UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-08137

AMERICAN PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)

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

3883 Howard Hughes Parkway, Suite 700
Las Vegas, Nevada 89169
(Address of principal executive offices) (Zip Code)

(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. YES þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

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

     The number of shares of the registrant’s common stock outstanding as of February 1, 2010 was 7,540,591.

 

 

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

		PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements					1
		Condensed Consolidated Statements of Operations (unaudited)			1
		Condensed Consolidated Balance Sheets (unaudited)			2
		Condensed Consolidated Statements of Cash Flows (unaudited)			3
		Notes to Condensed Consolidated Financial Statements (unaudited)			4
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk					38
ITEM 4. Controls and Procedures					38
		PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings					40
ITEM 1A. Risk Factors					40
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds					53
ITEM 3. Defaults Upon Senior Securities					53
ITEM 4. Submission of Matters to a Vote of Security Holders					53
ITEM 5. Other Information					53
ITEM 6. Exhibits					53
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

		Three Months Ended
		December 31,
		2009				2008
Revenues		$	34,064			$	45,629
Cost of Revenues			21,618				30,895
Gross Profit			12,446				14,734
Operating Expenses			12,307				11,309
Operating Income			139				3,425
Interest and Other Income (Expense), Net			(8	)			61
Interest Expense			2,691				2,694
Income (Loss) before Income Tax			(2,560	)			792
Income Tax Expense (Benefit)			(1,120	)			335
Net Income (Loss)		$	(1,440	)		$	457
Earnings (Loss) per Share:
Basic		$	(0.19	)		$	0.06
Diluted		$	(0.19	)		$	0.06
Weighted Average Shares Outstanding:
Basic			7,487,000				7,480,000
Diluted			7,487,000				7,573,000

See accompanying notes to condensed consolidated financial statements

AMERICAN PACIFIC CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands, Except per Share Amounts)

		December 31,				September 30,
		2009				2009
ASSETS
Current Assets:
Cash and Cash Equivalents		$	38,619			$	21,681
Accounts Receivable, Net			23,889				44,028
Inventories			47,783				36,356
Prepaid Expenses and Other Assets			2,353				1,811
Income Taxes Receivable			2,439				2,148
Deferred Income Taxes			6,317				6,317
Total Current Assets			121,400				112,341
Property, Plant and Equipment, Net			112,634				114,645
Intangible Assets, Net			3,005				3,553
Goodwill			3,088				3,144
Deferred Income Taxes			21,122				21,121
Other Assets			10,150				10,037
TOTAL ASSETS		$	271,399			$	264,841
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	8,217			$	7,444
Accrued Liabilities			7,084				5,295
Accrued Interest			4,125				1,650
Employee Related Liabilities			5,282				6,930
Income Taxes Payable			201				189
Deferred Revenues and Customer Deposits			11,101				6,911
Current Portion of Environmental Remediation Reserves			2,110				2,522
Current Portion of Long-Term Debt			121				151
Total Current Liabilities			38,241				31,092
Long-Term Debt			110,131				110,097
Environmental Remediation Reserves			23,898				24,168
Pension Obligations			28,573				27,720
Other Long-Term Liabilities			628				667
Total Liabilities			201,471				193,744
Commitments and Contingencies
Shareholders’ Equity
Preferred Stock — $1.00 par value; 3,000,000 authorized; none outstanding			—				—
Common Stock — $0.10 par value; 20,000,000 shares authorized, 7,540,591 and 7,504,591 issued			754				750
Capital in Excess of Par Value			72,664				72,322
Retained Earnings			8,557				9,997
Accumulated Other Comprehensive Loss			(12,047	)			(11,972	)
Total Shareholders’ Equity			69,928				71,097
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$271,399				$	264,841

See accompanying notes to condensed consolidated financial statements

AMERICAN PACIFIC CORPORATION

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

		Three Months Ended
		December 31,
		2009				2008
Cash Flows from Operating Activities:
Net Income (Loss)		$	(1,440	)		$	457
Adjustments to Reconcile Net Income (Loss)to Net Cash Provided by Operating Activities:
Depreciation and amortization			4,053				3,969
Non-cash interest expense			159				159
Share-based compensation			346				132
Excess tax benefit from stock option exercises			—				(3	)
Deferred income taxes			(44	)			(58	)
Loss on sale of assets			5				53
Changes in operating assets and liabilities:
Accounts receivable, net			20,141				6,661
Inventories			(11,323	)			(3,052	)
Prepaid expenses and other current assets			(540	)			(12	)
Accounts payable			296				(2,627	)
Income taxes			(279	)			325
Accrued liabilities			1,791				631
Accrued interest			2,475				2,509
Employee related liabilities			(1,643	)			(2,739	)
Deferred revenues and customer deposits			4,208				415
Environmental remediation reserves			(682	)			(367	)
Pension obligations, net			853				576
Other			(269	)			(79	)
Net Cash Provided by Operating Activities			18,107				6,950
Cash Flows from Investing Activities:
Capital expenditures			(1,099	)			(1,809	)
Acquisition of business, net of cash acquired			—				(6,653	)
Net Cash Used by Investing Activities			(1,099	)			(8,462	)
Cash Flows from Financing Activities:
Payments of long-term debt			(59	)			(108	)
Issuances of common stock, net			—				32
Excess tax benefit from stock option exercises			—				3
Net Cash Used by Financing Activities			(59	)			(73	)
Effect of Changes in Currency Exchnage Rates on Cash			(11	)			—
Net Change in Cash and Cash Equivalents			16,938				(1,585	)
Cash and Cash Equivalents, Beginning of Period			21,681				26,893
Cash and Cash Equivalents, End of Period		$	38,619			$	25,308
Cash Paid (Received) For:
Interest		$	57			$	55
Income taxes			(801	)			6
Non-Cash Investing and Financing Transactions:
Additions to Property, Plant and Equipment not yet paid			778				897
Capital Leases Originated			65				—

See accompanying notes to condensed consolidated financial statements

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 (collectively, the “Company”, “we”, “us”, or “our”) are unaudited, but in the opinion of management, include all adjustments, which are of a normal recurring nature, necessary to a fair statement of the results for the interim periods presented. 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, 2009. We have evaluated subsequent events through February 12, 2010, the date these condensed consolidated financial statements were issued. The operating results and cash flows for the three-month period ended December 31, 2009 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, 2009.

Principles of Consolidation. Our consolidated financial statements include the accounts of American Pacific Corporation and our wholly-owned subsidiaries. All intercompany accounts have been eliminated.

Effective October 1, 2008, we acquired Marotta Holdings Limited (subsequently renamed Ampac ISP Holdings Limited) and its wholly-owned subsidiaries (collectively “AMPAC ISP Holdings”) for a cash purchase price, including direct expenses and net of cash acquired, of $6,725. AMPAC ISP Holdings was included in our consolidated financial statements beginning on October 1, 2008 and is a component of our Aerospace Equipment segment.

Fair Value Disclosure of Financial Instruments. We estimate the fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term nature. We estimate the fair value of our fixed-rate long-term debt to be approximately $105,600 based on and accrued liabilities approximate their carrying values due to their short-term nature. We estimate the trade date closest to December 31, 2009, which was January 14, 2010.

Depreciation and Amortization Expense. Depreciation expense of $3,361 and $3,325 was classified as cost of revenues in our consolidated statements of operations for the three-month periods ended December 31, 2009 and 2008, respectively. Depreciation expense of $148 and $136 was classified as operating expenses in our consolidated statements of operations for the three-month periods ended December 31, 2009 and 2008, respectively.

Amortization expense of $544 and $508 was classified as operating expenses in our consolidated statements of operations for the three-month periods ended December 31, 2009 and 2008, respectively.

Bill and Hold Transactions. Some of our perchlorate and fine chemicals products customers have requested that we store materials purchased from us in our facilities (“Bill and Hold” arrangements). The sales value of inventory, subject to Bill and Hold arrangements, at our facilities was $21,786 and $25,882 as of December 31, 2009 and September 30, 2009, respectively.

Recently Issued or Adopted Accounting Standards. In September 2006, the Financial Accounting Standards Board (the “FASB”) issued a new standard which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of

1.

INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

America, and expands disclosures about fair value measurements. In February 2008, the FASB deferred this standard for one year as it applied to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests, and long-lived assets measured at fair value for impairment assessments. The standard 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. This standard was effective for us on October 1, 2008; however, we did not adopt all the provisions of the standard as the FASB delayed the effective date of its application to non-financial assets and liabilities. The remaining provisions became effective for us beginning October 1, 2009. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

In December 2007, the FASB issued a new standard that significantly changed the accounting for business combinations. Under the standard, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The standard also includes a substantial number of new disclosure requirements. The standard applies to us for business combinations with acquisition dates on or after October 1, 2009. We expect that the new standard will have an impact on our accounting for future business combinations, but the effect is dependent upon acquisitions at that time.

In December 2007, the FASB issued a new standard that establishes revised accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the standard requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. The standard requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The standard also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The standard was effective for us beginning on October 1, 2009. We currently have no entities or arrangements that were affected by the adoption of this standard.

In April 2008, the FASB issued a new standard which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The standard for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements must be applied prospectively to all intangible assets recognized in the Company’s financial statements as of the effective date. The standard was effective for us beginning on October 1, 2009. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

In December 2008, the FASB issued a new standard that provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures include disclosure of investment allocation decisions, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets, the effect of certain fair value measurements, and significant concentrations of risk within plan assets. The expanded disclosure requirements are effective for our fiscal year ending September 30, 2010. The adoption of this standard is not expected to have a material impact on our results of operations, financial position or cash flows.

2.

SHARE-BASED COMPENSATION

We account for our share-based compensation arrangements under an accounting standard 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. The fair values of awards are recognized as additional compensation expense, which is classified as operating expenses, proportionately over the vesting period of the awards.

Our share-based compensation arrangements are designed to advance the long-term interests of the Company, including by attracting and retaining employees and directors and aligning their interests with those of our stockholders. The amount, frequency, and terms of share-based awards may vary based on competitive practices, our operating results, government regulations and availability under our equity incentive plans. Depending on the form of the share-based award, new shares of our common stock may be issued upon grant, option exercise or vesting of the award. We maintain three share based plans, each as discussed below.

The American Pacific Corporation Amended and Restated 2001 Stock Option Plan (the “2001 Plan”) permits the granting of stock options to employees, officers, directors and consultants. Options granted under the 2001 Plan generally vested 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire ten years from the date of grant. As of December 31, 2009, there were no shares available for grant under the 2001 Plan. This plan was approved by our stockholders.

The American Pacific Corporation 2002 Directors Stock Option Plan, as amended and restated (the “2002 Directors Plan”) compensates non-employee directors with stock options granted annually or upon other discretionary events. Options granted under the 2002 Directors Plan prior to September 30, 2007 generally vested 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire ten years from the date of grant. Options granted under the 2002 Directors Plan in November 2007 vested 50% one year from the date of grant and 50% two years from the date of grant, and expire ten years from the date of grant. As of December 31, 2009, there were no shares available for grant under the 2002 Directors Plan. This plan was approved by our stockholders.

The American Pacific Corporation 2008 Stock Incentive Plan (the “2008 Plan”) permits the granting of stock options, restricted stock, restricted stock units and stock appreciation rights to employees, directors and consultants. A total of 350,000 shares of common stock are authorized for issuance under the 2008 Plan, provided that no more than 200,000 shares of common stock may be granted pursuant to awards of restricted stock and restricted stock units. Generally, awards granted under the 2008 Plan vest in three equal annual installments beginning on the first anniversary of the grant date, and in the case of option awards, expire ten years from the date of grant. As of December 31, 2009, there were 12,000 shares available for grant under the 2008 Plan. This plan was approved by our stockholders.

2.

SHARE-BASED COMPENSATION (continued)

A summary of our stock option and restricted stock activity for the three months ended December 31, 2009 is as follows:

		Stock Options																Restricted Stock
		Outstanding								Non-Vested								Outstanding and Non-Vested
						Weighted								Weighted								Weighted
						Average								Average								Average
						Exercise								Fair								Fair
						Price								Value								Value
		Shares				Per Share				Shares				Per Share				Shares				Per Share
Balance, September 30, 2009			540,997			$	8.64				161,710			$	5.57				22,000			$	11.25
Granted			149,000				7.21				149,000				3.65				36,000				7.15
Vested			—				—				(61,065	)			5.62				(7,336	)			11.25
Exercised			—				—				—				—				—				—
Expired / Cancelled			—				—				—				—				—				—
Balance, December 31, 2009			689,997				8.33				249,645				4.41				50,664				8.34

A summary of our exercisable stock options as of December 31, 2009 is as follows:

Number of vested stock options			440,352
Weighted-average exercise price per share		$	8.11
Aggregate intrinsic value		$	277
Weighted-average remaining contractual term in years			4.9

We determine the fair value of stock option awards at their grant date, using a Black-Scholes Option-Pricing model applying the assumptions in the following table. We determine the fair value of restricted stock awards based on the fair market value of our common stock on the grant date. Actual compensation, if any, ultimately realized by optionees may differ significantly from the amount estimated using an option valuation model.

		Three Months Ended
		December 31,
		2009				2008
Weighted-average grant date fair value per share of options granted Significant fair value assumptions:		$	3.65			$	5.41
Expected term in years			6.00				6.00
Expected volatility			51.3	%			48.7	%
Expected dividends			0.0	%			0.0	%
Risk-free interest rates			2.3	%			2.7	%
Total intrinsic value of options exercised		$	—			$	21
Aggregate cash received for option exercises		$	—			$	32
Compensation cost (included in operating expenses)
Stock options		$	211			$	108
Restricted stock			135				24
Total			346				132
Tax benefit recognized			73				29
Net compensation cost		$	273			$	103
As of period end date:
Total compensation cost for non-vested awards not yet recognized:
Stock options		$	635			$	807
Restricted stock		$	187			$	223
Weighted-average years to be recognized
Stock options			1.8				1.9
Restricted stock			1.8				1.9

3.

SELECTED BALANCE SHEET DATA

Inventories. Inventories consist of the following:

		December 31,				September 30,
		2009				2009
Finished goods		$	8,646			$	1,951
Work-in-process			24,233				22,080
Raw materials and supplies			10,401				9,930
Deferred cost of revenues			5,079				2,395
Under(over) applied manufacturing overhead costs			(576	)			—
Total		$	47,783			$	36,356

For our Specialty Chemicals segment, purchase price variances or volume or capacity cost variances associated with indirect manufacturing costs and that are planned and expected to be absorbed by goods produced through the end of our fiscal year are deferred at interim reporting dates as under(over) applied manufacturing overhead costs. The effect of unplanned or unanticipated purchase price or volume variances are applied to goods produced in the period.

Intangible Assets. Intangible assets consist of the following:

		December 31,				September 30,
		2009				2009
Perchlorate customer list		$	38,697			$	38,697
Less accumulated amortization			(38,697	)			(38,697	)
		—					—
Customer relationships			9,008				9,018
Less accumulated amortization			(6,527	)			(6,182	)
			2,481				2,836
Backlog			1,577				1,579
Less accumulated amortization			(1,053	)			(862	)
			524				717
Total		$	3,005			$	3,553

The perchlorate customer list is an asset of our Specialty Chemicals segment and was fully amortized as of February 2008.

Customer relationships are assets of our Fine Chemicals and Aerospace Equipment segments and are subject to amortization. Amortization expense was $347 and $310 for the three-month periods ended December 31, 2009 and 2008, respectively.

Backlog is an asset of our Aerospace Equipment segment and is subject to amortization. Amortization expense was $197 and $200 for the three-month periods ended December 31, 2009 and 2008, respectively.

Goodwill. Goodwill is an asset of our Aerospace Equipment segment and is not expected to be deductible for tax purposes.

4. COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS

Comprehensive income (loss) consists of the following:

		Three Months Ended
		December 31,
		2009				2008
Net Income (Loss)		$	(1,440	)		$	457
Other Comprehensive Income (Loss) -
Foreign currency translation adjustment			(75	)			(537	)
Comprehensive Loss		$	(1,515	)		$	(80	)

The components of accumulated other comprehensive loss are as follows:

		December 31,				September 30,
		2009				2009
Cumulative currency translation adjustment		$	(201	)		$	(126	)
Unamortized benefit plan costs, net of tax of $7,898			(11,846	)			(11,846	)
Total		$	(12,047	)		$	(11,972	)

5. EARNINGS (LOSS) PER SHARE

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

		Three Months Ended
		December 31,
		2009				2008
Net income (loss)		$	(1,440	)		$	457
Basic weighted-average shares			7,487,000				7,480,000
Diluted:
Weighted-average shares, basic			7,487,000				7,480,000
Dilutive effect of stock options			—				93,000
Weighted-average shares, diluted			7,487,000				7,573,000
Basic earnings (loss) per share		$	(0.19	)		$	0.06
Diluted earnings (loss) per share		$	(0.19	)		$	0.06

As of December 31, 2009 and 2008, we had 689,997 and 202,997 antidilutive options outstanding, respectively.

6. DEBT

Our outstanding debt balances consist of the following:

		December 31,				September 30,
		2009				2009
Senior Notes, 9%, due 2015		$	110,000			$	110,000
Capital Leases, due through 2014			252				248
Total Debt			110,252				110,248
Less Current Portion			(121	)			(151	)
Total Long-term Debt		$	110,131			$	110,097

6. DEBT (continued)

Senior Notes. In February 2007, we issued and sold $110,000 aggregate principal amount of 9.0% Senior Notes due February 1, 2015 (collectively, with the exchange notes issued in August 2007 as referenced below, the “Senior Notes”). Proceeds from the issuance of the Senior Notes were used to repay our former credit facilities. The Senior Notes accrue interest at an annual rate of 9.0%, payable semi-annually in February and August. 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 by the Company, 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 an applicable premium as defined in the related indenture;
	•		at any time on or after February 1, 2011 at redemption prices beginning at 104.5% of the principal amount to be redeemed and reducing to 100% by February 1, 2013;
	•		until February 1, 2010, up to 35% of the principal amount of the Senior Notes at a redemption price of 109% of the principal amount thereof, plus accrued and unpaid interest thereon, with the proceeds of certain sales of our equity securities; and
	•		under 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 which contains certain customary events of default, including cross default provisions if we default under our existing and future debt agreements having, individually or in the aggregate, a principal or similar amount outstanding of at least $10,000, and certain other 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.

6. DEBT (continued)

In connection with the closing of the sale of the Senior Notes, we entered into a registration rights agreement which required us to file a registration statement to offer to exchange the Senior Notes for notes that have substantially identical terms as the Senior Notes and are registered under the Securities Act of 1933, as amended. In July 2007, we filed a registration statement with the SEC with respect to an offer to exchange the Senior Notes as required by the registration rights agreement, which registration statement was declared effective by the SEC. In August 2007, we completed the exchange of 100% of the Senior Notes for substantially identical notes which are registered under the Securities Act of 1933, as amended.

Revolving Credit Facility. In February 2007, we entered into an Amended and Restated Credit Agreement, as amended as of July 7, 2009 (the “Revolving Credit Facility”), with Wachovia Bank, National Association, and certain other lenders, which provides a secured revolving credit facility in an aggregate principal amount of up to $20,000 with an initial maturity of 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 are, at our option, either 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 is tied to our total leverage ratio (as defined in the Revolving Credit Facility). In addition, we pay commitment fees, other fees related to the issuance and maintenance of 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;
	•		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 (“Total Leverage Ratio”), and interest coverage ratio of at least 2.50 to 1.00 (“Interest Coverage Ratio”). The Revolving Credit Facility defines Total Leverage Ratio as the ratio of Consolidated Funded Debt to Consolidated EBITDA and Interest Coverage Ratio as the ratio of Consolidated EBITDA to Consolidated Interest Expense. With respect to these covenant compliance calculations, Consolidated EBITDA, as defined in the Revolving Credit Facility (hereinafter, referred to as “Credit Facility EBITDA”), differs from typical EBITDA calculations and our calculation of Adjusted EBITDA, which is used in certain of our public releases and in connection with our incentive compensation plan. The most significant difference in the Credit Facility EBITDA calculation is the inclusion of cash payments for environmental remediation as part of the calculation. The following statements summarize the elements of those definitions that are material to our computations. Consolidated Funded Debt generally includes principal amounts outstanding under our Senior Notes, Revolving Credit Facility, capital leases and notional amounts for outstanding letters of credit. Credit Facility EBITDA is generally computed as consolidated net income (loss) plus income tax expense (benefit), interest expense, depreciation and amortization, and stock-based compensation expense and less cash payments for environmental remediation and other non-recurring gains in excess of $50. In accordance with the definitions contained in the Revolving Credit Facility, as of December 31, 2009, our Total Leverage Ratio was 3.86 to 1.00 and our Interest Coverage Ratio was 2.88 to 1.00.

6. DEBT (continued)

The Revolving Credit Facility also contains usual and customary events of default (subject to certain threshold amounts and grace periods), including cross-default provisions that include our Senior Notes. 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 December 31, 2009, under our Revolving Credit Facility, we had no borrowings outstanding, availability of $18,107, 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 December 31, 2009, we had $1,893 in outstanding standby letters of credit which mature through July 2013. 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.

7. COMMITMENTS AND CONTINGENCIES

Regulatory Review of Perchlorates. Our Specialty Chemicals segment manufactures and sells products that contain perchlorates. Federal and state regulators continue to review the effects of perchlorate, if any, on human health and the related allowable maximum level of contaminant from perchlorate. While the presence of regulatory review presents general business risk to the Company, we are currently unaware of any regulatory proposal that would have a material effect on our results of operations and financial position or that would cause us to significantly modify or curtail our business practices, including our remediation activities discussed below.

Perchlorate Remediation Project in Henderson, Nevada. We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada (“AMPAC Henderson Site”) from 1958 until the facility was destroyed in May 1988, after which we relocated our production to a new facility in Iron County, Utah. Kerr-McGee Chemical Corporation (“KMCC”) also operated a perchlorate production facility in Henderson, Nevada (the “KMCC Site”) from 1967 to 1998. In addition, between 1956 and 1967, American Potash operated a perchlorate production facility and, for many years prior to 1956, other entities also manufactured perchlorate chemicals at the KMCC Site. As a result of a longer production history in Henderson, KMCC and its predecessor operations manufactured significantly greater amounts of perchlorate over time than we did at the AMPAC Henderson Site.

In 1997, the Southern Nevada Water Authority (“SNWA”) detected trace amounts of the perchlorate anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern Nevada and areas of Southern California. 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 Nevada Division of Environmental Protection (“NDEP”), we engaged in an investigation of groundwater near the AMPAC Henderson Site and down gradient toward the Las Vegas Wash. The 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 parts per million, 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 KMCC Site did impact the Las Vegas Wash and Lake Mead. KMCC’s successor, Tronox LLC, operates an above ground perchlorate groundwater remediation facility at their Henderson site. Recent measurements of perchlorate in Lake Mead made by SNWA have been less than 10 parts per billion.

7. COMMITMENTS AND CONTINGENCIES (Continued)

Notwithstanding these facts, and at the direction of NDEP and the U.S. Environmental Protection Agency (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 was in situ bioremediation (“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 the fiscal year ended September 30, 2005 (“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. The location of this facility is several miles, in the direction of groundwater flow, from the AMPAC Henderson Site.

At the request of the NDEP, we recently renewed discussions to formalize our remediation efforts in a voluntary agreement that, if negotiated and executed, would provide more detailed regulatory guidance on environmental characterization and remedies at the AMPAC Henderson Site and vicinity. The agreement under discussion would be expected to be similar to others previously executed by the NDEP with other companies under similar circumstances. Typically, such agreements generally cover such matters as the scope of work plans, schedules, deliverables, remedies for non compliance, and reimbursement to the State of Nevada for past and future oversight.

Henderson Site Environmental Remediation Reserve. 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.

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 AMPAC Henderson Site, including the costs for capital equipment, operating and maintenance (“O&M”), and consultants. The project consisted of two primary phases: the initial construction of the remediation equipment phase and the O&M phase. During the fiscal year ended September 30, 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.

ISB is a new technology on the scale being used at the AMPAC Henderson Site. Accordingly, as we gain ISB operational experience, we have been and are observing certain conditions, operating results and other data which we consider in updating the assumptions used to determine our cost estimates. The two most significant assumptions are the estimated speed of groundwater flowing to our remediation extraction wells and the estimated annual O&M costs.

Late in the fiscal year ended September 30, 2009 (“Fiscal 2009”), we gained additional information from groundwater modeling that indicates groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones (more than 150 feet below ground surface) is moving toward our existing remediation facility at a much slower pace than previously estimated. Utilization of our existing facilities alone, at this lower groundwater pace, could, according to this recently created groundwater model, extend the life of our remediation project to well in excess of fifty years. As a result of this additional data, we re-evaluated our remediation operations. This evaluation indicates

7. COMMITMENTS AND CONTINGENCIES (Continued)

that we should be able to significantly reduce the total project time, and ultimately the total cost of the project, by installing additional groundwater extraction wells in the deeper, more concentrated areas, thereby providing for a more aggressive remediation treatment. The additional wells and related remediation equipment will incorporate above ground treatment to supplement or possibly replace by consolidation our existing ISB process. With the additional extraction wells and equipment, we estimate that the total remaining project life for the existing and new, more aggressive deep zone systems could range from 10 to 29 years, beginning with the fiscal year ending September 30, 2010 (“Fiscal 2010”). Within that range, we estimate that a range of 13 to 23 years is more likely. Groundwater speed, perchlorate concentrations, aquifer characteristics and forecasted groundwater extraction rates continue to be key variables underlying our estimate of the life of the project. If additional information becomes available in the future that is different than information currently available to us, our estimate of the resulting project life could change significantly.

In our Fiscal 2009 fourth quarter, we accrued approximately $9,600 representing our estimate of the cost to engineer, design, and install this additional equipment. We anticipate that these amounts will be spent through and the new equipment operational in approximately fall 2011. However, because we are in the early design and engineering steps, this estimate involves a number of significant assumptions. Due to uncertainties inherent in making early stage estimates, our estimate may later require significant revision as new facts become available and circumstances change.

In addition to accruing approximately $9,600 for engineering, design, installation and cost of additional equipment, in our Fiscal 2009 fourth quarter, we increased our estimate of total remaining O&M costs by $4,100 due primarily to incremental O&M costs to operate and maintain the additional equipment once installed. Total O&M expenses are currently estimated at approximately $1,000 per year and estimated to increase to approximately $1,300 per year after the additional equipment becomes operational. To estimate O&M costs, we consider, among other factors, the project scope and historical expense rates to develop assumptions regarding labor, utilities, repairs, maintenance supplies and professional service costs. If additional information becomes available in the future that is different than information currently available to us and thereby lead us to different conclusions, our estimate of O&M expenses could change significantly.

In addition, 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.

As of December 31, 2009, the aggregate range of anticipated environmental remediation costs was from approximately $22,300 to approximately $46,500 based on a possible total remaining life of the project ranging from 10 to 29 years. The accrued amount was $26,008, based on 13 years (beginning with Fiscal 2010), or the low end of the more likely range of 13 to 23 years as no amount within the range was more likely. These estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate. A summary of our environmental reserve activity for the three months ended December 31, 2009 is shown below:

Balance, September 30, 2009		$	26,690
Additions or adjustments			—
Expenditures			(682	)
Balance, December 31, 2009		$	26,008

AFC Environmental Matters. Our Fine Chemicals segment, Ampac Fine Chemicals LLC (“AFC”), is located on land leased from Aerojet-General Corporation (“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 of 1980 (“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

7. COMMITMENTS AND CONTINGENCIES (Continued)

Aerojet Fine Chemicals LLC (predecessor in interest to AFC) as part of its operations, CERCLA, among other things, provides for joint and severable liability for environmental liabilities including, for example, environmental remediation expenses.

As part of the agreement by which we acquired the business of AFC from GenCorp Inc. (“GenCorp”), 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 Aerojet Fine Chemicals LLC, 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 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.

Other Matters. Although we are not currently party to any material pending legal proceedings, we are from time to time subject to claims and lawsuits related to our business operations. We accrue for loss contingencies when a loss is probable and the amount can be reasonably estimated. Legal fees, which can be material in any given period, are expensed as incurred. We believe that current claims or lawsuits against us, individually and in the aggregate, will not result in loss contingencies that will have a material adverse effect on our financial condition, cash flows or results of operations.

8. SEGMENT INFORMATION

We report our business in four operating segments: Fine Chemicals, Specialty 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 income or loss 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.

Fine Chemicals. Our Fine Chemicals segment includes the operating results of our wholly-owned subsidiary Ampac Fine Chemicals LLC or AFC. AFC is a custom manufacturer of active pharmaceutical ingredients and registered intermediates for commercial customers in the pharmaceutical industry. AFC operates in compliance with the U.S. Food and Drug Administration’s current Good Manufacturing Practices and other regulatory agencies such as the European Union’s European Medicines Agency and Japan’s Pharmaceuticals and Medical Devices Agency. AFC has distinctive competencies and specialized engineering capabilities in performing chiral separations, manufacturing chemical compounds that require high containment and performing energetic chemistries at commercial scale.

Specialty Chemicals. Our Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, principally ammonium perchlorate, 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, (ii) sodium azide, a chemical used in pharmaceutical manufacturing, and (iii) Halotronâ, a series of clean fire extinguishing agents used in fire extinguishing products ranging from portable fire extinguishers to total flooding systems.

8. SEGMENT INFORMATION (Continued)

Aerospace Equipment. Our Aerospace Equipment segment includes the operating results of our wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned subsidiaries (collectively, “AMPAC ISP”). AMPAC ISP manufactures monopropellant and bipropellant liquid propulsion systems and thrusters for satellites, launch vehicles, and interceptors. In addition, AMPAC ISP designs, develops and manufactures high performance valves, pressure regulators, cold-gas propulsion systems, and precision structures for space applications, especially in the European space market.

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 real estate activities are not material.

Our revenues are characterized by individually significant orders and relatively few customers. As a result, in any given reporting period, certain customers may 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
		December 31,
		2009				2008
Fine chemicals customer							25	%
Fine chemicals customer			15	%
Fine chemicals customer							10	%
Specialty chemicals customer			28	%			29	%

The following provides financial information about our segment operations:

		Three Months Ended
		December 31,
		2009				2008
Revenues:
Fine Chemicals		$	9,504			$	20,384
Specialty Chemicals			12,803				17,359
Aerospace Equipment			8,325				5,756
Other Businesses			3,432				2,130
Total Revenues		$	34,064			$	45,629
Segment Operating Income (Loss):
Fine Chemicals		$	(740	)		$	(1,024	)
Specialty Chemicals			5,831				7,606
Aerospace Equipment			(362	)			410
Other Businesses			(17	)			545
Total Segment Operating Income			4,712				7,537
Corporate Expenses			(4,573	)			(4,112	)
Operating Income (Loss)		$	139			$	3,425
Depreciation and Amortization:
Fine Chemicals		$	3,328			$	3,208
Specialty Chemicals			171				304
Aerospace Equipment			423				331
Other Businesses			4				3
Corporate			127				123
Total Depreciation and Amortization		$	4,053			$	3,969

9. INCOME TAXES

We review our portfolio of uncertain tax positions and recorded liabilities based on the applicable recognition standards. In this regard, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We classify uncertain tax positions as non-current income tax liabilities unless expected to be settled within one year.

As of both December 31, 2009 and September 30, 2009, our recorded liability for unrecognized tax benefits was $652, of which $335 would affect our effective tax rate, if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. In Fiscal 2010, it is reasonably possible that the gross liability for unrecognized tax benefits will decrease by $323 primarily as a result of a change in accounting methods for tax purposes and the lapsing of statutes of limitations.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2009 and September 30, 2009, we had accrued $166 and $164, respectively, for the payment of tax-related interest and penalties. For the three months ended December 31, 2009 and 2008, income tax (benefit) expense includes a benefit of $8 and expense of $2 for interest and penalties.

We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions. With few exceptions, we are no longer subject to federal or state income tax examinations for years before 2006.

10. 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 Amended and Restated American Pacific Corporation Defined Benefit Pension Plan, the Ampac Fine Chemicals LLC Pension Plan for Salaried Employees, and the Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees, each as amended and restated (collectively, the “Pension Plans”). In addition, we maintain the American Pacific Corporation Supplemental Executive Retirement Plan, as amended and restated (the “SERP”), which includes certain of our existing and prior executive officers.

We maintain two 401(k) plans in which participating employees may make contributions. One covers substantially all U.S. employees except AFC bargaining unit employees and the other covers AFC bargaining unit employees. We make matching contributions for employees of AFC and U.S. employees of our Aerospace Equipment segment. In addition, we make a profit sharing contribution for U.S. employees of our Aerospace Equipment segment.

We provide healthcare and life insurance benefits to substantially all of our employees.

10. DEFINED BENEFIT PLANS (Continued)

Net periodic pension cost consists of the following:

		Three Months Ended
		December 31,
		2009				2008
Pension Plans:
Service Cost		$	625			$	507
Interest Cost			798				670
Expected Return on Plan Assets			(603	)			(601	)
Recognized Actuarial Losses			263				109
Amortization of Prior Service Costs			19				19
Net Periodic Pension Cost		$	1,102			$	704
Supplemental Executive Retirement Plan:
Service Cost		$	110			$	98
Interest Cost			93				102
Expected Return on Plan Assets							—
Recognized Actuarial Losses							—
Amortization of Prior Service Costs			105				105
Net Periodic Pension Cost		$	308			$	305

For the three months ended December 31, 2009, we contributed $527 to the Pension Plans to fund benefit payments and anticipate making approximately $2,041 in additional contributions through September 30, 2010. For the three months ended December 31, 2009, we contributed $32 to the SERP to fund benefit payments and anticipate making approximately $450 in additional contributions through September 30, 2010.

11. GUARANTOR SUBSIDIARIES

As discussed in Note 6, in February 2007, American Pacific Corporation, a Delaware corporation (“Parent”) issued and sold $110,000 aggregate principal amount of Senior Notes. In connection with the issuance of the Senior Notes, the Parent’s U.S. subsidiaries (“Guarantor Subsidiaries”) jointly, fully, severally, and unconditionally guaranteed the Senior Notes. The Parent’s foreign subsidiaries (“Non-Guarantor Subsidiaries”) are not guarantors of the Senior Notes. Each of the Parent’s subsidiaries is 100% owned. The Parent has no independent assets or operations. The following presents condensed consolidating financial information separately for the Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries.

     Condensed Consolidating Balance Sheet — December 31, 2009

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets:
Cash and Cash Equivalents		$	—			$	36,903			$	1,716			$	—			$	38,619
Accounts Receivable, Net			—				20,587				3,565				(263	)			23,889
Inventories			—				46,466				1,317				—				47,783
Prepaid Expenses and Other Assets			—				2,273				80				—				2,353
Income Taxes Receivable and Deferred Income Taxes			—				8,756				—				—				8,756
Total Current Assets			—				114,985				6,678				(263	)			121,400
Property, Plant and Equipment, Net			—				111,110				1,524				—				112,634
Intangible Assets, Net			—				1,465				1,540				—				3,005
Goodwill			—				—				3,088				—				3,088
Deferred Income Taxes			—				21,122				—				—				21,122
Other Assets			—				10,150				—				—				10,150
Intercompany Advances			79,918				2,879				—				(82,797	)			—
Investment in Subsidiaries, Net			100,010				5,827				—				(105,837	)			—
Total Assets		$	179,928			$	267,538			$	12,830			$	(188,897	)		$	271,399
Liabilitites and Stockholders’ Equity:
Accounts Payable and Other Current Liabilities		$	—			$	23,354			$	1,818			$	(263	)		$	24,909
Environmental Remediation Reserves			—				2,110				—				—				2,110
Deferred Revenues and Customer Deposits			—				9,016				2,085				—				11,101
Current Portion of Long-Term Debt			—				69				52				—				121
Intercompany Advances			—				79,918				2,879				(82,797	)			—
Total Current Liabilities			—				114,467				6,834				(83,060	)			38,241
Long-Term Debt			110,000				48				83				—				110,131
Environmental Remediation Reserves			—				23,898				—				—				23,898
Pension Obligations and Other Long-Term Liabilities			—				29,115				86				—				29,201
Total Liabilities			110,000				167,528				7,003				(83,060	)			201,471
Total Shareholders’ Equity			69,928				100,010				5,827				(105,837	)			69,928
Total Liabilities and Shareholders’ Equity		$	179,928			$	267,538			$	12,830			$	(188,897	)		$	271,399

11. GUARANTOR SUBSIDIARIES (Continued)

Condensed Consolidating Balance Sheet — September 30, 2009

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets:
Cash and Cash Equivalents		$	—			$	20,046			$	1,635			$	—			$	21,681
Accounts Receivable, Net			—				40,399				3,951				(322	)			44,028
Inventories			—				35,223				1,133				—				36,356
Prepaid Expenses and Other Assets			—				1,645				166				—				1,811
Income Taxes Receivable and Deferred Income Taxes			—				8,465				—				—				8,465
Total Current Assets			—				105,778				6,885				(322	)			112,341
Property, Plant and Equipment, Net			—				113,143				1,502				—				114,645
Intangible Assets, Net			—				1,775				1,778				—				3,553
Goodwill			—				—				3,144				—				3,144
Deferred Income Taxes			—				21,121				—				—				21,121
Other Assets			—				10,037				—				—				10,037
Intercompany Advances			79,918				2,535				—				(82,453	)			—
Investment in Subsidiaries, Net			101,179				6,229				—				(107,408	)			—
Total Assets		$	181,097			$	260,618			$	13,309			$	(190,183	)		$	264,841
Liabilitites and Stockholders’ Equity:
Accounts Payable and Other Current Liabilities		$	—			$	19,894			$	1,936			$	(322	)		$	21,508
Environmental Remediation Reserves			—				2,522				—				—				2,522
Deferred Revenues and Customer Deposits			—				4,579				2,332				—				6,911
Current Portion of Long-Term Debt			—				99				52				—				151
Intercompany Advances			—				79,918				2,535				(82,453	)			—
Total Current Liabilities			—				107,012				6,855				(82,775	)			31,092
Long-Term Debt			110,000				—				97				—				110,097
Environmental Remediation Reserves			—				24,168				—				—				24,168
Pension Obligations and Other Long-Term Liabilities			—				28,259				128				—				28,387
Total Liabilities			110,000				159,439				7,080				(82,775	)			193,744
Total Shareholders’ Equity			71,097				101,179				6,229				(107,408	)			71,097
Total Liabilities and Shareholders’ Equity		$	181,097			$	260,618			$	13,309			$	(190,183	)		$	264,841

Condensed Consolidating Statement of Operations — Three Months Ended December 31, 2009

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	—			$	31,728			$	2,503			$	(167	)		$	34,064
Cost of Revenues			—				20,012				1,773				(167	)			21,618
Gross Profit			—				11,716				730				—				12,446
Operating Expenses			—				11,257				1,050				—				12,307
Operating Income (Loss)			—				459				(320	)			—				139
Interest and Other Income			2,669				40				(48	)			(2,669	)			(8	)
Interest Expense			2,669				2,689				2				(2,669	)			2,691
Loss before Income Tax and Equity Account for Subsidiaries			—				(2,190	)			(370	)			—				(2,560	)
Income Tax Benefit			—				(1,077	)			(43	)			—				(1,120	)
Loss before Equity Account for Subsidiaries			—				(1,113	)			(327	)			—				(1,440	)
Equity Account for Subsidiaries			(1,440	)			(327	)			—				1,767				—
Net Loss		$	(1,440	)		$	(1,440	)		$	(327	)		$	1,767			$	(1,440	)

11. GUARANTOR SUBSIDIARIES (Continued)

Condensed Consolidating Statement of Operations — Three Months Ended December 31, 2008

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	—			$	43,902			$	1,745			$	(18	)		$	45,629
Cost of Revenues			—				29,809				1,104				(18	)			30,895
Gross Profit			—				14,093				641				—				14,734
Operating Expenses			—				10,711				598				—				11,309
Operating Income			—				3,382				43				—				3,425
Interest and Other Income			2,668				89				1				(2,668	)			90
Interest Expense			2,668				2,686				37				(2,668	)			2,723
Income before Income Tax and Equity Account for Subsidiaries			—				785				7				—				792
Income Tax Expense			—				335				—				—				335
Income before Equity Account for Subsidiaries			—				450				7				—				457
Equity Account for Subsidiaries			457				7				—				(464	)			—
Net Income		$	457			$	457			$	7			$	(464	)		$	457

Condensed Consolidating Statement of Cash Flows — Three Months Ended December 31, 2009

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net Cash Provided (Used) by Operating Activities		$	—			$	18,205			$	(98	)		$	—			$	18,107
Cash Flows from Investing Activities:
Capital expenditures			—				(957	)			(142	)			—				(1,099	)
Net Cash Used in Investing Activities			—				(957	)			(142	)			—				(1,099	)
Cash Flows from Financing Activities:
Payments of long-term debt			—				(47	)			(12	)			—				(59	)
Intercompany advances, net			—				(344	)			344				—				—
Net Cash Provided (Used) by Financing Activities			—				(391	)			332				—				(59	)
Effect of Changes in Currency Exchange Rates			—				—				(11	)							(11	)
Net Change in Cash and Cash Equivalents			—				16,857				81				—				16,938
Cash and Cash Equivalents, Beginning of Period			—				20,046				1,635				—				21,681
Cash and Cash Equivalents, End of Period		$	—			$	36,903			$	1,716			$	—			$	38,619

Condensed Consolidating Statement of Cash Flows — Three Months Ended December 31, 2008

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net Cash Provided by Operating Activities		$	—			$	5,535			$	1,415			$	—			$	6,950
Cash Flows from Investing Activities:
Capital expenditures			—				(1,626	)			(183	)			—				(1,809	)
Acquisition on business, net of cash acquired			—				(7,132	)			479				—				(6,653	)
Net Cash Used in Investing Activities			—				(8,758	)			296				—				(8,462	)
Cash Flows from Financing Activities:
Payments of long-term debt			—				(84	)			(24	)			—				(108	)
Issuance of common stock			32				—				—				—				32
Excess tax benefit from exrecise of stock options			3				—				—				—				3
Intercompany advances, net			(35	)			(363	)			398				—				—
Net Cash Provided by Financing Activities			—				(447	)			374				—				(73	)
Net Change in Cash and Cash Equivalents			—				(3,670	)			2,085				—				(1,585	)
Cash and Cash Equivalents, Beginning of Period			—				26,664				229				—				26,893
Cash and Cash Equivalents, End of Period		$	—			$	22,994			$	2,314			$	—			$	25,308

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: our expectations regarding working capital and related variances in the future, our potential incurrence of additional debt in the future, our belief that our cash flows and existing debt will be adequate for the foreseeable future to satisfy the needs of our operations, our expectations regarding anticipated contributions and obligations with respect to our defined benefit pension plans and supplemental executive retirement plan, our estimates and expectations regarding anticipated cash expenditures for environmental remediation at our former Henderson, Nevada site, our expectations regarding future compliance with debt covenants, statements regarding future price, manufacturing costs and demand for, and related volume of, perchlorate products and the impact on forecasted future revenues, our statement regarding one of the significant factors that will affect our consolidated gross margins in the future, our expectation regarding revenues from our Fine Chemicals segment for the current fiscal year, our expectations regarding fulfillment of existing backlog within the next twelve months, our anticipated capital expenditures for the current fiscal year, and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as “may,” “can,” “will,” “could,” “should,” “expect,” “anticipate,” “believe,” “estimate,” or “future,” 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 future results or outcomes expressed or implied in such forward-looking statements. Please see the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for further discussion of factors that could affect future results. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement, unless otherwise required by law. Any business risks discussed later in this Item 2, among other things, should be considered in evaluating our prospects and future financial performance.

The terms “Company,” “we,” “us,” and “our” are used herein to refer to American Pacific Corporation and, where the context requires, one or more of the direct and indirect subsidiaries or divisions of American Pacific Corporation. The following discussion and analysis is intended to provide a narrative discussion of our financial results and an evaluation of our financial condition and results of operations with respect to the first fiscal quarter of the year ending September 30, 2010 (“Fiscal 2010”) as compared to the first fiscal quarter of the year ended September 30, 2009 (“Fiscal 2009”). The discussion should be read in conjunction with our Annual Report on Form 10-K for Fiscal 2009 filed with the Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. 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 Fiscal 2009.

OUR COMPANY

We are a leading custom manufacturer of fine chemicals, specialty chemicals and propulsion products within our focused markets. We supply active pharmaceutical ingredients (“APIs”) and advanced intermediates to the pharmaceutical industry. For the aerospace and defense industry we provide specialty chemicals used in solid rocket motors for space launch and military missiles. We also design and manufacture liquid propulsion systems, valves and structures for space and missile defense applications. We produce clean agent chemicals for the fire protection industry, as well as electro-chemical equipment for the water treatment industry. 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 and international regulatory standards. We generally sell our products through long-term contracts under which we are the sole-source or limited-source supplier.

OUR BUSINESS SEGMENTS

Our operations comprise four reportable business segments: (i) Fine Chemicals, (ii) Specialty 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
		December 31,
		2009				2008
Fine Chemicals			28	%			45	%
Specialty Chemicals:
Perchlorates			32	%			35	%
Sodium Azide			3	%			1	%
Halotron			3	%			2	%
Total Specialty Chemicals			38	%			38	%
Aerospace Equipment			24	%			13	%
Other Businesses:
Real Estate			0	%*			1	%
Water Treatment Equipment			10	%			3	%
Total Other Businesses			10	%			4	%
Total Revenues			100	%			100	%

FINE CHEMICALS. Our Fine Chemicals segment, operated through our wholly-owned subsidiary Ampac Fine Chemicals LLC (“AFC”), is a custom manufacturer of APIs and registered intermediates for commercial customers in the pharmaceutical industry. The pharmaceutical ingredients 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 segment sales from manufacturing chemical compounds that are proprietary to our customers. We operate in compliance with the U.S. Food and Drug Administration’s (the “FDA”) current Good Manufacturing Practices (“cGMP”) and other regulatory agencies such as the European Union’s European Medicines Agency and Japan’s Pharmaceuticals and Medical Devices Agency. Our Fine Chemicals segment’s strategy is to focus on high growth markets where our technological position, combined with our chemical process development and engineering expertise, leads to strong customer allegiances and limited competition.

We have distinctive competencies and specialized engineering capabilities in performing chiral separations, manufacturing chemical compounds that require high containment and performing energetic chemistries at commercial scale. We have invested significant resources in our facilities and technology base. We believe we are the U.S. leader in performing chiral separations using commercial-scale simulated moving bed, or “SMB,” technology and own and operate two large-scale SMB machines, both of which are among the largest in the world operating under cGMP. We believe our distinctive competency in manufacturing chemical compounds that require specialized high containment facilities and handling expertise provide us a significant competitive advantage in competing for various opportunities associated with high potency, highly toxic and cytotoxic products. Many oncology drugs are made with APIs that are high potency or cytotoxic. AFC is one of the few companies in the world that can manufacture such compounds at a multi-ton annual rate. Moreover, our significant experience and specially engineered facilities make us one of the few companies in the world with the capability to use energetic chemistry on a commercial-scale under cGMP. We use this capability in development and production of products such as those used in anti-viral drugs, including HIV-related and influenza-combating drugs.

We have established long-term, sole-source and limited-source contracts, which help provide us with earnings stability and visibility. In addition, the inherent nature of custom pharmaceutical fine chemicals manufacturing encourages stable, long-term customer relationships. We work collaboratively with our customers to develop reliable, safe and cost-effective, custom solutions. Once a custom manufacturer

has been qualified as a supplier on a cGMP product, there are several potential barriers that discourage transferring the manufacturing of the product to an alternative supplier, including the following:

•		Alternative Supply May Not Be Readily Available. We are currently the sole-source supplier on several of our fine chemicals products.
•		Regulatory Approval. Applications to and approvals from the FDA and other regulatory authorities generally require the chemical contractor to be named. Switching contractors may require additional regulatory approvals and could take as long as two years to complete.
•		Significant Financial Costs. Switching contractors and amending various filings can result in significant costs associated with technology transfer, process validation and re-filing with the FDA and other regulatory authorities.

SPECIALTY CHEMICALS. Our Specialty Chemicals segment is principally engaged in the production of ammonium perchlorate (“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 addition, we produce and sell sodium azide, a chemical used in pharmaceutical manufacturing, and Halotron^®, a series of clean fire extinguishing agents used in fire extinguishing products ranging from portable fire extinguishers to total flooding systems.

We have supplied AP for use in space and defense programs for over 50 years and we have been the only AP supplier in North America since 1998, when we acquired the AP business of our principal competitor, Kerr-McGee Chemical Corporation. 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.

Alliant Techsystems Inc. or “ATK” is a significant 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 requires ATK to 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. Pricing varies inversely to volume and includes annual escalations.

AEROSPACE EQUIPMENT. Our Aerospace Equipment segment reflects the operating results of our wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned subsidiaries (“AMPAC ISP”).

Our U.S.-based Aerospace Equipment operation is one of two major North American manufacturers of monopropellant and bipropellant liquid propulsion systems and thrusters for satellites, launch vehicles, and interceptors. Our products are utilized on various satellite and launch vehicle programs such as Space Systems/Loral’s 1300 series geostationary satellites.

Our European-based Aerospace Equipment operation designs, develops and manufactures high performance valves, pressure regulators, cold-gas propulsion systems, and precision structures for space applications, especially in the European space market. These products are used on various satellites and spacecraft, as well as on the Ariane 5 launch vehicle.

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 real estate activities are not material.

RESULTS OF OPERATIONS

REVENUES

		December 31,								Increase				Percentage
		2009				2008				(Decrease)				Change
Three Months Ended:
Fine Chemicals		$	9,504			$	20,384			$	(10,880	)			(53	%)
Specialty Chemicals			12,803				17,359				(4,556	)			(26	%)
Aerospace Equipment			8,325				5,756				2,569				45	%
Other Businesses			3,432				2,130				1,302				61	%
Total Revenues		$	34,064			$	45,629			$	(11,565	)			(25	%)