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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended September 30, 2005
Commission File Number 001-08137
 AMERICAN PACIFIC CORPORATION
  Delaware
(State or other jurisdiction
of incorporation)
    
    59-6490478
(IRS Employer
Identification No.)3770 Howard Hughes Parkway, Suite 300,Las Vegas, Nevada
    
    89109(Address of principal executive offices)
    
    (Zip Code)
 (702) 735-2200
   þ o
 o
  o þ
 o þ
 o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A. Risk FactorsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Thousands)Item 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESExhibit IndexExhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 PART I
 Forward Looking Statements
  
 Item 1. Business
 Overview
   2005
    
    
    2004
    
    
    2003Specialty Chemicals:Perchlorates
    
    
    53
    %
    
    
    73
    %
    
    
    79
    %Packaged explosives
    
    
    19
    %
    
    
    14
    %
    
    
    0
    %Sodium azide
    
    
    2
    %
    
    
    5
    %
    
    
    6
    %Halotron
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %Total specialty chemicals
    
    
    79
    %
    
    
    97
    %
    
    
    89
    %Aerospace Equipment
    
    
    15
    %
    
    
    0
    %
    
    
    0
    %Other Businesses:Real estate
    
    
    4
    %
    
    
    1
    %
    
    
    7
    %Water treatment equipment
    
    
    2
    %
    
    
    2
    %
    
    
    4
    %Total other businesses
    
    
    6
    %
    
    
    3
    %
    
    
    11
    %Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Specialty Chemicals
 2




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Aerospace Equipment
 Other Businesses
 Recent Acquisition
  3




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Specialty Chemicals Segment
 Perchlorate Chemicals
 Strategy
  Market
      
    
    The timing of the Space Shuttles return to flight.
    
    The number of Shuttle flights between now and the retirement of the Shuttle fleet.
    
    The amount of inventory of Grade I AP owned by our customers.
    
    The amount of NASAs and the DODs annual budget over the next several years.
 4




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
    
    The timing of the retirement of the Space Shuttle fleet.
    
    The timing of the development of the new crew launch vehicle (CLV) and the number of CLV launches.
    
    The timing of the development and testing of the new heavy launch vehicle (HLV) used to transport material and
supplies to the ISS and the Moon; and the number of HLV launches.
  Customers
     5




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Manufacturing Capacity and Process
    Competition
  Packaged Explosives
 Acquisition
  6




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Customers and Markets
  Competition
  Facilities
  Sodium Azide
  Market
  7




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Ô
   Customers
  Competition
  8




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Halotron
     Customers and Market
    9




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10




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Competition
   Ô Ô Ô Ô Ô Ô
 Halotron Production Facility
  Aerospace Equipment Segment
  Customers and Market
  11




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Competition
   Facilities
    Other Businesses Segment
 Water Treatment Equipment
  12




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®
   Real Estate
  Ampac Fine Chemicals Segment
   Cash
    
    $
    88.5Fair value of Seller Subordinated Note (Face value $25,500)
    
    
    19.4Preliminary capital expenditures adjustment
    
    
    17.4Preliminary working capital adjustment
    
    
    2.4Other direct acquisition costs
    
    
    4.0Total
Consideration
    
    $
    131.7
   13




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Customers and Markets
  
    
    Alternative Supply May Not Be Available  AFC is
currently the sole-source supplier of a number of oncology
products that involve handling highly toxic compounds.
    
    Regulatory Approval  applications to and approvals from
the FDA always require the chemical contractor to be named.
Switching contractors requires additional regulatory approval
and could take as long as seven to 18 months.
    
    Significant Financial Costs  switching contractors can
result in significant costs associated with technology
transfer, process validation and re-filing with the FDA.
 Competition
   Raw Materials
  15




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Regulatory Compliance
  Government Regulation
  Environmental Regulation
  EPA Perchlorate Review:
 16




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Perchlorate Remediation Project in Henderson, Nevada:
    Environmental Remediation Reserve:
 17




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Other Matters
 Intellectual Property
 ® ® ® ® ®
 Product Development and Enhancement
  Insurance
  Employees
  18




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Available Information
  
 Item 1A. Risk Factors
 Our business could be adversely impacted by reductions or changes in NASA or U.S. government
military spending.
   
    
    The timing of the Space Shuttles return to flight.
    
    The number of Shuttle flights between now and the retirement of the Shuttle fleet.
    
    The amount of inventory of Grade I AP owned by our customers.
    
    The amount of NASAs and the Department of Defenses (DOD) annual budget over the next several years.
  19




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
    
    The timing of the retirement of the Space Shuttle fleet.
    
    The timing of the development of the new crew launch vehicle (CLV) and the number of CLV launches.
    
    The timing of the development and testing of the new heavy launch vehicle (HLV) used to transport material and
supplies to the ISS and the Moon; and the number of HLV launches.
   We depend on a limited number of customers for most of our net sales and the loss of one or
more of these customers could reduce our net sales.
  Our existing U.S. government contracts and contracts based on U.S. government contracts are
subject to continued appropriations by congress and may be terminated if future funding is not made
available.
  20




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A significant percentage of our contracts are fixed price contracts. If we experience cost
overruns on these contracts or our raw materials becomes more expensive, we would have to absorb
the excess costs and our profitability would be adversely affected.
     Our U.S. government contracts and our customers U.S. government contracts are subject to
termination.
  21




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
    
    the contractor is paid an amount agreed upon for completed and
partially completed products and services accepted by the U.S.
government,
    
    the U.S. government is not liable for the contractors costs for
unaccepted items, and is entitled to repayment of any advance
payments and progress payments related to the terminated portions
of the contract, and
    
    the contractor may be liable for excess costs incurred by the U.S.
government in procuring undelivered items from another source.
  We are subject to procurement and other related laws and regulations, non-compliance with which may
expose us to adverse consequences.
   Our operations and properties are currently the subject of numerous environmental and other
government regulations, which may become more stringent in the future and may reduce our
profitability and liquidity.
  22




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EPA Perchlorate Review:
 Perchlorate Remediation Project in Henderson, Nevada:
    23




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Environmental Remediation Reserve:
 Although we have established reserves for our environmental liabilities, given the many
uncertainties involved in assessing liability for environmental claims, our reserves may not be
sufficient.
  We have a substantial amount of debt, and the cost of servicing that debt could adversely affect
our ability to take actions or our liquidity or financial condition.
   
    
    make it more difficult for us to satisfy our outstanding debt obligations;
    
    require us to dedicate a substantial portion of our cash flow from operations to payments on our
debt, reducing the amount of our cash flow available for working capital, capital expenditures,
acquisitions, developing our real estate assets and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;
    
    place us at a competitive disadvantage compared to our competitors, some of which have lower debt
service obligations and greater financial resources than we do;
    
    limit our ability to borrow additional funds; or
 24




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
    
    increase our vulnerability to general adverse economic and industry conditions.
  We are obligated to comply with financial and other covenants in our debt that could restrict our
operating activities, and the failure to comply could result in defaults that accelerate the
payment under our debt.
  
    
    incur additional debt, incur contingent obligations and issue additional preferred stock;
    
    create liens;
    
    pay dividends, distributions or make other specified restricted payments, and restrict the ability of certain
of our subsidiaries to pay dividends or make other payments to us;
    
    sell assets;
    
    make certain capital expenditures, investments and acquisitions;
    
    enter into certain transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of our assets.
  The anticipated benefits of combining AMPAC and the AFC Business may not be realized.
  We may have difficulty and incur substantial costs in integrating the AFC Business.
  25




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
    
    potential difficulty in leveraging the value of the separate technologies of the combined company; perceived
adverse changes in product offerings available to customers or customer service standards, whether or not these
changes do, in fact, occur;
    
    costs and delays in implementing common systems and procedures;
    
    difficulty integrating differing distribution models;
    
    difficulty comparing financial reports due to differing management systems;
    
    diversion of management resources from the business of the combined company;
    
    potential incompatibility of business cultures and philosophies;
    
    reduction or loss of revenue due to the potential for market confusion, hesitation and delay; and
    
    coordinating infrastructure operations in an effective and efficient manner.
   The Securities and Exchange Commission (SEC) has asked for clarification regarding certain of our
accounting policies and disclosures.
  The release or explosion of dangerous materials used in our business could disrupt our operations
and cause us to incur additional costs and liability.
 26




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The production of most of our products is conducted in a single facility and our operations will be
materially affected if production at that facility is disrupted.
  Disruptions in the supply of key raw materials and difficulties in the supplier qualification
process, as well as increases in prices of raw materials, could adversely impact our operations.
   27




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Our inability to adapt to rapid technological changes could impair our ability to remain
competitive.
  
    
    adversely impact our competitive position if we are unable to react to these developments in a timely or
efficient manner;
    
    require us to write-down obsolete facilities, equipment and technology;
    
    require us to discontinue production of obsolete products before we can recover any or all of our related
research, development and commercialization expenses; or
    
    require significant capital expenditures for research, development and launch of new products or processes.
 Our proprietary rights may be violated or compromised, which could damage our operations.
  We are subject to intense competition in certain of the industries where we compete and therefore
may not be able to compete successfully.
  Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating
results to fluctuate.
 28




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The cyclicality and volatility of the chemical industry affects our capacity utilization and causes
fluctuations in our results of operations.
  A loss of key personnel or highly skilled employees could disrupt our operations.
  Our Shareholder Rights Plan, Certificate of Incorporation and Bylaws discourage unsolicited
takeover proposals and could prevent shareholders from realizing a premium on their common stock.
  
    
    a classified Board of Directors;
    
    the ability of our Board of Directors to designate the terms of and issue new series of preferred stock;
    
    advance notice requirements for nominations for election to our Board of Directors; and
    
    special voting requirements for the amendment of our certificate of incorporation and bylaws.
 29




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We may continue to expand our operations through acquisitions, which could divert managements
attention and expose us to unanticipated liabilities and costs. We may experience difficulties
integrating the acquired operations, and we may incur costs relating to acquisitions that are never
consummated.
   Risks Related to Newly Acquired Fine Chemicals Business
 We may be unable to comply with customer specifications and manufacturing instructions, experience
schedule delays or other problems with existing or new products and systems, which could result in
increased costs and loss of sales.
  30




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Failure to meet strict timing or delivery requirements could cause AFC to be in breach of
material customer contracts.
  Because AFC currently manufactures a limited number of products for a small number of
customers, a problem with any of its significant customers or the final products that our chemical
compound is a part could materially adversely affect its results of operations and cash flow.
  AFC depends heavily on third parties for the supply of certain raw materials used in its
production processes.
  31




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Our inability to adapt to rapid technological changes could impair our ability to remain
competitive.
  
    
    adversely impact our competitive position if we are
unable to react to these developments in a timely or efficient
manner; and
    
    require us to write-down obsolete facilities, equipment
and technology or incur significant capital expenditures to
upgrade such facilities and equipment.
 The fine chemicals industry is highly competitive, and the failure of AFC to compete
effectively could harm our business and profitability.
  Successful commercialization of pharmaceutical products and product line extensions is very
difficult and subject to many uncertainties. If a customer is not able to successfully
commercialize its products for which AFC produces compounds, then the operating results of AFC may
be negatively impacted.
  AFC or its customers may be unable to obtain government approval for its products or comply
with government regulations relating to its business.
  32




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Recall or withdrawal of a customers product from the market or the failure of the customer to
obtain regulatory approval of its products will impact forecasted revenues.
  33




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AFC involves hazardous and highly potent materials and if it is unable to comply with the
environmental laws and regulations to which it is subject, its results may be adversely affected.
    34




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A strike or other work stoppage, or the inability to renew collective bargaining agreements on
favorable terms, could have a material adverse effect on the cost structure and operational
capabilities of AFC.
  The pharmaceutical fine chemicals industry is a capital-intensive industry and if AFC does not
have enough capital to finance the necessary capital expenditures, its business and results of
operations may be harmed.
  AFC relies on intellectual property and proprietary rights to maintain its competitive
position and, therefore, failure to protect adequately its intellectual property and proprietary
rights could adversely affect its market share.
   35




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Item 2. Properties
  Approximate Area
    
    
    
    ApproximateLocation
    
    Principal Use
    
    or Floor Space
    
    Status
    
    Annual Rent(a) Iron County, Utah
    
    Perchlorate Manufacturing Facility
    
    217 Acres
    
    Owned
    
    
    N/A(b) Iron County, Utah
    
    Sodium Azide Manufacturing Facility
    
    41 Acres
    
    Owned
    
    
    N/A(c) Iron County, Utah
    
    Halotron Manufacturing Facility
    
    6,720 sq. ft.
    
    Owned
    
    
    N/A(d) Las Vegas, NV
    
    Executive Offices
    
    22,262 sq.ft.
    
    Leased
    
    $
    500,000(e) Cherokee County, KS
    
    Packages Explosives manufacturing facility and offices
    
    257 Acres
    
    Owned/Leased
    
    Nominal(f) Cherokee County, KS
    
    Underwater testing facility
    
    640 Acres
    
    Lease to own
    
    Nominal(g) Cherokee County, KS
    
    Laboratory and offices
    
    4 Acres
    
    Lease to own
    
    Nominal(h) Niagra Falls, NY
    
    Aerospace Equipment manufacturing
    
    81,425 sq. ft.
    
    Leased
    
    $
    165,000(i) Westcott, Bucks, UK
    
    Aerospace Equipment manufacturing
    
    65 Acres
    
    Leased
    
    $
    320,000
 
 (a)
    
    This facility is used for the production of perchlorate products and environmental
protection equipment. It consists of approximately 112,000 sq. ft. of enclosed manufacturing
space, a 12,000 sq. ft. administration building and a 3,200 sq. ft. laboratory building.
Perchlorate capacity utilization rates for this production facility were approximately 39%,
39%, and 62% during the fiscal years ended September 30, 2005, 2004 and 2003, respectively.(b)
    
    This facility is used for the production of sodium azide and consists of approximately 34,600
sq. ft. of enclosed manufacturing and laboratory space. Capacity utilization rates for this
production facility were approximately 3%, 12%, and 14% during the fiscal years ended
September 30, 2005, 2004 and 2003, respectively.(c)
    
    Capacity utilization rates for the Halotron production facility were approximately 9%, 5%,
and 6% during the fiscal years ended September 30, 2005, 2004 and 2003, respectively.(d)
    
    These facilities are leased from 3770 Howard Hughes Parkway Associates-Limited Partnership
for an initial term of 10 years, which began on March 1, 1991, and has been extended through
February 2009. Approximately 25% of this space is currently sublet at an annual rent of
approximately $130,000.(e)
    
    This facility is used for the production of packaged water gel explosives and binary
products. It consists of three manufacturing facilities of approximately 48,000 sq. ft. of
enclosed space, administration facilities of 5,200 sq. ft. and several raw material and
finished goods storage buildings and trailers.(f)
    
    This facility is used for underwater testing of explosives. It has an office and lab
building of approximately 2,400 sq. ft.(g)
    
    This facility houses the technical group for the ESI business and research and development
laboratories; it consists of an 8,000 sq. ft. building plus maintenance and storage space.(h)
    
    This facility is used for the design, manufacture and test of our Aerospace Equipment
Products.(i)
    
    This facility is used for the design, manufacture and test of our Aerospace Equipment
products. The facility consists of 34 buildings on 65 acres of land. 36




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Item 3. Legal Proceedings
   
 Item 4. Submission of Matters to a Vote of Security Holders
  38




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 Stock Listing ®
 2005
    
    
    2004High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    8.78
    
    
    $
    7.30
    
    
    $
    9.91
    
    
    $
    8.45Second Quarter
    
    
    8.99
    
    
    
    7.03
    
    
    
    10.75
    
    
    
    7.70Third Quarter
    
    
    8.52
    
    
    
    7.00
    
    
    
    8.02
    
    
    
    7.16Fourth Quarter
    
    
    8.79
    
    
    
    5.90
    
    
    
    7.91
    
    
    
    7.18
  Dividend Policy
  Transfer Agent
 Securities Authorized for Issuance Under Equity Compensation Plans
 39




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Item 6. Selected Financial Data
 
 2005 (a)
    
    
    2004 (b)
    
    
    2003
    
    
    2002
    
    
    2001STATEMENT OF OPERATIONS DATA:Revenues
    
    $
    83,347
    
    
    $
    59,489
    
    
    $
    68,866
    
    
    $
    73,588
    
    
    $
    63,089Cost of revenues
    
    
    55,669
    
    
    
    40,246
    
    
    
    37,349
    
    
    
    43,529
    
    
    
    38,186Gross profit
    
    
    27,678
    
    
    
    19,243
    
    
    
    31,517
    
    
    
    30,059
    
    
    
    24,903Operating expenses
    
    
    26,320
    
    
    
    21,493
    
    
    
    14,480
    
    
    
    13,776
    
    
    
    10,050Environmental remediation charge
    
    
    22,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (21,042
    )
    
    
    (2,250
    )
    
    
    17,037
    
    
    
    16,283
    
    
    
    14,853Net interest and other expense (income)
    
    
    (1,124
    )
    
    
    (120
    )
    
    
    1,544
    
    
    
    3,235
    
    
    
    2,590Loss on debt extinguishments
    
    
    
    
    
    
    
    
    
    
    1,522
    
    
    
    149
    
    
    
    Income (loss) before income tax, extraordinary
gain and accounting change
    
    
    (19,918
    )
    
    
    (2,130
    )
    
    
    13,971
    
    
    
    12,899
    
    
    
    12,263Income tax provision (benefit)
    
    
    (8,673
    )
    
    
    (2,502
    )
    
    
    4,611
    
    
    
    4,257
    
    
    
    4,537Income (loss) before extraordinary gain
and accounting change
    
    $
    (11,245
    )
    
    $
    372
    
    
    $
    9,360
    
    
    $
    8,642
    
    
    $
    7,726Earnings (loss) per share before extraordinary item
and accounting changeBasic
    
    $
    (1.54
    )
    
    $
    0.05
    
    
    $
    1.29
    
    
    $
    1.21
    
    
    $
    1.10Diluted
    
    $
    (1.54
    )
    
    $
    0.05
    
    
    $
    1.27
    
    
    $
    1.18
    
    
    $
    1.10Dividends declared per share
    
    $
    
    
    
    $
    
    
    
    $
    0.42
    
    
    $
    
    
    
    $
    BALANCE SHEET DATA:Cash and cash equivalents
    
    $
    37,213
    
    
    $
    23,777
    
    
    $
    27,140
    
    
    $
    65,826
    
    
    $
    51,471Inventories and receivables
    
    
    26,390
    
    
    
    30,058
    
    
    
    22,885
    
    
    
    21,156
    
    
    
    19,736Property, plant and equipment, net
    
    
    15,646
    
    
    
    16,573
    
    
    
    9,223
    
    
    
    7,918
    
    
    
    7,503Intangible assets, net
    
    
    9,763
    
    
    
    13,679
    
    
    
    17,579
    
    
    
    21,297
    
    
    
    25,411Total assets
    
    
    115,000
    
    
    
    101,576
    
    
    
    101,685
    
    
    
    131,971
    
    
    
    123,042Working capital
    
    
    49,235
    
    
    
    45,741
    
    
    
    42,599
    
    
    
    81,783
    
    
    
    67,426Long-term debt (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,600
    
    
    
    44,175
 
 (a)
    
    As discussed in Note 2 to our consolidated financial statements, we acquired ISP effective
October 1, 2004.(b)
    
    As discussed in Note 1 to our consolidated financial statements, the consolidation of the ES
joint venture as of March 31, 2004 significantly changes various line items of our balance
sheet, statement of operations and cash flow presentations as compared to financial
presentations in earlier reports.(c)
    
    As discussed in Note 6 to our consolidated financial statements, we entered into debt
agreements regarding the Credit Facilities and Seller Subordinated Note in connection with our
acquisition of the AFC Business in November 2005. 40




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in Thousands)
  Overview
     2005
    
    
    2004
    
    
    2003Specialty Chemicals:Perchlorates
    
    
    53
    %
    
    
    73
    %
    
    
    79
    %Packaged explosives
    
    
    19
    %
    
    
    14
    %
    
    
    0
    %Sodium azide
    
    
    2
    %
    
    
    5
    %
    
    
    6
    %Halotron
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %Total specialty chemicals
    
    
    79
    %
    
    
    97
    %
    
    
    89
    %Aerospace Equipment
    
    
    15
    %
    
    
    0
    %
    
    
    0
    %Other Businesses:Real estate
    
    
    4
    %
    
    
    1
    %
    
    
    7
    %Water treatment equipment
    
    
    2
    %
    
    
    2
    %
    
    
    4
    %Total other businesses
    
    
    6
    %
    
    
    3
    %
    
    
    11
    %Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 41




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Specialty Chemicals Segment
 Perchlorate Chemicals 
          
    
    The timing of the Space Shuttles return to flight.
    
    The number of Shuttle flights between now and the retirement of the Shuttle fleet.
 42




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
    
    The amount of inventory of Grade I AP owned by our customers.
    
    The amount of NASAs and the DODs annual budget over the next several years.
  
    
    The timing of the retirement of the Space Shuttle fleet.
    
    The timing of the development of the new crew launch vehicle (CLV) and the number of CLV launches.
    
    The timing of the development and testing of the new heavy launch vehicle (HLV) used to transport material and
supplies to the ISS and the Moon; and the number of HLV launches.
   Packaged Explosives 
   43




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##### Table of Contents



Sodium Azide 
  Halotron ® Fire Extinguishing Agents 
  Aerospace Equipment Segment
    Other Businesses Segment
  Water Treatment Equipment 
  44




---



##### Table of Contents



Real Estate 
  Raw Materials and Manufacturing Costs
   Profitability
  
    
    as discussed in Note 9 to our consolidated financial statements, we may
incur material legal and other costs associated with environmental remediation,
litigation and other contingencies;
    
    the magnitude, pricing and timing of perchlorate chemicals, sodium azide,
Halotron, packaged explosives and water treatment equipment sales in the future is
uncertain;
    
    the results of periodic reviews for impairments of long-lived assets; and
the ability to pass on increases in raw material costs to our customers.
 45




---



##### Table of Contents



Results of Operations
 Revenues
 Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Specialty Chemicals
    
    $
    65,470
    
    
    $
    57,490
    
    
    $
    61,248
    
    
    
    14
    %
    
    
    (6
    %)Aerospace Equipment
    
    
    12,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Businesses
    
    
    5,448
    
    
    
    1,999
    
    
    
    7,618
    
    
    
    173
    %
    
    
    (74
    %)Total Revenues
    
    $
    83,347
    
    
    $
    59,489
    
    
    $
    68,866
    
    
    
    40
    %
    
    
    (14
    %)
     Cost of Revenues
 Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Revenues
    
    $
    83,347
    
    
    $
    59,489
    
    
    $
    68,866
    
    
    
    40
    %
    
    
    (14
    %)Cost of Revenues
    
    
    55,669
    
    
    
    40,246
    
    
    
    37,349
    
    
    
    38
    %
    
    
    8
    %Gross Margin
    
    $
    27,678
    
    
    $
    19,243
    
    
    $
    31,517
    
    
    
    44
    %
    
    
    (39
    %)Gross Margin Percentage
    
    
    33
    %
    
    
    32
    %
    
    
    46
    %
    
    
    3
    %
    
    
    (29
    %)
   46




---



##### Table of Contents



Operating Expenses
 Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Operating Expenses
    
    $
    26,320
    
    
    $
    21,493
    
    
    $
    14,480
    
    
    
    22
    %
    
    
    48
    %Percentage of Revenues
    
    
    32
    %
    
    
    36
    %
    
    
    21
    %
    
    
    (13
    %)
    
    
    72
    %
   Environmental Charge
  Segment Operating Profit (Loss)
 Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Specialty Chemicals
    
    $
    (21,850
    )
    
    $
    (1,119
    )
    
    $
    14,020
    
    
    
    1,853
    %
    
    
    (108
    %)Aerospace Equipment
    
    
    (1,246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Businesses
    
    
    2,054
    
    
    
    (1,131
    )
    
    
    3,017
    
    
    
    (282
    %)
    
    
    (137
    %)Total Segment Operating Profit (Loss)
    
    $
    (21,042
    )
    
    $
    (2,250
    )
    
    $
    17,037
    
    
    
    835
    %
    
    
    (113
    %)
   47




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##### Table of Contents



Interest and Other Income / Interest Expense
 Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Interest and Other Income
    
    $
    1,398
    
    
    $
    693
    
    
    $
    912
    
    
    
    102
    %
    
    
    (24
    %)Interest Expense
    
    
    274
    
    
    
    573
    
    
    
    2,456
    
    
    
    (52
    %)
    
    
    (77
    %)Loss on Debt Extinguishments
    
    
    
    
    
    
    
    
    
    
    1,522
    
    
    
    
    
    
    
    (100
    %)
   Income Taxes
   2005
    
    
    2004
    
    
    2003Federal income tax at the statutory rate
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    35.0
    %State income tax, net of federal benefit
    
    
    (2.4
    %)
    
    
    (2.4
    %)
    
    
    2.4
    %Nondeductible expenses
    
    
    0.6
    %
    
    
    2.1
    %
    
    
    0.2
    %Valuation allowance
    
    
    1.2
    %
    
    
    23.1
    %
    
    
    0.0
    %Change in deferred tax liability estimate
    
    
    0.0
    %
    
    
    (97.5
    %)
    
    
    0.0
    %Other
    
    
    (7.9
    %)
    
    
    (7.8
    %)
    
    
    (4.6
    %)Effective tax rate
    
    
    (43.5
    %)
    
    
    (117.5
    %)
    
    
    33.0
    %
   48




---



##### Table of Contents



Extraordinary Gain
  Cumulative Effect of Accounting Change
  Critical Accounting Policies
   Sales and Revenue Recognition
  49




---



##### Table of Contents



Depreciable or Amortizable Lives of Long-Lived Assets
   Impairment of Long-Lived Assets
  Environmental Costs
  50




---



##### Table of Contents



Income Taxes 
  Pension Benefits
 New Accounting Pronouncements 
  Inflation
  51




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flows
  Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Income (Loss) before Extraordinary Gain
and Cumulative Effect of Accounting Change
    
    $
    (11,245
    )
    
    $
    372
    
    
    $
    9,360
    
    
    
    (3,123
    %)
    
    
    (96
    %)Depreciation and Amortization
    
    
    6,343
    
    
    
    5,737
    
    
    
    5,794
    
    
    
    11
    %
    
    
    (1
    %)Environmental Remediation Charge, Net of Tax
    
    
    14,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on Debt Extinguishments
    
    
    
    
    
    
    
    
    
    
    1,522
    
    
    
    
    
    
    
    (100
    %)Changes in Operating Assets and LiabilitiesAccounts Receivable
    
    
    9,916
    
    
    
    (4,144
    )
    
    
    (2,105
    )
    
    
    (339
    %)
    
    
    97
    %Inventories
    
    
    1,876
    
    
    
    1,090
    
    
    
    376
    
    
    
    72
    %
    
    
    190
    %Accounts Payable and Accrued Expenses
    
    
    (919
    )
    
    
    (376
    )
    
    
    1,332
    
    
    
    144
    %
    
    
    (128
    %)Other
    
    
    (930
    )
    
    
    (1,279
    )
    
    
    1,441
    
    
    
    (27
    %)
    
    
    (189
    %)Cash Provided by Operating Activities
    
    $
    19,153
    
    
    $
    1,400
    
    
    $
    17,720
    
    
    
    1,268
    %
    
    
    (92
    %)
    Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Capital Expenditures
    
    $
    (2,066
    )
    
    $
    (1,093
    )
    
    $
    (3,119
    )
    
    
    89
    %
    
    
    (65
    %)Acquisition of ISP
    
    
    (4,505
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment in ES Joint Venture
    
    
    
    
    
    
    
    
    
    
    (11,153
    )
    
    
    
    
    
    
    (100
    %)Other
    
    
    592
    
    
    
    (375
    )
    
    
    
    
    
    
    (258
    %)
    
    
    Cash Used in Investing Activities
    
    $
    (5,979
    )
    
    $
    (1,468
    )
    
    $
    (14,272
    )
    
    
    307
    %
    
    
    (90
    %)
   Year Ended September 30,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Issuance of Common Stock
    
    $
    24
    
    
    $
    2,291
    
    
    $
    1,152
    
    
    
    (99
    %)
    
    
    99
    %Treasury Stock Acquired
    
    
    
    
    
    
    (2,752
    )
    
    
    (1,747
    )
    
    
    (100
    %)
    
    
    58
    %Dividends
    
    
    
    
    
    
    (3,080
    )
    
    
    
    
    
    
    (100
    %)
    
    
    Debt Related Payments
    
    
    
    
    
    
    
    
    
    
    (41,539
    )
    
    
    
    
    
    
    (100
    %)Short-term Borrowings, net
    
    
    238
    
    
    
    246
    
    
    
    
    
    
    
    (3
    %)
    
    
    Cash Provided (Used) in Financing Activities
    
    $
    262
    
    
    $
    (3,295
    )
    
    $
    (42,134
    )
    
    
    (108
    %)
    
    
    (92
    %)
 52




---



##### Table of Contents



Capital Resources
    Credit Facilities and Seller Subordinated Note
 Credit Facilities
   53




---



##### Table of Contents




    
    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.
   54




---



##### Table of Contents



Environmental Remediation  Henderson Site
  Dividend and Stock Repurchase Program
  Contractual Obligations and Off-Balance Sheet Arrangements
  55




---



##### Table of Contents



Payments Due by Year Ending September 30,2006
    
    
    2007-08
    
    
    2009-10
    
    
    Thereafter
    
    
    TotalFirst Lien Term Loan
    
    $
    650
    
    
    $
    9,750
    
    
    $
    42,575
    
    
    $
    12,025
    
    
    $
    65,000Interest on First Lien Term Loan
    
    
    4,540
    
    
    
    10,255
    
    
    
    6,923
    
    
    
    169
    
    
    
    21,887Second Lien Term Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20,000Interest in Second Lien Term Loan
    
    
    1,470
    
    
    
    3,368
    
    
    
    3,368
    
    
    
    3,164
    
    
    
    11,370Seller Subordinated Note
    
    
    
    
    
    
    6,500
    
    
    
    
    
    
    
    19,000
    
    
    
    25,500Interest on Seller Subordinated Note
    
    
    
    
    
    
    1,294
    
    
    
    
    
    
    
    16,863
    
    
    
    18,157Operating Leases
    
    
    637
    
    
    
    1,202
    
    
    
    284
    
    
    
    
    
    
    
    2,123Total
    
    $
    7,297
    
    
    $
    32,369
    
    
    $
    53,150
    
    
    $
    71,221
    
    
    $
    164,037
     
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 8. Financial Statements and Supplementary Data
  56




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##### Table of Contents



PageReport of Independent Registered Public Accounting Firm
    
    67Consolidated Balance Sheets
    
    68Consolidated Statements of Operations
    
    69Consolidated Statements of Changes in Shareholders Equity
    
    70Consolidated Statements of Cash Flows
    
    71Notes to Consolidated Financial Statements
    
    72
 SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts)
 Quarters For Fiscal Year 20051st
    
    
    2nd
    
    
    3rd (a)
    
    
    4th
    
    
    TotalRevenues
    
    $
    18,254
    
    
    $
    18,513
    
    
    $
    16,301
    
    
    $
    30,279
    
    
    $
    83,347Gross Profit
    
    
    5,709
    
    
    
    6,527
    
    
    
    4,123
    
    
    
    11,319
    
    
    
    27,678Income (Loss) Before Extraordinary Gain
and Cumultive Effect of Accounting Change
    
    
    (594
    )
    
    
    (303
    )
    
    
    (15,792
    )
    
    
    5,444
    
    
    
    (11,245
    )Net Income (Loss)
    
    
    1,028
    
    
    
    (303
    )
    
    
    (15,792
    )
    
    
    5,376
    
    
    
    (9,691
    )Diluted Earnings (Loss) Per Share:Income (Loss) Before Extraordinary Gain
and Cumultive Effect of Accounting Change
    
    $
    (0.08
    )
    
    $
    (0.04
    )
    
    $
    (2.16
    )
    
    $
    0.74
    
    
    $
    (1.54
    )Net Income (Loss)
    
    $
    0.14
    
    
    $
    (0.04
    )
    
    $
    (2.16
    )
    
    $
    0.73
    
    
    $
    (1.33
    )
 
 (a)
    
    The 3rd quarter of fiscal year 2005 includes an after-tax charge for environmental remediation
of $14,112. Quarters For Fiscal Year 20041st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    TotalRevenues
    
    $
    4,794
    
    
    $
    18,787
    
    
    $
    15,829
    
    
    $
    20,079
    
    
    $
    59,489Gross Profit
    
    
    470
    
    
    
    7,389
    
    
    
    4,835
    
    
    
    6,549
    
    
    
    19,243Income (Loss) Before Extraordinary Gain
and Cumultive Effect of Accounting Change
    
    
    (2,204
    )
    
    
    966
    
    
    
    (524
    )
    
    
    2,134
    
    
    
    372Net Income (Loss)
    
    
    (2,204
    )
    
    
    197
    
    
    
    (524
    )
    
    
    2,134
    
    
    
    (397
    )Diluted Earnings (Loss) Per Share:Income (Loss) Before Extraordinary Gain
and Cumultive Effect of Accounting Change
    
    $
    (0.30
    )
    
    $
    0.13
    
    
    $
    (0.07
    )
    
    $
    0.29
    
    
    $
    0.05Net Income (Loss)
    
    $
    (0.30
    )
    
    $
    0.03
    
    
    $
    (0.07
    )
    
    $
    0.29
    
    
    $
    (0.05
    )
 57




---



##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  
 Item 9A. Controls and Procedures
  
 Item 9B. Other Information
  58




---



##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
 www.apfc.com.
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Financial Statements
 59




---



##### Table of Contents



See Part II, Item 8 for an index to the Registrants financial statements and supplementary data.
 Financial Statement Schedules
  Exhibits
  2.1
    
    Purchase Agreement, dated as of July 12, 2005, by and among Aerojet Fine
Chemicals LLC, Aerojet-General Corporation and American Pacific Corporation,
incorporated by reference to exhibit 2.1 of the Registrants Current Report on Form
8-K dated July 12, 2005.2.2
    
    First Amendment to Purchase Agreement, dated November 30, 2005, by and among
American Pacific Corporation, Aerojet Fine Chemicals LLC and Aerojet-General
Corporation, incorporated by reference to Exhibit 2.2 of the Registrants Current
Report on Form 8-K dated November 30, 2005.2.3
    
    Assignment and Assumption Agreement, dated October 22, 2005, by and between
American Pacific Corporation and Ampac Fine Chemicals LLC, incorporated by reference
to Exhibit 2.3 of the Registrants Current Report on Form 8-K dated November 30, 2005.2.4
    
    Amended and Restated Assignment and Assumption Agreement, dated November 30,
2005, by and between American Pacific Corporation and Ampac Fine Chemicals LLC,
incorporated by reference to Exhibit 2.4 of the Registrants Current Report on Form
8-K dated November 30, 2005.2.5
    
    Unconditional Guaranty of Payment and Performance, dated November 30, 2005,
for the benefit of Aerojet-General Corporation and Aerojet Fine Chemicals, LLC,
incorporated by reference to Exhibit 2.5 of the Registrants Current Report on Form
8-K dated November 30, 2005.3.1
    
    Registrants Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3A to Registrants Registration Statement on Form S-14 (File
No. 2-70830), (the S-14).3.2
    
    Registrants By-Laws, incorporated by reference to Exhibit 3B to the S-14.3.3
    
    Amendments to Registrants By-Laws, incorporated by Reference to the
Registrants Current Report on Form 8-K dated November 9, 1999.3.4
    
    Articles of Amendment to the Restated Certificate of Incorporation, as
filed with the Secretary of State, State of Delaware, on October 7, 1991,
incorporated by reference to Exhibit 4.3 to Registrants Registration Statement on
Form S-3 (File No. 33-52196) (the S-3).
 60




---



##### Table of Contents



3.5
    
    Articles of Amendment to the Restated Certificate of Incorporation as
filed with the Secretary of State, State of Delaware, on April 21, 1992,
incorporated by reference to Exhibit 4.4 to the S-3.4.1
    
    American Pacific Corporation 1997 Stock Option Plan (the 1997 Plan),
incorporated by reference to Exhibit 4.1 to Registrants Form S-8 (File No.
333-53449) (the 1998 S-8).4.2
    
    Form of Option Agreement under the 1997 Plan, incorporated by reference
to Exhibit 4.2 to the 1998 S-8.4.3
    
    American Pacific Corporation 2001 Amended and Restated Stock Option
Plan (the 2001 Plan), incorporated by reference to Exhibit 4.1 to Registrants
Form S-8 (File No. 333-104732) (the 2003 S-8).4.4
    
    Form of Option Agreement under the 2001 Plan, incorporated by reference
to Exhibit 4.3 to the 2003 S-8.4.5
    
    American Pacific Corporation Amended and Restated 2002 Directors Stock
Option Plan (the 2002 Plan), incorporated by reference to Exhibit 99.1 in the
Registrants Current Report on Form 8-K dated September 13, 2005.4.6
    
    Form of Option Agreement under the 2002 Plan, incorporated by reference
to Exhibit 4.4 to the 2003 S-8.4.7
    
    Form of Rights Agreement, dated as of August 3, 1999, between
Registrant and American Stock Transfer & Trust Company, incorporated by reference
to the Registrants Registration Statement on Form 8-A dated August 6, 1999 (the
Form 8-A).4.8
    
    Form of Letter to Stockholders with copies of Summary of Rights to
Purchase Preference Shares, incorporated by reference to the Form 8-A.10.1
    
    Employment agreement dated January 1, 2002, between the Registrant and
David N. Keys, incorporated by reference to Exhibit 10.1 to the Registrants Annual
Report on Form 10-K for the fiscal year ended September 30, 2002 (the 2002 10-K).10.2
    
    Employment agreement dated January 1, 2002, between the Registrant and
John R. Gibson, incorporated by reference to Exhibit 10.2 to the Registrants 2002
10-K.10.3
    
    Amended and Restated American Pacific Corporation Defined Benefit
Pension Plan, incorporated by reference to Exhibit 10.4 to the 1999 10-K.10.4
    
    Amended and Restated American Pacific Corporation Supplemental
Executive Retirement Plan effective January 1, 1999, incorporated by reference to
Exhibit 10.5 to the 1999 10-K.
 61




---



##### Table of Contents



10.5
    
    Trust Agreement for the Amended and Restated American Pacific
Corporation Supplemental Executive Retirement Plan, incorporated by reference to
Exhibit 10.6 to the 1999 10-K.10.6
    
    Lease Agreement between 3770 Hughes Parkway Associates Limited
Partnership and the Registrant, dated July 31, 1990, incorporated by reference to
Exhibit 10.22 to the Registrants Registration Statement on Form S-2 (File No.
33-36664) (the 1990 S-2).10.7
    
    Limited Partnership Agreement of 3770 Hughes Parkway Associates,
Limited Partnership, incorporated by reference to Exhibit 10.23 to the 1990 S-2.10.8
    
    Cooperation and Stock Option Agreement dated as of July 4, 1990, by and
between Dynamit Nobel AG and the Registrant, including exhibits thereto,
incorporated by reference to Exhibit 10.24 to the 1990 S-2.10.9
    
    Long-Term Pricing Agreement dated as of December 12, 1997, between
Thiokol Corporation-Propulsion and the Registrant, incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998 (the 1998 March 10-Q).10.10
    
    Modification No. 1 dated September 13, 2000, to Long-Term Pricing
Agreement between Thiokol Propulsion and the Registrant, incorporated by reference
to Exhibit 10.14 to the 2000 10-K.10.11
    
    Partnershipping Agreement between Alliant Techsystems Incorporated
(Alliant) and Western Electrochemical Company and letter dated November 24, 1997,
from the Registrant to Alliant and revised Exhibit B with respect thereto,
incorporated by reference to Exhibit 10.2 to the 1998 March 10-Q.10.12
    
    Articles of Organization of Energetic Systems Inc., LLC, incorporated
by reference to Exhibit 10.12 to the Registrants Annual Report on Form 10-K for
the fiscal year ended September 30, 2003 (the 2003 10-K).10.13
    
    Operating Agreement of Energetic Systems Inc., LLC, incorporated by
reference to Exhibit 10.13 to the 2003 10-K.10.14
    
    First Lien Credit Agreement, dated November 30, 2005, by and among
American Pacific Corporation as borrower, the domestic subsidiaries of American
Pacific Corporation as guarantors, Wachovia Bank, National Association, as
administrative agent, Bank of America, N.A., as syndication agent, and certain
lending parties specified therein, incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K dated November 30, 2005.10.15
    
    Second Lien Credit Agreement, dated November 30, 2005, by and among
American Pacific Corporation as borrower, the domestic subsidiaries of American
Pacific Corporation as guarantors, Wachovia Bank, National Association, as
administrative agent, Bank of America, N.A., as syndication agent, and certain
lending parties specified therein, incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K dated November 30, 2005.
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##### Table of Contents



10.16
    
    The Intercreditor Agreement, dated as of November 30, 2005, by and
among American Pacific Corporation, the domestic subsidiaries of American Pacific
Corporation as may time to time party become a party therein and Wachovia Bank,
National Association, in its capacity as administrative agent for the First Lien
Obligations, Wachovia Bank, National Association, in its capacity as administrative
agent for the Second Lien Obligations and Wachovia Bank, National Association, in
its capacity as control agent for the First Lien Administrative Agent and the
Second Lien Administrative Agent, incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K dated November 30, 2005.10.17
    
    American Pacific Corporation Subordinated Promissory Note, dated
November 30, 2005, in the principal amount of $25,500,000, incorporated by
reference to Exhibit 10.4 of the Registrants Current Report on Form 8-K dated
November 30, 2005.10.18
    
    Ground Lease, dated November 30, 2005, by and between Aerojet-General
Corporation and Ampac Fine Chemicals LLC, incorporated by reference to Exhibit 10.5
of the Registrants Current Report on Form 8-K dated November 30, 2005.10.19
    
    Employment Agreement, dated December 1, 2005, by and between American
Pacific Corporation and Seth Van Voorhees, incorporated by reference to Exhibit
10.6 of the Registrants Current Report on Form 8-K dated November 30, 2005.10.20
    
    Form of Indemnification Agreement between the Registrant and all
Directors of the Registrant, incorporated by reference to Exhibit 3.6 to the
Registrants Annual Report on Form 10-K for the fiscal year ended September 30,
2000 (the 2000 10-K).14
    
    Standards of Business Conduct, incorporated by reference to Exhibit 14 to the 2003
10-K.
 * 21
    
    Subsidiaries of the Registrant.* 23
    
    Consent of Deloitte & Touche LLP.* 24
    
    Power of Attorney, included on signature page.* 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.* 31. 2
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.* 32. 1
    
    Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.* 32. 2
    
    Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 63




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64




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##### Table of Contents



SIGNATURES
  Dated: December 22, 2005
    
    
    
    AMERICAN PACIFIC CORPORATION(Registrant)By:
    
    /s/ JOHN R. GIBSONJohn R. GibsonPresident & Chief Executive OfficerBy:
    
    /s/ SETH L. VAN VOORHEESSeth L. Van VoorheesVice President, Chief FinancialOfficer, and Treasurer, PrincipalFinancial and Accounting Officer
 65




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##### Table of Contents



POWER OF ATTORNEY
   /s/ JOHN R. GIBSON
    
    Date: December 22, 2005John R. Gibson, Chief Executive Officer,
President, and Director/s/ SETH L. VAN VOORHEES
    
    Date: December 22, 2005Seth L. Van Voorhees, Vice President,Chief Financial Officer, and
Treasurer; Principal Financial and
Accounting Officer/s/ FRED D. GIBSON, JR.
    
    Date: December 22, 2005Fred D. Gibson, Jr., Director/s/ JAN H. LOEB
    
    Date: December 22, 2005Jan H. Loab, Director/s/ BERLYN D. MILLER
    
    Date: December 22, 2005Berlyn D. Miller, Director/s/ NORVAL F. POHL
    
    Date: December 22, 2005Norval F. Pohl, Ph.D., Director/s/ C. KEITH ROOKER
    
    Date: December 22, 2005C. Keith Rooker, Director/s/ DEAN M. WILLARD
    
    Date: December 22, 2005Dean M. Willard, Director/s/ JANE L. WILLIAMS
    
    Date: December 22, 2005Jane L. Williams, Director
 66




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 67




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2004
(Dollars in Thousands)
 2005
    
    
    2004ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    37,213
    
    
    $
    23,777Accounts and Notes Receivable
    
    
    12,572
    
    
    
    16,231Inventories
    
    
    13,818
    
    
    
    13,827Prepaid Expenses and Other Assets
    
    
    1,365
    
    
    
    1,614Deferred Income Taxes
    
    
    834
    
    
    
    320Total Current Assets
    
    
    65,802
    
    
    
    55,769Property, Plant and Equipment, Net
    
    
    15,646
    
    
    
    16,573Intangible Assets, Net
    
    
    9,763
    
    
    
    13,679Deferred Income Taxes
    
    
    19,312
    
    
    
    11,585Other Assets
    
    
    4,477
    
    
    
    3,970TOTAL ASSETS
    
    $
    115,000
    
    
    $
    101,576LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    5,231
    
    
    $
    5,598Accrued Liabilities
    
    
    2,786
    
    
    
    1,590Employee Related Liabilities
    
    
    2,023
    
    
    
    2,310Environmental Remediation Reserves
    
    
    4,967
    
    
    
    Deferred Revenues
    
    
    792
    
    
    
    Notes Payable
    
    
    768
    
    
    
    530Total Current Liabilities
    
    
    16,567
    
    
    
    10,028Environmental Remediation Reserves
    
    
    15,620
    
    
    
    Pension Obligations
    
    
    8,144
    
    
    
    6,748Total Liabilities
    
    
    40,331
    
    
    
    16,776Commitments and Contingencies
    
    
    
    
    
    
    Shareholders EquityPreferred Stock  No par; 3,000,000 authorized; none outstanding
    
    
    
    
    
    
    Common Stock  $.10 par value; 20,000,000 shares authorized;
9,331,787 and 9,326,787 issued and outstanding
    
    
    932
    
    
    
    932Capital in Excess of Par Value
    
    
    86,187
    
    
    
    86,148Retained Earnings
    
    
    6,206
    
    
    
    15,897Treasury Stock - 2,034,870 shares
    
    
    (16,982
    )
    
    
    (16,982
    )Accumulated Other Comprehensive Loss
    
    
    (1,674
    )
    
    
    (1,195
    )Total Shareholders Equity
    
    
    74,669
    
    
    
    84,800TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    115,000
    
    
    $
    101,576
  68




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(Dollars in Thousands, Except Per Share Amounts)
 2005
    
    
    2004
    
    
    2003Revenues
    
    $
    83,347
    
    
    $
    59,489
    
    
    $
    68,866Cost of Revenues
    
    
    55,669
    
    
    
    40,246
    
    
    
    37,349Gross Profit
    
    
    27,678
    
    
    
    19,243
    
    
    
    31,517Operating Expenses
    
    
    26,320
    
    
    
    21,493
    
    
    
    14,480Environmental Remediation Charge
    
    
    22,400
    
    
    
    
    
    
    
    Operating Income (Loss)
    
    
    (21,042
    )
    
    
    (2,250
    )
    
    
    17,037Interest and Other Income
    
    
    1,398
    
    
    
    693
    
    
    
    912Interest Expense
    
    
    274
    
    
    
    573
    
    
    
    2,456Loss on Debt Extinguishments
    
    
    
    
    
    
    
    
    
    
    1,522Income (Loss) Before Income Taxes, Extraordinary Gain, and
Cumulative Effect of Accounting Change
    
    
    (19,918
    )
    
    
    (2,130
    )
    
    
    13,971Income Tax Provision (Benefit)
    
    
    (8,673
    )
    
    
    (2,502
    )
    
    
    4,611Income (Loss) Before Extraordinary Gain, and
Cumulative Effect of Accounting Change
    
    
    (11,245
    )
    
    
    372
    
    
    
    9,360Extraordinary Gain, Net of Tax
    
    
    1,554
    
    
    
    
    
    
    
    Cumulative Effect of Accounting Change, Net of Tax
    
    
    
    
    
    
    (769
    )
    
    
    Net Income (Loss)
    
    $
    (9,691
    )
    
    $
    (397
    )
    
    $
    9,360Basic Earnings (Loss) Per Share:Income (Loss) Before Extraordinary Gain and
Cumulative Effect of Accounting Change
    
    $
    (1.54
    )
    
    $
    0.05
    
    
    $
    1.29Extraordinary Gain, Net of Tax
    
    
    0.21
    
    
    
    
    
    
    
    Cumulative Effect of Accounting Change, Net of Tax
    
    
    
    
    
    
    (0.10
    )
    
    
    Net Income (Loss)
    
    $
    (1.33
    )
    
    $
    (0.05
    )
    
    $
    1.29Diluted Earnings (Loss) Per Share:Income (Loss) Before Extraordinary Gain and
Cumulative Effect of Accounting Change
    
    $
    (1.54
    )
    
    $
    0.05
    
    
    $
    1.27Extraordinary Gain, Net of Tax
    
    
    0.21
    
    
    
    
    
    
    
    Cumulative Effect of Accounting Change, Net of Tax
    
    
    
    
    
    
    (0.10
    )
    
    
    Net Income (Loss)
    
    $
    (1.33
    )
    
    $
    (0.05
    )
    
    $
    1.27Weighted Average Shares Outstanding:Basic
    
    
    7,294,000
    
    
    
    7,281,000
    
    
    
    7,253,000Diluted
    
    
    7,294,000
    
    
    
    7,328,000
    
    
    
    7,353,000
  69




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(Dollars in Thousands)
 CommonShares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedOutstanding,
    
    
    Par
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalNet of
    
    
    Value of
    
    
    Capital in
    
    
    
    
    
    
    
    
    
    
    Compre-
    
    
    Share-Treasury
    
    
    Common
    
    
    Excess of
    
    
    Retained
    
    
    Treasury
    
    
    hensive
    
    
    holdersShares
    
    
    Stock
    
    
    Par Value
    
    
    Earnings
    
    
    Stock
    
    
    Loss
    
    
    EquityBALANCES, October 1, 2002
    
    
    7,254,454
    
    
    $
    881
    
    
    $
    82,249
    
    
    $
    6,820
    
    
    $
    (12,483
    )
    
    $
    (1,226
    )
    
    $
    76,241Comprehensive Income (Loss):Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,360
    
    
    
    
    
    
    
    
    
    
    
    9,360Additional
Minimum Pension Liability, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (342
    )
    
    
    (342
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,018Issuance of Common Stock
    
    
    170,500
    
    
    
    17
    
    
    
    1,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,152Tax Benefit From Stock Options
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170Treasury Stock Acquired
    
    
    (182,125
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,747
    )
    
    
    
    
    
    
    (1,747
    )BALANCES, September 30, 2003
    
    
    7,242,829
    
    
    
    898
    
    
    
    83,554
    
    
    
    16,180
    
    
    
    (14,230
    )
    
    
    (1,568
    )
    
    
    84,834Comprehensive Income (Loss):Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (397
    )
    
    
    
    
    
    
    
    
    
    
    (397
    )Additional
Minimum Pension Liability, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    373
    
    
    
    373Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )Issuance of Common Stock
    
    
    49,088
    
    
    
    34
    
    
    
    2,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,291Reclassification of Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,569
    
    
    
    
    
    
    
    
    
    
    
    3,569Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,080
    )
    
    
    
    
    
    
    
    
    
    
    (3,080
    )Equity Investment Consolidation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    (375
    )Tax Benefit From Stock Options
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337Treasury Stock Acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,752
    )
    
    
    
    
    
    
    (2,752
    )BALANCES, September 30, 2004
    
    
    7,291,917
    
    
    
    932
    
    
    
    86,148
    
    
    
    15,897
    
    
    
    (16,982
    )
    
    
    (1,195
    )
    
    
    84,800Comprehensive Income (Loss):Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,691
    )
    
    
    
    
    
    
    
    
    
    
    (9,691
    )Currency Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7Additional
Minimum Pension Liability, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (486
    )
    
    
    (486
    )Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,177
    )Issuance of Common Stock
    
    
    5,000
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Tax Benefit From Stock Options
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15BALANCES, September 30, 2005
    
    
    7,296,917
    
    
    $
    932
    
    
    $
    86,187
    
    
    $
    6,206
    
    
    $
    (16,982
    )
    
    $
    (1,674
    )
    
    $
    74,669
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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(Dollars in Thousands)
 2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net Income (Loss)
    
    $
    (9,691
    )
    
    $
    (397
    )
    
    $
    9,360Adjustments to Reconcile Net Income (Loss) to Net Cash
from Operating Activities:Depreciation and Amortization
    
    
    6,343
    
    
    
    5,737
    
    
    
    5,794Extraordinary Gain, Net of Tax
    
    
    (1,554
    )
    
    
    
    
    
    
    Cumulative Effect of Accounting Change, Net of Tax
    
    
    
    
    
    
    769
    
    
    
    Basis in Development Property Sold
    
    
    
    
    
    
    
    
    
    
    632Equity in Loss of Joint Venture
    
    
    
    
    
    
    450
    
    
    
    760Loss on Debt Extinguishments
    
    
    
    
    
    
    
    
    
    
    1,522Tax Benefit from Stock Option Exercises
    
    
    15
    
    
    
    337
    
    
    
    170Changes in Operating Assets and Liabilities, Net of Initial
Consolidation of ES under FIN 46(R):Accounts and Notes Receivable
    
    
    9,916
    
    
    
    (4,144
    )
    
    
    (2,105
    )Inventories
    
    
    1,876
    
    
    
    1,090
    
    
    
    376Deferred Income Taxes
    
    
    (8,241
    )
    
    
    (1,598
    )
    
    
    (179
    )Accounts Payable and Accrued Liabilities
    
    
    (919
    )
    
    
    (376
    )
    
    
    1,332Pension Obligation
    
    
    926
    
    
    
    (384
    )
    
    
    (135
    )Environmental Remediation Reserves
    
    
    20,587
    
    
    
    
    
    
    
    Other
    
    
    (105
    )
    
    
    (84
    )
    
    
    193Net Cash Provided by Operating Activities
    
    
    19,153
    
    
    
    1,400
    
    
    
    17,720CASH FLOWS FROM INVESTING ACTIVITIES:Capital Expenditures
    
    
    (2,066
    )
    
    
    (1,093
    )
    
    
    (3,119
    )Investment In and Advances to Joint Venture
    
    
    
    
    
    
    
    
    
    
    (11,153
    )Initial Consolidation of ES Under FIN 46(R)
    
    
    
    
    
    
    (375
    )
    
    
    Acquisition of Business
    
    
    (4,505
    )
    
    
    
    
    
    
    Proceeds from Asset Sales
    
    
    592
    
    
    
    
    
    
    
    Net Cash Used in Investing Activities
    
    
    (5,979
    )
    
    
    (1,468
    )
    
    
    (14,272
    )CASH FLOWS FROM FINANCING ACTIVITIES:Debt Related Payments
    
    
    
    
    
    
    (54
    )
    
    
    (41,539
    )Issuance of Common Stock
    
    
    24
    
    
    
    2,291
    
    
    
    1,152Short Term Borrowings
    
    
    238
    
    
    
    300
    
    
    
    Treasury Stock Acquired
    
    
    
    
    
    
    (2,752
    )
    
    
    (1,747
    )Dividends
    
    
    
    
    
    
    (3,080
    )
    
    
    Net Cash Provided (Used) in Financing Activities
    
    
    262
    
    
    
    (3,295
    )
    
    
    (42,134
    )Net Increase (Decrease) In Cash and Cash Equivalents
    
    
    13,436
    
    
    
    (3,363
    )
    
    
    (38,686
    )Cash and Cash Equivalents, Beginning of Year
    
    
    23,777
    
    
    
    27,140
    
    
    
    65,826Cash and Cash Equivalents, End of Year
    
    $
    37,213
    
    
    $
    23,777
    
    
    $
    27,140Cash Paid For:Income Taxes
    
    $
    
    
    
    $
    551
    
    
    $
    1,875Interest
    
    $
    
    
    
    $
    
    
    
    $
    4,400Non-Cash Transactions:Initial Consolidation of ES Under FIN 46(R) -Fair value of assets
    
    $
    
    
    
    $
    11,958
    
    
    $
    Fair value of liabilities
    
    $
    
    
    
    $
    3,231
    
    
    $
    Reclassification of Warrants
    
    $
    
    
    
    $
    3,569
    
    
    $
    
  71




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(Dollars in Thousands, Except Per Share Amounts)
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation  Our consolidated financial statements include the accounts
of American Pacific Corporation, our wholly-owned subsidiaries, and variable interest entities,
as discussed below. All significant intercompany accounts have been eliminated.In January 2003, the Financial Accounting Standards Board (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.Prior to March 31, 2004, we treated our 50% equity interest in the Energetic System (ES) joint
venture as an unconsolidated operation whose financial performance was accounted for using the
equity method and 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 (net of tax benefit of $414) on our 2004 second quarter statement of
operations 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
changed various line items of our balance sheet, statement of operations and cash flow
presentations as compared to financial presentations in earlier reports.Estimates and Assumptions  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,
and recovery of deferred tax assets and long-lived and intangible assets. Other areas which
include significant judgment 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 consolidated
financial statements were prepared.Sales and Revenue Recognition Revenues for Specialty Chemicals and water treatment
equipment sales are recognized when persuasive evidence of an arrangement exists, shipment has
been made, title passes, the price is fixed or determinable and collectibility is reasonably
assured. Some of our perchlorate product customers have requested that we store materials
purchased from us 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
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title and risk of
ownership transfers to our customers. We receive cash for the full amount of real estate sales
at the time of closing which is when the sale is recorded.Revenues from our Aerospace Equipment segment are derived from contracts that are accounted for
in conformity with the American Institute of Certified Public Accountants (AICPA) audit and
accounting guide, Audits of Federal Government Contracts and the AICPAs Statement of Position
No. 81-1, Accounting for Performance of Construction-Type and Certain Production Type
Contacts. We account for these contracts using the percentage-of-completion method and measure
progress on a cost-to-cost basis. The percentage-of-completion method recognizes revenue as work
on a contract progresses. Revenues are calculated based on the percentage of total costs
incurred in relation to total estimated costs at completion of the contract. For fixed-price and
fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract,
the loss is recognized immediately.Environmental Remediation  We are subject to environmental regulations that relate to
our past and current operations. We record liabilities for environmental remediation costs when
our assessments indicate that remediation efforts are probable and the costs can be reasonably
estimated. When the available information is sufficient to estimate the amount of the
liability, that estimate is used. When the information is only sufficient to estimate a range
of probable liability, and no amount within the range is more likely than the other, the low end
of the range is used. Estimates of liabilities are based on currently available facts, existing
technologies and presently enacted laws and regulations. These estimates are subject to
revision in future periods based on actual costs or new circumstances. Accrued environmental
remediation costs include the undiscounted cost of equipment, operating and maintenance costs,
and fees to outside law firms or consultants, for the estimated duration of the remediation
activity. Estimating environmental cost requires us to exercise substantial judgment regarding
the cost, effectiveness and duration of our remediation activities. Actual future expenditures
could differ materially from our current estimates.We evaluate potential claims for recoveries from other parties separately from our estimated
liabilities. We record an asset for expected recoveries when recovery of the amounts are
probable.Related Party Transactions  Accounts and Notes Receivable at September 30, 2004,
includes $45 related to an interest bearing demand note from our former Chairman (see Note 3).
Our other related party transactions generally fall into the following categories; payments of
professional fees to firms affiliated with certain members of our Board, and payments to certain
directors for consulting services outside of the scope of their duties as directors. For the
years ended September 30, 2005, 2004 and 2003, such transactions totaled approximately
$97, $200 and $500.Cash and Cash Equivalents  All highly liquid investment securities with a maturity of
three months or less when acquired are considered to be cash equivalents. We maintain cash
balances that exceed federally insured limits; however, we have incurred no losses on such
accounts.Fair Value Disclosure of Financial Instruments  We estimate the fair value of cash and
cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities
approximates their carrying value due to their short-term nature.Concentration of Credit Risk Financial instruments that have potential concentrations
of credit risk include cash and cash equivalents and accounts receivable. We place our cash and
cash equivalents with
high quality credit institutions. Our accounts receivable have concentration risk because
significant amounts relate to customers in the aerospace and
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defense industries. From time to
time we make sales to a customer that exceeds 10% of our then outstanding accounts receivable
balance. At September 30, 2005, no single customer exceeded 10% of our accounts receivable.Inventories  Inventories are stated at the lower of cost or market. Inventoried costs
include materials, labor and manufacturing overhead. General and administrative costs are
expensed as incurred. Raw materials cost of the specialty chemicals segment inventories is
determined on a moving average basis. We provide reserves for obsolete inventories if inventory
quantities exceed our estimates of future demand. At September 30, 2005 and 2004, we had no
reserve for obsolete inventories.Property, Plant and Equipment  Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation is computed on the straight-line method over the
estimated productive lives of the assets of 3 to 12 years for machinery and equipment and 15 to
31 years for buildings and improvements.Intangible Assets  Intangible assets are recorded at cost and are amortized using the
straight-line method over their estimated period of benefit of ten years. We evaluate the
recoverability of intangible assets periodically and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment exists. All of
our intangible assets are subject to amortization. No impairments of intangible assets have been
identified during any of the periods presented.Impairment of Long-Lived Assets  We test our property, plant and equipment and
amortizable intangible assets for recoverability when events or changes in circumstances
indicate that their carrying amounts may not be recoverable. Examples of such circumstances
include, but are limited to, operating or cash flow losses from the use of such assets or
changes in our intended uses of such assets. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If we determine that an asset is not recoverable, then
we would record an impairment charge if the carrying value of the assets exceeds its fair value.Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing
net income (loss) by the weighted average shares outstanding during the year. Diluted earnings
(loss) per share is calculated by dividing net income by the weighted average shares outstanding
plus the dilutive effect of common share equivalents, which is computed using the treasury stock
method.Accounting for Stock-Based Compensation  We account for stock options using the
intrinsic value method provided in APB No. 25, Accounting for Stock Issued to Employees.
Intrinsic value represents the excess, if any, of the market price of our common stock at the
grant date over exercise price of the stock option. No compensation expense related to stock
options was recorded in any period presented because all stock options were granted at a price
equal to the market value of our stock on the grant date.If compensation expense had been determined based on the fair value provisions of SFAS No. 123,
our net income (loss) and net earnings (loss) per share would have been as follows for the years
ended September 30:
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2005
    
    
    2004
    
    
    2003Net income (loss), as reported
    
    $
    (9,691
    )
    
    $
    (397
    )
    
    $
    9,360Pro forma stock based compensation, net of tax benefits
    
    
    (324
    )
    
    
    (167
    )
    
    
    (205
    )Pro forma net income (loss)
    
    $
    (10,015
    )
    
    $
    (564
    )
    
    $
    9,155Basic Income (Loss) per Share:As reported
    
    $
    (1.33
    )
    
    $
    (0.05
    )
    
    $
    1.29Pro forma
    
    $
    (1.37
    )
    
    $
    (0.08
    )
    
    $
    1.26Diluted Income (Loss) per Share:As reported
    
    $
    (1.33
    )
    
    $
    (0.05
    )
    
    $
    1.27Pro forma
    
    $
    (1.37
    )
    
    $
    (0.08
    )
    
    $
    1.25Weighted average fair value of options granted during the year
    
    $
    3.00
    
    
    $
    4.18
    
    
    $
    3.68
  2005
    
    2004
    
    2003Dividend yield
    
    0%
    
    0%
    
    0%Volatility
    
    50%
    
    50%
    
    50%Risk-free interest rate
    
    3.9%
    
    3.0%
    
    2.9%Expected life
    

4.5
years
    

4.5
years
    

4.5
years
 Income Taxes  We account for income taxes using the asset and liability approach,
which requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. This method also requires the recognition of future tax benefits such as
net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. Valuation allowances are provided to reduce
deferred tax assets to an amount that is more likely than not to be realized. We evaluate the
likelihood of realizing our deferred tax assets by estimating sources of future taxable income
and the impact of tax planning strategies. The effect of a change in the valuation allowance is
reported in the current period tax provision.Foreign Currency  We acquired foreign operations in the United Kingdom (U.K.) with
our ISP Acquisition in October 2004 (See Note 2). We translate our foreign subsidiarys assets
and liabilities into U.S. dollars using the year-end exchange rate. Revenue and expense amounts
are translated at the average exchange rate for the year. Foreign currency translation gains or
loss are reported as cumulative currency translation adjustments as a component of shareholders
equity. Gains or losses resulting for transactions in foreign currencies are reported as other
expenses and not material for all years presented.Recently Issued Accounting Standards  In November 2004, the FASB issued SFAS 151,
Inventory Costsan amendment of ARB No. 43, Chapter 4. The Statement clarifies that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production facilities. The Statement
is effective for us beginning in fiscal 2006. We are in the process of assessing the extent of
the impact such adoption would have on our financial statements, if any.In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment which
requires all entities to recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees and directors. This statement is
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effective for us
beginning with our first quarter of fiscal 2006. The amount of future expense that we recognize
will vary based on the number of options or other share-based instruments that could be granted
solely at the discretion of our Board of Directors. Based on historical grants, we do not
expect that the adoption of this statement will have a material impact on our consolidated
financial statements.Reclassifications  Certain prior period amounts have been reclassified to conform with
our current period presentation.2.
    
    ACQUISITIONSAFC Business Acquisition  In July 2005, we entered into an agreement to acquire, and on
November 30, 2005, we completed the acquisition of, the fine chemicals business (the AFC
Business) of GenCorp Inc. (GenCorp) through the purchase of substantially all of the assets
of Aerojet Fine Chemicals, LLC and the assumption of certain of its liabilities. The assets
were acquired and liabilities assumed by our newly formed, wholly-owned subsidiary, Ampac Fine
Chemicals (AFC). AFC is a manufacturer of active pharmaceutical ingredients and registered
intermediates under cGMP guidelines for customers in the pharmaceutical industry. Its facilities
in California offer specialized engineering capabilities including high containment for high
potency compounds, energetic and nucleoside chemistries, and chiral separation using the first
commercial-scale simulated moving bed in the United States. In its fiscal year 2004, the AFC
Business reported revenues of approximately $66,000.The estimated total consideration for the AFC Business acquisition is comprised of the
following:
 Cash
    
    $
    88,500Fair value of Seller Subordinated Note (Face value $25,500)
    
    
    19,400Preliminary capital expenditures adjustment
    
    
    17,355Preliminary working capital adjustment
    
    
    2,404Other direct acquisition costs
    
    
    4,000Total purchase price
    
    $
    131,659
 The purchase price of $114,000 (comprised of cash of $88,500 and a Seller Subordinated Note
with a face value of $25,500) is subject to an additional contingent cash payment of up to
$5,000 based on targeted financial performance of AFC during the year ended September 30, 2006.The capital expenditures adjustment represents reimbursements to GenCorp for their estimated
investments, as defined in the acquisition agreements, during the period July 2005 through the
closing date on November 30, 2005. This amount is subject to adjustment based on post-closing
documents and analyses.The working capital adjustment represents an estimated adjustment to the purchase based on
actual working capital as of the closing date compared to a target working capital amount
specified in the acquisition agreements. This amount is subject to adjustment based on
post-closing documents and analyses.In connection with the AFC Business acquisition, we entered into Credit Facilities and a Seller
Subordinated Note, each discussed in Note 6. The total purchase price was funded with net
proceeds from the Credit Facilities of $83,323, the Seller Subordinated Note of $25,500 and
existing cash.We will account for this acquisition using the purchase method of accounting. The fair value of
the Seller Subordinated Note was determined by discounting the required principal and
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interest
payments at a rate of 15%, which we believe is appropriate for instruments with comparable
terms. The evaluation of the closing balance sheet and determination of the fair value of
assets acquired and liabilities assumed is in process. Accordingly, it is not practicable at
this time to disclose a preliminary allocation of the purchase price.ISP Acquisition  October 1, 2004, we acquired the former Atlantic Research
Corporations in-space propulsion business (ISP or ISP Acquisition) from Aerojet-General
Corporation for $4,505.We accounted for this acquisition using the purchase method of accounting. The fair value of
the current assets acquired and current liabilities assumed was approximately $6,972. Since the
purchased price was
less than the fair value of the net current assets acquired, non-current assets were recorded at
zero and an after-tax extraordinary gain of $1,554 was recognized (net of approximately $913 of
income tax expense).3.
    
    BALANCE SHEET DATAThe following tables provide additional disclosure for accounts and notes receivable,
inventories and property, plant and equipment at September 30:
 2005
    
    
    2004Accounts and Notes Receivable:Trade Receivables
    
    $
    8,001
    
    
    $
    15,963Unbilled Receivables
    
    
    4,300
    
    
    
    Note Receivable from our former Chairman
    
    
    
    
    
    
    45Employee Receivables
    
    
    271
    
    
    
    223Total
    
    $
    12,572
    
    
    $
    16,231
 Unbilled receivables represent unbilled costs and accrued profits related to revenues
recognized on contracts that we account for using the percentage-of-completion method.
Substantially all of these amounts are expected to be billed or invoiced within the next 12
months. We assess the collectibility of our accounts receivable based on historical experience
and provide allowances for estimated credit losses. Typically, our customers consist of large
corporations, many of which are government contractors procuring products from us on behalf of
or for the benefit of government agencies. At September 30, 2005, and 2004, we recorded no bad
debt allowance.The note receivable from our former Chairman is a demand note bearing interest at the banks
prime rate. The note was repaid in full during the year ended September 30, 2005.
 2005
    
    
    2004Inventories:Finished goods
    
    $
    2,475
    
    
    $
    2,639Work-in-progress
    
    
    2,940
    
    
    
    3,254Raw materials and supplies
    
    
    8,403
    
    
    
    7,934Total
    
    $
    13,818
    
    
    $
    13,827
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2005
    
    
    2004Property, Plant, and Equipment, Net:Land
    
    $
    391
    
    
    $
    310Buildings and improvements
    
    
    4,803
    
    
    $
    4,925Machinery and equipment
    
    
    25,317
    
    
    
    23,754Construction in progress
    
    
    1,152
    
    
    
    1,280Total Cost
    
    
    31,663
    
    
    
    30,269Less: accumulated depreciation
    
    
    (16,017
    )
    
    
    (13,696
    )Total
    
    $
    15,646
    
    
    $
    16,573
 Depreciation expense was approximately $2,443, $1,837 and $1,894 for the years ended
September 30, 2005, 2004 and 2003, respectively.4.
    
    INTANGIBLE ASSETSWe account for our intangible assets in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. Intangible assets consist of the following at September 30:
 2005
    
    
    2004Perchlorate customer list
    
    $
    38,697
    
    
    $
    38,697Pension-related intangible
    
    
    446
    
    
    
    462Total
    
    
    39,143
    
    
    
    39,159Less: accumulated amortization
    
    
    (29,380
    )
    
    
    (25,480
    )Intangible Assets, Net
    
    $
    9,763
    
    
    $
    13,679
 The perchlorate customer list is an asset of our Specialty Chemicals segment and is subject
to amortization. Amortization expense was $3,900 for each of the three years ended September 30,
2005, 2004, and 2003. Estimated future amortization expense for the perchlorate customer list is
$3,900, $3,900, and $1,517 for the years ending September 30, 2006, 2007, and 2008,
respectively. The pension-related intangible is an actuarially calculated amount related to
unrecognized prior service cost for our defined benefit pension plan and supplemental executive
retirement plan.5.
    
    REAL ESTATE ASSETSAt September 30, 2005, we owned approximately 2 acres of improved undeveloped land at the Gibson
Business Park near Las Vegas, Nevada. We also own approximately 4,700 acres of land and certain
water rights at our site in Iron County, Utah that are dedicated to our growth and
diversification.We held a 50% interest in the Ventana Canyon joint venture residential project located in the
Las Vegas, Nevada area. All homes have been sold and the venture has wound down its operations.
During the two-year period ended September 30, 2004, we received cash returns from this venture
of approximately $1.4 million. We do not expect to receive any cash returns from the venture in
the future.We owned a 70% interest as general and limited partner in Gibson Business Park Associates 1986-I
(the Partnership), a real estate development limited partnership. The remaining 30% limited
partners include certain current and former members of our Board of Directors. The Partnership,
in turn, owned a 33% limited partner interest in 3770 Hughes Parkway Associates Limited
Partnership, a Nevada limited partnership (Hughes Parkway). We entered into an agreement with
Hughes Parkway pursuant to which we lease office space in a building in Las Vegas, Nevada.
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During the year ended September 30, 2005, we received a cash distribution of $762 from the
Partnership which is recorded as other income. Subsequent to the year ended September 30, 2005,
the Partnership sold its interest in Hughes Parkway, which resulted in a net cash distribution
to us of $2,104. Concurrent with the sale of the Partnerships interest in Hughes Parkway, we
renewed our office space lease through February 2009.Our real estate assets, grouped with Other Assets in our Consolidated Balance Sheet, had a total
carrying value of approximately $1,344 and $1,678 at September 30, 2005 and 2004.6.
    
    LONG-TERM DEBTNotes Payable Our notes payable balance as of September 30, 2005 and 2004, includes
$500 and $200, respectively, payable to our ES joint venture partner. The remaining balance at
September 30, 2005 and 2004, respectively, represents short term bank borrowings by our ES joint
venture.Letters of Credit  As of September 30, 2005 we had $2,081 in outstanding standby
letters of credit which mature through November 2008. 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.Senior Unsecured Notes  On March 1, 2003, we redeemed all of our outstanding 91/4% Senior
Unsecured Notes (the Notes). The redemption was at a price of 102.313% of the principal
amount of the Notes, plus accrued interest to the date of redemption, aggregating approximately
$43,400. We recognized a loss on the redemption of $1,522, including a non-cash charge of $600
to write-off remaining debt issue costs.Credit Facilities  In connection with our acquisition of the AFC Business, discussed in
Note 2, on November 30, 2005, we entered into a $75,000 first lien credit agreement (the First
Lien Credit Facility) with Wachovia Capital Markets, LLC and other lenders. We also entered
into a $20,000 second lien credit agreement (the Second Lien Credit Facility, and together
with the First Lien Credit Facility, the Credit Facilities) with Wachovia Capital Markets,
LLC, and certain other lenders. The Credit Facilities are collateralized by substantially all
of our assets and the assets of our domestic subsidiaries.The First Lien Credit Facility provides for term loans in the aggregate principal amount of
$65,000. The term loans will be repaid in twenty consecutive quarterly payments in increasing
amounts, with the final payment due and payable on November 30, 2010. The First Lien Credit
Facility also provides for a revolving credit line in an aggregate principal amount of up to
$10,000 at any time outstanding, which includes a letter of credit sub-facility in the aggregate
principal amount of up to $5,000 and a swing-line sub-facility in the aggregate principal amount
of up to $2,000. There are currently no borrowings under this revolving credit line. The initial
scheduled maturity of the revolving credit line is November 30, 2010. The revolving credit line
may be increased by an amount of up to $5,000 within three years from the date of the Credit
Facilities.The Second Lien Credit Facility provides for term loans in the aggregate principal amount of
$20,000 with a scheduled maturity of November 30, 2011, with the full amount of such term loans
being payable on such date. We are required to pay a premium for certain prepayments, if any, of
the Second Lien Credit Facility made before November 30, 2008.The interest rates per annum applicable to loans under the Credit Facilities are, at our option,
the Alternate Base Rate (as defined in the Credit Facilities) or LIBOR Rate (as defined in the
Credit Facilities) plus, in each case, an applicable margin. Under the First Lien Credit
Facility such margin is tied to our total leverage ratio. A portion of the interest payment due
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under the Second Lien Credit Facility will accrue as payment-in-kind interest. In addition,
under the revolving credit facility, we will be required to pay (i) a commitment fee in an
amount equal to the applicable percentage per annum on the average daily unused amount of the
revolving commitments and (ii) other fees related to the issuance and maintenance of the letters
of credit issued pursuant to the letters of credit sub-facility. Additionally, we will be
required to pay to the administrative agent certain agency fees under both Credit Facilities.
Within 180 days of closing of the Credit Facilities we are required to hedge a portion of the
obligations under the Credit Facilities.On November 30, 2005, we borrowed $65,000 under the First Lien Credit Facility term loan at an
annual interest rate of 8.42% and $20,000 under the Second Lien Credit Facility at an annual
interest rate of 13.42%. Net proceeds of $83,323, after debt issuance costs of $1,677, were
used to fund a portion of the AFC Business acquisition price.Certain events, including asset sales, excess cash flow, recovery events in respect of property,
and debt and equity issuances will require us to make payments on the outstanding obligations
under the Credit Facilities. These prepayments are separate from the events of default and any
related acceleration described below.The Credit Facilities include certain negative covenants restricting or limiting our ability to,
among other things:
 
    
    incur debt, incur contingent obligations and issue certain types of preferred stock;
    
    create liens;
    
    pay dividends, distributions or make other specified restricted payments;
    
    make certain investments and acquisitions;
    
    enter into certain transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    merge or consolidate with any other entity or sell, assign, transfer,
lease, convey or otherwise dispose of assets.
 Financial covenants under the Credit Facilities include quarterly requirements for Total
Leverage Ratio, First Lien Coverage Ratio, Fixed Charge Coverage Ratio, Consolidated Capital
Expenditures and minimum Consolidated EBITDA. The Credit Facilities also contain usual and
customary events of default (subject to certain threshold amounts and grace periods). If an
event of default occurs and is continuing, we may be required to repay the obligations under the
Credit Facilities prior to their stated maturity and the commitments under the First Lien Credit
Facility may be terminated.Seller Subordinated Note In connection with our acquisition of the AFC Business, discussed in Note 2, we issued an
unsecured subordinated seller note in the principal amount of $25,500 to Aerojet-General
Corporation, a subsidiary of GenCorp. The note accrues interest on a payment-in-kind basis at a
rate equal to the threemonth U.S. dollar LIBOR as from time to time in effect plus a margin
equal to the weighted average of the interest rate margin for the loans outstanding under the
Credit Facilities, including certain changes interest rates due to subsequent amendments or
refinancing of the Credit Facilities. All principal and accrued and unpaid interest will be due
on November 30, 2012. Subject to the terms of the Credit Facilities, we may be required to repay
up to $6,500 of the note and interest thereon on or after September 30, 2007. The note is
subordinated to the senior debt under or related to the Credit Facilities, our other
indebtedness in respect to any working capital, revolving credit or term loans, or any other
extension of credit by a bank or insurance company or other
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financial institution, other
indebtedness relating to leases, indebtedness in connection with the acquisition of businesses
or assets, and the guarantees of each of the previously listed items, provided that the
aggregate principal amount of obligations of AMPAC or any of its Subsidiaries shall not exceed
the greater of (i) the sum of (A) the aggregate principal amount of the outstanding First Lien
Obligations (as such term is defined in the Intercreditor Agreement referred to in the Credit
Facilities) not in excess of $95,000 plus (B) the aggregate principal amount of the outstanding
Second Lien Obligations (as defined in the Intercreditor Agreement) not in excess of $20,000,
and (ii) an aggregate principal balance of Senior Debt (as defined in the note) which would not
cause AMPAC to exceed as of the end of any fiscal quarter a Total Leverage Ratio of 4.50 to 1.00
(as such term is defined in, and as such ratio is determined under, the First Lien Credit
Facility) (disregarding any obligations in respect of Hedging Agreements (as defined in the
First Lien Credit Facility) constituting First Lien Obligations or Second Lien Obligations or
any increase in the amount of the Senior Debt resulting from any payment-in-kind interest added
to principal each to be disregarded in calculating the aggregate principal amount of such
obligations).Principal maturities for term loans under the Credit Facilities and the Seller Subordinated Note
are as follows:
 Years ending September 30:2006
    
    $
    6502007
    
    
    3,2502008
    
    
    13,0002009
    
    
    6,5002010
    
    
    36,075Thereafter
    
    
    51,025Total
    
    $
    110,500
 7.
    
    INCOME TAXESThe components of the income tax provision (benefit) are as follows at September 30:
 2005
    
    
    2004
    
    
    2003Current
    
    $
    (813
    )
    
    $
    (904
    )
    
    $
    4,790Deferred
    
    
    (7,860
    )
    
    
    (1,598
    )
    
    
    (179
    )Income tax provision (benefit)
    
    $
    (8,673
    )
    
    $
    (2,502
    )
    
    $
    4,611
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2005
    
    
    2004Deferred tax assets:Property
    
    $
    5,763
    
    
    $
    6,505Intangible assets
    
    
    3,951
    
    
    
    3,619Pension obligations
    
    
    2,095
    
    
    
    1,169Environmental remediation reserves
    
    
    7,707
    
    
    
    Tax credits and carryforwards
    
    
    842
    
    
    
    497Accured expenses
    
    
    596
    
    
    
    985Inventory capitalization
    
    
    477
    
    
    
    146Other
    
    
    
    
    
    
    203Subtotal
    
    
    21,431
    
    
    
    13,124Valuation allowance
    
    
    (431
    )
    
    
    (497
    )Deferred tax assets
    
    
    21,000
    
    
    
    12,627Deferred tax liabilities:Prepaid expenses
    
    
    (239
    )
    
    
    (172
    )Other
    
    
    (615
    )
    
    
    (550
    )Deferred tax liabilities
    
    
    (854
    )
    
    
    (722
    )Net deferred tax assets
    
    $
    20,146
    
    
    $
    11,905
 As of September 30, 2005, we have federal net capital loss carryforwards available to
offset future capital gains of $1,290 for which we had previously provided a valuation allowance
for the deferred tax asset related of $497. During the year ended September 30, 2005, we
concluded that our capital loss carryforwards could be utilized, and accordingly, we reversed
the valuation allowance for this item. In addition, we have operating loss carryforwards of
$6,398 for certain U.S. states and $619 for the U.K. We do not anticipate future taxable income
in these states or the U.K., and accordingly provided a valuation allowance of $431 during the
year ended September 30, 2005. We have not provided U.S. federal income benefit for the U.K.
because we intend to permanently reinvest any earnings from the U.K.A reconciliation of the federal statutory rate to our effective tax (benefit) rate is as follows
for the years ended September 30:
 2005
    
    
    2004
    
    
    2003Federal income tax at the statutory rate
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    35.0
    %State income tax, net of federal benefit
    
    
    (2.4
    %)
    
    
    (2.4
    %)
    
    
    2.4
    %Nondeductible expenses
    
    
    0.6
    %
    
    
    2.1
    %
    
    
    0.2
    %Valuation allowance
    
    
    1.2
    %
    
    
    23.1
    %
    
    
    0.0
    %Change in deferred tax liability estimate
    
    
    0.0
    %
    
    
    (97.5
    %)
    
    
    0.0
    %Other
    
    
    (7.9
    %)
    
    
    (7.8
    %)
    
    
    (4.6
    %)Effective tax rate
    
    
    (43.5
    %)
    
    
    (117.5
    %)
    
    
    33.0
    %
 The change in deferred tax liability estimate for the year ended September 30, 2004,
represents an amount previously recorded for tax contingency reserves. During the fourth
quarter of fiscal 2004, we concluded that these tax contingency reserves were no longer required
and were reversed. Based on the analysis of deferred income taxes, we revised our estimate for
deferred tax liability by approximately $2,100.8.
    
    EMPLOYEE BENEFIT PLANSWe maintain a group health and life benefit plan, an employee stock ownership plan (ESOP) that
includes a Section 401(k) feature, and a defined benefit pension plan (the Pension Plan), that
cover substantially all of our domestic employees, except that the Pension Plan excludes
employees of our Aerospace Equipment segment. Aerospace Equipment employees are covered by a
401(k) plan in which we made contributions of $204 during the year ended September 30, 2005. The
ESOP permits employees to make contributions. Pension Plan benefits are paid based on an average
of earnings, retirement age, and length of service, among other factors. In addition, we have a
supplemental executive retirement
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plan (SERP) that includes our former and current Chief
Executive Officer. We use a measurement date of September 30 to account for our Pension Plan
and SERP.The tables below provide relevant financial information about the Pension Plan and SERP as of
and for the fiscal years ended September 30:
 Pension Plan
    
    
    SERP2005
    
    
    2004
    
    
    2005
    
    
    2004Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    27,099
    
    
    $
    25,255
    
    
    $
    2,540
    
    
    $
    2,987Service Cost
    
    
    1,072
    
    
    
    944
    
    
    
    
    
    
    
    18Interest cost
    
    
    1,653
    
    
    
    1,466
    
    
    
    148
    
    
    
    183Actuarial (gains) losses
    
    
    2,263
    
    
    
    225
    
    
    
    (64
    )
    
    
    75Benefits paid
    
    
    (838
    )
    
    
    (791
    )
    
    
    (126
    )
    
    
    (723
    )Benefit obligation, end of year
    
    
    31,249
    
    
    
    27,099
    
    
    
    2,498
    
    
    
    2,540Change in Plan Assets:Fair value of plan assets, beginning of year
    
    
    16,654
    
    
    
    13,968
    
    
    
    
    
    
    
    Actual return (loss) on plan assets
    
    
    1,251
    
    
    
    1,770
    
    
    
    
    
    
    
    Employer contributions
    
    
    1,591
    
    
    
    1,707
    
    
    
    126
    
    
    
    723Benefits paid
    
    
    (838
    )
    
    
    (791
    )
    
    
    (126
    )
    
    
    (723
    )Fair value of plan assets, end of year
    
    
    18,658
    
    
    
    16,654
    
    
    
    
    
    
    
    Reconciliation of Funded Status:Funded status
    
    
    (12,591
    )
    
    
    (10,445
    )
    
    
    (2,498
    )
    
    
    (2,540
    )Unrecognized net actuarial losses
    
    
    9,098
    
    
    
    7,186
    
    
    
    537
    
    
    
    632Unrecognized prior service costs
    
    
    347
    
    
    
    405
    
    
    
    99
    
    
    
    142Net amount recognized
    
    $
    (3,146
    )
    
    $
    (2,854
    )
    
    $
    (1,862
    )
    
    $
    (1,766
    )Amounts Recognized:Accrued benefit liability
    
    $
    (5,646
    )
    
    $
    (4,466
    )
    
    $
    (2,498
    )
    
    $
    (2,540
    )Intangible assets
    
    
    347
    
    
    
    405
    
    
    
    99
    
    
    
    142Accumulated other comprehensive loss before tax
    
    
    2,153
    
    
    
    1,207
    
    
    
    537
    
    
    
    632Net amount recognized
    
    $
    (3,146
    )
    
    $
    (2,854
    )
    
    $
    (1,862
    )
    
    $
    (1,766
    )
 The accumulated benefit obligation for the Pension Plan was $24,304 and $21,120 at
September 30, 2005 and 2004, respectively. The accumulated benefit obligation for the SERP was
$2,498 and $2,540 at September 30, 2005 and 2004, respectively.Pension Plan assets include no shares of our common stock. Through consultation with investment
advisors, expected long-term returns for each of the plans targeted asset classes were
developed. Several factors were considered, including current market data such as
yields/price-earnings ratios, and historical market returns over long periods. Using policy
target allocation percentages and the asset class expected returns, a weighted-average expected
return was calculated. The actual and target asset allocation for the defined benefit pension
plan is as follows at September 30:
 Target
    
    
    Actual2005
    
    
    2005
    
    
    2004Equity securities
    
    
    64
    %
    
    
    62
    %
    
    
    64
    %Debt securities
    
    
    14
    %
    
    
    14
    %
    
    
    14
    %Real estate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Other
    
    
    22
    %
    
    
    24
    %
    
    
    22
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
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Pension Plan
    
    
    SERP2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Net Periodic Pension Cost:Service cost
    
    $
    1,072
    
    
    $
    944
    
    
    $
    770
    
    
    $
    
    
    
    $
    18
    
    
    $
    18Interest cost
    
    
    1,653
    
    
    
    1,466
    
    
    
    1,388
    
    
    
    148
    
    
    
    183
    
    
    
    183Expected return on plan assets
    
    
    (1,364
    )
    
    
    (1,165
    )
    
    
    (930
    )
    
    
    
    
    
    
    
    
    
    
    Recognized actuarial losses
    
    
    464
    
    
    
    474
    
    
    
    387
    
    
    
    30
    
    
    
    29
    
    
    
    12Amortization of prior service costs
    
    
    58
    
    
    
    58
    
    
    
    58
    
    
    
    43
    
    
    
    43
    
    
    
    43Net periodic pension cost
    
    $
    1,883
    
    
    $
    1,777
    
    
    $
    1,673
    
    
    $
    221
    
    
    $
    273
    
    
    $
    256Actuarial Assumptions:Discount rate
    
    
    5.75
    %
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    5.75
    %
    
    
    6.00
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %Expected return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
 During the year ending September 30, 2006, we expect to contribute $1,834 to the Pension
Plan and $126 to the SERP. The table below sets forth expected future benefit payments for the
years ending September 30:
 Pension Plan
    
    SERPYears ending September 30:2006
    
    
    1,049
    
    
    $
    1262007
    
    
    1,098
    
    
    
    3032008
    
    
    1,132
    
    
    
    3032009
    
    
    1,135
    
    
    
    3032010
    
    
    1,176
    
    
    
    3032011-2015
    
    
    6,746
    
    
    
    1,515
 9.
    
    COMMITMENTS AND CONTINGENCIESOperating Leases  We lease our corporate offices and production facilities for our
Aerospace Equipment segment under operating leases with leases periods extending through 2010.
Total rental expense under operating leases was $741, $570, and $398 for the years ended
September 30, 2005, 2004, and 2003, respectively.Estimated future minimum lease payments under operating leases as of September 30, 2005, are as
follows:
 Years ending September 30:2006
    
    $
    6372007
    
    
    6082008
    
    
    5942009
    
    
    2572010
    
    
    27Thereafter
    
    
    Total
    
    $
    2,123
 Purchase Commitments  Purchase commitments represent obligations under agreements
which are not unilaterally cancelable by us, are legally enforceable, and specify fixed or
minimum amounts or quantities of goods or services at fixed or minimum prices. As of September
30, 2005, we had no material purchase commitments.Employee Agreements  We have entered into employment contracts with our Chief Executive
Officer and Chief Financial Officer, each with initial durations of three years. Significant
contract provisions include annual base salaries, health care benefits, and non-compete
provisions. These contracts are primarily at will employment agreements, under which we may
terminate employment. If we terminate these officers without cause, then we are obligated to
pay severance benefits specified in
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the contracts. Estimated minimum aggregate severance
benefits under these agreements are $1,724.During the second quarter of 2004, we recorded a charge of $2,000, which is included in
operating expenses, for estimated costs relating to the separation from us of the former Chief
Financial Officer. The separation charge includes: (i) salary and benefits owed under the terms
of an employment agreement and other severance costs, (ii) the present value of the estimated
amount payable under the terms of the Supplemental Executive Retirement Plan (SERP), and (iii)
compensation paid in lieu of compensation that would have been payable to him as a Director.Environmental MattersEPA Perchlorate Review:Perchlorate is not currently included in the list of hazardous
substances compiled by the Environmental Protection Agency (EPA), but has been added to the
EPAs Contaminant Candidate List. The EPA has conducted a risk assessment relating to
perchlorate, two drafts of which were subject to formal peer reviews held in 1999 and 2002.
Following the 2002 peer review, the EPA perchlorate risk assessment together with other
perchlorate related science was reviewed by the National Academy of Sciences (NAS). This NAS
report was released on January 11, 2005. The recommendations contained in this NAS report
indicate that human health is protected in drinking water at a level of 24.5 parts per billion
(ppb). Certain states have also conducted risk assessments (prior to the release of the NAS
report) and have set preliminary levels from 1  14 ppb. The EPA has established a reference
dose for perchlorate of .0007 mg/kg/day which is equal to a Drinking Water Equivalent Level
(DWEL) of 24.5 ppb. A decision as to whether or not to establish a Maximum Contaminate Level
(MCL) is pending. The outcome of these federal EPA actions, as well as any similar state regulatory action, will
influence the number, if any, of potential sites that may be subject to remediation action.Perchlorate Remediation Project in Henderson, Nevada:In 1997, the Southern Nevada Water
Authority (Water Authority) 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. At certain levels, perchlorate can interfere with the uptake of iodine by
the thyroid gland. While iodine uptake inhibition is a mundane occurrence, if the uptake
inhibition is high enough and lasts for a substantial period, then thyroid hormone production is
affected.We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada (the
Henderson Site) from 1958 until the facility was destroyed in May 1988, after which we
relocated our production to a new facility in Iron County, Utah. Kerr-McGee Chemical Corp
(KMCC) also operated a perchlorate production facility in Henderson, Nevada during 1967 to
1998. Between 1956 to 1967, American Potash operated a perchlorate production facility at the
same site. For many years prior to 1956, other entities also manufactured perchlorate chemicals
at that site. In 1998, Kerr-McGee Chemical LLC became the operating entity and it ceased the
production of perchlorate at the Henderson Site, although it currently continues to produce
other chemicals at this site. As a result of a longer production history at Henderson, the KMCC
and predecessor operations have manufactured significantly greater amounts of perchlorate over
time than did our operation formerly located there.The Water Authoritys testing has shown perchlorate concentrations of 4 to 18 ppb in Clark
County drinking water. In response to this discovery, we engaged environmental consultants to
drill ground water bore holes and monitoring wells in order to characterize ground water and
soil at, and in the vicinity of, the Henderson Site. The results of our tests over a period of
time have shown perchlorate concentrations in the ground water near, and at a distance from, the
Henderson Site range from 0 to approximately 750,000 ppb at certain monitoring
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wells. We have
continued to evaluate the sources of these amounts of perchlorate, possible environmental
impacts, and potential remediation methods.We are cooperating with Federal, State and local agencies in the investigation and evaluation of
perchlorate contamination found in Henderson, possible environmental impacts and potential
remediation methods. We have evaluated a pilot process to remediate groundwater containing
perchlorate using a biological in situ method (In Situ Process). During our fiscal 2005 third
quarter, we finalized a work plan with the Nevada Division of Environmental Protection that
determined the extent of the process and related estimated costs for the installation and
operation of a perchlorate in-groundwater remediation system. We are exploring potential
reimbursement for the costs related to the Henderson Remediation Project from government
agencies or their affiliates. However, there are no assurances that we will be successful in
obtaining such cost recovery.Environmental Remediation Reserve:During our fiscal 2005 third quarter, we recorded a charge
for $22,400 representing our estimate of the probable costs of our remediation efforts at the
Henderson Site, including the costs for equipment, operating and maintenance costs, and
consultants. Key factors in determining the total estimated cost include an estimated project
life of 45 years and estimates for capital expenditures and annual operating and maintenance
costs. This estimate is 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 year ended September 30, 2005 is shown
below:
 Balance, September 30, 2004
    
    $
    Additions or adjustments
    
    
    22,400Expenditures
    
    
    (1,813
    )Balance, September 30, 2005
    
    $
    20,587
 Other Matters  We are from time to time involved in other claims or lawsuits. We
believe that current claims or lawsuits against us, individually and in the aggregate, will not
have a material adverse effect on our financial condition, cash flows or results of operations.10.
    
    EARNINGS (LOSS) PER SHAREShares used to compute earnings (loss) per share before extraordinary item and cumulative effect
of accounting change are as follows for the years ending September 30:
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2005
    
    
    2004
    
    
    2003Income (Loss) before Extraordinary Gain and Cumulative Effect
of Accounting Change
    
    $
    (11,245
    )
    
    $
    372
    
    
    $
    9,360Basic:Weighted Average Shares
    
    
    7,294,000
    
    
    
    7,281,000
    
    
    
    7,294,000Diluted:Weighted Average Shares, Basic
    
    
    7,294,000
    
    
    
    7,281,000
    
    
    
    7,253,000Dilutive Effect of Stock Options
    
    
    
    
    
    
    47,000
    
    
    
    100,000Weighted Average Shares, Diluted
    
    
    7,294,000
    
    
    
    7,328,000
    
    
    
    7,353,000Income (Loss) per Share before Extraordinary Gain and Cumulative Effect
of Accounting ChangeBasic
    
    $
    (1.54
    )
    
    $
    0.05
    
    
    $
    1.29Diluted
    
    $
    (1.54
    )
    
    $
    0.05
    
    
    $
    1.27
 At September 30, 2005, we had 523,500 outstanding stock options that were antidilutive, and
accordingly, were excluded from our earnings (loss) per share calculation. Our outstanding stock
options are antidilutive because we are reporting a loss before extraordinary gain and
cumulative effect of accounting change and the exercise price of certain options exceeds the
average fair market value of our stock for the period. These options could be dilutive in
future periods if our operations are profitable and our stock price increases.11.
    
    SHAREHOLDERS EQUITYPreferred Stock and Purchase Rights  We have authorized 3,000,000 shares of preferred
stock, of which 125,000 shares have been designated as Series A, and 125,000 shares have been
designated as Series B. No Series A or Series B preferred stock is issued or outstanding. At
September 30, 2005, no shares of preferred stock are issued and outstanding.On August 3, 1999, our Board of Directors adopted a Shareholder Rights Plan and declared a
dividend of one preference share purchase right (a Right) for each outstanding share of our
Common Stock, par value $.10 per share (the Common Shares). The dividend was paid to
stockholders of record on August 16, 1999. Each Right entitles the registered holder to purchase
from us one one-hundredth of a share of Series D Participating Preference Stock, par value $1.00
per share, at a price of $24.00 per one one-hundredth of a Preference Share, subject to
adjustment under certain circumstances. The description and terms of the Rights are set forth in
a Rights Agreement dated as of August 3, 1999, between us and American Stock Transfer & Trust
Company, as Rights Agent. The Rights may also, under certain conditions,
entitle the holders (other than any Acquiring Person, as defined), to receive our Common Stock,
Common Stock of an entity acquiring us, or other consideration, each having a market value of
two times the exercise price of each Right.Three hundred and fifty-thousand (350,000) Preference Shares have been designated as Series D
Preference Shares and are reserved for issuance under the Plan. The Rights are redeemable at a
price of $.001 per Right under the conditions provided in the Plan. If not exercised or redeemed
(or exchanged by us), the Rights expire on August 2, 2009.Warrants  In February 1992, we issued $40,000 in Azide Notes with Warrants. The
remaining principal balance of the outstanding Azide Notes was repurchased in 1998. The
Warrants granted the right to purchase a maximum of 2,857,000 shares of Common Stock at an
exercise price of $14.00 per share. We accounted for the proceeds of the financing applicable to
the Warrants as temporary capital. The value assigned to the Warrants was determined in
accordance with Accounting Principle Board Opinion No. 14 Accounting for
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Convertible Debt and
Debt Issued with Stock Purchase Warrants and was based upon the relative fair value of the
Warrants and indebtedness at the time of issuance. The Warrants expired on December 31, 2003 and
the amount of the Warrants was transferred to retained earnings on their expiration.Dividend and Share Repurchase Program  In January 2003, our Board of Directors approved
a Dividend and Stock Repurchase Program (the Program) which 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. 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. The total amount of the cash dividend paid in
January 2004 was $3,055. By reason of the application of the program formula, no dividends were
paid for fiscal 2004 and 2005. In November 2005, we entered into First and Second Lien Credit
Facilities which substantially limits our ability to pay future dividends while borrowings are
outstanding under these facilities.Stock Options  The American Pacific Corporation 2001 Stock Option Plan, as amended
(the 2001 Plan), permits the granting of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code and nonqualified options that do not meet the
requirements of Section 422 to employees, officers, directors and consultants. Options granted
under the 2001 Plan generally vest 50% at the grant date and 50% on the one year anniversary of
the grant date, and expire in ten years. As of September 30, 2005, there were 56,500 shares
available for grant under the 2001 Plan.The American Pacific Corporation 2002 Directors Stock Option Plan (the 2002 Directors Plan)
compensates outside Directors with annual grants of stock options or upon other discretionary
events. Options are granted to each eligible director at a price equal to the fair market value
of our common stock on the date of the grant. Options granted under the 2002 Director Plan
generally vest 50% at the grant date and 50% on the one year anniversary of the grant date, and
expire in ten years. As of September 30, 2005, there were 25,000 shares available for grant
under the 2002 Directors Plan. These plans were approved by our shareholders.A summary of stock option activity and weighted average exercise prices for the years ended
September 30 is as follows:
 2005
    
    2004
    
    2003Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding, beginning of year
    
    
    304,500
    
    
    $
    7.68
    
    
    
    3,517,500
    
    
    $
    12.71
    
    
    
    3,503,000
    
    
    $
    12.63Granted
    
    
    287,500
    
    
    
    6.58
    
    
    
    40,000
    
    
    
    9.44
    
    
    
    249,000
    
    
    
    8.31Exercised
    
    
    (5,000
    )
    
    
    4.87
    
    
    
    (339,500
    )
    
    
    6.85
    
    
    
    (170,500
    )
    
    
    6.80Expired
    
    
    (63,500
    )
    
    
    7.86
    
    
    
    (2,913,500
    )
    
    
    13.87
    
    
    
    (64,000
    )
    
    
    6.90Outstanding, end of year
    
    
    523,500
    
    
    
    7.08
    
    
    
    304,500
    
    
    
    7.68
    
    
    
    3,517,500
    
    
    
    12.71
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Outstanding
    
    ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    
    
    
    
    Contractual
    
    Exercise
    
    
    
    
    
    ExerciseExercise Price
    
    Shares
    
    Life (years)
    
    Price
    
    Shares
    
    Price$4.87 - $6.34
    
    
    306,500
    
    
    
    9.18
    
    
    $
    6.08
    
    
    
    180,250
    
    
    $
    5.90$8.30 - $9.44
    
    
    217,000
    
    
    
    7.66
    
    
    $
    8.49
    
    
    
    199,500
    
    
    $
    8.51523,500
    
    
    
    8.55
    
    
    $
    7.08
    
    
    
    379,750
    
    
    $
    7.27
 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 (See Note 1).12.
    
    SEGMENT INFORMATIONWe report our business in three operating segments: 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 profit includes all sales and expenses directly associated with each
segment plus a proportionate allocation of corporate general and administrative expenses.
Environmental remediation costs are charged to our Specialty Chemicals segment. Interest is not
allocated to segment results.Specialty Chemicals  Our Specialty Chemicals segment manufactures and sells: (i)
perchlorate chemicals, used principally in solid rocket propellants for the space shuttle and
defense programs, (ii) sodium azide, used principally in the inflation of certain automotive
airbag systems, (iii) Halotronâ, clean gas fire extinguishing agents designed to replace
halons, and (iv) the ES joint venture which manufactures commercial explosives and specializes
in the development and testing of energetic compounds.We had one perchlorates customer that accounted for 41%, 44%, and 66% of our consolidated
revenues during the years ended September 30, 2005, 2004, and 2003, respectively.Aerospace Equipment  On October 1, 2004, we created a new operating segment, Aerospace
Equipment, to report the financial performance of our newly acquired ISP business (see Note 2).
The ISP business manufactures and sells in-space propulsion systems, thrusters (monopropellant
or bipropellant) and propellant tanks.Other Businesses  Our Other Businesses segment contains our water treatment equipment
and real estate activities. Our water treatment equipment business designs, manufactures and
markets systems for the control of noxious odors, the disinfection of water streams and the
treatment of seawater. We have
completed all planned sales of our improved land in the Gibson Business Park (near Las Vegas,
Nevada) and we do not anticipate significant real estate sales activity in future financial
reporting periods.
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2005
    
    
    2004
    
    
    2003Revenues:Specialty Chemicals
    
    $
    65,470
    
    
    $
    57,490
    
    
    $
    61,248Aerospace Equipment
    
    
    12,429
    
    
    
    
    
    
    
    Other Businesses
    
    
    5,448
    
    
    
    1,999
    
    
    
    7,618Total Revenues
    
    $
    83,347
    
    
    $
    59,489
    
    
    $
    68,866
 Operating Income (Loss):Specialty Chemicals
    
    $
    (21,850
    )
    
    $
    (1,119
    )
    
    $
    14,020Aerospace Equipment
    
    
    (1,246
    )
    
    
    
    
    
    
    Other Businesses
    
    
    2,054
    
    
    
    (1,131
    )
    
    
    3,017Total Operating Income (Loss)
    
    
    (21,042
    )
    
    
    (2,250
    )
    
    
    17,037Interest and Other Income (Expense)
    
    
    1,124
    
    
    
    120
    
    
    
    (3,066
    )Income (Loss) before Income Tax, Extraordinary Gain
and Cumulative Effect of Accounting Change
    
    $
    (19,918
    )
    
    $
    (2,130
    )
    
    $
    13,971Depreciation and Amortization:Specialty Chemicals
    
    $
    5,784
    
    
    $
    5,221
    
    
    $
    5,486Aerospace Equipment
    
    
    16
    
    
    
    
    
    
    
    Other Businesses and Corporate
    
    
    543
    
    
    
    516
    
    
    
    308Total
    
    $
    6,343
    
    
    $
    5,737
    
    
    $
    5,794Capital Expenditures:Specialty Chemicals
    
    $
    1,731
    
    
    $
    750
    
    
    $
    1,475Aerospace Equipment
    
    
    236
    
    
    
    
    
    
    
    Other Businesses and Corporate
    
    
    99
    
    
    
    343
    
    
    
    1,600Total
    
    $
    2,066
    
    
    $
    1,093
    
    
    $
    3,075Assets, at year end:Specialty Chemicals
    
    $
    29,183
    
    
    $
    42,985
    
    
    $
    44,118Aerospace Equipment
    
    
    9,865
    
    
    
    
    
    
    
    Other Businesses
    
    
    3,850
    
    
    
    3,316
    
    
    
    3,933Corporate
    
    
    72,102
    
    
    
    55,275
    
    
    
    53,634Total
    
    $
    115,000
    
    
    $
    101,576
    
    
    $
    101,685
 Substantially all of our operations are located in the United States. Our operations in the
U.K. are not material in terms of both operating results and assets. Export sales, consisting
mostly of specialty chemical and water treatment equipment sales, represent 10% or less of our
revenues during each of the last three fiscal years.13.
    
    SUBSEQUENT EVENTSIn November 2005, we completed our acquisition of the AFC Business (See Note 2).In connection with our acquisition of the AFC Business, we borrowed an aggregate of $110,500,
comprised of Credit Facilities and a Seller Subordinated Note (See Note 6).In October 2005, the Partnership sold its interest in Hughes Parkway, which resulted in a net
cash distribution to us of $2,104 (See Note 5).
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Exhibit Index
 * 21
    
    Subsidiaries of the Registrant.* 23
    
    Consent of Deloitte & Touche LLP.* 24
    
    Power of Attorney, included on signature page.* 31. 1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.* 31. 2
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.* 32. 1
    
    Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.* 32. 2
    
    Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.