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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15 (d) 
of the Securities Exchange Act of 1934
 For Quarterly Period Ended December 31, 2004 or o
    
    Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 Commission File Number 1-8137 AMERICAN PACIFIC CORPORATION  Delaware
    
    59-6490478(State or other jurisdiction
of incorporation or
organization)
    
    (I.R.S. Employer
Identification No.)3770 Howard Hughes Parkway, Suite 300Las Vegas, NV
    
    89109(Address of principal executive offices)
    
    (Zip Code)
 (702) 735-2200
(Registrants telephone number, including area code) NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ No £ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES £ No þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 7,300,000 as of January 31, 2005.




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TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
    
    
    3-25ITEM 1. Financial Statements
    
    
    3ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25ITEM 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    26ITEM 1. Legal Proceedings
    
    
    26ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    26ITEM 3. Defaults Upon Senior Securities
    
    
    26ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    26ITEM 5. Other Information
    
    
    26ITEM 6. Exhibits and Reports on Form 8-K
    
    
    26EX-31.1EX-31.2EX-32.1EX-32.2
  - 2 -




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PART I. FINANCIAL STATEMENTS 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
For the Three Months Ended December 31,
(unaudited) 2004
    
    
    2003Sales and Operating Revenues
    
    $
    18,254,000
    
    
    $
    4,794,000Cost of Sales
    
    
    12,545,000
    
    
    
    4,324,000Gross Profit
    
    
    5,709,000
    
    
    
    470,000Operating Expenses
    
    
    6,695,000
    
    
    
    3,764,000Operating Loss
    
    
    (986,000
    )
    
    
    (3,294,000
    )Net Interest and Other Expense (Income)
    
    
    (43,000
    )
    
    
    96,000Loss Before Income Taxes
    
    
    (943,000
    )
    
    
    (3,390,000
    )Benefit for Income Taxes
    
    
    (349,000
    )
    
    
    (1,186,000
    )Loss Before Extraordinary Gain
    
    
    (594,000
    )
    
    
    (2,204,000
    )Extraordinary Gain, Net of Taxes
    
    
    1,622,000Net Income (Loss)
    
    $
    1,028,000
    
    
    $
    (2,204,000
    )Basic Net Income (Loss) Per Share:Loss Before Extraordinary Gain
    
    $
    (.08
    )
    
    $
    (.30
    )Extraordinary Gain
    
    
    .22Net Income (Loss)
    
    $
    .14
    
    
    $
    (.30
    )Average Shares Outstanding
    
    
    7,292,000
    
    
    
    7,256,000Diluted Net Income (Loss) Per Share:Loss Before Extraordinary Gain
    
    $
    (.08
    )
    
    $
    (.30
    )Extraordinary Gain
    
    
    .22Net Income (Loss)
    
    $
    .14
    
    
    $
    (.30
    )Diluted Shares
    
    
    7,317,000
    
    
    
    7,256,000
 See the accompanying Notes to Condensed Consolidated Financial Statements. - 3 -




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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited) December 31,
    
    
    September 30,2004
    
    
    2004ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    21,709,000
    
    
    $
    23,777,000Accounts and Notes Receivable
    
    
    19,339,000
    
    
    
    15,963,000Related Party Notes and Accrued Interest Receivable
    
    
    250,000
    
    
    
    268,000Inventories
    
    
    15,410,000
    
    
    
    13,827,000Prepaid Expenses and Other Assets
    
    
    2,201,000
    
    
    
    666,000Deferred Income Taxes
    
    
    349,000
    
    
    
    320,000Total Current Assets
    
    
    59,258,000
    
    
    
    54,821,000Property, Plant and Equipment, Net
    
    
    16,510,000
    
    
    
    16,573,000Intangible Assets, Net
    
    
    12,704,000
    
    
    
    13,679,000Joint Venture Equity
    
    
    291,000
    
    
    
    227,000Deferred Income Taxes
    
    
    10,952,000
    
    
    
    11,585,000Other Assets, Net
    
    
    3,744,000
    
    
    
    3,743,000TOTAL ASSETS
    
    $
    103,459,000
    
    
    $
    100,628,000
 See the accompanying Notes to Condensed Consolidated Financial Statements. - 4 -




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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited) December 31,
    
    
    September 30,2004
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    4,948,000
    
    
    $
    4,481,000Accrued Liabilities
    
    
    6,901,000
    
    
    
    5,649,000Total Current Liabilities
    
    
    11,849,000
    
    
    
    10,130,000Other Long-Term Liabilities
    
    
    5,282,000
    
    
    
    5,698,000TOTAL LIABILITIES
    
    
    17,131,000
    
    
    
    15,828,000Commitments and ContingenciesShareholders Equity:Common Stock
    
    
    932,000
    
    
    
    932,000Capital in Excess of Par Value
    
    
    86,148,000
    
    
    
    86,148,000Retained Earnings
    
    
    16,925,000
    
    
    
    15,897,000Treasury Stock
    
    
    (16,982,000
    )
    
    
    (16,982,000
    )Accumulated Other Comprehensive Loss
    
    
    (695,000
    )
    
    
    (1,195,000
    )Total Shareholders Equity
    
    
    86,328,000
    
    
    
    84,800,000TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    103,459,000
    
    
    $
    100,628,000
 See the accompanying Notes to Condensed Consolidated Financial Statements. - 5 -




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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended December 31,
(unaudited) 2004
    
    
    2003Cash Flows From Operating Activities
    
    $
    3,038,000
    
    
    $
    (5,274,000
    )Cash Flows From Investing Activities:Asset Purchase
    
    
    (4,468,000
    )Capital Expenditures
    
    
    (568,000
    )
    
    
    (321,000
    )Investment in and Advances to Joint Venture
    
    
    (141,000
    )
    
    
    (144,000
    )Net Cash From Investing Activities
    
    
    (5,177,000
    )
    
    
    (465,000
    )Cash Flows From Financing Activities:Issuance of Common Stock
    
    
    
    
    
    
    2,142,000Treasury Stock Acquired
    
    
    
    
    
    
    (2,752,000
    )Net Cash From Financing Activities
    
    
    
    
    
    
    (610,000
    )Net Change in Cash and Cash Equivalents
    
    
    (2,139,000
    )
    
    
    (6,349,000
    )Cash and Cash Equivalents, Beginning of Period
    
    
    23,777,000
    
    
    
    27,140,000Foreign Currency Exchange Rate
    
    
    71,000Cash and Cash Equivalents, End of Period
    
    $
    21,709,000
    
    
    $
    20,791,000Supplemental Disclosure of Cash Flow Information:Cash paid during quarter for taxes
 See the accompanying Notes to Condensed Consolidated Financial Statements - 6 -




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):  1.
    BASIS OF REPORTINGThe accompanying Condensed Consolidated Financial Statements are unaudited and do not include
certain information and disclosures included in the Annual Report on Form 10-K of American
Pacific Corporation (the Company, we, us, or our). The Condensed Consolidated Balance
Sheet as of September 30, 2004, was derived from the Consolidated Financial Statements included
in our Annual Report on Form 10-K for the year ended September 30, 2004. Such statements should
therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto
included in our Annual Report on Form 10-K for the year ended September 30, 2004. In our
opinion, however, all adjustments necessary for a fair presentation have been included. The
operating results and cash flows for the three-month period ended December 31, 2004 are not
necessarily indicative of the results that will be achieved for the full fiscal year or for
future periods.A summary of our significant accounting policies is included in our Annual Report on Form 10-K
for the year ended September 30, 2004. We believe that the application of these policies on a
consistent basis enables us to provide the users of the financial statements with useful and
reliable information about our operating results and financial condition.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenue and expenses. Judgments and assessments of
uncertainties are required in applying our accounting policies in many areas. For example, key
assumptions and estimates are particularly important when determining our projected liabilities
for pension benefits, useful lives for depreciable and amortizable assets, deferred tax assets
and long-lived assets, including intangible assets. Other areas in which significant
uncertainties exist include, but are not limited to, costs that may be incurred in connection
with environmental matters and the resolution of litigation and other contingencies. Actual
results will inevitably differ to some extent from estimates on which our Condensed Consolidated
Financial Statements were prepared.Revenue recognition of the specialty chemicals and environmental protection products 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. We offer
some of our perchlorate product customers the option, at their election, of storing purchased
materials in our Cedar City facility (Bill and Hold transactions). We recognize the revenue
and profit from these Bill and Hold transactions at the point at which the risks of ownership
and transfer of title are transferred to the customers. Sales of the environmental protection
equipment segment are recognized when the product is shipped. We receive cash for the full
amount of real estate sales at the time of closing which is when the sale is recorded.Revenues from the Companys Aerospace Equipment segment is derived from contracts that are
accounted for in conformity with the American Institute of Certified Public Accountants
(AICPA) audit and accounting guide, Audits of Federal Government Contracts and the AICPAs
Statement of Position No. 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and
Certain Production Type Contacts. The Company accounts for these contracts using the
percentage-of-completion method, and progress is measured on a cost-to-cost basis. Sales include
estimated earned fees or profits calculated on the relationship between contract milestones and
the estimate at completion. 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. -7-




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During the first quarter of fiscal 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. The adoption of SFAS No. 142 did not
have a material effect on our results of operations or financial position. Under the provisions
of SFAS No. 142, the intangible asset related to our perchlorate acquisition (the Acquisition)
in fiscal 1998 will continue to be amortized under its originally assigned life of ten years. At
December 31, 2004, this intangible asset had a gross carrying value of approximately $39.0
million and accumulated amortization of approximately $26.5 million. Amortization expense was
approximately $1.0 million during both the three months ended December 31, 2004 and 2003.
Amortization expense is estimated to amount to approximately $3.9 million in each of the years
during the three-year period ending September 30, 2007.In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, which addresses consolidation by business enterprises of variable interest
entities that either: (1) do not have sufficient equity investment at risk to permit the entity
to finance its activities without additional subordinated financial support, or (2) hold a
significant variable interest in, or have significant involvement with, an existing variable
interest entity. In December 2003, FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities (FIN
46(R)), was issued to clarify the
application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as
amended by FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries.We historically treated our 50% equity interest in the Energetic System (ES) joint venture as
an unconsolidated operation whose financial performance was disclosed, but not consolidated in
our financial results. However under FIN 46(R), we are required to consolidate the ES joint
venture due to a number of factors including our majority ownership of the joint ventures debt
securities.We consolidated the ES joint venture as of March 31, 2004. We reported a cumulative effect of an
accounting change of $769,000 (net of tax benefit of $414,000) on our 2004 second quarter income
statement to reflect the loss that we would have incurred had the ES joint venture been
consolidated since its inception. The consolidation of the ES joint venture significantly
changes various line items of our balance sheet, statement of operations and cash flow
presentations as compared to financial presentations in earlier reports.In November 2004, the FASB issued SFAS 151, Inventory Costsan amendment of ARB No. 43, Chapter
4. The Statement amends the guidance of ARB No. 43, Chapter 4, Inventory Pricing, by clarifying
that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of the production
facilities. The Statement is effective for the Company beginning in fiscal 2006 and could have a
material effect on our financial statements upon adoption.In December 2004, the FASB issued a revision to SFAS 123 (revised in 2004, as
described below), Share-Based Payment. The revision requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based payments granted to
employees. The revision eliminates the alternative method of accounting for employee share-based
payments previously available under APB 25. Beginning in our fourth quarter of fiscal 2005, the
revision will be reflected in our financial statements.Our only component of other comprehensive income (loss) represents a minimum pension liability
adjustment. The changes in such adjustment were approximately $429,000 and $680,000 (net of
applicable income taxes) during the three-month periods ended December 31, 2004 and 2003, -8-




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respectively. Comprehensive income (loss) for the three-month periods ended December 31, 2004
and 2003, was as follows: Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Net loss before extraordinary gain
    
    $
    (594,000
    )
    
    $
    (2,204,000
    )Minimum pension liability adjustment
    
    
    429,000
    
    
    
    680,000Comprehensive loss
    
    $
    (165,000
    )
    
    $
    (1,524,000
    )
  2.
    NET INCOME (LOSS) PER COMMON SHAREBasic per share amounts are computed by dividing net income (loss) by average shares outstanding
during the period. Diluted per share amounts are calculated by
dividing net income by average shares outstanding plus the dilutive effect of common share equivalents. Approximately 29,000
shares were included in diluted per share calculations for the
three-month period ended December 31, 2004.In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation was issued.
SFAS 148 is effective for fiscal years ending after December 15, 2002, and gives further
guidance regarding methods of transition for a voluntary change to the fair-value-based method
of accounting for stock-based employee compensation and regarding disclosure requirements as
previously defined in SFAS 123. We have elected to follow APB No. 25, Accounting for Stock
Issued to Employees and related interpretations in accounting for our stock options. Under APB
No. 25, if the exercise price of our employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is recognized.We granted stock options to our directors in the first quarter of fiscal 2005 ended December 31,
2004. The effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS No. 123 to our stock option grants would have been as follows: Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Net loss before extraordinary gain:As reported
    
    $
    (594,000
    )
    
    $
    (2,204,000
    )Total stock based employee compensation
expense using the fair value based method,
net of related tax
    
    
    82,000
    
    
    
    122,000Pro forma
    
    $
    (676,000
    )
    
    $
    (2,326,000
    )Net income (loss):As reported
    
    $
    1,028,000
    
    
    $
    (2,204,000
    )Total stock based employee compensation
expense using the fair value based method,
net of related tax
    
    
    82,000
    
    
    
    122,000Pro forma
    
    $
    946,000
    
    
    $
    (2,326,000
    )Basic earnings (loss) per share before
extraordinary gain:As reported
    
    $
    .14
    
    
    $
    (.30
    )Pro forma
    
    $
    .13
    
    
    $
    (.32
    )
 -9-




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Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Basic loss per share before extraordinary gain:As reported
    
    $
    (.08
    )
    
    $
    (.30
    )Pro forma
    
    $
    (.09
    )
    
    $
    (.32
    )Diluted earnings (loss) per share:As reported
    
    $
    .14
    
    
    $
    (.30
    )Pro forma
    
    $
    .13
    
    
    $
    (.32
    )Diluted loss per share before extraordinary
gain:As reported
    
    $
    (.08
    )
    
    $
    (.30
    )Pro forma
    
    $
    (.09
    )
    
    $
    (.32
    )
  The estimated fair value of the individual options granted during the fiscal quarter of fiscal
2005 was $3.74 on the date of grant. This fair value was determined using a Black-Scholes
option-pricing model with the following assumptions: 2005Dividend yield
    
    
    0
    %Volatility
    
    
    50
    %Risk-free interest rate
    
    
    3.5
    %Expected life
    
    4.5 years
  3.
    INVENTORIESInventories consist of the following: December 31,
    
    
    September 30,2004
    
    
    2004Work-in-process
    
    $
    10,533,000
    
    
    $
    6,321,000Raw materials and supplies
    
    
    4,877,000
    
    
    
    7,506,000Total
    
    $
    15,410,000
    
    
    $
    13,827,000
  4.
    DEBTAs of December 31, 2004, we had approximately $1,936,000 in outstanding standby letters of
credit with $564,000 of additional availability with US Bank. These letters of credit
principally secure performance of certain environmental protection equipment sold by us and
payment of fees associated with the delivery of natural gas and power.5.
    COMMITMENTS AND CONTINGENCIESIn 1997, the Southern Nevada Water Authority detected trace amounts of perchlorate chemicals in
Lake Mead and the Las Vegas Wash, bodies of water near our real estate development property in
Henderson, Nevada (in the Las Vegas area). Lake Mead is a source of drinking water for the City
of Las Vegas, neighboring areas and certain areas of metropolitan Southern California.
Perchlorate chemicals are a potential health concern because they can interfere with the
production of a growth hormone by the thyroid gland. Although they are not currently included in
the list of hazardous substances compiled by the Environmental Protection Agency (EPA),
perchlorates have been added to the EPAs Contaminant Candidate List. We manufactured
perchlorate chemicals at a facility on the Henderson site until the facility was destroyed in
May 1988, after which we relocated our perchlorate production to our current facilities in Iron
County, Utah. For many years, Kerr-McGee also operated a perchlorate production facility at a
site near our Henderson site. -10-




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The Water Authoritys testing has shown perchlorate concentrations of 4 to 18 parts per billion
(ppb) in Clark County drinking water. In response to this discovery, we have engaged
environmental consultants to drill monitor wells in order to characterize ground water at, and
in the vicinity of, the Henderson site. The results of our tests have shown perchlorate
concentrations in the ground water at the former Henderson site ranging from 0 to approximately
750,000 ppb at certain monitoring wells. Since 1998, we have spent in excess of $7.0 million on
the investigation and evaluation of the source or sources of these trace amounts, possible
environmental impacts, and potential remediation methods (including the pilot process described
below). Our ground water characterization investigations indicate that the ground water
containing perchlorate at and around our former Henderson manufacturing site has not reached the
Las Vegas Wash or Lake Mead and, accordingly, has not been introduced into any source of
drinking water. Based upon flow rates and modeling techniques, such ground water is not expected
to reach a source of drinking water for several years. We have completed a pilot remediation
testing process to treat groundwater containing perchlorate at and near the Henderson site using
a biological in situ method. The pilot remediation test is complete and achieved all its
operational objectives.The EPA is conducting a risk assessment relating to perchlorates and has recommended a
preliminary reference dose for perchlorates that would equate to 1 ppb in drinking water.
Certain states are also conducting risk assessments and some have set preliminary levels as low
as 1 ppb. To our knowledge, virtually all independent and qualified experts believe that such
preliminary levels have been arbitrarily established and are not based upon credible science.
The National Academy of Sciences (NAS) was requested to review the work done by EPA to date
along with other science that was disregarded or developed after EPA had drawn their
conclusions. The NAS report was released January 11, 2005. The recommendations contained in this
NAS report indicate that human health is protected at a level in drinking water at a level of
approximately 24 ppb. The report will have to be assessed and evaluated by the EPA before any
final reference dose is published. Public statements indicate that the EPA intends to complete
its risk assessment and make a final reference dose recommendation, although we do not know when
that will occur. We are cooperating with Federal, State and local agencies, and with Kerr-McGee
and other interested firms, in the investigation and evaluation of the source or sources of
these trace amounts, possible environmental impacts, potential remediation methods and a proper
reference dose. Until these investigations and evaluations have reached definitive conclusions,
it will not be possible for us to determine the extent to which, if at all, we may be called
upon to contribute to, or assist with future remediation efforts, or the financial impact, if
any, of such cooperation, contribution or assistance. Accordingly, no accrual for potential
costs has been made in our Condensed Consolidated Financial Statements. However, the lower the
level at which final reference dose is established, the more severe the negative impact will
likely be on our financial condition, results of operations and ability to manufacture and
handle perchlorate chemicals.In January 2002, the Company received a claim for approximately $1.7 million from Frontier
Insurance Company (Frontier), alleging liability arising from indemnity agreements. The
Company rejected the claim and filed a complaint with the District Court, Clark County, Nevada
on February 28, 2002, seeking a declaratory judgment declaring that the indemnity agreements
have been terminated and that we have no liability to Frontier. Frontier was declared insolvent
and ordered into rehabilitation status by the Supreme Court of New York on October 15, 2001,
which Order also stayed all lawsuits involving Frontier. On March 31, 2004, the Nevada District
Court dismissed our declaratory judgment suit without prejudice because the case had been
pending for more than two years. Recent information indicates that Frontiers rehabilitation
status has not changed.On June 4, 2004, Alan Andrew Curtis and Linda Ann Curtis, residents of Bullhead City, Arizona,
filed an action in the United States District Court for the District of Arizona entitled Alan
Andrew Curtis, an individual (Husband); Linda Ann Curtis, an individual (Wife), Plaintiffs,
vs. City of -11-




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Bullhead City, Arizona a municipality; The County of Mohave, Arizona; The State of Arizona;
Arizona Department of Environmental Quality; Arizona-American Water Company; The State of
Nevada; Clark County Nevada; The Southern Nevada Water Authority; Kerr-McGee Corporation LLC;
American Pacific Corporation; State Title Corporation of Arizona; Mister and Miss Edward Koontz;
The United States Department of the Interior; The United States Environmental Protection Agency
Region IX; and Does 1 through 100, Inclusive, Defendants, alleging that various combinations of
defendants are liable under federal and state law for damages and injuries suffered by the
Curtis and the environment as a result of perchlorate and other contaminants found in the
Colorado River, and requesting compensation and injunctive relief. We waived service of the
summons and complaint on August 12, 2004, and filed a motion to dismiss based on perceived
jurisdictional, procedural, and substantive defects in the Curtis complaint on September 20,
2004. Several other defendants also filed motions to dismiss. There have been numerous motions
to strike documents filed by the Curtis. The court has not yet ruled on any motion to dismiss,
and we are therefore not in a position to know with any degree of certainty how the Court views
the merits of the Curtis claims. We expect decisions from the court on our and other
defendants motions to dismiss in the near term. In the event one or more of the Curtis claims
survive the initial motions, our plan is to conduct thorough discovery of all remaining claims.We have been and are also involved in other lawsuits. We believe that these other lawsuits,
individually and in the aggregate, will not have a material adverse effect on our financial
condition or results of operations.6.
    SEGMENT INFORMATIONOur last financial report included two operating segments: Specialty Chemicals 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.The Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, used
principally in solid rocket propellants for the space shuttle and defense programs, (ii) sodium
azide, used principally in the inflation of certain automotive airbag systems, (iii)
Halotronâ, clean gas fire extinguishing agents designed to replace halons, and (iv) the ES
joint venture which manufactures commercial explosives and specializes in the development and
testing of energetic compounds.The Other Businesses segment contains our environmental protection equipment and real estate
activities. Our environmental protection business designs, manufactures and markets systems for
the control of noxious odors, the disinfection of waste water streams and the treatment of
seawater. As of December 31, 2004, our Real Estate business had approximately 14 acres of
improved land in the Gibson Business Park (near Las Vegas, Nevada) remaining.On October 1, 2004 we acquired the former Atlantic Research Corporations in-space propulsion
business (ISP) from Aerojet-General Corporation. The financial performance of ISP is included
for the first time in the accompanying Condensed Consolidated Financial Statements. Due to the
ISPs operational and financial characteristics, we have created a new operating segment,
Aerospace Equipment, to report the financial performance of the ISP business unit.We had one customer that accounted for 10% or more of our total sales during at least one of the
three-month periods ended December 31, 2004 and 2003. Sales to this customer during the three
months ended December 31 were as follows: -12-




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Customer
    
    Chemical
    
    2004
    
    2003A
    
    Perchlorates
    
    $5,779,000
    
    $435,000
  Additional information about our operations in different segments for the three months ended
December 31, 2004 and 2003, is provided below. 2004
    
    
    2003Revenues:Specialty Chemicals
    
    $
    13,637,000
    
    
    $
    4,627,000Aerospace Equipment
    
    
    3,735,000Other Businesses
    
    
    882,000
    
    
    
    167,000Total revenues
    
    $
    18,254,000
    
    
    $
    4,794,000Operating income (loss):Specialty Chemicals
    
    $
    (970,000
    )
    
    $
    (2,915,000
    )Aerospace Equipment
    
    
    (186,000
    )Other Businesses
    
    
    170,000
    
    
    
    (379,000
    )Total operating loss
    
    
    (986,000
    )
    
    
    (3,294,000
    )Unallocated net expenses
    
    
    43,000
    
    
    
    (96,000
    )Loss before income taxes
    
    $
    (943,000
    )
    
    $
    (3,390,000
    )
  7.
    ACQUISITIONAs discussed in Note 6, on October 1, 2004 we acquired the former Atlantic Research
Corporations in-space propulsion business from Aerojet-General Corporation. The purchase price
for this acquisition included: (i) $3.5 million in cash, (ii) the assumption of certain
liabilities, and (iii) a post-closing working capital adjustment. This working capital purchase
price adjustment for this transaction has not been completed.Approximately $8.5 million of net assets were acquired as part of this transaction. Since the
purchased price was less than the net assets acquired, non-current assets were recorded at zero
and an after-tax extraordinary gain of $1.6 million was
recognized (net of approximately $1.0 million income tax expense).
The purchase price allocation has been completed and reflected in the
Condensed Consolidated Financial Statements, however, this allocation
is still subject to possible future reallocations.8.
    DIVIDEND AND STOCK REPURCHASE PROGRAMIn January 2003, our Board of Directors approved a Dividend and Stock Repurchase Program (the
Program). The Program is designed to allocate a portion of our annual free cash flows (as
calculated) for the purposes of paying cash dividends and repurchasing our Common Stock. The
amount available for these purposes each fiscal year will equal 25% of our annual cash flows
from operating activities less, our annual capital expenditures, plus the amount of cash
received from the issuance of our Common Stock resulting from the exercise of stock options. We
will subtract the total amount spent on the repurchase of our Common Stock (if any) during the
fiscal year from the total amount otherwise available under the Program, and pay the resultant
amount as an annual dividend to our shareholders if and to the extent that the Board of
Directors also determines that such payment is appropriate in light of the Companys overall
financial condition, growth prospects and anticipated cash needs at the time. As part of the
stock repurchase portion of the Program, our Board of Directors have approved a provision that
permits the repurchase of Common Stock from our employees and directors. -13-




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In accordance with the provisions of the Program, on December 18, 2003, our Board of Directors
declared a cash dividend of $0.42 per share to shareholders of record on December 29, 2003 for
fiscal 2003. By reason of the application of the Program formula, no dividend was paid for
fiscal 2004. -14-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject
to the safe harbor created by those sections. These forward-looking statements include, but are not
limited to: statements about our business strategy, the effect of GAAP accounting pronouncements on
our recognition of revenue, uncertainty regarding our future operating results and our
profitability, anticipated sources of revenue and all plans, objectives, expectations and
intentions contained in this report that are not historical facts. We usually use words such as
may, will, should, expect, plan, anticipate, believe, estimate, predict, future, intend, or certain
or the negative of these terms or similar expressions to identify forward-looking statements.
Discussions containing such forward-looking statements may be found throughout the document. These
forward-looking statements involve certain risks and uncertainties that could cause actual results
to differ materially from those in such forward-looking statements. 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 an investor with 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. OVERVIEW We are principally engaged in the production of Grade I ammonium perchlorate (AP) for the
aerospace and national defense industries. In addition, we produce and sell sodium azide, the
primary component of a gas generator used in certain automotive airbag safety systems, and
Halotron, a chemical used in fire extinguishing systems ranging from portable fire extinguishers to
airport firefighting vehicles. We also hold a 50% ownership stake in Energetic Systems, an entity
we consolidate under FIN 46(R) that manufactures and distributes commercial explosives. These
businesses collectively represent our Specialty Chemicals operating segment. On October 1, 2004 we acquired the ISP business from Aerojet-General Corporation. The financial
performance of ISP will be included for the first time in the accompanying Condensed Consolidated
Financial Statements. Due to ISPs operational and financial characteristics, we have created a new
operating segment starting October 1, 2004, Aerospace Equipment, to report the financial
performance of the ISP business unit. Our Other Businesses segment includes our real estate operation, which is winding down, and the
production of environmental protection equipment, including waste water and seawater treatment
systems. A summary of our significant accounting policies is included in Note 1 to our Condensed
Consolidated Financial Statements. We believe that the application of these policies on a
consistent basis enables us to provide the users of our financial statements with useful and
reliable information about our operating results and financial condition. -15-




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Sales and Operating Revenues: Specialty Chemicals Segment: The Specialty Chemicals segment accounts for approximately 75% and 96% of our revenues during the
three-month periods ended December 31, 2004 and 2003, respectively. Perchlorate chemicals account for a major portion of the Specialty Chemicals segment revenues. In
general, demand for Grade I AP is driven by a relatively small number of Department of Defense
(DOD) and National Aeronautics and Space Administration (NASA) contractors. As a result, any
one individual AP customer usually accounts for a significant portion of our revenues. In connection with the Acquisition, we entered into an agreement with the Thiokol Propulsion
Division of Alcoa (Thiokol) with respect to the supply of AP through the year 2008. The
agreement, as amended, provides that during its term Thiokol will make all of its AP purchases from
us. In addition to the Grade I AP purchased from us, Thiokol may use AP inventoried by it in prior
years. The agreement also establishes a pricing matrix under which Grade I AP unit prices vary
inversely with the quantity of Grade I AP sold by us to all of our customers. Grade I AP unit
prices in the matrix at all quantity levels escalate each year through fiscal 2003 and, in fiscal
2004, were adjusted downward by approximately 20%. Such downward adjustment had the effect of
reducing revenues and operating cash flows on Grade I AP sold to Thiokol by 20% in fiscal 2004.
After the adjustment, AP unit prices continue to escalate each year through fiscal 2008. In connection with the Acquisition, we entered into an agreement with Alliant Techsystems, Inc.
(Alliant) to extend an existing agreement through the year 2008. The agreement establishes
prices for any Grade I AP purchased by Alliant from us during the term of the agreement as
extended. Under this agreement, Alliant agrees to use its efforts to cause our Grade I AP to be
qualified on all new and current programs served by Alliants Bacchus Works. During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual agreements
in place prior to Alliants acquisition of Thiokol remain in place. All Thiokol programs existing
at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will continue
to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta, Pegasus and
Titan) will be priced under the Alliant Agreement. Since the Acquisition, our annual sales volumes of Grade I AP have been approximately 20.2 million,
16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999, 2000, 2001, 2002
and 2003 fiscal years (ended September 30) respectively. Prior to the Space Shuttle Columbia
disaster on February 1, 2003, and based principally upon information we had received from our major
customers, we previously estimated that annual demand for Grade I AP would range between 16.0
million and 20.0 million pounds over the next several years. The suspension of Space Shuttle missions since the Columbia disaster reduced the sales volume of
our Grade I AP products in fiscal 2004 to 11.2 million pounds. This reduced sales volume exceeded
the actual consumption of Grade I AP product by our customers. As a result, our customers
inventory levels of Grade I AP increased throughout the year. The Space Shuttle is currently
expected to resume flights beginning in the spring of 2005 with four to five flights per year
thereafter, although there is no assurance in this regard. Based principally upon market
information we received from our customers, we currently estimate that our annual sales volumes of
Grade I AP will range between 10.0 and 13.0 million pounds over the next three years. In addition,
the new space exploration initiative for NASA announced by -16-




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President Bush in January 2004 could have a significant impact on the demand for Grade I AP,
however, the ultimate impact from this initiative remains uncertain at this time. We also produce and sell other perchlorates. Other perchlorates have a wide range of prices per
pound, depending upon the type and grade of the product. We have recently experienced a change in
the sales mix of other perchlorates, from lower price per pound products to higher price and margin
per pound products. Other perchlorates are used in a variety of applications, including munitions,
explosives, propellants, and initiators. Some of these applications are in a development phase, and
there can be no assurance that sales of the higher price and higher margin products will continue.
A significant reduction in these sales would have a material adverse effect on our results of
operations and financial condition. Other significant sales contributors to the Specialty Chemicals segment are: (i) packaged
explosives, (ii) sodium azide, and (iii) Halotron® fire extinguishing agents. As discussed in Note 1 to the Condensed Consolidated Financial Statements, we began consolidating
the financial performance of our ES packaged explosive joint venture as of March 31, 2004.
Geographic markets for ES products include the US, Canada and Mexico. The primary buyers of SECs
products are explosive distributors who provide products and services to companies in the
aggregates, construction, Eastern U.S. coal, precious mineral and metal mining industries. Overall consumption of commercial explosives is expected to increase throughout 2005, in line with
improved performance of the economy in general, and more specifically the aggregates, construction,
Eastern U.S. coal, and metal mining sectors. We also expect Congress to pass a new, multi-year
Transportation Bill in 2005, and as this works its way through the construction industry it will
stimulate spending on new road construction, as well as infrastructure maintenance and renewal.
This will increase demand for package products used in road construction and quarrying, particular
the Companys Presplit product line and the new emulsion products. The increased mining activity
in the coal industry seen during 2004 is expected to continue as long as there is no significant
downturn in the price of oil and natural gas. Worldwide demand for sodium azide has declined considerably over the last several years. Currently,
worldwide demand for sodium azide is substantially less than worldwide supply. Based principally
upon market information received from airbag inflator manufacturers, we expect sodium azide use to
continue to decline and that inflators using sodium azide will be phased out over some period of
time. Halotron is designed to replace halon-based fire extinguishing systems. Accordingly, demand for
Halotron depends upon a number of factors including the willingness of consumers to switch from
halon-based systems, the effects of competing products, as well as existing and potential
governmental regulations. Aerospace Equipment Segment: The newly formed Aerospace Equipment segment accounts for approximately 21% of our revenues during
the three-month period ended December 31, 2004. Prior to this most recent three month period, the
segment did not exist. The ISP business is the sole contributor to the Aerospace Equipment segment. The ISP business
manufactures in-space propulsion thrusters that are either monopropellant or bipropellant based
products. Monopropellant thrusters utilize a single liquid fuel source (typically hydrazine),
whereas bipropellant thrusters use a combination of a liquid fuel (typically monomethylhydrazine)
and an oxidizer. -17-




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The selection of propulsion thruster is based on the satellites or spacecrafts mission and
encompasses a variety of factors. The factors generally include type of mission, mission length,
type of orbit, mass, type of launch vehicle and price. The ISP business supplies both governmental
and commercial satellite customers. Sales to these customers are usually awarded based on product
performance, pricing, and reliability. The market for ISP products is expected to grow modestly over the next several years. Government
funding for defense, earth observation and space systems satellites is stable, but continued budget
pressure will stretch some of these programs. Funding for missile defense programs is also expected
to remain flat given budget pressures. The commercial satellite industry is expecting higher growth
as a result of demand from broadband, HDTV and communications applications. Higher growth rates are
expected in the markets for ISP products after the next several years as a result of the
replacement of existing military and defense communications constellation systems. Other Businesses Segment: The Other Businesses segment accounts for approximately 5% and 3.5% of our revenues during the
three-month periods ended December 31, 2004 and 2003, respectively. This segment included sales
from our real estate and environmental equipment businesses. There were no real estate sales during the three-month periods ended December 31, 2004 and 2003.
We have approximately 14 acres remaining in our Nevada portfolio and real estate sales will cease
after the sale of this property. We sell electrochemical equipment used to purify air or water in municipal, industrial and power
generation applications. At the heart of these systems is a proprietary bi-polar electrochemical
cell which uses brine or seawater to produce the necessary chemicals. We compete with companies
that utilize other technologies and those that utilize technologies similar to ours. Our success
depends principally upon our ability to be cost competitive and, at the same time, to provide a
quality product. Cost of Sales: The principal elements comprising our cost of sales are raw materials, electric power, labor,
manufacturing overhead, depreciation and amortization and the book basis in real estate sold. The
major raw materials used in our production processes are graphite, sodium chlorate, ammonia,
hydrochloric acid, sodium metal, nitrous oxide and HCFC 123. Significant increases in the cost of
raw materials may have an adverse impact on margins if we are unable to pass along such increases
to our customers. Prices paid by us for raw materials have historically been relatively stable, although we have
experienced cost increases on certain raw materials. All the raw materials used in our
manufacturing processes have been available in commercial quantities. Although we recently had some
difficulty in obtaining graphite, significant progress has been made in establishing an assured
source of supply. We continue to explore other technologies that would reduce our dependence on
graphite. A substantial portion of the total cash costs of operating our specialty chemical plants,
consisting mostly of labor and overhead, are largely fixed in nature. Net Income (Loss): Although our net income (loss) and diluted net income (loss) per common share have not been subject
to seasonal fluctuations, they have been and are expected to continue to be subject to variations
from quarter to quarter and year to year due to the following factors, among others: (i) as
discussed in Note 5 to our -18-




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Condensed Consolidated Financial Statements, we may incur material legal and other costs associated
with certain litigation and contingencies; (ii) the magnitude, pricing and timing of perchlorate
chemicals, sodium azide, Halotron, packaged explosives and environmental protection equipment sales
in the future is uncertain; (iii) weighted average common and common equivalent shares for purposes
of calculating diluted net income per common share are subject to significant fluctuations based
upon changes in the market price of our Common Stock due to outstanding warrants and options; (iv)
the results of periodic reviews of impairment issues; and (v) the ability to pass on increases in
raw material costs to our customers. Critical Accounting Policies and the Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles
in the United States of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenue and expenses. Application of the critical accounting policies discussed below requires managements 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, the Company is not currently aware of any reasonably
likely events or circumstances that would result in materially different results. Sales and Revenue Recognition: Sales of the specialty chemicals and environmental protection products 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. We offer some of our perchlorate
product customers the option, at their election, of storing purchased materials in our Cedar City
facility (Bill and Hold transactions). We recognize the revenue and profit from these Bill and
Hold transactions at the point at which the risks of ownership and transfer of title are
transferred to the customers. Sales of the environmental protection equipment segment are
recognized when the product is shipped. We receive cash for the full amount of real estate sales at
the time of closing which is when we record the sale. Depreciable Lives of Plant and Equipment: Plant and equipment is recorded at cost and depreciated using the straight-line method, which
deducts equal amounts of cost of each asset from earnings every year over its estimated economic
useful life. Economic useful life is the duration of time the asset is expected to be productively
employed by the company, which may be less than its physical life. Managements assumptions on the
following factors, among others, affect the determination of estimated economic useful life: wear
and tear, obsolescence, technical standards, contract life, changes in market demand and raw
material availability. 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, the Company
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. -19-




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Impairment of Long-Lived Assets  Plant and Equipment: Plant and equipment held for use is grouped for impairment testing at the lowest level for
which there are identifiable cash flows. Impairment testing of the asset group occurs whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company assesses recoverability by comparing the carrying amount of the asset
group to the estimated undiscounted future cash flows expected to be generated by the assets. If an
asset group is considered impaired, the impairment loss to be recognized would be measured as the
amount by which the asset groups carrying amount exceeds its fair value. Assets to be disposed of
by sale are reported at the lower of carrying amount or fair value less cost to sell. The estimate of plant and equipment fair value is based on estimated discounted future cash flows
expected to be generated by the 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. The Company uses reasonable and supportable assumptions when
performing impairment reviews and cannot predict the occurrence of future events and circumstances
that could result in impairment charges. Impairment of Long-Lived Assets  Goodwill and Intangible Assets: The purchase method of accounting for business combinations requires the Company to make use of
estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of
the net tangible and identifiable intangible assets. Goodwill represents the excess of the
aggregate purchase price over the fair value of net assets of an acquired entity. The Company
currently has no goodwill in its financial statements. Disclosures related to intangible assets are
included in Note 1. The Company performs an impairment test annually in the fourth quarter of the fiscal year. In
addition, additional tests will be conducted if changes in circumstances indicate a potential
impairment exists. The impairment test requires the Company to compare the fair value of business
reporting units to carrying value. The results of the impairment tests have indicated fair value
amounts exceeded carrying amounts. The Company primarily uses the present value of future cash flows to determine fair value. The
Companys valuation model assumes a five-year growth period for the business and an estimated exit
trading multiple. Management judgment is required in the estimation of future operating results and
to determine the appropriate exit multiple. The exit multiple is determined from comparable
industry transactions. Future operating results and exit multiples could reasonably differ from the
estimates. Income Taxes: We account for income taxes using the asset and liability approach required by SFAS No. 109. The
asset and liability approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the carrying amounts and the
tax bases of our assets and liabilities. Future tax benefits attributable to temporary differences
are recognized to the extent that realization of such benefits are more likely than not. These
future tax benefits are measured by applying currently enacted tax rates. 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. -20-




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Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when
there are not sufficient sources of future taxable income to realize the benefit of the operating
loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A
valuation allowance is recognized if, based on the weight of available evidence, it is considered
more likely than not that some portion or all of the deferred tax asset will not be realized. The
factors used to assess the likelihood of realization include forecasted future taxable income and
available tax planning strategies that could be implemented to realize or renew net deferred tax
assets in order to avoid the potential loss of future tax benefits. The effect of a change in the
valuation allowance is reported in the current period tax expense. Pension Benefits: The Company sponsors 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. Assumptions
about the discount rate, the expected rate of return on plan assets and the future rate of
compensation increases are determined by the Company. 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.
Information with respect to pension expenses and liabilities, together with the impact of changes
in key assumptions is discussed in Note 8 to our Consolidated Financial Statements included in our
September 30, 2004 Annual Report on Form 10-K. Other areas in which significant uncertainties exist include, but are not limited to, projected
costs to be incurred in connection with environmental matters, tax matters, the resolution of
litigation, and the recoverability of investments in and advances to our ES joint venture. A
discussion of environmental and legal matters is included in Note 5 to our Condensed Consolidated
Financial Statements. Information on some of the key estimates and assumptions on which our annual
provision for income taxes is based may be found in Note 7 to our Consolidated Financial Statements
included in our September 30, 2004 Annual Report on Form 10-K. Actual results will inevitably differ to some extent from the estimates on which our Condensed
Consolidated Financial Statements are prepared at any given point in time. Despite these inherent
limitations, we believe that our Managements Discussion and Analysis and Condensed Consolidated
Financial Statements provide a meaningful and fair perspective on our Company. -21-




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RESULTS OF OPERATIONS Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003 Sales and Operating Revenues: For the three months ended December 31, 2004, sales increased by $13.5 million, or 281% to $18.3
million from $4.8 million in the corresponding period of the prior year. This increase was
attributable to an increase in Specialty Chemicals and Other Businesses segment sales of $9.0
million and $0.7 million respectively. In addition, sales from our new ISP business reported in the
newly formed Aerospace Equipment segment increased our sales by $3.7 million for the three months
ended December 31, 2004. The increase in the Specialty Chemicals segments sales resulted principally from higher sales
volume of perchlorate chemicals and the inclusion of ES packaged explosives sales in our financial
results as compared to fiscal 2004. The increase in sales in the Other Businesses segment resulted principally from an increase of $0.5
million in environmental equipment sales in fiscal 2005 as compared to fiscal 2004. There were no
real estate sales in the first quarter of fiscal 2004. Cost of Sales: Cost of sales increased $8.2 million, or 191%, in the three months ended December 31, 2004, to
$12.5 million from $4.3 million in the corresponding period of the prior year. As a percentage of
sales, cost of sales was 69% in the first quarter of fiscal 2005, compared to 90% in the first
quarter of fiscal 2004. The increases in cost of sales during in the three months ended December 31, 2004 versus the
corresponding period ended December 31, 2003, was principally as a result of the inclusion of the
ES packaged explosives joint venture and the addition of our newly formed Aerospace Equipment
segment. Cost of sales also increased during this period as a result of higher sales volumes from
our perchlorate chemicals and environmental protection equipment businesses. Operating Expenses: Operating (selling, general and administrative) expenses increased $2.9 million, or 78%, in the
three months ended December 31, 2004, to $6.7 million from $3.8 million in the corresponding period
of 2003. The increase in operating expenses was due primarily to: (i) the consolidation of the ES
packaged explosive joint venture as of the third quarter of fiscal 2004, (ii) the addition of the
ISP business into the newly formed Aerospace Equipment segment on October 1, 2004, (iii) an
increase in environmental remediation expenditures, and (iv) corporate development costs. Net Interest and Other Expense (Income): Net interest and other expense decreased by $0.2 million to $(0.1) million in the three months
ended December 31, 2004, from $0.1 million in the corresponding period of the prior year. -22-




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Segment Operating Income (Loss) Operating income (loss) of our industry segments during the three-month periods ended December 31,
2004 and 2003, respectively, was as follows: 2004
    
    
    2003Specialty Chemicals
    
    $
    (970,000
    )
    
    $
    (2,915,000
    )Aerospace Equipment
    
    
    (186,000
    )Other Businesses
    
    
    170,000
    
    
    
    (379,000
    )Total
    
    $
    (986,000
    )
    
    $
    (3,294,000
    )
 INFLATION General inflation did not have a significant effect on our sales and operating revenues or costs
during the three months ended December 31, 2004 and 2003. General inflation may have an effect on
gross profit in the future as certain of our agreements relating to Grade I AP, sodium azide,
in-space propulsion thrusters require fixed prices, although certain of such agreements contain
escalation features that should somewhat insulate us from increases in costs associated with
inflation. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by (used for) operating activities were $3.0 million and $(5.3) million during
the three months ended December 31, 2004 and 2003, respectively. The increase in cash flows from
operating activities, as referred to above, was primarily due to higher sales volumes. We believe
that our cash flows from operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of our operations, including the repurchase of our Common Stock and/or
dividends under the Program. However, the resolution of litigation and contingencies, and the
timing, pricing and magnitude of orders for our products may have an effect on the use and
availability of cash. Capital expenditures were $0.6 million and $0.3 million during the three months ended December 31,
2004 and 2003, respectively. Capital expenditures relate principally to specialty chemicals segment
capital improvement projects. Capital expenditures are expected to be funded from existing cash
balances and operating cash flows. We did not issue or repurchase any of our Common Stock during the three-month period ended December
31, 2004. As a result of the litigation and contingencies discussed in Note 5 to our Condensed Consolidated
Financial Statements, 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. Any
such costs, to the extent not recovered by insurance, would adversely affect our liquidity. We are
currently unable to predict or quantify the amount or range of such costs or the period of time
over which such costs may be incurred. -23-




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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS Various discussions in this Quarterly Report onForm 10-Qcontain forward-looking statements
concerning our future products, expenses, revenue, liquidity and cash needs, as well as our plans
and strategies. These forward-looking statements are based on current expectations and we assume no
obligation to update this information. Numerous factors could cause our actual results to differ
significantly from the results described in these forward-looking statements, including the
following risk factors.  1.
    (a) Declining demand (including excess customer inventories) or downward pricing
pressure for our products as a result of general or specific economic conditions, (b)
governmental budget decreases affecting the DOD or NASA, including the status of the Space
Shuttle Program (including President Bushs current plan to ultimately terminate shuttle
operations), that would cause further decreases in demand for Grade I AP, (c) technological
advances and improvements with respect to existing or new competitive products causing a
reduction or elimination of demand for Grade I AP and other perchlorates, sodium azide,
Halotron, explosives or thrusters (d) the ability and desire of purchasers to change existing
products or substitute other products for our products based upon perceived quality,
environmental effects and pricing, and (e) the fact that perchlorate chemicals, sodium azide,
Halotron and our environmental products have limited applications and highly concentrated
customer bases.2.
    The cost and effects of legal and administrative proceedings, settlements and investigations,
particularly those investigations described in Note 5 to our Condensed Consolidated Financial
Statements, as well as the costs resulting from regulatory and environmental matters that may
have a negative impact on sales or costs.3.
    Our ability to profitably integrate, manage and operate new businesses and/or investments
competitively and cost effectively (including recently acquired ES and Ampac-ISP).4.
    Competitive factors including, but not limited to, our limitations respecting financial
resources and our ability to compete against companies with substantially greater resources,
significant excess market supply in the sodium azide market and in the perchlorate market,
potential patent coverage issues, and the development or penetration of competing new
products, particularly in the propulsion, airbag inflation, fire extinguishing and explosives
businesses.5.
    Underutilization of our manufacturing facilities resulting in production inefficiencies and
increased costs, the inability to recover facility costs, reductions in margins, and
impairment issues.6.
    The near depletion of our Clark County, Nevada commercial real estate, with only 14 acres
remaining for sale.7.
    The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and
other activities of governments, agencies or similar organizations, including, but not limited
to, environmental, safety and transportation issues.8.
    The dependence upon a single facility for the production of most of our products.9.
    Provisions of our Certificate of Incorporation and Bylaws and Series D Preferred Stock, and
the dividend of preference stock purchase rights and related Rights Agreement, could have the
effect of making it more difficult for potential acquirors to obtain a control position in us.   -24-




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates, commodity prices and foreign currency
exchange rates. We did not have any long-term debt outstanding for the period ending December 31,
2004 and 2003, respectively. As of December 31, 2004, we did not have any derivative-based
financial instruments. However, the amount of any outstanding debt may fluctuate and we may at some
time be subject to financing risk. There have been no material changes in market risk since
December 31, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation as of December 31, 2004, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934) were effective as of such date to ensure
that information required to be disclosed in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. There were no changes in
the Companys internal controls over financial reporting that occurred during the Companys last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. -25-




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS. None. 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 
 ITEM 5. OTHER INFORMATION. None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K. a) Exhibits: Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 b) Reports on Form 8-K: On October 4, 2004, the Registrant a report on Form 8-K, announcing that it completed the
acquisition of the former Atlantic Research Corporations in-space propulsion business
from Aerojet-General Corporation. -26-




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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 CORPORATIONDate: February 10, 2005
    /s/ JOHN R. GIBSONJohn R. GibsonChief Executive Officer and PresidentDate: February 10, 2005
    /s/ SETH L. VAN VOORHEESSeth L. Van VoorheesVice President, Treasurer, Chief Financial
Officer & Secretary -27-




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Exhibit Index Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002