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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, 2004
Commission File Number 001-08137 AMERICAN PACIFIC CORPORATION  Delaware
    
    59-6490478(State or other jurisdiction
of incorporation)
    
    (IRS Employer
Identification No.)3770 Howard Hughes Parkway, Suite 300,Las Vegas, Nevada
    
    89109(Address of principal executive offices)
    
    (Zip Code)
 (702) 735-2200
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10 par value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act. o Yes þ No The aggregate market value of the voting stock held by non-affiliates of the registrant as of March
31, 2004, was approximately $57 million. Solely for the purposes of this calculation, shares held
by directors and officers of the Registrant have been excluded. Such exclusion should not be
deemed a determination by the Registrant that such individuals are, in fact, affiliates of the
Registrant. The number of shares of Common Stock, $.10 par value, outstanding as of December 31, 2004, was
7,300,000.




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 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#9
#10
Item 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 Schedules#22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  DOCUMENTS INCORPORATED BY REFERENCE Part III Hereof Definitive Proxy Statement for 2005 Annual Meeting of Stockholders to be filed not later than
January 28, 2005. Part IV Hereof S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for the years ended
September 30, 2003, 2002, 2000 and 1999; S-2 Registration Statement (33-36664); Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1998; Form 8-A dated August 6, 1999; S-3
Registration Statement (33-52196); S-8 Registration Statement (333-104732); S-8 Registration
Statement (333-53449); S-8 Registration Statement (333-62566) and Current Report on Forms 8-K dated
November 9, 1999. 2




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PART I 
 Item 1. Business Overview The terms Company, we, us, and our are used herein to refer to American Pacific
Corporation and, where the context requires, one or more of the direct and indirect subsidiaries or
divisions of American Pacific Corporation. American Pacific Corporation is principally engaged in the production of a specialty chemical,
ammonium perchlorate (AP), which is used as an oxidizing agent in composite solid propellants for
rockets, booster motors and missiles. We also produce a variety of other specialty chemicals,
performance products and environmental protection equipment for niche applications, including: (i)
sodium azide, used primarily in the inflation of automotive airbags, in the production of certain
tetrazoles and in certain pharmaceutical applications; (ii) Halotron products, used to extinguish
fires; (iii) water treatment equipment, used to disinfect effluents from sewage treatment and
industrial facilities and for the treatment of seawater; and (iv) packaged explosive products. In
addition, as of September 30, 2004, we own approximately 14 acres of improved undeveloped land in
an industrial park in the Las Vegas, Nevada area and approximately 4,700 acres of land and certain
water rights at our production site in Iron County, Utah. Our highest propellant grade AP (Grade I AP) is employed in the Space Shuttle, the Minuteman
missile, the Delta and Atlas families of commercial space launch vehicles, a number of defense
related missiles and rockets, and most other solid fuel rocket motors. Grade I AP customers
include contractors of the National Aeronautics and Space Administration (NASA), the Department
of Defense (DOD) and certain commercial space launch vehicle programs used to launch satellites
for communication, navigation, intelligence gathering, space exploration, weather forecasting and
environmental monitoring. Our strategic plan with respect to the market we serve with our existing products is described
below. In addition, our strategic plan will attempt to accelerate our growth by pursuing attractive
new product and market opportunities. In pursuing these growth initiatives, we seek to leverage our
existing customer, market or manufacturing position. These growth initiatives may include the
evaluation of new product development and acquisition opportunities. On October 1, 2004 we acquired the former Atlantic Research Corporation in-space propulsion
business from Aerojet-General Corporation. This acquisition provides us with a leading supplier of
commercial and military propulsion products and the worlds largest producer of bipropellant
thrusters. We currently have two operating segments: (i) Specialty Chemicals and (ii) Other Businesses.
See Note 11 to our Consolidated Financial Statements for financial information concerning our
operating segments. Our perchlorate chemicals, a part of the Specialty Chemical segment, accounted
for approximately 73%, 79% and 73% of revenues during fiscal 2004, 2003 and 2002, respectively. Specialty Chemicals Perchlorate Chemicals Strategy In March 1998, we acquired certain assets and rights of Kerr-McGee Chemical Corporation
(Kerr-McGee) related to its production of AP (the Acquisition). By virtue of the Acquisition,
we became the sole 3




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commercial producer of perchlorate chemicals in North America. Our strategy is
to maintain and enhance our position as the leading world-wide producer of perchlorate chemicals. Market AP is the sole oxidizing agent for solid fuel rockets, booster motors and missiles used
in space exploration, commercial satellite transportation and national defense programs. A
significant number of existing and planned launch vehicles providing access to space use solid fuel
and thus depend, in part, upon AP. Many of the rockets and missiles used in national defense
programs are also powered by solid fuel. We have supplied AP for use in space and defense programs for over 40 years. Today, our
principal space customers are Alliant Techsystems, Inc. (Alliant) for the Space Shuttle Program
and the Delta family of commercial rockets, and Aerojet General Corporation for the Atlas family of
commercial rockets. We also supply AP for use in a number of defense programs, including the
Minuteman, Navy Standard Missile, Patriot, and Multiple Launch Rocket System programs. We have
supplied AP to various foreign defense programs and commercial space programs, although AP is
subject to strict export license controls. Demand for perchlorate chemicals declined throughout the 1990s. In 1998, supply capacity was
substantially in excess of demand levels. In 1998, we consummated the Acquisition with Kerr-McGee
in an effort to rationalize market production capacity and increase our sales volume of Grade I AP
(see Perchlorate Chemicals  Kerr-McGee Acquisition). Since the Acquisition in 1998, our annual sales volumes of Grade I AP have been approximately
20.2 million, 16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999,
2000, 2001, 2002 and 2003 fiscal years (ended September 30), respectively. Prior to the Space
Shuttle Columbia disaster on February 1, 2003, and based principally upon information we had
received from our major customers, we had estimated that annual demand for Grade I AP would range
between 16.0 million and 20.0 million pounds over the next several years. The suspension of Space Shuttle missions after the Columbia disaster reduced sales volume of
our Grade I AP products in fiscal 2004 to 11.3 million pounds. This reduced sales volume exceeded
the actual consumption of Grade I AP product by our customers. As a result, our customers
inventory levels of Grade I AP increased throughout the year. The Space Shuttle is currently
expected to resume flights beginning in the spring of 2005 with four to five flights per year
thereafter, although there is no assurance in this regard. Based principally upon market
information we received from our customers, we currently estimate that our annual sales volumes of
Grade I AP will range between 10.0 and 13.0 million pounds over the next three years. In January 2004, President Bush announced a new initiative for the Nations space exploration
program. The President proposed a long-term human and robotic program to explore the solar system,
starting with a return to the Moon. This program includes the following:  
    The United States will complete its work on the International Space Station (ISS) by
2010. To accomplish this goal, NASA will return the Space Shuttle to flight and the
Shuttles chief purpose over the next several years will be to help finish assembly of the
ISS. The Space Shuttle will be retired at the end of this decade.
    The United States will begin developing a new crew exploration vehicle (CEV). The CEV
will be developed and tested by 2008 and conduct its first manned mission no later than
2014.
    The United States will return to the Moon as early as 2015 and no later than 2020 and
use it as a stepping stone for more ambitious missions. The Presidents plan for NASA will likely have a significant impact on the demand for Grade I
AP. The ultimate impact on the demand for Grade I AP is uncertain at this time, and will depend
upon, among other things, the following factors: 4




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
    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 timing of the retirement of the Space Shuttle fleet.
    The amount of inventory of Grade I AP owned by our customers.
    The amount of NASAs annual budget over the next several years.
    The type of propulsion technology used to launch the CEV.
    The timing of the development and testing of the CEV and the number of CEV launches.
    The type of heavy lift vehicle used to transport material and supplies to the ISS and
the Moon after retirement of the Shuttle fleet. Our revenues, operating income and cash flows from operating activities are negatively
impacted by these lower sales volume levels. In addition, demand for Grade I AP is program specific
and dependent upon, among other things, governmental appropriations. We have no ability to
influence the demand for Grade I AP. Any decision to further delay, reduce or cancel Space Shuttle
flights over an extended period of time would have a further significant adverse effect on our
results of operations and financial condition. We also produce and sell a number of other grades of AP and different types and grades of
sodium and potassium perchlorates (collectively other perchlorates). Other perchlorates have a
wide range of prices per pound, depending upon the type and grade of the product. We have recently
experienced a change in the sales mix of other perchlorates, from lower price per pound products to
higher price and margin per pound products. Other perchlorates are used in a variety of
applications, including munitions, explosives, propellants, and initiators. Some of these
applications are in a development phase, and there can be no assurance that sales of the higher
price and higher margin products will continue. A significant reduction in these sales would have a
material adverse effect on our results of operations and financial condition. Customers Prospective purchasers of Grade I AP consist principally of contractors in programs of
NASA and the DOD. The specialized nature of the activities of these contractors restricts
competitive entry by others. Therefore, there are relatively few potential customers for Grade I
AP, and individual Grade I AP customers account for a significant portion of our revenues.
Prospective customers also include companies providing commercial satellite launch services and agencies
of foreign governments and their contractors. During 2001, Alliant acquired the Thiokol Propulsion Division (Thiokol) of Alcoa. Alliant
(including Thiokol) accounted for 44%, 66%, and 51% of our revenues during the fiscal years 2004,
2003 and 2002, respectively. Thiokol Agreement In connection with the Acquisition, we entered into an agreement with Thiokol with
respect to the supply of Grade I AP through September 30, 2008. This agreement contains no volume
commitments, however, the agreement, as amended, provides that during its term Thiokol will make
all of its Grade I AP purchases from us. In addition to the Grade I AP purchased from us, Thiokol
may use AP inventoried by it in prior years. The agreement also establishes a pricing matrix under
which Grade I AP unit prices vary inversely with the quantity of a specific grade of Grade I AP
sold by us to all of our customers. Under the agreement, Grade I AP unit prices in the matrix at
all quantity levels escalated each year through fiscal 2003 and were adjusted downward by
approximately 20% in fiscal 2004. This downward adjustment reduced revenues and operating cash
flows on Grade I AP sold to Thiokol in fiscal 2004. After the adjustment, Grade I AP unit prices
again escalate each year through fiscal 2008. See below for a discussion of the impact of the
Alliant acquisition of Thiokol in 2001 on this agreement. 5




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Alliant Agreement In connection with the Acquisition, we entered into an agreement with Alliant to extend
an existing agreement through the year 2008. The agreement establishes prices for any Grade I AP
purchased by Alliant from us during the term of the agreement as extended. Under this agreement,
Alliant agreed to use its efforts to cause our Grade I AP to be qualified on all new and current
programs served by Alliants Bacchus Works. We have agreed with Alliant that the individual
agreements in place prior to Alliants acquisition of Thiokol will remain in place. All Thiokol
programs existing at the time of the Alliant acquisition (principally the Space Shuttle and
Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant programs
(principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement. Manufacturing Capacity and Process Production of AP at our manufacturing facility in Iron County, Utah commenced in July
1989. This facility, as currently configured, is capable of producing 30.0 million pounds of
perchlorate chemicals annually and is readily expandable to 40.0 million pounds annually. Grade I
AP produced at the facility and propellants incorporating such AP have qualified for use in all
programs for which testing has been conducted, including the Space Shuttle, Titan, Minuteman,
Multiple Launch Rocket System, and the Delta, Pegasus and Atlas programs. Our perchlorate chemicals facility is designed to site particular components of the
manufacturing process in discrete areas of the facility. It incorporates modern equipment and
materials-handling systems designed, constructed and operated in accordance with the operating and
safety requirements of our customers, insurance carriers and governmental authorities. Perchlorate chemicals are manufactured by electrochemical processes using our proprietary
technology. The principal raw materials used in the manufacture of AP (other than electricity) are
salt, sodium chlorate, graphite, ammonia and hydrochloric acid. All of the raw materials used in
the manufacturing process are available in commercial quantities. Although we recently
had some difficulty in obtaining graphite, significant progress has been made in establishing
an assured source of supply. We continue to explore other technologies that would reduce our
dependence on graphite. Competition Upon consummation of the Acquisition, we became the sole North American commercial
producer of perchlorate chemicals. We are aware of production capacity for perchlorate chemicals
(including AP) in France, Japan and possibly China and Taiwan. Although we have limited information
with respect to these facilities, we believe that these foreign producers operate lower volume,
higher cost production facilities and are not approved as AP suppliers for NASA or DOD programs,
which represent the majority of domestic AP demand. In addition, we believe that the rigorous and
sometimes costly NASA and DOD program qualification process, the strategic nature of such programs,
the high cost of constructing a perchlorate chemicals facility, and our established relationships
with key customers, constitute significant hurdles to entry for prospective competitors. Kerr-McGee Acquisition On March 12, 1998 we acquired, pursuant to a purchase agreement with Kerr-McGee, certain
intangible assets related to Kerr-McGees production of AP (the Rights) for a purchase price of
$39.0 million. The Acquisition did not include Kerr-McGees production facilities (the Production
Facilities) and certain water and power supply agreements used by Kerr-McGee in the production of
AP. Under the purchase agreement, Kerr-McGee ceased the production and sale of AP, although the
Production Facilities may continue to be used by Kerr-McGee for production of AP under certain
limited circumstances not competitive with our operations. Kerr-McGee also reserved a perpetual,
royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may
be necessary or useful to use, repair or sell the Production Facilities. 6




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Financing On March 12, 1998, we sold $75.0 million in principal amount of 91/4% unsecured senior
notes (the Notes). A portion of the net proceeds from the sale of the Notes ($39.0 million) was
used to effect the Acquisition. Prior to March 1, 2003, we had repurchased and retired
approximately $34.4 million in principal amount of Notes. On March 1, 2003, we redeemed all of our
remaining outstanding 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 $43.4
million. We recognized a loss on the redemption of $1.5 million, including a non-cash charge of
$0.6 million to write off remaining debt issue costs. Sodium Azide Sodium Azide Facility In July 1990, the Company entered into agreements with Dynamit Nobel A.G. (Dynamit
Nobel) under which it licensed to us its technology and know-how for the production of sodium
azide, the principal component of a gas generator used in certain automotive airbag safety systems.
In addition, Dynamit Nobel provided technical support for the design, construction and startup of
the production facility located in Iron County, Utah for its owner and operator, American Azide
Corporation (AAC), our indirect wholly-owned subsidiary. Our
obligation to make royalty payments to Dynamit Nobel under the license was suspended in 1995. Financing On February 21, 1992, we concluded a $40.0 million financing for the design, construction
and startup of the sodium azide facility through the sale of 11% noncallable subordinated secured
term notes (the Azide Notes). On March 12, 1998, we repurchased the then remaining $25.0 million
principal amount outstanding of the Azide Notes with funds obtained through the issuance of the
Notes. In connection with the issuance of the Azide Notes, we issued Warrants (the Warrants) to
purchase shares of our Common Stock to the purchasers of the Azide Notes, which went unexercised
and expired on December 31, 2003. Market Over the last 30 years, a number of firms have made extensive efforts to develop
automotive airbag safety systems. The initial airbag system adopted by the automobile industry used
sodium azide in combination with other materials in tablet or granule form. The airbag market
became the largest consumer of sodium azide. Subsequently, a number of other non-azide based bag
inflator technologies have been commercialized. These new inflator systems have gained substantial
market share and, as a consequence, there has been a substantial decline in the demand for sodium
azide. Based upon market information received from inflator manufacturers, we expect that sodium
azide use will continue to decline and that bag inflators using sodium azide will be phased out
over some period of time. Currently, demand for sodium azide is substantially less than supply on
a worldwide basis. The Company has an on-going program to evaluate and potentially commercialize the use of
sodium azide in other non-airbag applications. Currently, sodium azide is used as an intermediary
in the manufacture of certain tetrazoles and pharmaceuticals, and we sell small quantities into
these markets. The emerging methyl-bromide pesticide replacement market maybe a promising area for sodium
azide new product development. Methyl bromide is a widely used pesticide that is being phased out
globally (due to its harmful effect on the atmospheric ozone layer) as required under by The
Montreal Protocol on Substances that Deplete the Ozone Layer (the Montreal Protocols) that was
signed by the United States in 1987. Historically, methyl bromide was manufactured by a number of
companies, including Great Lakes Chemical, Albemarle, and Dead Sea Bromine. 7




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We have developed a proprietary sodium azide based pesticide as a potential replacement for
methyl bromide. We have tentatively named this new pesticide line Soil Enhancement Products
(SEP). SEP 100, our first product in this line, has undergone extensive field trials on a variety
of applications, including turf, cut flowers, and food crops. The results of these evaluations
have been promising. As of this date, SEP 100 is under review by the United States Environmental
Protection Agency, (US EPA) for approval as a pesticide in certain applications. The potential demand for a methyl bromide replacement is substantial. Although the Company
currently plans to pursue this market, there is no assurance that there will be wide market
acceptance of this new product. While we are optimistic that the EPA will approve SEP 100, there is
no assurance that such EPA approval will be granted. Furthermore, a variety of larger companies,
with financial resources exceeding our own, are also developing potential methyl bromide substitute
products. Customers Historically, Autoliv ASP, Inc. (Autoliv) has been the Companys primary customer for
sodium azide. Competition We believe that current competing sodium azide production capacity includes at least one
producer in Japan and at least three producers in India. Energetic Systems Acquisition In December 2002, we established Energetic Systems Inc., LLC (ES), a joint venture
formed to acquire and manage a commercial explosives business. Our ownership interest in ES is held
by our wholly-owned subsidiary, Energetic Additives Inc., LLC (EA). EA holds a 50% equity
interest in ES. The remaining 50% equity interest is held by a private entity with extensive
experience in the explosives industry. On December 11, 2002, we made a $10.7 million investment in ES so that it could complete the
purchase of certain assets (including the assumption of certain liabilities) of Slurry Explosives
Corporation and Universal Tech Corporation (collectively SEC/UTC), subsidiaries of LSB
industries, Inc. SEC/UTC is involved in the manufacture and distribution of commercial explosives,
and is also a research, development and testing organization specializing in the development and
testing of products and processes for commercial explosives and energetic compounds. Customers and Markets ES manufactures and markets a niche line of packaged explosives to other explosives
manufacturers and major distributors within North America, and directly to end users in Oklahoma,
Kansas and Missouri. ES markets a unique line of commercial explosives incorporating demilled
military energetic materials using proprietary technology. ES also conducts testing and
classification of energetic materials and markets product/process technology, sensitizers and other
related materials. Competition Our packaged explosives products compete with similar products manufactured by major
explosives companies. The market for packaged explosives is very competitive over the broad range
and types of packaged explosives products available. ES believes that its relative small size, its
flexible manufacturing capabilities, its commitment to customer service and its superior product
performance provides a competitive advantage over other suppliers. 8




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Facilities The corporate office for ES is in Oklahoma City, Oklahoma. The company operates four
packaged explosives manufacturing plants from a single site at Columbus, Kansas, a research and
development laboratory at Riverton, Kansas, an underwater testing laboratory at Hallowell, Kansas,
and a blasting services and product distribution operation at Pryor, Oklahoma. Halotron Halotron is a clean agent based fire extinguishing system composed of proprietary
chemicals and hardware. Traditional fire extinguishing agents, such as those based on sodium
bicarbonate (regular dry chemical) or mono-ammonium phosphate (ABC dry chemical), consist of
finely divided solid powders. These traditional fire extinguishing agents leave a coating upon
discharge that is costly and difficult to clean. In contrast to traditional fire extinguishing
agents, Halotron is discharged as a rapidly evaporating liquid that leaves no residue. As a result,
Halotron is much less likely to damage valuable assets (such as electronic equipment, machinery and
various engines) than traditional extinguishing agents. Halotron was designed to replace halons, which are brominated CFC chemicals that have been
widely used as fire extinguishing agents since the early 1970s. The impetus for the invention and
improvement of Halotron was the discovery during the 1980s that halons are highly destructive to
the atmospheric ozone layer, which acts as a shield against harmful solar ultraviolet radiation. In
1987 the Montreal Protocols stipulated restrictions on the production (which ended in developed
countries at the end of 1993) and use of halons by 1994. Use of Halons Halons have been used throughout the world in modalities that range from hand-held fire
extinguishers to extensively engineered fixed systems. They are generally of two types, streaming
and total flooding systems. Streaming systems rely upon the focused projection of a slowly
gasifying liquid over distances of up to 50 feet from the point of projection. Total flooding
systems release a quickly gasifying liquid or gas into a confined space, extinguishing any ongoing
combustion and, in limited instances, inerting a space to prevent combustion. Customers and Market The end-user market for clean fire extinguishing agents is divided into five application
segments: (i) industrial, (ii) commercial, (iii) military, (iv) civil aviation and (v) maritime.
The industrial segment consists of manufacturing plants, clean rooms, and telecommunications
facilities. The commercial segment consists of workplace environments such as office buildings,
wholesale and retail sales facilities, art galleries, warehouses, and computer rooms. The military
segment includes the armed services including the Navy and Air Force. The civil aviation segment
includes airport flightlines, airport gates, on-board aircraft and aircraft manufacturing. The
maritime segment includes commercial vessels, yachts, and pleasure boats. Our first and primary Halotron clean agent is Halotron I. In 1993, Halotron I was approved by
the United States Environmental Protection Agency (EPA) as a substitute for Halon 1211. In June,
1995 the Federal Aviation Administration (FAA) approved Halotron I as an acceptable airport ramp
firefighting agent alternative to Halon 1211 based on a rigorous test program conducted prior to
that date. In 2002, approval was issued by the FAA for a Halotron I portable fire extinguisher
that met all FAA requirements for use on civilian commercial transport aircraft. Through September
30, 2004, more than 50 domestic US airports have installed 460-500 lb Halotron I systems on their
aircraft rescue and fire fighting (ARFF) vehicles. 9




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Together with distributors Amerex Corporation (Amerex), Badger Fire Protection (Badger),
Kidde Fyrnetics (Kidde) and Buckeye Fire Equipment Company (Buckeye), we have successfully
completed Underwriters Laboratories (UL) fire tests for a number of sizes of portable and wheeled
fire extinguishers using Halotron I in streaming agent applications. Four of the five major
domestic fire extinguisher companies are now manufacturing and distributing UL listed portable fire
extinguishers using Halotron I. We are also marketing Halotron I to other domestic and
international fire extinguisher manufacturers. We have also developed a new clean fire extinguishing agent (Halotron II) designed for total
flooding applications in certain niche clean agent markets. Halotron II has a zero Ozone Depletion
Potential (ODP) and a relatively low Global Warming Potential (GWP). Sales of Halotron II to
date have been limited. Although Halotron I has a good environmental profile, with an ozone depletion potential
(ODP) that is near zero, potential users of clean agents may eventually require a product with an
absolute zero ODP. Accordingly, the product life of Halotron I may be limited. The Company
continues to explore, through research and development efforts, other clean agent candidates for
possible commercialization. There can be no assurance that we will be able to identify and produce
such new agents, if necessary, or that a competitor will not develop fire extinguishing agents with
comparable or superior qualities to Halotron products. Competition As of September 30, 2004, there are non-essential use restrictions on halons in the US.
There are more stringent restrictions in other countries, notably EU wide. Despite this, recycled
Halon 1211 is the primary competitor to Halotron I. Halon alternatives compete primarily on the basis of performance characteristics,
environmental effects, and cost. Performance measurements include fire rating (UL or FAA), ease of
training non-experts, throw range, collateral damage, equipment size and weight, performance at low
and high temperatures, corrosion probability, and shelf life. The environmental and human health
effects include ODP, GWP and toxicity. It is likely that competitors producing alternatives and
substitutes will be larger than and have at least as much experience in the production of fire
extinguishing chemicals and systems as us and will have greater financial resources. One primary competitor to Halotron I is FE36Ô from Dupont Fluoroproducts. Another
competing product is Novec 1230Ô from 3M. FE36Ô and Novec 1230Ô are marketed as
both streaming and total flooding clean agents. Great Lakes Chemical, historically a significant
producer of halon, produces FM200Ô which established a large market share in the halon 1301
replacement market over the last seven years. Halotron Facility Within the Companys primary manufacturing facility at Cedar City, Utah, the Company
maintains a production facility for its Halotron products. The capacity of this facility is
sufficient to meet future anticipated demands for both Halotron products. Other Businesses Environmental Protection Equipment We engineer and manufacture equipment for a wide range of environmental protection
applications. These systems utilize an electrochemical process, which is an extension of one of our
core competencies, to produce chemicals such as sodium hypochlorite on site at the point of use.
The industries and specific applications in which our equipment is used include the following: (i)
our ChlorMaster systems used by 10




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municipalities and sewage plants for the disinfection of drinking
water, effluent and waste water; (ii) our ChlorMaster systems
used by power plants, desalination
plants, chemical plants and on-shore/off-shore crude oil facilities for the control of marine
growth in seawater used in cooling water circuits; and (iii) our OdorMaster scrubber used by
composting plants for the deodorizing of malodorous compounds in contaminated air. At the heart of these systems is a proprietary bi-polar electrochemical cell which uses brine
or seawater to produce the necessary chemicals. For drinking water applications, these cells are
supplied with an NSF® certification. Our systems are marketed domestically by independent sales representatives and overseas by
sales representatives and licensees. We also receive a significant amount of direct sales leads as
a result of advertising and through attendance at key trade shows. We compete with companies that utilize other technologies and those that utilize technologies
similar to ours. Most of these companies are substantially larger than we are. Our success depends
principally upon our ability to be cost competitive and, at the same time, to provide a quality
product. Real Estate Assets At September 30, 2004, we owned approximately 14 acres of improved undeveloped land at
the Gibson Business Park in Henderson, Nevada. Approximately 13 of the 14 acres are under option to
be purchased by Western Realco, an industrial warehouse developer in Newport Beach, California. The
transaction is expected to close early in the second quarter of FY 2005 for approximately $3
million. We expect the remaining acreage to be developed as a commercial site in the near future.
We believe that this site has an approximate value of $1 million and would likely be developed as
part of a joint venture. We also own approximately 4,700 acres of land and certain water rights at our site in Iron
County, Utah. We are exploring development options for this property. Intellectual Property The following are registered trademarks and service marks pursuant to applicable
intellectual property laws and are the property of American Pacific Corporation or our
subsidiaries: Halotron®, SEP, OdorMaster®, and ChlorMaster®. Product Development and Enhancement Our existing laboratory facilities are located on the premises of our perchlorate
chemicals production site and are used to support those activities and our sodium azide and
Halotron production activities. We also conduct development programs directed toward enhancement of
product quality and performance and the development of complementary or related products at
these facilities. Insurance The Companys policy is to obtain liability and property insurance coverage that is currently
available at what management determines to be a fair and reasonable price. The Company maintains
public liability and property insurance coverage at amounts that management believes are sufficient
to meet the Companys anticipated needs in light of historical experience to cover future
litigation and claims. There is no assurance, however, that the Company will not incur losses
beyond the limits of, or outside the coverage of, its insurance. 11




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##### Table of Contents



Government Regulation As a supplier to United States government projects, we have been and may be subject to
audit and/or review by the government of the negotiation and performance of, and of the accounting
and general practice relating to, government contracts. Most of our contracts for the sale of AP
are in whole or in part subject to the commercial sections of the Federal Acquisition Regulations.
Our AP pricing practices have been and may be reviewed by our customers and by certain government
agencies. Environmental Regulation Our operations are subject to extensive Federal, State and local regulations governing,
among other things, emissions to air, discharges to water and waste management. We believe that we
are currently in compliance in all material respects with all applicable environmental, safety and
health requirements and, subject to the matters discussed below, we do not anticipate any material
adverse effects from existing or known future requirements. To meet changing licensing and
regulatory standards, we may be required to make additional significant site or operational
modifications, potentially involving substantial expenditures or the reduction or suspension of
certain operations. In addition, the operation of our manufacturing plants entails risk of adverse
environmental and health effects (not covered by insurance) and there can be no assurance that
material costs or liabilities will not be incurred to rectify any future occurrences related to
environmental or health matters. In 1997, the Southern Nevada Water Authority detected trace amounts of perchlorate chemicals
in Lake Mead and the Las Vegas Wash, bodies of water near our real estate development property in
Henderson, Nevada (in the Las Vegas area). Lake Mead is a source of drinking water for the City of
Las Vegas, neighboring areas and certain areas of Southern California. Perchlorate chemicals
(including AP) are a potential health concern because they can interfere with the production of a
growth hormone by the thyroid gland, although they are not currently included in the list of
hazardous substances compiled by the EPA. However, perchlorates have been added to the EPAs
Contaminant Candidate List and will likely be regulated. We manufactured perchlorate chemicals at
a facility on the Henderson site until the facility was destroyed in May 1988, after which we
relocated our perchlorate production to our current facilities in Iron County, Utah. For many
years, Kerr-McGee operated a perchlorate production facility at a site near our former Henderson
site. The Water Authoritys testing has shown perchlorate concentrations of 4 to 18 parts per
billion (ppb) in Clark County drinking water. In response to this discovery, we have engaged
environmental consultants to drill monitoring wells in order to characterize ground water at
and in the vicinity of the Henderson site. The results of our tests have shown perchlorate
concentrations in the ground water at the Henderson property ranging from 0 to approximately
750,000 ppb at certain monitoring wells. We have completed a pilot remediation testing process to
treat groundwater containing perchlorate using a biological in situ process at and near the
Henderson site. The pilot remediation process has shown promising results, but there can be no
assurance as to its efficacy. 12




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##### Table of Contents



The EPA is conducting a risk assessment for the purpose of recommending a proposed reference
dose for perchlorates. The EPA has recommended a preliminary reference dose that would equate to 1
ppb in drinking water. Certain states are also conducting risk assessments and some have set
advisory levels as low as 1 ppb. It is our understanding that virtually all independent and
qualified experts believe that EPA used flawed animal studies and overly conservative uncertainty
factors while completely or mostly ignoring substantial human data that indicate the reference dose
could safely and reasonably be orders of magnitude higher with no increased risk to a human
population. Several different experts and organizations have opined that the number could safely
be as high as 200 ppb while others have opined in the range between 70 and 200 ppb. It is
impossible to determine the future outcome of this debate; however, the National Academy of
Sciences (NAS) was requested to review the work done by EPA to date along with other science that
was disregarded or developed after EPA had drawn their conclusions. The NAS report was released
January 11, 2005. The recommendations contained in this NAS report indicate that human health is
protected at a level in drinking water at a level of approximately 24 ppb. The report will have to
be assessed and evaluated by the EPA before any final reference dose is published. Public statements indicate that the EPA intends to complete its risk assessment and make a
final reference dose recommendation, although we do not know when that will occur. We are
cooperating with Federal, State and local agencies (including the Nevada Department of
Environmental Protection), and with Kerr-McGee and other interested firms, in the investigation and
evaluation of the source or sources of these trace amounts, possible environmental impacts,
potential remediation methods, and the establishment of a safe drinking water standard for
perchlorates. Until one or more of these matters have reached definitive conclusions, it will not
be possible for us to determine the extent to which, if at all, we may be called upon to contribute
to or assist with future remediation efforts, or the financial impact, if any, of such cooperation,
contribution or assistance. Accordingly, no accrual for potential costs has been made in our
Consolidated Financial Statements. (See Note 9 to our Consolidated Financial Statements.) However,
the lower the level at which the final reference dose is established, the more severe the negative
impact will likely be on our financial condition, results of operations and ability to manufacture
and handle perchlorate chemicals. Our perchlorate operations have an evaporation pond which was the subject of a notice of
consent decree received in 1995 from the Utah Division of Water Quality after sampling and testing
that occurred in 1994. This decree requires that we remediate the evaporation pond which was
determined to have lead in excess of 5 ppm. A site remediation plan was submitted to the Utah
Division of Water Quality and approved. Remediation has been performed and the pond is below the
regulatory 5 ppm limit. However, evaporation of pond water could concentrate the remaining lead in
the pond above the 5 ppm limit. As a result, we have continued to remediate this pond to ensure
that we remain in compliance even at lower water volumes. This remediation is expected to be
completed in the summer of 2005. In December 2002, we made an investment in Energetic Systems Inc., LLC (ES), a joint venture
formed to acquire and manage a commercial explosives business. On December 11, 2002, ES completed
the purchase of certain assets and the assumption of certain liabilities of
Slurry Explosives Corporation and Universal Tech Corporation (collectively SEC/UTC),
subsidiaries within LSB Industries, Inc. (LSB). ES is party to two consent orders with the Kansas
Department of Health and Environment (KDHE). The first consent order involves approximately 10
acres of land at the Hallowell, Kansas site, and the second involves a smaller parcel of land which
is located in Riverton, Kansas. The latter is part of a larger issue the KDHE is addressing at the
unrelated adjacent Jayhawk chemical complex. Contaminants at the Hallowell location are
predominantly perchlorate and nitrates, while the Riverton site may contain perchlorates, some
chlorinated compounds and other materials. Under the asset purchase agreement LSB is responsible for all environmental issues that arose
prior to December 11, 2002. A number of environmental issues arose prior to purchase, and the
seller is actively working with state regulators and consultants to remediate the problems. ES has
committed to provide access to the sites so any remediation can take place, provided there is no
interruption in its operations. 13




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The Companys policy is to conduct its businesses with high regard for the safety of its
personnel and for the preservation and protection of the environment. The Company devotes
significant resources and management attention to complying with environmental and safety laws and
regulations. In view of our production and handling of specialty chemicals, such operations are
regulated and monitored by governmental agencies (i.e. OSHA, EPA and other regulatory agencies).
Accordingly, the Company from time to time has been subject to compliance orders, including civil
penalties, imposed by such regulatory agencies. Safety Considerations Our largest operating facility is located in Iron County, Utah, where the perchlorate
oxidizers, sodium azide, and Halotron products are produced. The largest of these is the
perchlorate manufacturing facility, and the loss or shutdown of operations of this facility over an
extended period of time would have a material adverse effect on us. Our operations are subject to
the usual hazards associated with chemical manufacturing and the related storage and transportation
of products and wastes, including explosions, fires, inclement weather and natural disasters,
mechanical failure, unscheduled downtime, transportation interruptions, chemical spills, discharges
or releases of toxic or hazardous substances or gases and other environmental risks, such as
required remediation of contamination. These hazards can cause personal injury and loss of life,
severe damage to or destruction of property and equipment and environmental damage, and could
result in suspension of operations and the imposition of civil or criminal penalties. We maintain
property, business interruption and liability insurance at levels which we believe are in
accordance with customary industry practice, but there can be no assurance that we will not incur
losses beyond the limits or outside the coverage of our insurance. AP, in the particle sizes and chemical purities produced by us, is categorized for
transportation purposes by the United States Department of Transportation (DOT) as a Class V
oxidizer. Such classification indicates that the DOT considers AP to be non-explosive and
non-flammable. Our perchlorate manufacturing plant was constructed in a manner intended to
minimize, to the extent of known technologies and safety measures, the combination of AP with other
materials in a manner that could result in explosions or combustion. However, no assurance can be
given that our safety precautions will be effective in preventing explosions, fires and other such
events from occurring. On July 30, 1997, an explosion and fire occurred at our perchlorate
production facility in Iron County, Utah. Although damage to our property was confined to a
relatively small area, the incident left one employee dead and three others injured, one seriously.
As a result of this incident, the Utah Occupational Safety and Health
Division of the Utah Labor Commission cited us for violation of certain applicable Utah safety
regulations in connection with the handling of AP and assessed fines totaling $5,250. Although we
have taken steps to improve safety measures and training in response to this incident, there can be
no assurance that such measures will be effective in preventing other such events in the future. On May 4, 1988, our former manufacturing and office facilities in Henderson, Nevada were
destroyed by a series of massive explosions and associated fires. Extensive property damage
occurred both at our facilities and in immediately adjacent areas, the principal damage occurring
within a three-mile radius. Production of AP ceased for a 15-month period. Significant
interruptions were also experienced in our other businesses, which occupied the same or adjacent
sites. Although our current facility is designed to site particular components of the manufacturing
process in discrete areas of the facility and incorporates modern equipment and materials handling
systems designed, constructed and operated in accordance with the operating and safety requirements
of our customers, insurance carriers and governmental authorities, there can be no assurance that
another incident would not interrupt some or all of the activities carried on at our current
manufacturing site. Sodium azide is a strong reducing agent and is classified by the DOT as a poison. Its
manufacture entails certain hazards with which we have become familiar over the course of time. Our
method of production is intended to limit the quantity of sodium azide in process at any one time
and to utilize known safety measures in an effort to lessen attendant risks. 14




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In late 1992, a fire occurred in a sodium azide reactor vessel at our facility during start-up
and testing of the reactor vessel. In addition, fires are reported to have affected production at a
competitors facility in the past. There can be no assurance that a fire or other incident will not
occur at our sodium azide production facility in the future. On April 11, 2002, an accident
occurred at our sodium azide plant that resulted in the death of an employee. No other employees
were involved and there was no significant damage to the facility. We have received fines from
Utah OSHA relating to this accident, but believe that the ultimate payment by us for these fines
will be less than $75,000. See Item 3. Legal Proceedings. We believe that exposure to sodium azide after an airbag is installed in an automobile is
highly unlikely due to the way in which sodium azide is used and to the housing in which it is
encased. However, in January 2002, AAC was named as a defendant in a complaint relating to airbag
deployment. In the third quarter of fiscal 2003, we paid less than $50,000 to settle our part of
this complaint See Item 3. Legal Proceedings. The ES joint venture produces commercial explosives for the mining, quarry, and construction
industries, and has developed appropriate safety, environmental, and hazard assessment programs.
All products manufactured by ES are approved under the DOT designations of 1.1, 1.5, or 5.1. Safety
performance has significantly improved since the business was acquired, with no recordable injuries
reported during the Companys 2004 fiscal year. Employees At September 30, 2004, we employed approximately 200 persons in executive,
administrative, sales and manufacturing capacities. Although efforts have been made by union
representatives to seek certification to represent certain of our employees, no such certification
has been granted and we do not have collective bargaining agreements with any of our employees. We
consider our relationships with our employees to be satisfactory. Acquisition of the In-Space Propulsion Business On October 1, 2004 we acquired the former Atlantic Research Corporation in-space
propulsion business from Aerojet-General Corporation. This acquisition provides us with a leading
supplier of commercial and military propulsion products and the worlds largest producer of
bipropellant thrusters. The purchase price for this acquisition was approximately $3.5 million in cash plus the
assumption of certain liabilities. The purchase agreement is based on the transfer of approximately
$4.0 million of certain net working capital assets at the close of the transaction. The purchase
agreement includes a post-closing adjustment, to the extent that a different amount of certain net
working capital assets are transferred at the close of this transaction. The purchase price
adjustment analysis for this transaction has not been completed. We renamed the acquired business as Ampac-ISP. We believe that Ampac-ISP will be able to
develop new high value-added products by leveraging our strength in the development of energetic
materials. This report does not reflect the financial impact of this transaction since it was
completed after the close of our 2004 fiscal year. Our first quarter 2005 fiscal report will
reflect the Ampac-ISP transaction and its financial performance in that period. Customers and Market Ampac-ISP is a leading supplier of propulsion products to the commercial and government
satellite market, and is the worlds largest producer of bipropellant thrusters. In-space
propulsion thrusters are either monopropellant or bipropellant based products. Monopropellant
thrusters utilize a single liquid fuel source (typically hydrazine), whereas bipropellant thrusters
use a combination of a liquid fuel (typically monomethylhydrazine) and an oxidizer. 15




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Both defense and commercial satellite contracts make up the business mix, which are typically
awarded based on product performance, pricing, and reliability. The selection of propulsion
thruster is based on the satellites or spacecrafts mission and encompasses a variety of factors.
The factors generally include type of mission, mission length, type of orbit, mass, type of launch
vehicle and price. Competition The U.S. market for monopropellant and bipropellant thrusters is highly concentrated.
Ampac-ISP and Gencorp are the principal suppliers of these thrusters to commercial, civil and
defense customers in the United States. Foreign suppliers of in-space propulsion thrusters are not
significant competitors in the U.S. in-space propulsion market due to burdensome and time consuming
regulatory requirements for U.S. commercial, civil and defense customers to procure thrusters from
foreign suppliers. In addition, many U.S. governmental agencies are restricted from purchasing
thrusters from foreign suppliers due to national security concerns. A new supplier in the in-space propulsion market will have significant market barriers to
overcome. A new entrant into this market would need to undertake the difficult, expensive and
time-consuming process of developing a viable in-space propulsion thruster, acquiring the necessary
production and testing assets, obtaining the appropriate environmental permits and developing the
expertise needed to successfully design, manufacture, and market these products. In addition, a new
supplier would also have the onerous heritage or track record requirements that customers
demand. Facilities Ampac-ISP has operations in Niagara Falls, New York and Westcott, England. With tungsten
inert gas and electron beam welding capabilities, final thruster assembly, clean rooms assembly,
water flushing, vibration, shock and hot fire test at simulated sea level and simulated altitude,
the combined facilities can serve all in-space propulsion, maneuvering, and de-orbiting needs. Ampac-ISPs Niagara Falls, New York facility is leased and consists of thirteen buildings with
a total of 96,000 square feet of floor space, distributed across a parcel of approximately 13 acres
of land. This facility can provide complete liquid propulsion assembly and complete testing
capabilities. Ampac-ISPs Westcott facility is located midway between Aylesbury and Bicester in England.
The facility is leased and consists of 65 acres of land with 34 buildings occupying 61,463 square
feet of floor space. The site is used to manufacture and test liquid propulsion engines and
associated subsystems and components. Available Information The Companys Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge
on the Companys Internet website at http://www.apfc.com as soon as reasonably practicable after
such reports are filed with the Securities and Exchange Commission. 
 Item 2. Properties The following table sets forth certain information regarding our properties at September
30, 2004. Approximate Area or
    
    
    
    Approximate AnnualLocation
    
    Principal Use
    
    Floor Space
    
    Status
    
    RentIron County, Utah
    
    Perchlorate Manufacturing
Facility(a)
    
    217 Acres
    
    Owned
    
    N/A
 16




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##### Table of Contents



Approximate Area or
    
    
    
    Approximate AnnualLocation
    
    Principal Use
    
    Floor Space
    
    Status
    
    RentIron County, Utah
    
    Sodium Azide Manufacturing
Facility(b)
    
    41 Acres
    
    Owned
    
    N/AIron County, Utah
    
    Halotron Manufacturing Facility(c)
    
    6720 sq. ft.
    
    Owned
    
    N/ALas Vegas, NV
    
    Executive Offices(d)
Packaged Explosives Manufacturing Facility
    
    22,262 sq. ft.
    
    Leased
    
    $600,000Cherokee County, KS
    
    and Offices(e)
Offices, Storage and Maintenance
    
    257 acres
    
    Owned/Leased
    
    NominalMayes County, OK
    
    Facility(f)
    
    1.5 acres
    
    Lease to own
    
    NominalCherokee County, KS
    
    Underwater Testing Facility(g)
    
    640 acres
    
    Lease to own
    
    NominalCherokee County, KS
    
    Laboratory and Offices(h)
    
    4 acres
    
    Lease to own
    
    Nominal
  (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%, 62% and 66% during the fiscal years ended September 30, 2004, 2003
and 2002, 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 12%, 14% and 30% during the fiscal years
ended September 30, 2004, 2003 and 2002, respectively.(c)
    Capacity utilization rates for the Halotron production facility were approximately 5%,
6% and 8% during the fiscal years ended September 30, 2004, 2003 and 2002, 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 was extended
for an additional five years in March 2001. Approximately 25% of this space is currently
sublet at an annual rent of approximately $130,000. (See Note 4 to our Consolidated
Financial Statements.)(e)
    This facility is used for the production of packaged water gel explosives and binary
products. It consists of three manufacturing facilities of approximately of 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 approximately 3,200 sq. ft. facility is used for the administration of explosive
retail, drill and blasting operations and the maintenance of drilling and blasting
equipment and vehicles.(g)
    This facility is used for underwater testing of explosives. It has an office and lab
building of approximately 2,400 sq. ft.(h)
    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. We consider our facilities to be adequate for our present needs and suitable for their current
use. See Item 1. Business  Other Businesses for a description of our development properties in
Iron County, Utah and Clark County, Nevada. 
 Item 3. Legal Proceedings In January 2002, AAC was named as a defendant in a complaint filed in the Superior Court
of the State of California for the County of Los Angeles  Southwest District. The complaint named
a number of defendants, including AACs principal sodium azide customer, Autoliv. The complaint
alleged, among 17




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##### Table of Contents



other things toxic injuries as a result of the deployment of an airbag. In the
third quarter of fiscal 2003, we paid less than $50,000 to settle our part of this complaint. In January 2002, the Company received a claim for approximately $1.7 million from Frontier
Insurance Company (Frontier), alleging liability arising under indemnity agreements. The Company
rejected the claim and filed a complaint with the District Court, Clark County, Nevada on February
28, 2002, seeking a declaratory judgment declaring that the indemnity agreements
have been terminated and that we have no liability to Frontier. Frontier has been declared
insolvent and was ordered into rehabilitation status by the Supreme Court of New York on October
15, 2001, which Order also stayed all lawsuits involving Frontier. On March 31, 2004, the Nevada
District Court dismissed our declaratory judgment suit without prejudice because the case had been
pending for more than two years. Recent information indicates that Frontiers rehabilitation status
has not changed. On June 4, 2004, Alan Andrew Curtis and Linda Ann Curtis, residents of Bullhead City, Arizona,
filed an action in the United States District Court for the District of Arizona entitled Alan
Andrew Curtis, an individual (Husband); Linda Ann Curtis, an individual (Wife), Plaintiffs, vs.
City of Bullhead City, Arizona a municipality; The County of Mohave, Arizona; The State of Arizona;
Arizona Department of Environmental Quality; Arizona-American Water Company; The State of Nevada;
Clark County Nevada; The Southern Nevada Water Authority; Kerr-McGee Corporation LLC; American
Pacific Corporation; State Title Corporation of Arizona; Mister and Miss Edward Koontz; The United
States Department of the Interior; The United States Environmental Protection Agency Region IX; and
Does 1 through 100, Inclusive, Defendants, alleging that various combinations of defendants are
liable under federal and state law for damages and injuries suffered by the Curtis and the
environment as a result of perchlorate and other contaminants found in the Colorado River, and
requesting compensation and injunctive relief. We waived service of the summons and complaint on
August 12, 2004, and filed a motion to dismiss based on perceived jurisdictional, procedural, and
substantive defects in the Curtis complaint on September 20, 2004. Several other defendants also
filed motions to dismiss. Thereafter, there have been numerous motions to strike documents filed by
the Curtis. The court has not yet ruled on any motion to dismiss, and we are therefore not in a
position to know with any degree of certainty how the Court views the merits of the Curtis claims.
We expect decisions from the court on our and other defendants motions to dismiss in the near
term. In the event one or more of the Curtis claims survive the initial motions, our plan is to
conduct thorough discovery of all remaining claims. The Company is pursuing a legal claim against Bejaro Brandskysföretaget AB (Bejaro), a
company headquartered in Sweden. This claim involves historical infringement of the Companys
Halotron trademark rights in Sweden. The Company has received an interim judgment in its favor
concerning the ownership of these rights. The case is currently under appeal by Bejaro and the
ultimate resolution of the case, including any damages, could take several years or more. The information set forth in Note 9 to our Consolidated Financial Statements regarding
litigation and contingencies is incorporated herein by reference. Reference is also made to Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations. There are also various other lawsuits and claims, other than those mentioned above, pending
against the Company and certain of its consolidated subsidiaries. Although it is not possible to
predict or determine the outcome of legal actions brought against the Company or the ultimate cost
of these actions, the Company believes the costs associated with all such actions in the aggregate
will not have a material adverse effect on its consolidated financial position, liquidity or
results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 18




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Common Stock trades on The Nasdaq Stock Market® under the symbol APFC.
The table below sets forth the high and low sales prices of the Common Stock for the periods
indicated. High
    
    
    LowFiscal Year 20041st Quarter
    
    $
    9.91
    
    
    $
    8.452nd Quarter
    
    
    10.75
    
    
    
    7.703rd Quarter
    
    
    8.02
    
    
    
    7.164th Quarter
    
    
    7.91
    
    
    
    7.18
 High
    
    
    LowFiscal Year 20031st Quarter
    
    $
    10.05
    
    
    $
    5.592nd Quarter
    
    
    10.25
    
    
    
    6.773rd Quarter
    
    
    8.65
    
    
    
    6.664th Quarter
    
    
    8.74
    
    
    
    7.11
 At December 31, 2004, there were approximately 1,021 shareholders of record of our Common
Stock. In January 2003, we adopted our Dividend and Stock Repurchase Program. (See Note 12 to our
Consolidated Financial Statements for a description of this program). Under the provisions of this
Program, on December 18, 2003, our Board of Directors declared a cash dividend of $0.42 per share,
payable on January 9, 2004, to shareholders of record on December 29, 2003. The program specifies a
formula based on a percentage of available cash flow and the dollar amount of our repurchases of
Common Stock for the fiscal year as a basis for determining any dividend and is also subject to the
Boards determination that a dividend is appropriate in light of our overall financial condition,
prospects and anticipated cash needs. By reason of the application of the program formula, no
dividend will be paid based on the Companys performance in fiscal 2004. 19




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##### Table of Contents



Item 6. Selected Financial Data FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED SEPTEMBER 30,  2004 (1)
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands except per share amounts)STATEMENT OF OPERATIONS DATA:Sales and operating revenues
    
    $
    59,489
    
    
    $
    68,866
    
    
    $
    73,588
    
    
    $
    63,089
    
    
    $
    67,369Cost of sales
    
    
    40,246
    
    
    
    37,349
    
    
    
    43,529
    
    
    
    38,186
    
    
    
    44,279Gross profit
    
    
    19,243
    
    
    
    31,517
    
    
    
    30,059
    
    
    
    24,903
    
    
    
    23,090Operating expenses
    
    
    21,493
    
    
    
    14,480
    
    
    
    13,776
    
    
    
    10,050
    
    
    
    10,236Impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,084Operating (loss) income
    
    
    (2,250
    )
    
    
    17,037
    
    
    
    16,283
    
    
    
    14,853
    
    
    
    3,770Net interest and other expense (income)
    
    
    (120
    )
    
    
    1,544
    
    
    
    3,235
    
    
    
    2,590
    
    
    
    3,581Loss on Debt Extinguishments
    
    
    
    
    
    
    1,522
    
    
    
    149
    
    
    
    
    
    
    
    1,594Income (loss) before cumulative effect
    
    
    (2,130
    )
    
    
    13,971
    
    
    
    12,899
    
    
    
    12,263
    
    
    
    (1,405
    )Income taxes
    
    
    (2,502
    )
    
    
    4,611
    
    
    
    4,257
    
    
    
    4,537
    
    
    
    (15,136
    )Cumulative effect
    
    
    769Net (loss) income
    
    
    (397
    )
    
    
    9,360
    
    
    
    8,642
    
    
    
    7,726
    
    
    
    13,731Basic net income per share
    
    
    (0.05
    )
    
    
    1.29
    
    
    
    1.21
    
    
    
    1.10
    
    
    
    1.88Diluted net income per share
    
    $
    (0.05
    )
    
    $
    1.27
    
    
    $
    1.18
    
    
    $
    1.10
    
    
    $
    1.86BALANCE SHEET DATA:Cash and cash equivalents
    
    $
    23,777
    
    
    $
    27,140
    
    
    $
    65,826
    
    
    $
    51,471
    
    
    $
    30,128Inventories and receivables
    
    
    30,058
    
    
    
    22,885
    
    
    
    21,156
    
    
    
    19,736
    
    
    
    20,813Property, plant and equipment  net
    
    
    16,573
    
    
    
    9,223
    
    
    
    7,918
    
    
    
    7,503
    
    
    
    7,460Intangible assets  net
    
    
    13,679
    
    
    
    17,579
    
    
    
    21,297
    
    
    
    25,411
    
    
    
    29,805Deferred income taxes
    
    
    11,905
    
    
    
    10,307
    
    
    
    10,128
    
    
    
    11,103
    
    
    
    15,406Total assets
    
    
    100,628
    
    
    
    101,685
    
    
    
    131,971
    
    
    
    123,042
    
    
    
    117,590Working capital
    
    
    44,691
    
    
    
    42,599
    
    
    
    81,783
    
    
    
    67,426
    
    
    
    43,362Long-term debt
    
    
    
    
    
    
    
    
    
    
    40,600
    
    
    
    44,175
    
    
    
    44,175Shareholders equity
    
    $
    84,800
    
    
    $
    84,834
    
    
    $
    76,241
    
    
    $
    66,955
    
    
    $
    59,609
   (1)
    
    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. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview We are principally engaged in the production of Grade I AP for the aerospace and national
defense industries. In addition, we produce and sell sodium azide, the primary component of a gas
generator used in certain automotive airbag safety systems, and Halotron, a chemical used
in fire extinguishing systems ranging from portable fire extinguishers to airport firefighting
vehicles. The perchlorate, sodium azide and Halotron facilities are located on our
property in Southern Utah. We also hold a 50% ownership stake in Energetic Systems, an entity we
consolidate under FIN 46(R) that manufactures and distributes commercial explosives. These
businesses collectively represent our specialty chemicals operating segment. Our other businesses
segment includes our real estate operation which is winding down, and 20




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the production of
environmental protection equipment, including waste water and seawater treatment systems. Critical Accounting Policies. A summary of our significant accounting policies is included in
Note 1 to our Consolidated Financial Statements. We believe that the application of these policies
on a consistent basis enables us to provide the users of our financial statements with useful and
reliable information about our operating results and financial condition. The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenue and expenses. Application of the critical accounting policies discussed below requires managements
significant judgments, often as the result of the need to make estimates of matters that are
inherently uncertain. If actual results were to differ materially from the estimates made, the
reported results could be materially affected. However, the Company is not currently aware of any
reasonably likely events or circumstances that would result in materially different results. Sales and Revenue Recognition Sales of the specialty chemicals and environmental protection products are recognized when
persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is
fixed or determinable and collectibility is reasonably assured. We offer some of our perchlorate
product customers the option, at their election, of storing purchased materials in our Cedar City
facility (Bill and Hold transactions). We recognize the revenue and profit from these Bill and
Hold transactions at the point at which the risks of ownership and transfer of title is transferred
to the customers. Sales of the environmental protection equipment segment are recognized when the
product is shipped. We receive cash for the full amount of real estate sales at the time of
closing. Depreciable Lives of Plant and Equipment Plant and equipment is recorded at cost and depreciated using the straight-line method, which
deducts equal amounts of cost of each asset from earnings every year over its estimated economic
useful life. Economic useful life is the duration of time the asset is expected to be productively
employed by the company, which may be less than its physical life. Managements assumptions on the
following factors, among others, affect the determination of estimated economic useful life: wear
and tear, obsolescence, technical standards, contract life, changes in market demand and raw
material availability. The estimated economic useful life of an asset is monitored to determine its appropriateness,
especially in light of changed business circumstances. For example, changes in technological
advances, changes in the estimated future demand for products, or excessive wear and tear may
result in a shorter estimated useful life than originally anticipated. In these cases, the Company
would depreciate the remaining net book value over the new estimated remaining life, thereby
increasing depreciation expense per year on a prospective basis.
Likewise, if the estimated useful life is increased, the adjustment to the useful life
decreases depreciation expense per year on a prospective basis. Impairment of Long-Lived Assets  Plant and Equipment Plant and equipment held for use is grouped for impairment testing at the lowest level for
which there are identifiable cash flows. Impairment testing of the asset group occurs whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company assesses recoverability by comparing the carrying amount of the asset
group to the estimated undiscounted future cash flows expected to be generated by the assets. If an
asset group is considered impaired, the impairment loss to be recognized would be measured as the
amount by which the asset groups carrying amount exceeds its fair value. Assets to be disposed of
by sale are reported at the lower of carrying amount or fair value less cost to sell. 21




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The estimate of plant and equipment fair value is based on estimated discounted future cash
flows expected to be generated by the asset group. The assumptions underlying cash flow projections
represent managements best estimates at the time of the impairment review. Factors that management
must estimate include: industry and market conditions, sales volume and prices, costs to produce,
inflation, etc. Changes in key assumptions or actual conditions which differ from estimates could
result in an impairment charge. The Company uses reasonable and supportable assumptions when
performing impairment reviews and cannot predict the occurrence of future events and circumstances
that could result in impairment charges. Impairment of Long-Lived Assets  Goodwill and Intangible Assets The purchase method of accounting for business combinations requires the Company to make use
of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value
of the net tangible and identifiable intangible assets. Goodwill represents the excess of the
aggregate purchase price over the fair value of net assets of an acquired entity. The Company
currently has no goodwill in its financial statements. Disclosures related to intangible assets are
included in Note 1  Intangible Assets to the consolidated financial statements. The Company performs an impairment test annually in the fourth quarter of the fiscal year. In
addition, additional tests will be conducted if changes in circumstances indicate a potential
impairment exists. The impairment test requires the Company to compare the fair value of business
reporting units to carrying value. The results of the impairment tests have indicated fair value
amounts exceeded carrying amounts. The Company primarily uses the present value of future cash flows to determine fair value. The
companys valuation model assumes a five-year growth period for the business and an estimated exit
trading multiple. Management judgment is required in the estimation of future operating results and
to determine the appropriate exit multiple. The exit multiple is determined from comparable
industry transactions. Future operating results and exit multiples could reasonably differ from the
estimates. Income Taxes We account for income taxes using the asset and liability approach required by SFAS No. 109.
The asset and liability approach requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the carrying amounts and
the tax bases of our assets and liabilities. Future tax benefits attributable to
temporary differences are recognized to the extent that realization of such benefits are more
likely than not. These future tax benefits are measured by applying currently enacted tax rates. Actual income taxes paid may vary from estimates depending upon changes in income tax laws,
actual results of operations, and the final audit of tax returns by taxing authorities. Tax
assessments may arise several years after tax returns have been filed. Deferred tax assets are recorded for operating losses and tax credit carryforwards. However,
when there are not sufficient sources of future taxable income to realize the benefit of the
operating loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation
allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is
considered more likely than not that some portion or all of the deferred tax asset will not be
realized. The factors used to assess the likelihood of realization include forecasted future
taxable income and available tax planning strategies that could be implemented to realize or renew
net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of
a change in the valuation allowance is reported in the current period tax expense. Pension Benefits The Company sponsors defined benefit pension plans in various forms for employees who meet
eligibility requirements. Several assumptions and statistical variables are used in actuarial
models to calculate the pension expense and liability related to the various plans. Assumptions
about the discount rate, the expected rate of return on plan assets and the future rate of
compensation increases are 22




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determined by the Company. The actuarial models also use assumptions on
demographic factors such as retirement, mortality and turnover. Depending on the assumptions
selected, pension expense could vary significantly and could have a material effect on reported
earnings. The assumptions used can also materially affect the measurement of benefit obligations.
For more information regarding the Companys pension benefits, see Note 8  Employee Benefit Plans
to the consolidated financial statements. Recently Issued Accounting Standards.In May 2003, the Financial Accounting Standards Board
(FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liability and Equity. SFAS No. 150 established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and equity and
requires that an issuer classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). We have determined that SFAS No. 150 will not have a material
impact on our financial position or results of operations. In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, which addresses consolidation by business enterprises of variable interest
entities that either: (1) do not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or (2) hold a significant
variable interest in, or have significant involvement with, an existing variable interest entity.
In December 2003, FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities (FIN 46(R)), was issued to clarify the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries. We historically treated our 50% equity interest in the ES joint venture as an unconsolidated
operation whose financial performance was disclosed, but not consolidated in our financial results.
However under FIN 46(R), we are required to consolidate the ES joint venture due to a number of
factors including our majority ownership of the joint ventures debt securities. As of March 31, 2004, we consolidated the ES joint venture. We reported a cumulative effect
of an accounting change of $769,000 (net of tax benefit of $414,000) on our 2004 second quarter
income statement to reflect the loss that we would have incurred had the ES joint venture been
consolidated since its inception. The consolidation of the ES joint venture significantly changes
various line items of our balance sheet, statement of operations and cash flow presentations as
compared to financial presentations in earlier reports. In November 2004, the FASB issued SFAS 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4. The Statement amends the guidance of ARB No. 43, Chapter 4, Inventory Pricing, by
clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. The Statement is effective for us beginning in fiscal 2006 and could have a material
effect on our financial statements upon adoption. In December 2004, the FASB issued a revision to SFAS 123 (revised 2004), Share-Based Payment.
The revision requires all entities to recognize compensation expense in an amount equal to the fair
value of share-based payments granted to employees. The statements eliminates the alternative
method of accounting for employee share-based payments previously available under APB 25. The
Statement is effective for us beginning in our fourth quarter of fiscal 2005. 23




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Results of Operations Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003 Sales of our perchlorate chemical products accounted for approximately 73%, 79% and 73%
of revenues during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. In
general, demand for Grade I AP is driven by a relatively small number of DOD and NASA contractors.
As a result, any one individual Grade I AP customer usually accounts for a significant portion of
our revenues. For example, Alliant accounted for approximately 44%, 66% and 51% of our revenues
during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. In connection with the Acquisition, we entered into an agreement with Thiokol with respect to
the supply of Grade I AP through the year 2008. The agreement contains no volume commitments,
however, the agreement, as amended, provides that during its term Thiokol will make all of its
Grade I AP purchases from us. In addition to the Grade I AP purchased from us, Thiokol may use AP
inventoried by it in prior years. The agreement also establishes a pricing matrix under which Grade
I AP unit prices vary inversely with the quantity of Grade I AP sold by us to all of our customers.
Under the agreement, Grade I AP unit prices in the matrix at all quantity levels escalated each
year through fiscal 2003 and, in fiscal 2004, were adjusted downward by approximately 20%. Such
downward adjustment had the effect of reducing revenues and operating cash flows on Grade I AP sold
to Thiokol by 20% in fiscal 2004. After the adjustment, Grade I AP unit prices again escalate each
year through fiscal 2008. In connection with the Acquisition, we entered into an agreement with Alliant to extend an
existing agreement through the year 2008. The agreement establishes prices for any Grade I AP
purchased by Alliant from us during the term of the agreement as extended. Under this agreement,
Alliant agrees to use its efforts to cause our Grade I AP to be qualified on all new and current
programs served by Alliants Bacchus Works. During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual
agreements in place prior to Alliants acquisition of Thiokol remain in place. All Thiokol programs
existing at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will
continue to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta,
Pegasus and Titan) will be priced under the Alliant Agreement. Since the Acquisition, our annual sales volumes of Grade I AP have been approximately 20.2
million, 16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999, 2000,
2001, 2002 and 2003 fiscal years (ended September 30) respectively. Prior to the Space Shuttle
Columbia disaster on February 1, 2003, and based principally upon information we had received from
our major customers, we previously estimated that annual demand for Grade I AP would range between
16.0 million and 20.0 million pounds over the next several years. The suspension of Space Shuttle missions since the Columbia disaster reduced the sales volume
of our Grade I AP products in fiscal 2004 to 11.2 million pounds. This reduced sales volume
exceeded the actual consumption of Grade I AP product by our customers. As a result, our customers
inventory levels of Grade I AP increased throughout the year. The Space Shuttle is currently
expected to resume flights beginning in the spring of 2005 with four to five flights per year
thereafter although there is no assurance in this regard. Based principally upon market information
we received from our customers, we currently estimate that our annual sales volumes of Grade I AP
will range between 10.0 and 13.0 million pounds over the next three
years. In addition, the new space exploration initiative for NASA announced by President Bush
in January 2004 could have a significant impact on the demand for Grade I AP, however, the ultimate
impact from this initiative remains uncertain at this time. We also produce and sell other perchlorates. Other perchlorates have a wide range of prices
per pound, depending upon the type and grade of the product. We have recently experienced a change
in the 24




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sales mix of other perchlorates, from lower price per pound products to higher price and
margin per pound products. Other perchlorates are used in a variety of applications, including
munitions, explosives, propellants, and initiators. Some of these applications are in a development
phase, and there can be no assurance that sales of the higher price and higher margin products will
continue. A significant reduction in these sales would have a material adverse effect on our
results of operations and financial condition. Sodium azide sales accounted for approximately 5%, 6% and 12% of sales during fiscal years
ended September 30, 2004, 2003 and 2002, respectively. Autoliv, our principal sodium azide
customer, accounted for approximately 2%, 3% and 8% of our revenues during fiscal 2004, 2003 and
2002, respectively. Worldwide demand for sodium azide has declined considerably over the last several years.
Currently, worldwide demand for sodium azide is substantially less than worldwide supply. Based
principally upon market information received from airbag inflator manufacturers, we expect sodium
azide use to continue to decline and that inflators using sodium azide will be phased out over some
period of time. As discussed in Note 1 to the Consolidated Financial Statements we began consolidating the
financial performance of our packaged explosive joint venture as of March 31, 2004. As a result,
our reported financial performance for fiscal 2004 includes only six months of our Energetic
Systems operation. Prior to fiscal 2004, the financial performance of ES was not included in our
Consolidated Financial Statements. As a consequence, the consolidation of our ES joint venture
significantly changes various line items of our balance sheet, statement of operations and cash
flow presentations as compared to financial presentations in earlier reports. Our fiscal 2005
annual report will include twelve months of financial performance of our ES operation. Sales of Halotron amounted to approximately 5%, 4% and 5% of revenues during the fiscal years
2004, 2003 and 2002, respectively. Halotron is designed to replace halon-based fire extinguishing
systems. Accordingly, demand for Halotron depends upon a number of factors including the
willingness of consumers to switch from halon-based systems, the effects of competing products, as
well as existing and potential governmental regulations. Environmental protection equipment sales accounted for approximately 3%, 4% and 1% of revenues
during the fiscal years 2004, 2003 and 2002, respectively. We currently do not expect significant
change in the business performance in 2005, although there can be no assurance in that regard. There were no real estate sales in fiscal 2004. Real estate sales amounted to approximately
7% and 9% of revenues during the fiscal years 2003 and 2002, respectively. Our real estate
operations are in a wind-down phase and real estate sales are currently estimated to be completed
by the end of fiscal 2005. The principal elements comprising our cost of sales are raw materials, electric power, labor,
manufacturing overhead, depreciation and amortization and the book basis in real estate sold. The
major raw materials used in our production processes are graphite, sodium chlorate,
ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC 123. Significant increases in
the cost of raw materials may have an adverse impact on margins if we are unable to pass along such
increases to our customers. Prices paid by us for raw materials have historically been relatively stable, although we have
experienced cost increases on certain raw materials. All the raw materials used in our
manufacturing processes have been available in commercial quantities. Although we recently had some
difficulty in obtaining graphite, significant progress has been made in establishing an assured
source of supply. We continue to explore other technologies that would reduce our dependence on
graphite. A substantial portion of the total cash costs of operating our specialty chemical plants,
consisting mostly of labor and overhead, are largely fixed in nature. Although our net income (loss) and diluted net income (loss) per common share have not been
subject to seasonal fluctuations, they have been and are expected to continue to be subject to
variations from quarter to quarter and year to year due to the following factors, among others: (i)
as discussed in Note 9 to our Consolidated Financial Statements, we may incur material legal and
other costs associated 25




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##### Table of Contents



with certain litigation and contingencies; (ii) the magnitude, pricing and
timing of perchlorate chemicals, sodium azide, Halotron, packaged explosives and environmental
protection equipment sales in the future is uncertain; (iii) weighted average common and common
equivalent shares for purposes of calculating diluted net income per common share are subject to
significant fluctuations based upon changes in the market price of our Common Stock due to
outstanding warrants and options; (iv) the results of periodic reviews of impairment issues; and
(v) the ability to pass on increases in raw material costs to our customers. (See Liquidity and
Capital Resources and Forward Looking Statements/Risk Factors below.) Sales and Operating Revenues. Sales decreased $9.4 million, or 14%, to $59.5 million in
fiscal 2004, from $68.9 million in fiscal 2003. This decrease was principally attributable to a
decrease in specialty chemicals segment sales of $3.8 million and a $5.6 million decrease in other
businesses segment sales. The decrease in specialty chemicals sales resulted principally from a 20% sales volume
decrease in perchlorate chemicals and a 13% decrease in sales volume of sodium azide in fiscal 2004
as compared to fiscal 2003. The decrease in other businesses segment sales resulted principally from a $4.4 million
decline in real estate sales and a decline of $1.2 million in environmental equipment sales in
fiscal 2004 as compared to fiscal 2003. Real estate sales were expected to decline substantially in
2004 since we have successfully sold almost all of the real estate assets in Nevada that we
intended to monetize. Environmental protection equipment sales decreased due to fewer jobs
generating lower amounts of revenue during fiscal 2004 as compared to fiscal 2003. Cost of Sales. Cost of sales increased $2.9 million, or 8%, to $40.2 million in fiscal 2004,
from $37.3 million in fiscal 2003. As a percentage of sales, cost of sales was 68% in fiscal 2004,
compared to 54% in fiscal 2003. The increases were primarily due to fixed costs that are allocated
over a smaller base of perchlorates and other specialty chemical sales volumes for the year. In
addition, higher costs were incurred due to the inclusion of the ES packaged explosives joint
venture beginning in the third quarter of fiscal 2004. This increase in costs was partially offset
by lower sales volumes in our other businesses segment. Operating Expenses. Operating (selling, general and administrative) expenses increased $7
million, or 48%, in fiscal 2004 to $21.5 million, from $14.5 million in fiscal 2003. The increase
in operating expenses was due primarily to: (i) separation costs that occurred during the
second quarter of fiscal 2004 (See Note 1 and 13 to our Consolidated Financial Statements),
(ii) the addition of the ES packaged explosive joint venture during the third quarter of fiscal
2004, (iii) an increase in environmental remediation expenditures, and (iv) corporate development
costs. Provision (Benefit) for Income Taxes.The effective income tax rate in fiscal 2004 is 116.5% which compares with
33.0% in fiscal 2003. In fiscal 2004, based on the analysis of deferred income taxes, the Company
revised its estimate for deferred tax liability by $2.1 million. The increase in the effective tax rate
in fiscal 2004 is largely the result of the change in estimate. 26




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##### Table of Contents



Segment Operating Income (Loss). Operating income (loss) of our operating segments during the
fiscal years ended September 30, 2004 and 2003 was as follows: 2004
    
    
    2003Specialty chemicals
    
    $
    (1,119
    )
    
    $
    14,020Other businesses
    
    
    (1,131
    )
    
    
    3,017Total
    
    $
    (2,250
    )
    
    $
    17,037
 The decrease in operating income in our specialty chemicals industry segment was primarily
attributable to lower sales volume of our perchlorate chemicals. The decrease in operating income
of our other businesses segment was principally due to decreased land sales. Net Interest and Other Expense (Income).Net interest and other expense (income) decreased to
$(0.1) million in fiscal 2004 from $1.5 million in fiscal 2003. The decrease was principally due to
the redemption of the Notes. (See Note 5 to our Consolidated Financial Statements.) Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002 Sales and Operating Revenues. Sales decreased $4.7 million, or 7%, to $68.9 million in
fiscal 2003, from $73.6 million in fiscal 2002. This decrease was principally attributable to a
decrease in specialty chemicals segment sales of $4.6 million and a decrease in other businesses
segment sales of $0.2 million. The decrease in specialty chemicals sales resulted principally from a 6% sales volume decrease
in perchlorate chemicals and a 54% decrease in sales volume of sodium azide in fiscal 2004 as
compared to fiscal 2003. The decrease in other businesses segment sales resulted principally from a $2.2 million
decline in real estate sales which was offset by a $2.1 million increase in environmental equipment
sales in fiscal 2003 as compared to fiscal 2002. Real estate sales were expected to decline
substantially in 2003 since we have successfully sold most of the real estate assets in Nevada that
we intended to monetize. Environmental protection equipment sales increased due to increase in the
number of jobs generating higher revenue in fiscal 2003 as compared to fiscal 2002. Cost of Sales. Cost of sales decreased $6.2 million, or 14%, to $37.3 million in fiscal
2003, from $43.5 million in fiscal 2002. As a percentage of sales, cost of sales was 54% in fiscal
2003, compared to 59% in fiscal 2002. The decrease in the percentage of cost of sales to sales was
principally attributable to decreased depreciation expense associated with our specialty chemicals
segment as a result of certain fully depreciated assets, and a change in the mix of products sold
to higher margin products within the specialty chemicals segment. Operating Expenses. Operating (selling, general and administrative) expenses increased $0.7
million, or 5%, in fiscal 2003 to $14.5 million, from $13.8 million in fiscal 2002. The increase
was primarily due to increased insurance costs and costs associated with the trace amounts of
perchlorate chemicals found in Lake Mead. (See Note 9 to our Consolidated Financial Statements).
These increases were partially offset by decreased spending on corporate development activities. Provision
(Benefit) for Income Taxes.The effective income tax rate in fiscal 2003 is 33.0% which is unchanged
from fiscal 2002. 27




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##### Table of Contents



Segment Operating Income. Operating income of our operating segments during the fiscal years
ended September 30, 2003 and 2002 was as follows: 2003
    
    
    2002Specialty chemicals
    
    $
    14,020,000
    
    
    $
    13,551,000Other businesses
    
    
    3,017,000
    
    
    
    2,732,000Total
    
    $
    17,037,000
    
    
    $
    16,283,000
 The increase in operating income in our specialty chemicals industry segment was primarily
attributable to a decrease in depreciation expense associated with our specialty chemicals segment,
offset partially by decreased Halotron and sodium azide shipments. The increase in the operating
performance of our environmental protection equipment business was primarily due to increased
sales. The decrease in operating income of our real estate segment was principally due to decreased
land sales resulting from the wind-down of our real estate operation. Net Interest and Other Expense.Net interest and other expense decreased to $1.5 million in
fiscal 2003 from $3.2 million in fiscal 2002. The decrease was principally due to the redemption of
the Notes. This decrease was partially offset by our equity in the loss from our investment in ES. Inflation General inflation did not have a significant effect on our sales and operating revenues
or costs during the three-year period ended September 30, 2004. General inflation may have an
effect on gross profit in the future as certain of our agreements relating to Grade I AP and sodium
azide customers require fixed prices, although certain of such agreements contain escalation
features that should somewhat insulate us from increases in costs associated with inflation. Liquidity and Capital Resources Cash flows provided by operating activities were $1.4 million, $17.7 million and $17.1
million during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. Capital expenditures were $1.1 million, $3.1 million and $2.1 million during the fiscal years
ended September 30, 2004, 2003 and 2002, respectively. Capital expenditures relate principally to
specialty chemicals segment capital improvement projects and enterprise software. In December 2002 we made an investment of approximately $10.7 million in ES. The form of our
investment in ES represents a combination of term and revolving debt and preferred stock and common
equity. As discussed in Note 5 to our Consolidated Financial Statements, we redeemed the Notes on
March 1, 2003. The total cost of the redemption, including interest on the Notes, was approximately
$43.4 million. We recognized a loss on the redemption of the Notes of approximately $1.5 million. During the three-year period ended September 30, 2004, we received cash of approximately $1.4
million from our Ventana Canyon residential joint venture. The venture has wound down its
operations and we do not expect to receive any cash returns from this venture in the future. We spent $2.8 million, $1.7 million and $0.3 million during the fiscal years ended September
30, 2004, 2003 and 2002, respectively, on the repurchase of our Common Stock. As discussed in
Note 12 to our Consolidated Financial Statements, our Dividend and Stock Repurchase Program
became effective in fiscal 2003. On December 18, 2003, our Board of Directors declared a cash
dividend of $0.42 per share based upon application of the program formula for fiscal 2003, payable
on January 9, 2004, to 28




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##### Table of Contents



shareholders of record on December 29, 2003. By reason of the application of
the program formula, no dividend will be paid for fiscal 2004. 2005 Outlook Capital expenditures for operations in 2005 are currently expected to be between $2.0
million and $3.0 million. This levels of spending is $0.9 million to $1.9 million more than in
fiscal 2004. This increase in capital expenditures is driven primarily due to addition of ES
business (for a full a year) and the Ampac-ISP business in our consolidated financial statements. In addition, the Company intends to continue to evaluate acquisition opportunities and
investments in affiliated entities. Financing for these potential investment activities is likely
to be obtained either through our existing cash balances and/or debt issuances. We believe that our cash flows from operations and existing cash balances will be adequate for
the foreseeable future to satisfy the needs of our operations. However, the resolution of
litigation and contingencies, and the timing, pricing and magnitude of sales of perchlorates,
sodium azide, Halotron and explosives, may have an effect on the use and availability of cash. As a result of the litigation and contingencies discussed in Note 9 to our Consolidated
Financial Statements, we have incurred legal and other costs, and we may incur material legal and
other costs associated with the resolution of litigation and contingencies in future periods. Any
such costs, to the extent borne by us and not recovered through insurance, would adversely affect
our liquidity. We are currently unable to predict or quantify the amount or range of such costs or
the period of time over which such costs may be incurred. Contractual Obligations and Commitments. The following tables summarize our fiscal year
contractual obligations and commitments as of September 30, 2004. Payments Due by Period2008 andTotal
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    ThereafterContractual ObligationsOperating leases
    
    $
    875,000
    
    
    $
    600,000
    
    
    $
    275,000
    
    
    
    
    
    
    
    Pension obligations
    
    
    6,731,000
    
    
    
    1,600,000
    
    
    
    1,600,000
    
    
    $
    1,600,000
    
    
    $
    1,931,000Salary commitments
    
    
    1,656,000
    
    
    
    414,000
    
    
    
    414,000
    
    
    
    414,000
    
    
    
    414,000Total contractual obligations
    
    $
    9,262,000
    
    
    $
    2,614,000
    
    
    $
    2,289,000
    
    
    $
    2,014,000
    
    
    $
    2,345,000
 Amount of Commitment Expiration by PeriodTotal Amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2008 andCommitted
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    ThereafterOther CommitmentsLetters of credit
    
    $
    1,936,000
    
    
    $
    1,704,000
    
    
    $
    42,000
    
    
    $
    80,000
    
    
    $
    110,000Total other commitments
    
    $
    1,936,000
    
    
    $
    1,704,000
    
    
    $
    42,000
    
    
    $
    80,000
    
    
    $
    110,000
 Forward-Looking Statements/Risk Factors Certain matters discussed in this Report may include forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, the risk factors set forth
below. The following risk factors, among others, may cause our operating results and/or financial
position to be adversely affected from time to time: 29




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##### Table of Contents



1.
    (a) Declining demand (including excess customer inventories) or downward pricing pressure for
our products as a result of general or specific economic conditions, (b) governmental budget
decreases affecting the DOD or NASA, including the status of the Space Shuttle Program
(including President Bushs current plan to ultimately terminate shuttle operations), that
would cause further decreases in demand for Grade I AP, (c) technological advances and
improvements with respect to existing or new competitive products causing a reduction or
elimination of demand for Grade I AP and other perchlorates, sodium azide, Halotron,
explosives or thrusters (d) the ability and desire of purchasers to change existing products
or substitute other products for our products based upon perceived quality, environmental
effects and pricing, and (e) the fact that perchlorate chemicals, sodium azide, Halotron and
our environmental products have limited applications and highly concentrated customer bases.2.
    The cost and effects of legal and administrative proceedings, settlements and investigations,
particularly those investigations described in Note 9 to our Consolidated Financial
Statements, as well as the costs resulting from regulatory and environmental matters that may
have a negative impact on sales or costs.3.
    Our ability to profitably integrate, manage and operate new businesses and/or investments
competitively and cost effectively (including recently acquired ES and Ampac-ISP).4.
    Competitive factors including, but not limited to, our limitations respecting financial
resources and our ability to compete against companies with substantially greater resources,
significant excess market supply in the sodium azide market and in the perchlorate market,
potential patent coverage issues, and the development or penetration of competing new
products, particularly in the propulsion, airbag inflation, fire extinguishing and explosives
businesses.5.
    Underutilization of our manufacturing facilities resulting in production inefficiencies and
increased costs, the inability to recover facility costs, reductions in margins, and
impairment issues.6.
    The near depletion of our Clark County, Nevada commercial real estate, with only 14 acres
remaining for sale.7.
    The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and
other activities of governments, agencies or similar organizations, including, but not limited
to, environmental, safety and transportation issues.8.
    The dependence upon a single facility for the production of most of our products.9.
    Provisions of our Certificate of Incorporation and By-laws and Series D Preferred Stock, and
the dividend of preference stock purchase rights and related Rights Agreement, could have
the effect of making it more difficult for potential acquirors to obtain a control position
in us.   30




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss arising from adverse changes in market rates and
prices, commodity prices and foreign currency exchange rates. We had certain long-term fixed-rate
debt that was redeemed on March 1, 2003. At September 30, 2004, we did not have any
derivative-based financial instruments. However, the amount of outstanding debt may fluctuate and
we may at some time be subject to financing risk. 
 Item 8. Financial Statements and Supplementary Data Financial statements called for hereunder are included herein on the following pages: Page(s)Report of Independent Registered Public Accounting Firm
    
    
    39Consolidated Balance Sheets
    
    
    40Consolidated Statements of Operations
    
    
    41Consolidated Statements of Changes in Shareholders Equity
    
    
    42Consolidated Statements of Cash Flows
    
    
    43Notes to Consolidated Financial Statements
    
    
    44-57
 31




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##### Table of Contents



SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts) Quarters For Fiscal Year 20041st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    TotalSales and Operating Revenues
    
    $
    4,794
    
    
    $
    18,787
    
    
    $
    15,829
    
    
    $
    20,079
    
    
    $
    59,489Gross Profit
    
    
    470
    
    
    
    7,389
    
    
    
    4,835
    
    
    
    6,549
    
    
    
    19,243Net Income
    
    
    (2,204
    )
    
    
    197
    
    
    
    (524
    )
    
    
    2,134
    
    
    
    (397
    )Basic and Diluted Net
Income Per Share
    
    $
    (0.30
    )
    
    $
    0.03
    
    
    $
    (0.07
    )
    
    $
    0.29
    
    
    $
    (0.05
    )
 Quarters For Fiscal Year 20031st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    TotalSales and Operating Revenues
    
    $
    15,063
    
    
    $
    19,550
    
    
    $
    13,809
    
    
    $
    20,444
    
    
    $
    68,866Gross Profit
    
    
    6,379
    
    
    
    9,372
    
    
    
    5,502
    
    
    
    10,264
    
    
    
    31,517Net Income
    
    
    1,191
    
    
    
    2,682
    
    
    
    1,600
    
    
    
    3,887
    
    
    
    9,360Basic and Diluted Net
Income Per Share
    
    $
    .16
    
    
    $
    .36
    
    
    $
    .22
    
    
    $
    .53
    
    
    $
    1.27
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 
 Item 9A. Controls and Procedures Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange
Act), our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective in ensuring
that information required to be disclosed in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. No change in our internal control over financial
reporting occurred during our most recent fiscal quarter that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. 
 Item 9B. Other Information Not applicable. 32




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant The required information regarding directors and executive officers is incorporated
herein by reference from our definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than January 28,
2005. We have adopted a policy that applies to all of our directors and employees entitled
Standards of Business Conduct that is filed as an exhibit to this annual report. This policy is
also posted to our website at www.apfc.com. In March 2004 David N. Keys and Victor M. Rosenzweig resigned from the Companys Board of
Directors to pursue personal interests. The Board has elected to reduce its overall size from 10 to
8 members by not filling these board seats with new candidates. 
 Item 11. Executive Compensation The required information regarding executive compensation is incorporated herein by
reference from our definitive proxy statement for the 2005 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission not later than January 28, 2005. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The required information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from our definitive proxy statement for the 2005
Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later
than January 28, 2005. 
 Item 13. Certain Relationships and Related Transactions The required information regarding certain relationships and related transactions is
incorporated herein by reference from our definitive proxy statement for the 2005 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission not later than January 28,
2005. 
 Item 14. Principal Accountant Fees and Services The required information regarding principal accountant fees and services is incorporated
herein by reference from our definitive proxy statement for the 2005 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission not later than January 28,
2005. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules  (a)(1)
    Financial StatementsSee Part II, Item 8 for an index to the Registrants financial statements and supplementary data. 33




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##### Table of Contents



(2)
    Financial Statement SchedulesNone applicable.(3)
    ExhibitsThe following Exhibits are filed as part of this Report (references are to Regulation S-K
Exhibit Numbers):  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).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-3.3.6
    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).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 2002 Directors Stock Option Plan (the
2002 Plan), incorporated by reference to Exhibit 4.2 to the 2003 S-8.4.6
    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. 34




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##### Table of Contents



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.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.*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. 35




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##### Table of Contents



*24
    
    Power of Attorney, included on Page 32.*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.(b)
    
    See (a)(3) above.(c)
    
    None applicable. 36




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized. Dated: January 11, 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 Financial
Officer, Secretary and Treasurer, Principal
Financial and Accounting Officer 37




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##### Table of Contents



POWER OF ATTORNEY American Pacific Corporation and each of the undersigned do hereby appoint John R. Gibson
and Seth L. Van Voorhees and each of them severally, its or his true and lawful attorneys, with
full power of substitution and resubstitution, to execute on behalf of American Pacific Corporation
and the undersigned any and all amendments to this Report and to file the same with all exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission.
Each of such attorneys shall have the power to act hereunder with or without the others. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. /s/ JOHN R. GIBSON
    
    
    
    Date:   January 11, 2005John R. Gibson, Chief Executive Officer,President, and Director/s/ SETH L. VAN VOORHEES
    
    
    
    Date:   January 11, 2005Seth L. Van Voorhees, Vice President,Chief Financial Officer, Secretary andTreasurer; Principal Financial andAccounting Officer/s/ FRED D. GIBSON, JR.
    
    
    
    Date:   January 11, 2005Fred D. Gibson, Jr., Director/s/ JAN H. LOEB
    
    
    
    Date:   January 11, 2005Jan H. Loeb, Director/s/ BERLYN D. MILLER
    
    
    
    Date:   January 11, 2005Berlyn D. Miller, Director/s/ NORVAL F. POHL
    
    
    
    Date:   January 11, 2005Norval F. Pohl, Ph.D., Director/s/ C. KEITH ROOKER
    
    
    
    Date:   January 11, 2005C. Keith Rooker, Director/s/ DEAN M. WILLARD
    
    
    
    Date:   January 11, 2005Dean M. Willard, Director/s/ JANE L. WILLIAMS
    
    
    
    Date:   January 11, 2005Jane L. Williams, Director
 38




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Shareholders of
American Pacific Corporation:  We have audited the accompanying consolidated balance sheets of American Pacific Corporation
and Subsidiaries (the Company) as of September 30, 2004 and 2003, and the related
consolidated statements of operations, changes in shareholders equity and cash flows for each
of the three years in the period ended September 30, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of American Pacific Corporation and subsidiaries as of
September 30, 2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2004, in conformity with accounting
principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP
Las Vegas, Nevada
January 12, 2005 39




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND 2003  2004
    
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    23,777,000
    
    
    $
    27,140,000Accounts and notes receivable
    
    
    15,963,000
    
    
    
    8,951,000Related party notes and accrued interest receivable
    
    
    268,000
    
    
    
    321,000Inventories
    
    
    13,827,000
    
    
    
    13,613,000Prepaid expenses and other assets
    
    
    666,000
    
    
    
    446,000Deferred income taxes
    
    
    320,000
    
    
    
    79,000Total Current Assets
    
    
    54,821,000
    
    
    
    50,550,000PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    16,573,000
    
    
    
    9,223,000INTANGIBLE ASSETS, NET
    
    
    13,679,000
    
    
    
    17,579,000JOINT VENTURE EQUITY
    
    
    227,000
    
    
    
    10,393,000DEFERRED INCOME TAXES
    
    
    11,585,000
    
    
    
    10,228,000OTHER ASSETS, NET
    
    
    3,743,000
    
    
    
    3,712,000TOTAL ASSETS
    
    $
    100,628,000
    
    
    $
    101,685,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    4,481,000
    
    
    $
    1,098,000Accrued liabilities
    
    
    5,649,000
    
    
    
    6,853,000OTHER LONG-TERM LIABILITIES
    
    
    5,698,000
    
    
    
    5,331,000TOTAL LIABILITIES
    
    
    15,828,000
    
    
    
    13,282,000COMMITMENTS AND CONTINGENCIESWARRANTS TO PURCHASE COMMON STOCK
    
    
    
    
    
    
    3,569,000SHAREHOLDERS EQUITY:Common stock  $.10 par value, 20,000,000 shares authorized,
issued  9,326,787 shares in 2004 and 8,995,041 shares in 2003
    
    
    932,000
    
    
    
    898,000Capital in excess of par value
    
    
    86,148,000
    
    
    
    83,554,000Retained earnings
    
    
    15,897,000
    
    
    
    16,180,000Treasury stock (2,034,870 shares in 2004 and 1,752,212 shares in 2003)
    
    
    (16,982,000
    )
    
    
    (14,230,000
    )Accumulated other comprehensive loss
    
    
    (1,195,000
    )
    
    
    (1,568,000
    )Total Shareholders Equity
    
    
    84,800,000
    
    
    
    84,834,000TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    100,628,000
    
    
    $
    101,685,000
 See Notes to Consolidated Financial Statements. 40




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002  2004
    
    
    2003
    
    
    2002SALES AND OPERATING REVENUES
    
    $
    59,489,000
    
    
    $
    68,866,000
    
    
    $
    73,588,000COST OF SALES
    
    
    40,246,000
    
    
    
    37,349,000
    
    
    
    43,529,000GROSS PROFIT
    
    
    19,243,000
    
    
    
    31,517,000
    
    
    
    30,059,000OPERATING EXPENSES
    
    
    21,493,000
    
    
    
    14,480,000
    
    
    
    13,776,000OPERATING (LOSS) INCOME
    
    
    (2,250,000
    )
    
    
    17,037,000
    
    
    
    16,283,000NET INTEREST AND OTHER EXPENSE (INCOME)
    
    
    (120,000
    )
    
    
    1,544,000
    
    
    
    3,235,000LOSS ON DEBT EXTINGUISHMENTS
    
    
    
    
    
    
    1,522,000
    
    
    
    149,000(LOSS) INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT
    
    
    (2,130,000
    )
    
    
    13,971,000
    
    
    
    12,899,000PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (2,502,000
    )
    
    
    4,611,000
    
    
    
    4,257,000INCOME BEFORE CUMULATIVE EFFECT
    
    
    372,000
    
    
    
    9,360,000
    
    
    
    8,642,000CUMULATIVE EFFECT ACCOUNTING ADJUSTMENT
    
    
    769,000NET (LOSS) INCOME
    
    $
    (397,000
    )
    
    $
    9,360,000
    
    
    $
    8,642,000BASIC NET (LOSS) INCOME PER SHARE
    
    $
    (0.05
    )
    
    $
    1.29
    
    
    $
    1.21BASIC LOSS (INCOME) BEFORE CUMULATIVE EFFECT
    
    $
    0.05
    
    
    $
    1.29
    
    
    $
    1.21AVERAGE SHARES OUTSTANDING
    
    
    7,281,000
    
    
    
    7,253,000
    
    
    
    7,145,000DILUTED NET (LOSS) INCOME PER SHARE
    
    $
    (0.05
    )
    
    $
    1.27
    
    
    $
    1.18DILUTED (LOSS) INCOME BEFORE CUMULATIVE
EFFECT PER SHARE
    
    $
    0.05
    
    
    $
    1.27
    
    
    $
    1.18DILUTED SHARES
    
    
    7,328,000
    
    
    
    7,353,000
    
    
    
    7,335,000
 See Notes to Consolidated Financial Statements. 41




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002 Note
    
    
    AccumulatedNet Outstanding
    
    
    Par Value
    
    
    Capital in
    
    
    
    
    
    
    
    
    
    
    Receivable
    
    
    OtherNumber of
    
    
    of Shares
    
    
    excess of
    
    
    Retained
    
    
    Treasury
    
    
    from the
    
    
    ComprehensiveCommon Shares
    
    
    Issued
    
    
    Par Value
    
    
    Earnings
    
    
    Stock
    
    
    Sale of Stock
    
    
    LossBALANCES, October 1, 2001
    
    
    6,997,204
    
    
    $
    852,000
    
    
    $
    80,106,000
    
    
    $
    (1,822,000
    )
    
    $
    (12,170,000
    )
    
    $
    (11,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,642,000
    
    
    
    
    
    
    
    
    
    
    $
    8,642,000Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,226,000
    )Subtotal  comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,416,000Issuance of common stock
    
    
    308,750
    
    
    
    29,000
    
    
    
    1,874,000Stock option tax effects
    
    
    
    
    
    
    
    
    
    
    269,000Treasury stock acquired
    
    
    (51,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (313,000
    )Note payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000BALANCES, SEPTEMBER 30, 2002
    
    
    7,254,454
    
    
    
    881,000
    
    
    
    82,249,000
    
    
    
    6,820,000
    
    
    
    (12,483,000
    )
    
    
    
    
    
    
    (1,226,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,360,000
    
    
    
    
    
    
    
    
    
    
    
    9,360,000Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (342,000
    )Subtotal  comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,018,000Issuance of common stock
    
    
    170,500
    
    
    
    17,000
    
    
    
    1,135,000Stock option tax effects
    
    
    
    
    
    
    
    
    
    
    170,000Treasury stock acquired
    
    
    (182,125
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,747,000
    )BALANCES, SEPTEMBER 30, 2003
    
    
    7,242,829
    
    
    
    898,000
    
    
    
    83,554,000
    
    
    
    16,180,000
    
    
    
    (14,230,000
    )
    
    
    
    
    
    
    (1,568,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (397,000
    )
    
    
    
    
    
    
    
    
    
    
    (397,000
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    373,000Subtotal  comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,000
    )Issuance of common stock
    
    
    49,088
    
    
    
    34,000
    
    
    
    2,257,000Equity investment in common stockReclassification of Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,569,000Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,080,000
    )Equity Investment Consolidation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375,000
    )Stock option tax effects
    
    
    
    
    
    
    
    
    
    
    337,000Treasury stock acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,752,000
    )BALANCES, SEPTEMBER 30, 2004
    
    
    7,291,917
    
    
    $
    932,000
    
    
    $
    86,148,000
    
    
    $
    15,897,000
    
    
    $
    (16,982,000
    )
    
    
    
    
    
    $
    (1,195,000
    )
 See Notes to Consolidated Financial Statements. 42




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##### Table of Contents



AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002 2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (397,000
    )
    
    $
    9,360,000
    
    
    $
    8,642,000Adjustments to reconcile net income (loss) to
net cash from operating activities:Depreciation and amortization
    
    
    5,737,000
    
    
    
    5,794,000
    
    
    
    6,384,000Cumulative effect
    
    
    769,000Basis in development property sold
    
    
    
    
    
    
    632,000
    
    
    
    2,517,000Equity in loss of joint venture
    
    
    450,000
    
    
    
    760,000Loss on debt extinguishments
    
    
    
    
    
    
    1,522,000
    
    
    
    149,000Stock options tax effects
    
    
    337,000
    
    
    
    170,000
    
    
    
    269,000Changes in
operating assets and liabilities, net of initial consolidation of ES
under FIN 46(R):Accounts and notes receivable
    
    
    (4,144,000
    )
    
    
    (2,105,000
    )
    
    
    (1,328,000
    )Inventories
    
    
    1,090,000
    
    
    
    376,000
    
    
    
    (81,000
    )Prepaid expenses and other
    
    
    (53,000
    )
    
    
    193,000
    
    
    
    (2,412,000
    )Deferred income taxes
    
    
    (1,598,000
    )
    
    
    (179,000
    )
    
    
    975,000Accounts payable and other liabilities
    
    
    (760,000
    )
    
    
    1,197,000
    
    
    
    1,992,000Other Assets
    
    
    (31,000
    )Total adjustments
    
    
    1,797,000
    
    
    
    8,360,000
    
    
    
    8,465,000Net cash from operating activities
    
    
    1,400,000
    
    
    
    17,720,000
    
    
    
    17,107,000CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (1,093,000
    )
    
    
    (3,119,000
    )
    
    
    (2,080,000
    )Investment in and advances to joint venture
    
    
    
    
    
    
    (11,153,000
    )Initial
consolidation of ES under Fin 46(R)
    
    
    (375,000
    )Real estate equity returns
    
    
    
    
    
    
    
    
    
    
    1,385,000Net cash used in investing activities
    
    
    (1,468,000
    )
    
    
    (14,272,000
    )
    
    
    (695,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Debt related payments
    
    
    (54,000
    )
    
    
    (41,539,000
    )
    
    
    (3,647,000
    )Issuance of common stock
    
    
    2,291,000
    
    
    
    1,152,000
    
    
    
    1,903,000Borrowings
    
    
    300,000Treasury stock acquired
    
    
    (2,752,000
    )
    
    
    (1,747,000
    )
    
    
    (313,000
    )Dividends
    
    
    (3,080,000
    )Net cash used in financing activities
    
    
    (3,295,000
    )
    
    
    (42,134,000
    )
    
    
    (2,057,000
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (3,363,000
    )
    
    
    (38,686,000
    )
    
    
    14,355,000CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    27,140,000
    
    
    
    65,826,000
    
    
    
    51,471,000CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    23,777,000
    
    
    $
    27,140,000
    
    
    $
    65,826,000SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during year for interest
    
    $
    551,000
    
    
    $
    1,875,000
    
    
    $
    3,800,000Cash paid during year for income taxes
    
    $
    0
    
    
    $
    4,400,000
    
    
    $
    2,400,000Non-cash items:Initial consolidation of ES under FIN 46(R):Fair value of assets
    
    $
    11,958,00Fair value of liabilities
    
    $
    3,231,000Reclassification of warrants
    
    $
    3,569,000
 See Notes to Consolidated Financial Statements. 43




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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002  1.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation  The Consolidated Financial Statements include the accounts
of American Pacific Corporation and Subsidiaries (the Company, we, us, or our). All
significant intercompany accounts and transactions have been eliminated.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,
deferred tax assets and long-lived assets, including intangible assets. Other areas in which
significant uncertainties exist include, but are not limited to, costs that may be incurred in
connection with environmental matters and the resolution of litigation and other contingencies.
Actual results will inevitably differ to some extent from estimates on which our Consolidated
Financial Statements were prepared.Sales and Revenue Recognition Sales of the specialty chemicals and environmental
protection products are recognized when persuasive evidence of an arrangement exists, shipment
has been made, title passes, the price is fixed or determinable and collectibility is reasonably
assured. We offer some of our perchlorate product customers the option, at their election, of
storing purchased materials in our Cedar City facility (Bill and Hold transactions). We
recognize the revenue and profit from these Bill and Hold transactions at the point at which the
risks of ownership and transfer of title is transferred to the customers. Sales of the
environmental protection equipment segment are recognized when the product is shipped. We
receive cash for the full amount of real estate sales at the time of closing.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.Related Party Transactions  Related party notes and accrued interest receivable
represent demand notes bearing interest at a banks prime rate from our former Chairman and a
current officer.Our other related party transactions generally fall into the following categories:  
    Payments of professional fees to firms affiliated with certain members of our Board.
    Payments to certain directors for consulting services outside of the scope of their duties as directors.  For the years ended September 30, 2004, 2003 and 2002, such transactions totaled $0.2 million,
$0.5 million and $0.5 million.Inventories  Inventories are stated at the lower of cost or market. Cost of the
specialty chemicals segment inventories is determined on a moving average basis and cost of the
environmental protection equipment segment inventories is determined on the specific
identification basis.Property, Plant and Equipment  Property, plant and equipment are carried at cost less
accumulated depreciation. We periodically assess the recoverability of property, plant and
equipment and evaluate such assets for impairment whenever events or changes in circumstances
indicate that the net carrying amount of an asset may not be recoverable. Asset impairment
(including intangible assets) is determined to exist if estimated future cash flows,
undiscounted and without interest charges, are less than the net carrying amount. Depreciation
is computed on the straight-line method over the 44




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estimated productive lives of the assets (3 to
12 years for machinery and equipment and 15 to 31 years for buildings and improvements).Intangible Assets  During the first quarter of fiscal 2002, we adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The
adoption of SFAS No. 142 did not have a material effect on our results of operations or
financial position. Under the provisions of SFAS No. 142, our intangible assets, related
primarily to our perchlorate acquisition in fiscal 1998, will continue to be amortized under its
originally assigned life of ten years. At September 30, 2004, our intangible assets had a gross
carrying value of approximately $39.1 million and accumulated amortization of approximately
$(25.4) million. Amortization expense was approximately $3.9 million in fiscal 2004 and $3.9
million and $4.4 million in fiscal 2003 and 2002, respectively. Amortization expense is
estimated to amount to approximately $3.9 million in each of the years during the three-year
period ending September 30, 2007.Fair Value Disclosure  Cash and cash equivalents, accounts and notes receivable,
accounts payable and accrued liabilities, and other short-term liabilities  The carrying value
of these items is a reasonable estimate of their fair value due to their short-term nature.Net Income Per Common Share  Basic per share amounts are calculated by dividing net
income by average shares outstanding during the period. Diluted per share amounts are calculated
by dividing net income by average shares outstanding plus the dilutive effect of common share
equivalents. The effect of outstanding stock options and warrants to purchase approximately 2.9
million and 2.9 million shares of common stock during the fiscal years 2003 and 2002,
respectively, were not included in diluted per share calculations, since the average exercise
price of such options and warrants was greater than the average market price of our common stock
during these periods. The dilutive effect of the assumed exercise of stock options increased the
weighted average of common shares by 47,000, 100,000 and 190,000 during the years ended
September 30, 2004, 2003 and 2002, respectively.Accounting for Stock-Based Compensation  In December 2002, SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting
for Stock-Based Compensation was issued. SFAS 148 is effective for fiscal years ending after
December 15, 2002, and gives further guidance regarding methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee compensation and
regarding disclosure requirements as previously defined in SFAS 123. We have elected to follow
Accounting Principles Board Opinion (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 10.) 45




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2004
    
    
    2003
    
    
    2002Net income (loss):As reported
    
    $
    (397,000
    )
    
    $
    9,360,000
    
    
    $
    8,642,000Total stock based employee
compensation expense using the fair
value based method, net of taxes
    
    
    (167,000
    )
    
    
    (205,000
    )
    
    
    (106,000
    )Pro forma
    
    $
    (564,000
    )
    
    $
    9,155,000
    
    
    $
    8,536,000Net income (loss) before cumulative effect:As reported
    
    $
    372,000
    
    
    $
    9,360,000
    
    
    $
    8,642,000Total stock based employee
compensation expense using the fair
value based method, net of taxes
    
    
    (167,000
    )
    
    
    (205,000
    )
    
    
    (106,000
    )Pro forma
    
    $
    205,000
    
    
    $
    9,155,000
    
    
    $
    8,536,000Basic earnings per share:Net income (loss), as reported
    
    $
    (0.05
    )
    
    $
    1.29
    
    
    $
    1.21Pro forma
    
    $
    (0.08
    )
    
    $
    1.26
    
    
    $
    1.19Income (loss) before cumulative
effect, as reported
    
    $
    0.05
    
    
    $
    1.29
    
    
    $
    1.21Pro forma
    
    $
    0.03
    
    
    $
    1.26
    
    
    $
    1.19Diluted earnings per share:Net income (loss), as reported
    
    $
    (0.05
    )
    
    $
    1.27
    
    
    $
    1.18Pro forma
    
    $
    (0.08
    )
    
    $
    1.25
    
    
    $
    1.16Income (loss) before cumulative
effect, as reported
    
    $
    0.05
    
    
    $
    1.27
    
    
    $
    1.18Pro forma
    
    $
    0.03
    
    
    $
    1.25
    
    
    $
    1.16
  Income Taxes  We account for income taxes using the asset and liability approach
required by SFAS No. 109. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of our assets and liabilities. Future tax
benefits attributable to temporary differences are recognized to the extent that realization of
such benefits are more likely than not. These future tax benefits are measured by applying
currently enacted tax rates.Deferred tax assets are recorded for operating losses and tax credit carryforwards. However,
when there are not sufficient sources of future taxable income to realize the benefit of the
operating loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation
allowance. A valuation allowance is recognized if, based on the weight of available evidence, it
is considered more likely than not that some portion or all of the deferred tax asset will not
be realized. The factors used to assess the likelihood of realization include forecasted future
taxable income and available tax planning strategies that could be implemented to realize or
renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The
effect of a change in the valuation allowance is reported in the current period tax expense.Loss on Debt Extinguishments  During the first quarter of fiscal 2003, we adopted SFAS
No. 145. SFAS No. 145 requires that gains and losses from extinguishment of debt be classified
as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of
APB No. 30 distinguishes transactions that are part of an entitys recurring operations from
those that are unusual and infrequent and that meet the criteria for classification as an
extraordinary
item. We have reclassified previously reported extraordinary losses on debt extinguishments to a
separate line item above the caption Income Before Income Taxes in our Consolidated Statements
of Operations.Comprehensive Loss  Other comprehensive loss is reported in our Consolidated Statements
of Shareholders Equity and Accumulated other comprehensive loss is reported in our Consolidated
Balance Sheets. Our only component of other comprehensive loss represents a minimum pension
liability adjustment. (See Note 8.) 46




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Recently Issued Accounting Standards  In May 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity. SFAS No. 150 established standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity and requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). We have determined that
SFAS No. 150 will not have a material impact on our financial position or results of operations.In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, which addresses consolidation by business enterprises of variable interest
entities that either: (1) do not have sufficient equity investment at risk to permit the entity
to finance its activities without additional subordinated financial support, or (2) hold a
significant variable interest in, or have significant involvement with, an existing variable
interest entity. In December 2003, FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities (FIN
46(R), was issued to clarify the
application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as
amended by FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries.We historically treated our 50% equity interest in the ES joint venture as an unconsolidated
operation whose financial performance was disclosed, but not consolidated in our financial
results. However under FIN 46(R), we are required to consolidate the ES joint venture due to a
number of factors including our majority ownership of the joint ventures debt securities.As of March 31, 2004, we consolidated the ES joint venture. We reported a cumulative effect of
an accounting change of $769,000 (net of tax benefit of $414,000) on our 2004 second quarter
income statement to reflect the loss that we would have incurred had the ES joint venture been
consolidated since its inception.The consolidation of the ES joint venture significantly changes various line items of our
balance sheet, statement of operations and cash flow presentations as compared to financial
presentations in earlier reports. As of March 31, 2004, we consolidated the following balance
sheet items: (i) $4.9 million of current assets, (ii) $7.6 million of noncurrent assets, and
(iii) $3.4 million of noncurrent liabilities.In November 2004, the FASB issued SFAS 151, Inventory Costsan amendment of ARB No. 43, Chapter
4. The Statement amends the guidance of ARB No. 43, Chapter 4, Inventory Pricing, by clarifying
that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of the production
facilities. The Statement is effective for the Company beginning in fiscal 2006 and could have a
material effect on our financial statements upon adoption.In December 2004, the FASB issued a revision to SFAS 123 (revised 2004), Share-Based Payment.
The revision requires all entities to recognize compensation expense in an amount equal to the
fair value of share-based payments granted to employees. The statements eliminates the
alternative method of accounting for employee share-based payments
previously available under APB 25. The Statement is effective for the Company beginning in our
fourth quarter of fiscal 2005.2.
    INVENTORIESInventories at September 30, 2004 and 2003 consist of the following: 2004
    
    
    2003Work-in-process
    
    $
    6,321,000
    
    
    $
    6,613,000Raw material and supplies
    
    
    7,506,000
    
    
    
    7,000,000Total
    
    $
    13,827,000
    
    
    $
    13,613,000
 47




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3.
    PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment at September 30, 2004 and 2003 are summarized as follows: 2004
    
    
    2003Land
    
    $
    310,000
    
    
    $
    117,000Buildings, machinery and equipment
    
    
    28,679,000
    
    
    
    19,465,000Construction in progress
    
    
    1,280,000
    
    
    
    1,029,000Total
    
    
    30,269,000
    
    
    
    20,611,000Less: accumulated depreciation
    
    
    (13,696,000
    )
    
    
    (11,388,000
    )Property, plant and equipment, net
    
    $
    16,573,000
    
    
    $
    9,223,000
  Depreciation expense was approximately $1.8 million, $1.8 million and $2.2 million during
the years ended September 30, 2004, 2003 and 2002, respectively. The increase in building,
machinery and equipment in 2004 was principally attributed to the consolidation of ES.4.
    REAL ESTATE ASSETSAt September 30, 2004, we owned approximately 14 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 hold 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 three-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.In July 1990, we contributed $0.7 million to Gibson Business Park Associates 1986-I, a real
estate development limited partnership (the Partnership), in return for a 70% interest as a
general and limited partner, and other limited partners contributed $0.3 million in return for a
30% interest as limited partners. Such other limited partners include certain current and former
members of our Board of Directors. The Partnership, in turn, contributed $1.0 million to 3770
Hughes Parkway Associates Limited Partnership, a Nevada limited partnership (Hughes Parkway),
in return for a 33% interest as a limited partner in Hughes Parkway. We entered into an
agreement with Hughes Parkway pursuant to which we lease office space in a building in Las
Vegas, Nevada. (See Note 9.)Our real estate assets, grouped with Other Assets in our Consolidated Balance Sheet, had a total
carrying value of approximately $1.7 million at each of September 30, 2004 and 2003.5.
    LONG-TERM DEBTOn March 1, 2003, we redeemed all of our outstanding 9 1/4% 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 $43.4 million. We recognized a
loss on the redemption of $1.5 million, including a non-cash charge of $0.6 million to write-off
remaining debt issue costs.In 1992, we issued warrants (the Warrants) to the purchasers of certain subordinated secured
notes (the Azide Notes). The remaining principal balance of the outstanding Azide Notes were
repurchased in 1998. The Warrants, which granted the right to purchase shares of Common Stock
at an exercise price of $14.00 per share, expired on December 31, 2003. The maximum number of
shares purchasable upon exercise of the Warrants was 2,857,000 shares. The Warrants were
exercisable, at the option of their holders, to purchase up to 20 percent of the common stock of
American Azide Corporation (AAC), our wholly-owned subsidiary, rather than our Common Stock.
In 48




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the event of such an election, the exercise price of the Warrants was based upon a pro rata
share of AACs capital, adjusted for earnings and losses, plus interest from the date of
contribution.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 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.As of September 30, 3004 the Company has $564,000 of availability in a letter of credit
agreement that it has with US Bank.6.
    ACQUISITIONOn March 12, 1998 we acquired, pursuant to a purchase agreement with Kerr-McGee, certain
intangible assets related to Kerr-McGees production of AP (the Rights) for a purchase price
of $39.0 million. The Acquisition did not include Kerr-McGees production facilities (the
Production Facilities) and certain water and power supply agreements used by Kerr-McGee in the
production of AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale of
AP, although the Production Facilities may continue to be used by Kerr-McGee for production of
AP under certain limited circumstances not competitive with our operations. Kerr-McGee also
reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming
part of the Rights as may be necessary or useful to use, repair or sell the Production
Facilities.In connection with the Acquisition, we entered into an agreement with the Thiokol Propulsion
Division (Thiokol) of Alcoa with respect to the supply of Grade I AP through the year 2008.
The agreement, as amended, provides that during its term Thiokol will make all of its Grade I AP
purchases from us. In addition to the Grade I AP purchased from us, Thiokol may use AP
inventoried by it in prior years. The agreement also establishes a pricing matrix under which
Grade I AP unit prices vary inversely with the quantity of a specific grade of AP sold by us to
all of our customers. Under the agreement, Grade I AP unit prices in the matrix at all quantity
levels escalate each year through fiscal 2003 and, in fiscal 2004, were adjusted downward by
approximately 20%. Such downward adjustment will have the effect of reducing revenues and
operating cash flows on Grade I AP sold to Thiokol by at least 20% in fiscal 2004. After the
adjustment, Grade I AP unit prices again escalate each year through fiscal 2008.In connection with the Acquisition, we also entered into an agreement with Alliant Techsystems,
Inc. (Alliant) to extend an existing agreement through the year 2008. The agreement
establishes prices for any Grade I AP purchased by Alliant from us during the term of the
agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause our
Grade I AP to be qualified on all new and current programs served by Alliants Bacchus Works.During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual
agreements in place prior to Alliants acquisition of Thiokol will remain in place. All Thiokol
programs existing at the time of the Alliant acquisition (principally the Space Shuttle and
Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant programs
(principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement.On October 1, 2004 we acquired the former Atlantic Research Corporations in-space propulsion
business from Aerojet-General Corporation. The purchase price for this acquisition was
approximately $3.5 million in cash plus the assumption of certain liabilities. The purchase
agreement is based on the transfer of approximately $4.0 million of certain net working capital
assets at the close of the transaction. The purchase agreement includes a post-closing
adjustment, to the extent that a different amount of certain net working capital assets are
transferred at the close of this transaction. This purchase price adjustment analysis for this
transaction has not been completed. The accompanying consolidated financial statements do not
reflect the financial impact of this transaction since it was 49




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completed after the September 30
close of our 2004 fiscal year. Our first quarter 2005 fiscal report will reflect this
transaction and its financial performance in that period.7.
    INCOME TAXESThe following table provides an analysis of our income taxes for the years ended September 30: 2004
    
    
    2003Current
    
    $
    (904,000
    )
    
    $
    4,790,000Deferred (federal and state)
    
    
    (1,598,000
    )
    
    
    (179,000
    )Income taxes (benefit)
    
    $
    (2,502,000
    )
    
    $
    4,611,000
  Income taxes for the years ended September 30, 2003, 2002 and 2001 differ from the amount
computed at the federal and state income tax statutory rates as a result of the following: 2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %Expected provision for Income taxes
    
    $
    (746,000
    )
    
    $
    35.0
    %
    
    $
    4,890,000
    
    
    
    35.0
    %
    
    
    4,515,000
    
    
    
    35.0
    %Adjustment:Nondeductible expenses
    
    
    45,000
    
    
    
    (2.09
    %)
    
    
    21,000
    
    
    
    0.1
    %
    
    
    24,000
    
    
    
    0.2
    %Valuation allowance
    
    
    497,000
    
    
    
    (23.07
    %)Change in
deferred tax liability estimate
    
    
    (2,100,000
    )
    
    
    97.54
    %Other
    
    
    (198,000
    )
    
    
    9.18
    %
    
    
    (300,000
    )
    
    
    (2.1
    %)
    
    
    (282,000
    )
    
    
    (2.2
    %)Provision for income taxes
    
    $
    (2,502,000
    )
    
    
    116.56
    %
    
    $
    4,611,000
    
    
    
    33.0
    %
    
    $
    4,257,000
    
    
    
    33.0
    %
  The Company has net capital loss carryforwards available to offset future capital gains of
$1,290,000. However, the Company does not expect to generate any capital gains in the future. As
the Company does not expect to utilize the benefit of the capital loss deferred tax asset, a
valuation allowance of $452,000 has been established. In addition, in fiscal 2004, based on the
analysis of deferred income taxes, the Company has reversed its
estimate for deferred tax liability by $2.1 million.The components of net deferred taxes at September 30, 2004, 2003 and 2002 consisted of the
following: 2004
    
    
    2003Deferred tax assets:Amortization
    
    $
    3,619,000
    
    
    $
    3,255,000Property
    
    
    6,505,000
    
    
    
    6,740,000Reorganization costs
    
    
    426,000
    
    
    
    107,000Inventory capitalization
    
    
    146,000
    
    
    
    146,000Accruals
    
    
    1,728,000
    
    
    
    1,546,000Other
    
    
    700,000
    
    
    
    998,000Total gross deferred tax assets
    
    
    13,124,000
    
    
    
    12,792,000Less: valuation allowance
    
    
    497,000Deferred tax assets
    
    $
    12,627,000
    
    
    $
    12,792,000Deferred tax liabilities:Accrued income and expenses
    
    $
    (172,000
    )
    
    $
    (2,252,000
    )Other
    
    
    (550,000
    )
    
    
    (233,000
    )Total gross deferred tax liabilities
    
    
    (722,000
    )
    
    
    (2,485,000
    )Net deferred tax assets
    
    $
    11,905,000
    
    
    $
    10,307,000
  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, a defined benefit pension plan (the Plan), and a
supplemental executive retirement plan (SERP). The ESOP permits employees to make
contributions. Plan benefits are paid based on an average of earnings, retirement age, and
length of service, among other factors. 50




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The tables below provide relevant financial information about the Plan as of and for the fiscal
years ended September 30: Defined Benefit Pension Plan2004
    
    
    2003Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    25,255,000
    
    
    $
    20,160,000Service cost
    
    
    944,000
    
    
    
    770,000Interest cost
    
    
    1,466,000
    
    
    
    1,388,000Actuarial (gains)/losses
    
    
    225,000
    
    
    
    3,728,000Benefits paid
    
    
    (791,000
    )
    
    
    (791,000
    )Benefit obligation, end of year
    
    
    27,099,000
    
    
    
    25,255,000Change in Plan Assets:Fair value of plan assets, beginning of year
    
    
    13,968,000
    
    
    
    11,232,000Actual return (loss) on plan assets
    
    
    1,770,000
    
    
    
    1,717,000Employer contributions
    
    
    1,707,000
    
    
    
    1,810,000Benefits paid
    
    
    (791,000
    )
    
    
    (791,000
    )Fair value of plan assets, end of year
    
    
    16,654,000
    
    
    
    13,968,000Reconciliation of Funded Status:Funded status
    
    
    (10,444,000
    )
    
    
    (11,287,000
    )Unrecognized net actuarial (gains)
    
    
    7,186,000
    
    
    
    8,040,000Unrecognized prior service costs
    
    
    405,000
    
    
    
    462,000Net amount recognized
    
    $
    (2,854,000
    )
    
    $
    (2,785,000
    )Amounts Recognized:Accrued benefit liability
    
    $
    (4,466,000
    )
    
    $
    (5,587,000
    )Intangible assets
    
    
    405,000
    
    
    
    461,000Accumulated other comprehensive loss (pre-tax)
    
    
    1,207,000
    
    
    
    2,341,000Net amount recognized
    
    $
    (2,854,000
    )
    
    $
    (2,785,000
    )
 2004
    
    
    2003
    
    
    2002Net Periodic Pension Cost:Service cost
    
    $
    945,000
    
    
    $
    770,000
    
    
    $
    615,000Interest cost
    
    
    1,466,000
    
    
    
    1,388,000
    
    
    
    1,245,000Expected return on assets
    
    
    (1,165,000
    )
    
    
    (930,000
    )
    
    
    (966,000
    )Net total of other components
    
    
    532,000
    
    
    
    445,000
    
    
    
    254,000Net periodic pension cost
    
    $
    1,778,000
    
    
    $
    1,673,000
    
    
    $
    1,148,000Actuarial Assumptions:Discount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.75
    %Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %Expected return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
 Participants in the SERP include our current and former Chief Executive Officer. The tables
below provide relevant financial information about the SERP as of and for the fiscal years ended
September 30: Supplemental Executive Retirement Plan2004
    
    
    2003Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    2,987,000
    
    
    $
    2,631,000Service cost
    
    
    18,000
    
    
    
    18,000Interest cost
    
    
    183,000
    
    
    
    183,000Actuarial (gains)/losses
    
    
    75,000
    
    
    
    281,000Benefits paid
    
    
    (723,000
    )
    
    
    (126,000
    )Benefit obligation, end of year
    
    
    2,540,000
    
    
    
    2,987,000
 51




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##### Table of Contents



Supplemental Executive Retirement Plan2004
    
    
    2003Change in Plan Assets:Fair value of plan assets, beginning of year
    
    
    0
    
    
    
    0Actual return (loss) on plan assets
    
    
    0
    
    
    
    0Employer contributions
    
    
    722,919
    
    
    
    126,000Benefits paid
    
    
    (722,919
    )
    
    
    (126,000
    )Fair value of plan assets, end of year
    
    
    0
    
    
    
    0Reconciliation of Funded Status:Funded status
    
    
    (2,540,000
    )
    
    
    (2,987,000
    )Unrecognized net actuarial (gains)/losses
    
    
    0
    
    
    
    0Unrecognized transition obligation
    
    
    631,000
    
    
    
    585,000Unrecognized prior service costs
    
    
    142,000
    
    
    
    185,000Net amount recognized
    
    $
    (1,767,000
    )
    
    $
    (2,217,000
    )Amounts Recognized:Accrued benefit liability
    
    $
    (2,540,000
    )
    
    $
    (2,293,000
    )Intangible assets
    
    
    142,000
    
    
    
    76,000Accumulated other comprehensive
loss (net of taxes)
    
    
    631,000
    
    
    
    0Net amount recognized
    
    $
    (1,767,000
    )
    
    $
    (2,217,000
    )
 2004
    
    
    2003
    
    
    2002Net Periodic Pension Cost:Service cost
    
    $
    18,000
    
    
    $
    18,000
    
    
    $
    11,000Interest cost
    
    
    183,000
    
    
    
    183,000
    
    
    
    176,000Expected return on assets
    
    
    0
    
    
    
    0
    
    
    
    0Net total of other components
    
    
    71,000
    
    
    
    55,000
    
    
    
    54,000Net periodic pension cost
    
    $
    272,000
    
    
    $
    256,000
    
    
    $
    241,000Actuarial Assumptions:Discount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %Expected return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
  9.
    COMMITMENTS AND CONTINGENCIESIn 1997, the Southern Nevada Water Authority detected trace amounts of perchlorate chemicals in
Lake Mead and the Las Vegas Wash, bodies of water near our real estate development property in
Henderson, Nevada (in the Las Vegas area). Lake Mead is a source of drinking water for the City
of Las Vegas, neighboring areas and certain areas of metropolitan Southern California.
Perchlorate chemicals (including AP) are a potential health concern because they can interfere
with the production of a growth hormone by the thyroid gland. Although they are not currently
included in the list of hazardous substances compiled by the Environmental Protection Agency
(EPA), perchlorates have been added to the EPAs Contaminant Candidate List. We manufactured
perchlorate chemicals at a facility on the Henderson site until the facility was destroyed in
May 1988, after which we relocated our perchlorate production to our current facilities in Iron
County, Utah. For many years, Kerr-McGee operated a perchlorate production facility at a site
near our Henderson site.The Water Authoritys testing has shown perchlorate concentrations of 4 to 18 parts per billion
(ppb) in Clark County drinking water. In response to this discovery, we have engaged
environmental consultants to drill monitor wells in order to characterize ground water at and in
the vicinity of the Henderson site. The results of our tests have shown perchlorate
concentrations in the ground water at the former Henderson site ranging from 0 to approximately
750,000 ppb at certain monitoring wells. Since 1998, we have spent in excess of $7.0 million on
the investigation and evaluation of the source or sources of these trace amounts, possible
environmental impacts, and potential remediation methods (including the pilot process described
below). Our ground water characterization investigations indicate that the ground water
containing perchlorate at and around our former Henderson manufacturing site has not reached the
Las Vegas Wash or Lake Mead and, accordingly, 52




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has not been introduced into any source of
drinking water. Based upon flow rates and modeling techniques, such ground water is not expected
to reach a source of drinking water for several years. We have completed a pilot remediation
testing process to treat groundwater containing perchlorate at and near the Henderson site using
a biological in situmethod. The pilot remediation test is complete and achieved all its
operational objectives.The EPA is conducting a risk assessment relating to perchlorates and has recommended a
preliminary reference dose for perchlorates that would equate to 1 ppb in drinking water.
Certain states are also conducting risk assessments and some have set preliminary levels as low
as 1 ppb. To our knowledge, virtually all independent and qualified experts believe that such
preliminary levels have been arbitrarily established and are not based upon credible science.
The NAS was requested to review the work done by EPA to date along with other science that was
disregarded or developed after EPA had drawn their conclusions. The NAS report was released
January 11, 2005. The recommendations contained in this NAS report indicate that human health is
protected at a level in drinking water at a level of approximately 24 ppb. The report will have
to be assessed and evaluated by the EPA before any final reference dose is published. Public
statements indicate that the EPA intends to complete its risk assessment and make a final
reference dose recommendation, although we do not know when that will occur. We are cooperating
with Federal, State and local agencies, and with Kerr-McGee and other interested firms, in the
investigation and evaluation of the source or sources of these trace amounts, possible
environmental impacts, potential remediation methods and a proper reference dose. Until these
investigations and evaluations have reached definitive conclusions, it will not be possible for
us to determine the extent to which, if at all, we may be called upon to contribute to or assist
with future remediation efforts, or the financial impact, if any, of such cooperation,
contribution or assistance. Accordingly, no accrual for potential costs has been made in our
Consolidated Financial Statements. However, the lower the level at which final reference dose is
established, the more severe the negative impact will likely be on our financial condition,
results of operations and ability to manufacture and handle perchlorate chemicals.In January 2002, the Company received a claim for approximately $1.7 million from Frontier
Insurance Company (Frontier), alleging liability arising from indemnity agreements. The
Company rejected the claim and filed a complaint with the District Court, Clark County, Nevada
on February 28, 2002, seeking a declaratory judgment declaring that the indemnity agreements
have been terminated and that we have no liability to Frontier. Frontier was declared insolvent
and ordered into rehabilitation status by the Supreme Court of New York on October 15, 2001,
which Order also stayed all lawsuits involving Frontier. On March 31, 2004, the Nevada District
Court dismissed our declaratory judgment suit without prejudice because the case had been
pending for more than two years. Recent information indicates that Frontiers rehabilitation
status has not changed.On June 4, 2004, Alan Andrew Curtis and Linda Ann Curtis, residents of Bullhead City, Arizona,
filed an action in the United States District Court for the District of Arizona entitled Alan
Andrew Curtis, an individual (Husband); Linda Ann Curtis, an individual (Wife), Plaintiffs,
vs. City of Bullhead City, Arizona a municipality; The County of Mohave, Arizona; The State of
Arizona; Arizona Department of Environmental Quality; Arizona-American Water Company; The State
of Nevada; Clark County Nevada; The Southern Nevada Water Authority; Kerr-McGee Corporation LLC;
American Pacific Corporation; State Title Corporation of Arizona; Mister and Miss Edward Koontz;
The United States Department of the Interior; The United States Environmental Protection Agency
Region IX; and Does 1 through 100, Inclusive, Defendants, alleging that various combinations of
defendants are liable under federal and state law for damages and injuries suffered by the
Curtis and the environment as a result of perchlorate and other contaminants found in the
Colorado River, and requesting compensation and injunctive relief. We waived service of the
summons and complaint on August 12, 2004, and filed a motion to dismiss based on perceived
jurisdictional, procedural, and substantive defects in the Curtis complaint on September 20,
2004. Several other defendants also filed motions to dismiss. There have been numerous motions
to strike documents filed by the Curtis. The court has not yet ruled on any motion to dismiss,
and we are therefore not in a position to know with any degree of certainty how the Court views
the merits of the Curtis claims. We expect decisions from the court on our and other
defendants motions to dismiss in
the near term. In the event one or 53




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more of the Curtis claims survive the initial motions, our
plan is to conduct thorough discovery of all remaining claims.We have been and are also involved in other lawsuits. We believe that these other lawsuits,
individually and in the aggregate, will not have a material adverse effect on our financial
condition or results of operations.As discussed in Note 4, we entered into an agreement with Hughes Parkway pursuant to which we
lease office space. The lease, which had an initial term of 10 years expiring in March 2001, was
renewed for an additional five year term (the Amended Lease). The Amended Lease is subject to
escalation every three years based on changes in the consumer price index, and permits us to
occupy 22,262 square feet of office space. Rental payments were approximately $0.6 million
during the fiscal years ended September 30, 2004, 2003 and 2002. We received approximately
$130,000 in the fiscal years 2004, 2003 and 2002 associated with sublet arrangements of certain
of this office space. At September 30, 2004, minimum rentals to be received under non-cancelable
subleases were approximately $67,000 in fiscal 2004. Future gross minimum rental payments under
this lease for the next two years ending September 30, are as follows: 2005
    
    $
    600,0002006
    
    
    275,000Total
    
    $
    875,000
  As of September 30, 2004, we had approximately $1.9 million in outstanding standby letters
of credit. 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.10.
    SHAREHOLDERS EQUITYPreferred Stock and Purchase RightsWe have authorized the issuance of 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.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.Stock Options and WarrantsWe have granted options and issued warrants to purchase shares of our Common Stock at prices at
or in excess of market value at the date of grant or issuance. The options were granted under
various plans or by specific grants approved by our Board of Directors.Option and warrant transactions are summarized as follows: 54




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Shares Under Optionsand Warrants
    
    
    Option PriceOctober 1, 2001
    
    
    3,898,000
    
    
    $
    4.87      $14.00Exercised
    
    
    (309,000
    )
    
    
    4.87          7.88Expired
    
    
    (86,000
    )
    
    

6.38          7.13September 30, 2002
    
    
    3,503,000
    
    
    

4.87        14.00Granted
    
    
    249,000
    
    
    

8.30          8.36Exercised
    
    
    (170,500
    )
    
    

4.87          7.78Expired
    
    
    (64,000
    )
    
    

6.94          7.00September 30, 2003
    
    
    3,517,500
    
    
    

4.87        14.00Granted
    
    
    40,000
    
    
    

9.44          9.44Exercised
    
    
    (339,500
    )
    
    

4.87          8.30Expired
    
    
    (2,913,500
    )
    
    
    7.781      14.00September 30, 2004
    
    
    304,500
    
    
    $
4.87      $  9.44
  In February 1992, we issued $40,000,000 in Azide Notes with Warrants. See Note 5 for a
description of the Warrants. Shares under options and warrants at September 30, 2003 included
approximately 2,857,000 Warrants at a price of $14 per Warrant. The Warrants expired on December
31, 2003.The following table summarizes information about stock options outstanding at September 30,
2004: Options Outstanding
    
    
    Options ExercisableAverageRemainingRange of
    
    Number
    
    
    Contractual Life
    
    
    Weighted Average
    
    
    Number
    
    
    
    Weighted AverageExercise Price
    
    Outstanding
    
    
    (Years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$4.87
    
    
    59,000
    
    
    
    6.57
    
    
    $
    4.87
    
    
    
    59,000
    
    
    $
    4.878.13  9.44
    
    
    245,500
    
    
    
    6.75
    
    
    
    8.39
    
    
    
    245,500
    
    
    
    8.39304,500
    
    
    
    6.72
    
    
    $
    7.71
    
    
    
    304,500
    
    
    $
    7.71
  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.The estimated weighted-average fair value of the individual options granted during the fiscal
years 2004, 2003 and 2001 was $4.18, $3.68 and $2.57 respectively, on the date of grant. The
fair values for these years were determined using a Black-Scholes option-pricing model with the
following assumptions: 2004
    
    
    2003
    
    
    2001Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    50
    %
    
    
    50
    %
    
    
    55
    %Risk-free interest rate
    
    
    3.0
    %
    
    
    2.9
    %
    
    
    4.6
    %Expected life
    
    4.5 years
    
    4.5 years
    
    4.5 years
 11. SEGMENT INFORMATION  Our two reportable operating segments are Specialty chemicals and Other businesses. These
segments are based upon business units that offer distinct products and services, are
operationally managed separately and produce products using different production methods.The Specialty chemicals and Other businesses segments are based upon business units that offer
distinct products and services, are operationally managed separately and produce products using
different production methods. We evaluate the performance of each operating segment and allocate 55




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resources based upon operating income or loss before an allocation of interest expense and
income taxes.The Specialty chemicals segment manufactures and sells: (i) perchlorate chemicals, used
principally in solid rocket propellants for the space shuttle and defense programs, (ii) sodium
azide, used principally in the inflation of certain automotive airbag systems, (iii)
Halotronâ, clean gas fire extinguishing agents designed to replace halons, and (iv) the ES
joint venture which manufactures commercial explosives and specializes in the development and
testing of energetic compounds.The Other businesses segment contains our environmental protection and real estate activities.
Our environmental protection business designs, manufactures and markets systems for the control
of noxious odors, the disinfection of waste water streams and the treatment of seawater. As of
September 30, 2004, our Real Estate business had approximately 14 acres of improved land in the
Gibson Business Park (near Las Vegas, Nevada) remaining.Perchlorate chemical sales comprised approximately 75%, 89% and 81% of specialty chemicals
segment sales during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. We
had two customers that accounted for 10% or more of both our total and our specialty chemicals
segments sales during at least one of our last three fiscal years. Sales to these customers
during the fiscal years ended September 30 were as follows: Customer
    
    Chemical
    
    2004
    
    
    2003
    
    
    2002A
    
    Perchlorates
    
    $
    26,465,000
    
    
    $
    45,161,000
    
    
    $
    37,182,000B
    
    Sodium Azide
    
    
    929,000
    
    
    
    1,790,000
    
    
    
    6,205,000
  Additional information about our operations in different segments for each of the last
three fiscal years ended September 30, is provided below. 2004
    
    
    2003
    
    
    2002Revenues:Specialty chemicals
    
    $
    57,490,000
    
    
    $
    61,248,000
    
    
    $
    65,811,000Other businesses
    
    
    1,999,000
    
    
    
    7,618,000
    
    
    
    7,777,000Total revenues
    
    $
    59,489,000
    
    
    $
    68,866,000
    
    
    $
    73,588,000Gross profit (loss):Specialty chemicals
    
    $
    18,416,000
    
    
    $
    26,806,000
    
    
    $
    25,714,000Other businesses
    
    
    827,000
    
    
    
    4,711,000
    
    
    
    4,345,000Total gross profit
    
    $
    19,243,000
    
    
    $
    31,517,000
    
    
    $
    30,059,000Operating income (loss):Specialty chemicals
    
    $
    (1,119,000
    )
    
    $
    14,020,000
    
    
    $
    13,551,000Other businesses
    
    
    (1,131,000
    )
    
    
    3,017,000
    
    
    
    2,732,000Total operating income (loss)
    
    
    (2,250,000
    )
    
    
    17,037,000
    
    
    
    16,283,000Net interest and other (expense) income
    
    
    120,000
    
    
    
    (3,066,000
    )
    
    
    (3,384,000
    )Income (loss) before income taxes
    
    $
    (2,130,000
    )
    
    $
    13,971,000
    
    
    $
    12,899,000Income taxes
    
    
    (2,502,000
    )
    
    
    4,611,000
    
    
    
    4,257,000Income (loss) before cumulative effect
    
    $
    372,000
    
    
    $
    9,360,000
    
    
    $
    8,642,000Depreciation and amortization:Specialty chemicals
    
    $
    5,221,000
    
    
    $
    5,486,000
    
    
    $
    5,940,000All other segments and corporate
    
    
    516,000
    
    
    
    228,000
    
    
    
    119,000Total depreciation and amortization
    
    $
    5,737,000
    
    
    $
    5,714,000
    
    
    $
    6,059,000Capital Expenditures:Specialty chemicals
    
    $
    750,000
    
    
    $
    1,475,000
    
    
    $
    2,058,000All other segments and corporate
    
    
    343,000
    
    
    
    1,600,000
    
    
    
    22,000Total capital expenditures
    
    $
    1,093,000
    
    
    $
    3,075,000
    
    
    $
    2,080,000Assets:Specialty chemicals
    
    $
    42,985,000
    
    
    $
    44,118,000
    
    
    $
    45,726,000
 56




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##### Table of Contents



Other businesses
    
    
    3,316,000
    
    
    
    3,933,000
    
    
    
    4,483,000Corporate
    
    
    54,327,000
    
    
    
    53,634,000
    
    
    
    81,762,000Total assets
    
    $
    100,628,000
    
    
    $
    101,685,000
    
    
    $
    131,971,000
  Our operations are located in the United States. Export sales, consisting mostly of
specialty chemical and environmental protection equipment sales, have represented less than 10%
of our revenues during each of the last three fiscal years.The Specialty chemicals operating segment is subject to various Federal, State and local
environmental and safety regulations. We have designed and implemented policies and procedures
to minimize the risk of potential violations of these regulations, although such risks will
likely always be present in the production and sale of our specialty chemicals. (See Note 9).12.
    DIVIDEND AND STOCK REPURCHASE PROGRAMIn January 2003, our Board of Directors approved a Dividend and Stock Repurchase Program (the
Program). The Program is designed to allocate a portion of our annual free cash flows (as
calculated) for the purposes of paying cash dividends and repurchasing our Common Stock. The
amount available for these purposes each fiscal year will equal 25% of our annual cash flows
from operating activities less our annual capital expenditures, plus the amount of cash received
from the issuance of our Common Stock resulting from the exercise of stock options. We will
subtract the total amount spent on the repurchase of our Common Stock (if any) during the fiscal
year from the total amount otherwise available under the Program, and pay the resultant amount
as an annual dividend to our shareholders if and to the extent that the Board of Directors also
determines that such payment is appropriate in light of the Companys
overall financial condition, growth prospects and anticipated cash needs at the time. As part of
the stock repurchase portion of the Program, our Board of Directors have approved a provision
that permits the repurchase of Common Stock from our employees and directors.In accordance with the provisions of the Program, on December 18, 2003, our Board of Directors
declared a cash dividend of $0.42 per share to shareholders of record on December 29, 2003 for
fiscal 2003. By reason of the application of the program formula, no dividend will be paid for
fiscal 2004.13.
    EMPLOYEE SEPARATION COSTSDuring the second quarter of 2004, we recorded a charge of $2.0 million (pre-tax) for estimated
costs relating to the separation from the Company of the former Chief Financial Officer. This
charge is included in Operating Expenses on our statement of operations for this period. In
fiscal 2004, approximately $0.9 million of this separation expense was paid in cash.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 of the Company. 57