for future fiscal years. In addition, most U.S. government contracts are subject to modification if funding is changed. Any failure by Congress to appropriate additional funds to any program in which we or our customers participate, or any contract modification as a result of funding changes, could materially delay or terminate the program for us or for our customers. Since our significant customers in the Specialty Chemicals segment are mainly U.S.

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government contractors subject to this yearly Congressional appropriations process, their purchase of our products are also dependent on their U.S. government contracts not being materially curtailed. U.S. government contracts or contracts based on U.S. government contracts in our Specialty Chemicals segment accounted for almost all of its revenues during fiscal 2006, 2005 and 2004, respectively.

The inherent limitations of our “cost-plus” or “fixed-price” government contracts may impact our profitability.

Cost-Plus Contracts: Cost-plus contracts are cost-plus-fixed-fee, cost-plus-incentive-fee, or cost-plus-award-fee contracts. Cost-plus-fixed-fee contracts allow us to recover our approved costs plus a fixed fee. Cost-plus-incentive-fee contracts and cost-plus-award-fee contracts allow us to recover our approved costs plus a fee that can fluctuate based on actual results as compared to contractual targets for factors such as cost, quality, schedule, and performance.

Fixed-Price Contracts: Fixed-price contracts are firm-fixed-price, fixed-price-incentive, or fixed-price-level-of-effort contracts. Under firm-fixed-price contracts, we agree to perform certain work for a fixed price and absorb any cost underruns or overruns. Fixed-price-incentive contracts are fixed-price contracts under which the final contract prices may be adjusted based on total final costs compared to total target cost, and may be affected by schedule and performance. Fixed-price-level-of-effort contracts allow for a fixed price per labor hour, subject to a contract cap. All fixed-price contracts present the inherent risk of un-reimbursed cost overruns, which could have a material adverse effect on our operating results, financial condition, or cash flows. The U.S. government also regulates the accounting methods under which costs are allocated to U.S. government contracts. As a result, all fixed-price contracts involve the inherent risk of un-reimbursed cost overruns. To the extent that we did not anticipate the increase in cost of producing our products which are subject to a fixed-price contract, our profitability would be adversely affected.

Our U.S. government contracts and our customers’ U.S. government contracts are subject to termination.

We are subject to the risk that the U.S. government may terminate its contracts with its suppliers, either for its convenience or in the event of a default by the contractor. If a cost-plus contract is terminated, the contractor is entitled to reimbursement of its approved costs. If the contractor would have incurred a loss had the entire contract been performed, then no profit is allowed by the U.S. government. If the termination is for convenience, the contractor is also entitled to receive payment of a total fee proportionate to the percentage of the work completed under the contract. If a fixed-price contract is terminated, the contractor is entitled to receive payment for items delivered to and accepted by the U.S. government. If the termination is for convenience, the contractor is also entitled to receive fair compensation for work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses, and a reasonable profit on the costs incurred or committed. If a contract termination is for default:

• the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. government;

• the U.S. government is not liable for the contractor’s costs for unaccepted items, and is entitled to repayment of any advance payments and progress payments related to the terminated portions of the contract; and

• the contractor may be liable for excess costs incurred by the U.S. government in procuring undelivered items from another source.

In addition, since our significant customers are U.S. government contractors, they may cease purchasing our products if their contracts are terminated, which may have a material adverse effect on our operating results, financial condition or cash flow.

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We are subject to procurement and other related laws and regulations, non-compliance with which may expose us to adverse consequences.

Our Specialty Chemicals and Aerospace Equipment segments are subject to extensive and complex U.S. government procurement laws and regulations, along with ongoing U.S. government audits and reviews of contract procurement, performance, and administration. We could suffer adverse consequences if we were to fail to comply, even inadvertently, with these laws and regulations or with laws governing the export of munitions and other controlled products and commodities; or commit a significant violation of any other federal law. These consequences could include contract termination; civil and criminal penalties; and, under certain circumstances, our suspension and debarment from future U.S. government contracts for a period of time. In addition, foreign sales are subject to greater variability and risk than our domestic sales. Foreign sales subject us to numerous stringent U.S. and foreign laws and regulations, including regulations relating to import-export control, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act, and the anti-boycott provisions of the U.S. Export Administration Act. Failure to comply with these laws and regulations could result in material adverse consequences to us.

These procurement laws and regulations also provide for ongoing audits and reviews of incurred costs as well as contract procurement, performance and administration. The U.S. government may, if appropriate, conduct an investigation into possible illegal or unethical activity in connection with these contracts. Investigations of this nature are common in the aerospace and defense industry, and lawsuits may result. In addition, the U.S. government and its principal prime contractors periodically investigate the financial viability of its contractors and subcontractors as part of its risk assessment process associated with the award of new contracts. If the U.S. government or one or more prime contractors were to determine that we were not financially viable, our ability to continue to act as a government contractor or subcontractor would be impaired.

Our operations and properties are currently the subject of numerous environmental and other government regulations, which may become more stringent in the future and may reduce our profitability and liquidity.

Our operations are subject to extensive Federal, State and local regulations governing, among other things, emissions to air, discharges to water and waste management. To meet changing licensing and regulatory standards, we may be required to make additional significant site or operational modifications, potentially involving substantial expenditures or the reduction or suspension of certain operations. In addition, the operation of our manufacturing plants entails risk of adverse environmental and health effects (not covered by insurance) and there can be no assurance that material costs or liabilities will not be incurred to rectify any future occurrences related to environmental or health matters.

Review of Perchlorate Toxicity by EPA— Perchlorate is not currently included in the list of hazardous substances compiled by the EPA, but it is on the EPA’s Contaminant Candidate List. The NAS, the EPA and certain states have set or discussed certain guidelines on the acceptable levels of perchlorate in water. 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, which could, in turn, cause us to incur material costs.

Perchlorate Remediation Project in Henderson, Nevada— We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada, or the “Ampac Henderson Site.” In 1997, the 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 NDEP, we engaged in an investigation of groundwater near the Ampac Henderson Site and down gradient toward the Las Vegas Wash. At the direction of NDEP and EPA, we conducted an investigation of remediation technologies for perchlorate in groundwater with the intention of remediating groundwater near the Ampac Henderson Site. In fiscal 2005, we submitted a work plan to NDEP for the construction of a remediation facility near the Ampac Henderson Site. The permanent plant began operation in December 2006.

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Henderson Site Environmental Remediation Reserve— During our fiscal years 2005 and 2006, we recorded charges totaling $26,000 representing our estimate of the probable costs of our remediation efforts at the Ampac 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 completed the permanent facility in December 2006. In fiscal year 2007, we began the operating and maintenance phase and expect cash spending to decline to less than $1,000 per year annually for the next several years. 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.

Other AFC Environmental Matters— Also as part of the acquisition of AFC by us, AFC leased approximately 240 acres of land on the Aerojet-General Corporation Superfund Site. CERCLA has very strict joint and several liability provisions that make any “owner or operator” of a Superfund site a “potentially responsible party” for remediation activities. AFC could be considered an “operator” for purposes of the Superfund law and, in theory, could be a potentially responsible party for purposes of contribution to the site remediation. In addition, pursuant to the EPA consent order governing remediation for this site, AFC will have to abide by certain limitations regarding construction and development of the site which may restrict AFC’s operational flexibility and require additional substantial capital expenditures that could negatively affect the results of operations for AFC. Please see “Business — Regulatory Compliance” for a full discussion of our environmental compliance issues.

The production of most of our Specialty Chemicals products is conducted in a single facility and our operations will be materially affected if production at that facility is disrupted.

Most of our Specialty Chemicals products are produced at our Iron County, Utah facility. A significant disruption at this facility, even on a short-term basis, could impair our ability to produce and ship our Specialty Chemicals products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.

Disruptions in the supply of key raw materials and difficulties in the supplier qualification process, as well as increases in prices of raw materials, could adversely impact our operations.

Key raw materials used in our operations include salt, sodium chlorate, graphite, ammonia and hydrochloric acid. We closely monitor sources of supply to assure that adequate raw materials and other supplies needed in our manufacturing processes are available. In addition, as a U.S. government contractor, we are frequently limited to procuring materials and components from sources of supply that can meet rigorous customer and/or government specifications. In addition, as business conditions, the DOD budget, and Congressional allocations change, suppliers of specialty chemicals and materials sometimes consider dropping low volume items from their product lines, which may require, as it has in the past, qualification of new suppliers for raw materials on key programs. The qualification process may impact our profitability or ability to meet contract deliveries. We are also impacted by the cost of these raw materials used in production on fixed-price contracts. The increased cost of natural gas and electricity also has an impact on the cost of operating our Specialty Chemicals facilities.

AFC uses substantial amounts of raw materials in its production processes. Increases in the prices of raw materials which AFC purchases from third party suppliers could adversely impact revenue and operating results. In certain cases, the customer provides some of the raw materials which are used by AFC to produce or manufacture the customer’s products. Failure to receive raw materials in a timely manner, whether from a third party supplier or a customer, could cause AFC to fail to meet production schedules and adversely impact revenues. Certain key raw materials are obtained from sources from outside the

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U.S. A delay in the arrival in the shipment of raw material from a third party supplier could have a significant impact on AFC’s ability to meet its contractual commitments to customers.

Prolonged disruptions in the supply of any of our key raw materials, difficulty completing qualification of new sources of supply, implementing use of replacement materials or new sources of supply, or a continuing increase in the prices of raw materials and energy could have a material adverse effect on our operating results, financial condition or cash flows.

Our Fine Chemicals segment may be unable to comply with customer specifications and manufacturing instructions, experience schedule delays or other problems with existing or new products and systems, which could result in increased costs and loss of sales.

Our Fine Chemicals segment produces chemical compounds that are difficult to manufacture, including highly energetic, highly toxic and high potency materials. These chemical compounds are manufactured to exacting specifications of our customers’ filings with the FDA, and other regulatory authorities world-wide. The production of these chemicals requires a high degree of precision and strict adherence to safety and quality standards. Regulatory agencies, such as the FDA, and the EMEA, have regulatory oversight over the production process for many of the products that AFC manufactures for its customers. AFC employs sophisticated and rigorous manufacturing and testing practices to ensure compliance with the FDA’s cGMP and the International Conference on Harmonization (ICH) Q7A. If AFC is unable to adhere to these standards and produce these chemical compounds to the standards required by our customers, its operating results and revenues will be negatively impacted.

Failure to meet strict timing or delivery requirements could cause AFC to be in breach of material customer contracts.

AFC is a capital intensive business. Certain major customers have agreed to reimburse AFC for all or a portion of the cost of acquiring or installing certain production equipment to insure sufficient supply of the customer’s product. AFC must meet strict timelines for installation and validation of the production equipment and the manufacturing processes. Failure to install and validate the production equipment and to validate the production process in a timely manner could result in delays in production or in breach of contract claims which could adversely impact revenues and operating results of AFC. In addition, the rate of utilization of AFC production capacity is currently very high. Therefore, AFC may experience significant delays in its production if its production capability experiences unscheduled reductions. This may in turn cause AFC to be in breach of its material customer contracts, which could adversely affect its revenues and operating results.

Successful commercialization of pharmaceutical products and product line extensions is very difficult and subject to many uncertainties. If a customer is not able to successfully commercialize its products for which AFC produces compounds, then the operating results of AFC may be negatively impacted.

Successful commercialization of products and product line extensions requires accurate anticipation of market and customer acceptance of particular products, customers’ needs, the sale of competitive products, and emerging technological trends, among other things. Additionally, for successful product development, the customers must complete many complex formulation and analytical testing requirements and timely obtain regulatory approvals from the FDA and other regulatory agencies. When developed, new or reformulated drugs may not exhibit desired characteristics or may not be accepted by the marketplace. Complications can also arise during production scale-up. In addition, these products may encounter unexpected, irresolvable patent conflicts or may not have enforceable intellectual property rights. If the customer is not able to successfully commercialize their products for which AFC produces compounds for, then the operating results of AFC may be negatively impacted.

AFC or its customers may be unable to obtain government approval for its products or comply with government regulations relating to its business.

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The commercialization of pharmaceutical products is subject to extensive Federal, State and local regulation in the U.S. and similar foreign regulation. We do not know the extent to which we may be affected by legislative and other regulatory actions and developments concerning various aspects of the operations and products of AFC or its customers and the health care field generally. We do not know what effect changes in governmental regulation and other actions or decisions by governmental agencies may have on AFC in the future. Any changes could impose on AFC or its customers changes to manufacturing methods or facilities, pharmaceutical importation, expanded or different labeling, new approvals, the recall, replacement or discontinuance of certain products, additional record keeping, testing, price or purchase controls or limitations, and expanded documentation of the properties of certain products and scientific substantiation. Any regulatory changes could have a material adverse effect on AFC, its financial condition and results of operations or its competitive position.

The manufacturing, processing, formulation, packaging, labeling, distribution, importation, pricing, reimbursement and advertising of these products, and disposal of waste products arising from these activities, are also subject to regulation by the U.S. Drug Enforcement Administration, the Federal Trade Commission, the U.S. Consumer Product Safety Commission, the Occupational Safety and Health Administration, the U.S. Environmental Protection Agency, and the U.S. Customs Service, as well as State, local and foreign governments.

Before marketing most drug products, AFC’s customers generally are required to obtain approval from the FDA based upon pre-clinical testing, clinical trials showing safety and efficacy, chemistry and manufacturing control data, and other data and information. The generation of these required data is regulated by the FDA and can be time-consuming and expensive, and the results might not justify approval. Even if AFC customers are successful in obtaining all required pre-marketing approvals, post-marketing requirements and any failure on either parties’ part to comply with other regulations could result in suspension or limitation of approvals or commercial activities pertaining to affected products. The FDA could also require reformulation of products during the post-marketing stage.

All of AFC’s products must be manufactured in conformance with cGMP regulations, as interpreted and enforced by the FDA, the International Conference on Harmonization (ICH) Q7A, and drug products subject to an FDA-approved application must be manufactured, processed, packaged, held and labeled in accordance with information contained in the regulations, current FDA guidance, current industry practice and application. Additionally, modifications, enhancements or changes in manufacturing sites of approved products are, in many circumstances, subject to FDA approval, which may be subject to a lengthy application process or which may not be obtainable. The facilities of AFC are periodically subject to inspection by the FDA and other governmental agencies, and operations at these facilities could be interrupted or halted if such inspections are unsatisfactory.

Failure to comply with FDA or other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production or distribution, suspension of the FDA’s review of relevant product applications, termination of ongoing research, disqualification of data for submission to regulatory authorities, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals. Although we have instituted internal compliance programs, if compliance is deficient in any significant way, it could have a material adverse effect on AFC.

Recall or withdrawal of a customer’s product from the market or the failure of the customer to obtain regulatory approval of its products will impact forecasted revenues.

A customer product that includes ingredients that are manufactured by AFC may be recalled or withdrawn from the market by the customer. The recall or withdrawal may be for reasons beyond the control of AFC. A recall or withdrawal of a product manufactured by AFC or that includes ingredients manufactured by AFC for its customers could have an adverse impact on its forecasted revenues and operating results. Failure of a customer to obtain regulatory approval for marketing a drug that utilizes an ingredient manufactured by AFC could have an adverse effect on AFC’s performance.

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A strike or other work stoppage, or the inability to renew collective bargaining agreements on favorable terms, could have a material adverse effect on the cost structure and operational capabilities of AFC.

As of September 30, 2006, AFC had approximately 141 employees that were covered by collective bargaining or similar agreements which expire in June 2007. If we are unable to negotiate acceptable new agreements with the unions representing these employees upon expiration of the existing contracts, we could experience strikes or work stoppages. Even if AFC is successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase its operating costs and could adversely affect its profitability. If the unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, AFC could experience a significant disruption of operations at its facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of its major customers could also have similar effects on AFC.

The pharmaceutical fine chemicals industry is a capital-intensive industry and if AFC does not have enough capital to finance the necessary capital expenditures, its business and results of operations may be harmed.

The pharmaceutical fine chemicals industry is a capital-intensive industry that consumes cash from our Fine Chemicals segment and our other operations and borrowings. Upon further expansion of the operations of AFC, capital expenditures for AFC are expected to increase. Increases in expenditures may result in low levels of working capital or require us to finance working capital deficits. These factors could substantially increase AFC’s operating costs and negatively impact its operating results.

Although we have established reserves for our environmental liabilities, given the many uncertainties involved in assessing liability for environmental claims, our reserves may not be sufficient.

As of September 30, 2006, we had established reserves of approximately $18 million, which we believe to be sufficient to cover our estimated environmental liabilities at that time. However, given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient. We continually evaluate the adequacy of those reserves, and they could change. In addition, the reserves are based only on known sites and the known contamination at those sites. It is possible that additional remediation sites will be identified in the future or that unknown contamination at previously identified sites will be discovered. This could lead us to have additional expenditures for environmental remediation in the future and given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient.

The release or explosion of dangerous materials used in our business could disrupt our operations and cause us to incur additional costs and liability.

Our operations involve the handling, production, storage, and disposal of potentially explosive or hazardous materials and other dangerous chemicals, including materials used in rocket propulsion. Despite our use of specialized facilities to handle dangerous materials and intensive employee training programs, the handling and production of hazardous materials could result in incidents that temporarily shut down or otherwise disrupt our manufacturing operations and could cause production delays. It is possible that a release of these chemicals or an explosion could result in death or significant injuries to employees and others. Material property damage to us and third parties could also occur. The use of these products in applications by our customers could also result in liability if an explosion or fire were to occur. Any release or explosion could expose us to adverse publicity or liability for damages or cause production delays, any of which could have a material adverse effect on our reputation and profitability.

On May 4, 1988, our former manufacturing and office facilities in Henderson, Nevada were destroyed by a series of massive explosions and associated fires. Extensive property damage occurred both at our facilities and in immediately adjacent areas, the principal damage occurring within a three-mile radius. Production of AP ceased for a 15-month period. Significant interruptions were also experienced in our

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other businesses, which occupied the same or adjacent sites. There can be no assurance that another incident would not interrupt some or all of the activities carried on at our current manufacturing site.

Our inability to adapt to rapid technological changes could impair our ability to remain competitive.

The aerospace and defense industry, the pharmaceutical fine chemicals industry and the other specialty chemicals, performance products and environmental protection equipment industries in which we participate have all undergone rapid and significant technological development over the last few years. Our competitors may implement new technologies before we are able to, allowing them to provide more effective products at more competitive prices. As an example, the automotive airbag market is currently the largest consumer of sodium azide. New automotive inflator systems that do not use sodium azide have gained substantial market share and, as a consequence, there has been a substantial decline in the demand for sodium azide. Based upon market information received from inflator manufacturers, we expect that sodium azide use will continue to decline and that bag inflators using sodium azide will be phased out over approximately five years. Currently, demand for sodium azide is substantially less than supply on a worldwide basis. Future technological developments could:

• adversely impact our competitive position if we are unable to react to these developments in a timely or efficient manner;

• require us to write-down obsolete facilities, equipment and technology;

• require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or

• require significant capital expenditures for research, development and launch of new products or processes.

Our proprietary rights may be violated or compromised, which could damage our operations.

We own numerous patents, patent applications and unpatented trade secret technologies in the U.S. and certain foreign countries. There can be no assurance that the steps taken by us to protect our proprietary rights will be adequate to deter misappropriation of these rights. In addition, independent third parties may develop competitive or superior technologies. If we are unable to adequately protect and utilize our intellectual property or property rights, our results of operations may be adversely affected.

We are subject to intense competition in certain of the industries where we compete and therefore may not be able to compete successfully.

Other than the sale of Grade I AP, for which we are the sole supplier in the U.S., we face significant competition in all of the other industries that we participate in, including from competitors with greater resources than ours. Many of our competitors have financial, technical, production and other resources substantially greater than ours. Moreover, barriers to entry, other than capital availability, are low in some of the product segments of our business. Capacity additions or technological advances by existing or future competitors may also create greater competition, particularly in pricing. In particular, the pharmaceutical fine chemicals market is fragmented and competitive. Competition in the pharmaceutical fine chemicals market is based upon reputation, service, manufacturing capability and expertise, price and reliability of supply. AFC faces increasing competition against pharmaceutical contract manufacturers located in the People’s Republic of China and India, where production costs are significantly less. If AFC is unable to compete successfully, its results of operations may be materially adversely impacted. Furthermore, there is a worldwide over-supply of sodium azide, which creates significant price competition for that product. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in revenues that we historically have generated from the sale of our products.

Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating results to fluctuate.

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Changes in our operating results from quarter to quarter could result in volatility in our common stock price. Our quarterly and annual sales are affected by a variety of factors that could lead to significant variability in our operating results. In our Specialty Chemicals segment, the need for our products are generally based on contractually defined milestones that our customers are bound by and these milestones may fluctuate from quarter to quarter. In our Fine Chemicals segment, some of our products require multiple steps of chemistries, the production of which can span multiple quarterly periods. Revenue is typically recognized after the final step and when the product has been shipped and accepted by the customer. As a result of this multi-quarter process, revenues and related profits can vary from quarter to quarter.

The cyclicality and volatility of the chemical industry affects our capacity utilization and causes fluctuations in our results of operations.

The operating rates at our facilities will impact the comparison of period-to-period results. Different facilities may have differing operating rates from period to period depending on many factors, such as transportation costs and supply and demand for the product produced at the facility during that period. As a result, individual facilities may be operated below or above rated capacities in any period. We may idle a facility for an extended period of time because an oversupply of a certain product or a lack of demand for that product makes production uneconomical. The expenses of the shutdown and restart of facilities may adversely affect quarterly results when these events occur. In addition, a temporary shutdown may become permanent, resulting in a write-down or write-off of the related assets.

A loss of key personnel or highly skilled employees could disrupt our operations.

Our executive officers are critical to the management and direction of our businesses. Our future success depends, in large part, on our ability to retain these officers and other capable management personnel. We have entered into employment agreements with two of our corporate executive officers that allow those officers to terminate their employment with certain levels of severance under particular circumstances, such as a change of control affecting our company. Although we believe that we will be able to attract and retain talented personnel and replace key personnel should the need arise, our inability to do so could disrupt the operations of the segment affected or our overall operations. Furthermore, our business is very technical and the technological and creative skills of our personnel are essential to establishing and maintaining our competitive advantage. For example, customers often turn to AFC because very few companies have the specialized experience and capabilities required for energetic and high containment chemistry. Our operations could be disrupted by a shortage of available skilled employees or if we are unable to retain these highly skilled and experienced employees.

We may continue to expand our operations through acquisitions, which could divert management’s attention and expose us to unanticipated liabilities and costs. We may experience difficulties integrating the acquired operations, and we may incur costs relating to acquisitions that are never consummated.

Our business strategy could include growth through future acquisitions. However, our ability to consummate and integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and our ability to obtain financing. Our success in integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid diversion of management’s attention from operational matters, integrate general and administrative services and key information processing systems and, where necessary, requalify our customer programs. In addition, future acquisitions could result in the incurrence of additional debt, costs and contingent liabilities. We may also incur costs and divert management attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated. It is also possible that expected synergies from past or future acquisitions may not materialize.

Although we undertake a diligence investigation of each business that we acquire, there may be liabilities of the acquired companies that we fail to or are unable to discover during the diligence investigation and

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for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller, which may in some instances be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.

We have a substantial amount of debt, and the cost of servicing that debt could adversely affect our ability to take actions or our liquidity or financial condition.

As disclosed in Note 7 to our condensed consolidated financial statements, we have a substantial amount of debt for which we are required to make interest payments. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt in the future or we may refinance some or all of this debt.

Our level of debt places significant demands on our cash resources, which could:

• make it more difficult for us to satisfy our outstanding debt obligations;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the amount of our cash flow available for working capital, capital expenditures, acquisitions, developing our real estate assets and other general corporate purposes;

• limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;

• place us at a competitive disadvantage compared to our competitors, some of which have lower debt service obligations and greater financial resources than we do;

• limit our ability to borrow additional funds; or

• increase our vulnerability to general adverse economic and industry conditions.

If we are unable to generate sufficient cash flow to service our debt and fund our operating costs, our liquidity may be adversely affected.

We are obligated to comply with financial and other covenants in our debt that could restrict our operating activities, and the failure to comply could result in defaults that accelerate the payment under our debt.

Our outstanding debt generally contains various restrictive covenants. These covenants include provisions restricting our ability to, among other things:

• incur additional debt, incur contingent obligations and issue additional preferred stock;

• create liens;

• pay dividends, distributions or make other specified restricted payments, and restrict the ability of certain of our subsidiaries to pay dividends or make other payments to us;

• sell assets;

• make certain capital expenditures, investments and acquisitions;

• enter into certain transactions with affiliates;

• enter into sale and leaseback transactions; and

• merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.

Any of the covenants described in this risk factor may restrict our operations and our ability to pursue potentially advantageous business opportunities. Our failure to comply with these covenants could also result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt.

Our Shareholder Rights Plan, Certificate of Incorporation and Bylaws discourage unsolicited takeover proposals and could prevent stockholders from realizing a premium on their common stock.

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We have a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals. The rights issued under the shareholder rights plan would cause substantial dilution to a person or group which attempts to acquire us on terms not approved in advance by our board of directors. In addition, our certificate of incorporation and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include:

• a classified board of directors;

• the ability of our board of directors to designate the terms of and issue new series of preferred stock;

• advance notice requirements for nominations for election to our board of directors; and

• special voting requirements for the amendment of our certificate of incorporation and bylaws.

We are also subject to anti-takeover provisions under Delaware laws, each of which could delay or prevent a change of control. Together these provisions and the rights plan may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES – None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Voting results of matters submitted to a vote of Security Holders at our Annual Meeting of Stockholders held on March 6, 2007 were as follows:

Item No. 1(a): Election of one Class B Director (through March 2008).

Name	Votes For		Votes Withheld
C. Keith Rooker		6,014,311		1,070,371

Item No. 1(b): Election of two Class C Directors (through March 2009).

Name	Votes For		Votes Withheld
Fred D. Gibson, Jr.		6,041,362		1,043,320
Berlyn D. Miller		6,048,692		1,035,720

Item No. 1(c): Election of three Class A Directors (through March 2010).

Name	Votes For		Votes Withheld
John R. Gibson		6,043,968		1,040,714
Jan H. Loeb		5,994,294		1,090,388
Dean M. Willard		6,007,378		1,077,304

Each of the Nominees received more than 80% of the votes cast. Accordingly, in accordance with the Registrant’s certificate of incorporation and bylaws, Mr. Rooker is hereby elected as a Class B Director to serve until the annual meeting of stockholders in 2008, Messrs. F. Gibson and Miller are hereby elected as Class C Directors to serve until the annual meeting of stockholders in 2009, and Messrs. J. Gibson, Loeb and Willard are hereby elected as Class A Directors to serve until the annual meeting of stockholders in 2010.

Item No. 2: Ratification and approval of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2007:

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Votes For	Against		Abstained
7,071,712		5,328		7,641

     In addition, the following individuals are continuing members of the board of directors. They will serve until the annual meeting of stockholders in the indicated year that their term expires.

Name	Class	Term Expires
Norval F. Pohl	Class B		2008
Jane L. Williams	Class B		2008
Joseph Carleone	Class C		2009

ITEM 5. OTHER INFORMATION

     On May 8, 2007, our subsidiary AMPAC Fine Chemicals LLC, adopted a Severance Pay Plan (the “AFC Severance Plan”). One of our named executive officer, Dr. Aslam Malik, participates in the AFC Severance Plan. Pursuant to the AFC Severance Plan, Dr. Malik shall receive severance benefits for certain involuntary terminations, including:

• Monthly payments equal to regular straight-time salary in effect on the date of termination for 24 months;

• Reimbursement of Dr. Malik’s COBRA premiums on his current health care coverage for a period of six months; and

• If Dr. Malik’s employment is terminated after he was employed for at least six months in a fiscal year, Dr. Malik shall be entitled to a portion of his bonus pursuant to the bonus plan in effect for such year applicable to him, equal to the bonus he would have achieved for that year, multiplied by the number of weeks that he was employed during the fiscal year, divided by 52, payable at the time normally payable under such bonus plan.

ITEM 6. EXHIBITS

10.1	AMPAC Fine Chemicals LLC Severance Pay Plan
10.2	Notice of Eligibility for Dr. Aslam Malik under AMPAC Fine Chemicals LLC Severance Pay Plan, dated January 24, 2007.
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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN PACIFIC CORPORATION
Date: May 15, 2007	/s/ JOHN R. GIBSON
	John R. Gibson
	Chief Executive Officer

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INDEX TO EXHIBITS

10.1	AMPAC Fine Chemicals LLC Severance Pay Plan
10.2	Notice of Eligibility for Dr. Aslam Malik under AMPAC Fine Chemicals LLC Severance Pay Plan, dated January 24, 2007.
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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