---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





xQuarterly Report Pursuant to Section 13 or 15(d)


of the Securities
Exchange Act of 1934





For Quarterly Period Ended December 31, 2002





OR





 ̈ Transition Report Pursuant to Section 13 or 15(d)


of the Securities Exchange Act of 1934





Commission File Number 1-8137





AMERICAN PACIFIC CORPORATION


(Exact name of registrant as specified in its charter)





Delaware

59-6490478(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification
No.)





3770 Howard Hughes Parkway, Suite 300 Las Vegas, NV

89109(Address of principal executive offices)

(Zip Code)





(702) 735-2200


(Registrants telephone number, including area code)





NOT
APPLICABLE


(Former name, former address and former fiscal year, if


changed since last report.)





Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  YES  x    No  ̈





Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act).  YES  ̈ No  x





Applicable Only to Corporate Issuers





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 7,251,000 as of December 31, 2002.





---



---




PART I.    FINANCIAL INFORMATION





ITEM 1.

Condensed Consolidated Financial Statements.





The information required by Rule 10-01 of Regulation S-X is
provided on pages 6 through 14 of this Report on Form 10-Q.





ITEM 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations.





The information required by Item 303 of Regulation S-K is provided
on pages 15 through 19 of this Report on Form 10-Q.





ITEM 3.

Quantitative and Qualitative Disclosure 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 have certain long-term fixed-rate debt that we will redeem on March 1, 2003. The cost of the redemption will be 102.313% of the principal amount
outstanding. We recently entered into a revolving line of credit facility that is secured by certain inventory and receivables. To date, we have not drawn upon the line of credit. At December 31, 2002, 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 refinancing risk.





ITEM 4.

Controls and Procedures.





Based on their evaluation, as of a date within 90 days of the
filing of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded the Companys disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.





PART II.    OTHER INFORMATION





ITEM 1.

Legal Proceedings.





The information required by Item 103 of Regulation S-K is provided
on pages 11 through 13 of this report on Form 10-Q.





ITEM 2.

Changes in Securities and Use of Proceeds.





None.





ITEM 3.

Defaults Upon Senior Securities.





None.





ITEM 4.

Submission of Matters to a Vote of Security Holders.





None.




2




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ITEM 5.

Other Information.





None.





ITEM 6.

Exhibits and Reports on Form 8-K.





a)  Exhibits





99.1

Certification of Principal Executive Officer99.2

Certification of Principal Financial Officer





b)  On December 12, 2002 we filed a Form 8-K reporting
our investment in Energetic Systems, Inc., LLC.








SIGNATURES





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





AMERICAN PACIFIC CORPORATIONDate: January 29, 2003



/s/    JOHN R. GIBSONJohn R. Gibson Chief Executive Officer and PresidentDate: January 29, 2003



/s/    DAVID N.
KEYSDavid N. Keys Executive Vice President, Chief Financial Officer, Secretary and Treasurer; Principal Financial and
Accounting Officer




3




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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER


Section 302 Certification





I, John R. Gibson, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of American Pacific Corporation, a Delaware corporation (the registrant);
|-- |  | ------------------------------------------------------------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: January 29, 2003



By:

/s/    JOHN R.
GIBSONJohn R. Gibson Principal Executive
Officer




4




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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER


Section 302 Certification





I, David N. Keys, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of American Pacific Corporation, a Delaware corporation (the registrant);
|-- |  | ------------------------------------------------------------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: January 29, 2003



By:

/s/    DAVID N.
KEYSDavid N. Keys Principal Financial
Officer




5




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AMERICAN PACIFIC CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three Months Ended December 31,


(Unaudited)





2002

2001Sales and Operating Revenues

$
15,063,000

$
13,117,000Cost of Sales


8,684,000


9,278,000Gross Profit


6,379,000


3,839,000Operating Expenses


3,695,000


3,004,000Operating Income


2,684,000


835,000Net Interest and Other Expense


906,000


843,000Income (Loss) Before Income Taxes


1,778,000


(8,000
)Income Taxes


587,000


(3,000
)Net Income (Loss)

$
1,191,000

$
(5,000
)Basic Net Income (Loss) Per Share

$
.16

$
(.00
)Average Shares Outstanding


7,253,000


7,005,000Diluted Net Income (Loss) Per Share

$
.16

$
(.00
)Diluted Shares


7,388,000


7,005,000








See the accompanying Notes to
Condensed Consolidated Financial Statements.




6




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AMERICAN PACIFIC CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)





December 31, 2002

September 30, 2002ASSETSCurrent Assets:Cash and Cash Equivalents

$
55,541,000

$
65,826,000Accounts and Notes Receivable


7,637,000


6,787,000Related Party Notes and Accrued Interest Receivable


354,000


380,000Inventories


14,074,000


13,989,000Prepaid Expenses and Other Assets


2,175,000


841,000Deferred Income Taxes


450,000


435,000Total Current Assets


80,231,000


88,258,000Property, Plant and Equipment, Net


7,489,000


7,522,000Intangible Assets, Net


20,042,000


21,017,000Investment in and Advances to Joint Venture


10,743,000Deferred Income Taxes


9,778,000


9,693,000Other Assets, Net


4,941,000


5,481,000Total Assets

$
133,224,000

$
131,971,000








See the accompanying Notes to
Condensed Consolidated Financial Statements.




7




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AMERICAN PACIFIC CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)





December 31, 2002


September 30, 2002LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts Payable and Accrued Liabilities

$
6,778,000


$
6,079,000Total Current Liabilities


6,778,000



6,079,000Long-Term Debt


40,600,000



40,600,000Other Long-Term Liabilities


5,798,000



6,086,000Total Liabilities


53,176,000



52,765,000Commitments and ContingenciesWarrants to Purchase Common Stock


3,569,000



3,569,000Shareholders Equity:Common Stock


897,000



881,000Capital in Excess of Par Value


83,355,000



82,249,000Retained Earnings


8,011,000



6,820,000Treasury Stock


(14,121,000
)


(12,483,000
)Accumulated Other Comprehensive Loss


(1,663,000
)


(1,830,000
)Total Shareholders Equity


76,479,000



75,637,000Total Liabilities and Shareholders Equity

$
133,224,000


$
131,971,000








See the accompanying Notes to
Condensed Consolidated Financial Statements.




8




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AMERICAN PACIFIC CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Three Months Ended December 31,


(Unaudited)





2002


2001Cash Flows From Operating Activities

$
1,381,000


$
2,257,000Cash Flows From Investing Activities:Capital Expenditures


(407,000
)


(385,000
)Investment in and Advances to Joint Venture


(10,743,000
)Real Estate Equity Returns






736,000Net Cash From Investing Activities


(11,150,000
)


351,000Cash Flows From Financing Activities:Issuance of Common Stock


1,122,000



549,000Treasury Stock Acquired


(1,638,000
)


(230,000
)Net Cash From Financing Activities


(516,000
)


319,000Net Change in Cash and Cash Equivalents


(10,285,000
)


2,927,000Cash and Cash Equivalents, Beginning of Period


65,826,000



51,471,000Cash and Cash Equivalents, End of Period

$
55,541,000


$
54,398,000Supplemental Disclosure of Cash Flow Information:Cash paid during quarter for taxes

$
400,000


$








See the accompanying Notes to
Condensed Consolidated Financial Statements.




9




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AMERICAN PACIFIC CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):





|1. |  | BASIS OF REPORTING
|-- |  | ------------------




The accompanying Condensed Consolidated Financial Statements are unaudited and do not include certain information and disclosures included in the Annual Report on Form 10-K of American Pacific Corporation (the
Company, we, us, or our). The Condensed Consolidated Balance Sheet as of September 30, 2002, was derived from the Consolidated Financial Statements included in our Annual Report on Form 10-K for the
year ended September 30, 2002. Such statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2002. In our opinion,
however, all adjustments necessary for a fair presentation have been included. The operating results and cash flows for the three-month period ended December 31, 2002 are not necessarily indicative of the results that will be achieved for the full
fiscal year or for future periods.





The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses. Judgments and assessments of uncertainties are required in applying our accounting policies in many areas. For example, key assumptions and estimates are particularly important when determining our projected liabilities for
pension benefits, useful lives for depreciable and amortizable assets, and the recoverability of deferred tax assets and long-lived assets, including intangible assets. Other areas in which significant uncertainties exist include, but are not
limited to, costs that may be incurred in connection with environmental matters and the resolution of litigation and other contingencies. Actual results will inevitably differ to some extent from estimates on which our Condensed Consolidated
Financial Statements were prepared.





During the first quarter of fiscal 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The adoption of SFAS No. 142 did not have a material effect on our results of operations or financial position. Under the provisions of SFAS No. 142,
the intangible asset related to our perchlorate acquisition (the Acquisition) in fiscal 1998 will continue to be amortized under its originally assigned life of ten years. At December 31, 2002, this intangible asset had a gross carrying
value of approximately $39.0 million and accumulated amortization of approximately $19.0 million. Amortization expense was approximately $1.0 million during the three months ended December 31, 2002 and 2001. Amortization expense is estimated to
amount to approximately $3.9 million in each of the years during the five-year period ending September 30, 2007.





During the first quarter of fiscal 2002, 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 Accounting Principles
Board Opinion No. 30 (Opinion No. 30). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entitys recurring operations from those that are unusual and infrequent that meet the criteria for
classification as an extraordinary item. We will reclassify previously reported extraordinary losses on debt extinguishments to a separate line item above income before income taxes in our Condensed Consolidated Statements of Operations.





In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 is effective at the beginning of our fiscal year ended




10




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AMERICAN PACIFIC CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)




September 30, 2004. We have not yet evaluated the effect that SFAS No. 148 may have on our consolidated
financial statements and notes thereto.





Our only component of other comprehensive income (loss) represents a
minimum pension liability adjustment. The change in such adjustment was approximately $167,000 during the three-month period ended December 31, 2002.





|2. |  | NET INCOME (LOSS) PER COMMON SHARE
|-- |  | ----------------------------------




Basic per share amounts are computed by dividing net income (loss) by average shares outstanding during the period. Diluted per share amounts are computed by dividing net income (loss) by average
shares outstanding plus the dilutive effect of common share equivalents. Since we incurred a net loss during the three-month period ended December 31, 2001, the effect of outstanding stock options and warrants were not included in diluted per share
calculations. The effect of warrants outstanding to purchase approximately 2.8 million shares of common stock were not included in diluted per share calculations during the three-month period ended December 31, 2002, since the exercise price of the
warrants was greater than the average price of our common stock during this period.





|3. |  | INVENTORIES
|-- |  | -----------




Inventories consist of the following:





December 31,

September 30,2002

2002Work-in-process

$
6,854,000

$
6,923,000Raw materials and supplies


7,220,000


7,066,000Total

$
14,074,000

$
13,989,000





|4. |  | DEBT
|-- |  | ----




In December 2002, we advised the Trustee of our 9 1⁄4% Senior Unsecured Notes (the Notes) that we had elected to redeem all of the outstanding Notes on March 1, 2003. The Trustee mailed a Notice of Redemption to each
holder of the Notes in January 2003.





The redemption will be at a redemption price of 102.313% of the principal
amount of the Notes, plus accrued interest to the date of redemption, as a result of which the total expected cost of redemption of the Notes, including interest payable, will be approximately $43.4 million. In January 2003, this amount was
deposited with the Trustee. We will recognize 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. Assuming current interest rates, redemption of the Notes will save us
approximately $2.0 million in annual after-tax net interest costs.





In December 2002, we entered into a revolving
line of credit with a major bank. The maximum available credit under the line is the lesser of $10.0 million, or the sum of 85% of eligible receivables and 50% of qualifying inventory. No draws have been made under the line of credit.





|5. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------




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 metropolitan Southern California. Perchlorate chemicals (including ammonium perchlorate, or 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




11




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AMERICAN PACIFIC CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







EPAs Contaminant Candidate List and will likely be regulated.
We manufactured AP at a facility on the Henderson site until May 1988, after which we relocated our AP production to our current facilities in Iron County, Utah. For many years, Kerr-McGee Chemical, LLC (Kerr-McGee) operated an AP
production facility at a site near our Henderson site.





The Water Authoritys testing has shown perchlorate
concentrations of 8 to 14 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 Henderson property ranging from 0 to approximately 750,000 ppb at certain monitoring wells. Since 1998, we have spent in excess
of $5.0 million on the investigation and evaluation of the source or sources of these trace amounts, possible environmental impacts, and potential remediation methods. Our ground water characterization investigations indicate that the ground water
containing perchlorate at and around our former Henderson manufacturing site has not reached Lake Mead and, accordingly, has not been introduced into any source of drinking water. Based upon flow rates and modeling techniques, such ground water is
not expected to reach a source of drinking water for at least 10 years. However, we have begun a pilot remediation testing process to treat groundwater containing perchlorate at and near the Henderson site using a biological in situ method.





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 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. We understand 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, and
potential remediation methods. 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.





In January 2002, American Azide Corporation (AAC), our indirect wholly-owned subsidiary, 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 names a number of defendants, including AACs principal sodium azide customer, Autoliv ASP, Inc.
(Autoliv). The complaint alleges, among other things, toxic injuries as a result of the deployment of an airbag. The plaintiffs have submitted a Statement of Damages to the Court for approximately $5.0 million. In March 2002,
AAC filed a motion to quash service of summons that was denied by the Court. AAC has not determined whether its sodium azide was actually a raw material used by the manufacturer of the airbag inflator device subject to the complaint. We believe the
allegations in the complaint are wholly without merit.





In January 2002, we received a demand for payment from
Frontier Insurance Company (Frontier) of approximately $1.7 million as a result of the failure of a local developer to complete a project that had been bonded by Frontier. The local developer was an owner of a company that is the
managing member of a Limited Liability Company (LLC) in which we are also a member. The LLC recently completed development of a residential project and is winding down its operations. In 1995, we entered into indemnity agreements
relating to the development of this residential joint project. In February 2002, we (along with other plaintiffs) filed a complaint for declaratory relief in District Court, Clark County, Nevada. The complaint seeks a judgment declaring that the
indemnity agreements have been terminated and that we have no liability to Frontier.




12




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AMERICAN PACIFIC CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







We have been and are also involved in other lawsuits. We believe that
these other lawsuits, individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations.





As of December 31, 2002, we had approximately $1.8 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.





|6. |  | SEGMENT INFORMATION
|-- |  | -------------------




Our three reportable operating segments are specialty chemicals, environmental protection equipment and real estate sales and development. These 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 resources based upon operating income or loss before an allocation of interest expense and income taxes. The accounting policies of each reportable operating segment are the same as
ours.





Our specialty chemicals segment manufactures and sells perchlorate chemicals used principally in solid
rocket propellants for the space shuttle and defense programs, sodium azide used principally in the inflation of certain automotive airbag systems and Halotronñ clean gas fire extinguishing agents designed to
replace halons. The specialty chemicals segment production facilities are located in Iron County, Utah.





Our
environmental protection equipment operating segment designs, manufactures and markets systems for the control of noxious odors, the disinfection of waste water streams and the treatment of seawater. These operations are also located in Iron County,
Utah.





At December 31, 2002, our real estate operating segment had approximately 34 remaining acres of improved
land in the Gibson Business Park near Las Vegas, Nevada, that is held for development and sale. Recent activity has consisted of sales of land parcels.





Additional information about our operations in different segments for the three months ended December 31, is provided below.





2002


2001Revenues:Specialty chemicals

$
13,724,000


$
9,722,000Environmental protection


1,335,000



379,000Real estate


4,000



3,016,000Total revenues

$
15,063,000


$
13,117,000Operating income (loss):Specialty chemicals

$
2,870,000


$
(234,000
)Environmental protection


19,000



(227,000
)Real estate


(205,000
)


1,296,000Total segment operating income


2,684,000



835,000Unallocated net expenses (principally net interest)


906,000



843,000Income (Loss) before income taxes

$
1,778,000


$
(8,000
)




13




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AMERICAN PACIFIC CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







|7. |  | INVESTMENT IN AND ADVANCES TO JOINT VENTURE
|-- |  | -------------------------------------------




On December 11, 2002 we made an investment of approximately $10.7 million in Energetic Systems Inc., LLC (ES), a joint venture entity formed to acquire and manage a fully operational
commercial explosives business.





The form of our investment in ES represents a combination of term and revolving
debt, preferred stock and common equity. The investment was made and is held by our newly organized, wholly-owned indirect 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,
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. SEC/UTC is involved in
the manufacture and distribution of commercial explosives, and is a respected research, development and testing organization specializing in the development and testing of products and processes for commercial explosives and energetic compounds. We
have accounted for our investment in ES using the equity method of accounting. At December 31, 2002, EA had total assets and equity of approximately $11.0 million and $1.3 million, respectively.





|8. |  | DIVIDEND AND STOCK REPURCHASE PROGRAM
|-- |  | -------------------------------------




In 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
available under the Program, and pay the resultant amount as an annual dividend to our shareholders.





Any
dividends under the Program will likely be declared and paid in November following our September 30 fiscal year end and the completion of our annual audit. Had the Program been in place during fiscal 2002, approximately $5.8 million would have been
available for dividends and the repurchase of Common Stock. Approximately $0.3 million was spent during the fiscal year 2002 on the repurchase of our Common Stock. The remaining $5.5 million, or approximately $0.76 per share, would have been
declared and paid as a cash dividend in November 2002.




14




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





OVERVIEW





We
are principally engaged in the production of AP for the aerospace and national defense industries. In addition, we produce and sell sodium azide, the primary component of a gas generant used in 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 and the chemicals produced and sold at these facilities collectively represent our specialty chemicals operating segment. Our other lines of business include the
development of real estate in Nevada and the production of environmental protection equipment, including waste water and seawater treatment systems.





Significant Accounting Policies.    A summary of our significant accounting policies is included in Note 1 to our Condensed Consolidated Financial Statements. The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenue and expenses. Judgments and assessments of uncertainties are required in applying our accounting policies in many areas. For example, key assumptions and estimates are particularly important when
determining our projected liabilities for pension benefits, useful lives for depreciable and amortizable assets, and the recoverability of deferred tax assets and long-lived assets, including intangible assets. Other areas in which significant
uncertainties exist include, but are not limited to, costs that may be incurred in connection with environmental matters and the resolution of litigation and other contingencies. Actual results will inevitably differ to some extent from estimates on
which our Condensed Consolidated Financial Statements were prepared.





Sales and Operating
Revenues.    Sales of our perchlorate chemical products, consisting almost entirely of AP sales, accounted for approximately 82% and 48% of revenues during the three-month periods ended December 31, 2002 and 2001,
respectively. In general, demand for AP is driven by a relatively small number of Department of Defense (DOD) and National Aeronautics and Space Administration (NASA) contractors. As a result, any one individual AP customer
usually accounts for a significant portion of our revenues.





In connection with the Acquisition, we entered into an agreement with the
Thiokol Propulsion Division of Alcoa (Thiokol) with respect to the supply of AP through the year 2008. The agreement, as amended, provides that during its term Thiokol will make all of its AP purchases from us. In addition to the AP
purchased from us, Thiokol may use AP inventoried by it in prior years. The agreement also establishes a pricing matrix under which AP unit prices vary inversely with the quantity of a specific grade of AP sold by us to all of our customers. AP unit
prices in the matrix at all quantity levels escalate each year through fiscal 2003 and, in fiscal 2004, are adjusted downward by approximately 20%. Such downward adjustment will have the effect of reducing revenues and operating cash flows on AP
sold to Thiokol by 20% in fiscal 2004. After the adjustment, AP unit prices continue to escalate each year through fiscal 2008.





In
connection with the Acquisition, we entered into an agreement with Alliant Techsystems, Inc. (Alliant) to extend an existing agreement through the year 2008. The agreement establishes prices for any 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 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.




15




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Demand for AP declined throughout the 1990s. In 1998, supply capacity was substantially in excess
of demand levels and, in an attempt to rationalize the AP industry, we consummated the Acquisition. Subsequent to the Acquisition in 1998, our annual sales volumes for our top grade of AP were approximately 20.2 million, 16.4 million, 12.6 million
and 16.4 million pounds during the fiscal years ended September 30, 1999, 2000, 2001 and 2002, respectively. Based principally upon information we have received from our major customers, we estimate that annual AP demand will be between 16.0 million
and 20.0 million pounds over the next five years. However, demand for AP is program specific and dependent upon, among other things, governmental appropriations. We have no ability to influence the demand for AP.





Sodium azide sales accounted for approximately 5% and 21% of revenues during the three-month periods ended December 31, 2002 and 2001, respectively. Worldwide
sodium azide demand has declined significantly during the last three fiscal years. Our sodium azide sales volumes declined approximately 17% in both fiscal 2001 and 2000, and declined further by approximately 10% during fiscal 2002. 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.





Sales of Halotron ® amounted to approximately 4% and 6% of revenues during the three-month periods ended December 31, 2002 and 2001,
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, as well as existing and potential governmental regulations.





Real estate sales amounted to approximately 0% and 23% of revenues during the three-month periods ended December 31, 2002 and 2001, respectively. The nature of real estate development and sales is such that we are unable reliably to
predict any pattern of future real estate sales. Real estate sales are currently estimated to be completed by the end of fiscal 2004. In addition, we do not expect to receive any significant cash returns in the future from our interest in our
residential joint venture project.





Environmental protection equipment sales accounted for approximately 9% and 2% of revenues during the
three-month periods ended December 31, 2002 and 2001, respectively.





Cost of Sales.    The
principal elements comprising our cost of sales are raw materials, electric power, labor, manufacturing overhead, depreciation and amortization and the book basis in real estate sold. The major raw materials used in our production processes are
graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC 123. Significant increases in the cost of raw materials may have an adverse impact on margins if we are unable to pass along such increases to our customers.





Prices paid by us for raw materials have historically been relatively stable, although we have experienced cost increases on certain raw
materials, particularly on HCFC 123 used in the production of Halotron. All the raw materials used in our manufacturing processes have been available in commercial quantities, and we have had no difficulty obtaining necessary raw materials. 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 and diluted net income per common share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year
due to the following factors, among others: (i) as discussed in Note 5 to our Consolidated Financial Statements, we may incur material legal and other costs associated with certain litigation and contingencies; (ii) the timing of real estate sales
is not predictable; (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; (v) the ability to pass on increases in raw material costs to our customers; and (vi) the magnitude, pricing and timing of AP, sodium azide,
Halotron ® , and environmental protection equipment sales in the future is
uncertain. (See Forward Looking Statements/Risk Factors below.)




16




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RESULTS OF OPERATIONS





Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2001





Sales and Operating Revenues.    Sales increased $2.0 million, or 15%, during the three months ended December 31, 2002, to $15.1 million from $13.1 million in the corresponding period of
the prior year. This increase was principally attributable to an increase in specialty chemical sales of approximately $4.0 million and an increase in environmental protection equipment sales of approximately $1.0 million. These increases were
partially offset by a decrease in real estate sales of approximately $3.0 million.





Perchlorate chemical sales increased approximately
98% in the first quarter of fiscal 2003, compared to the first quarter of fiscal 2002. Although the quarterly timing of AP shipments is not certain, as noted above, we estimate that annual AP demand will be between 16.0 and 20.0 million pounds over
the next five years. The increase in perchlorate chemical sales was partially offset by a decrease in sodium azide sales of approximately $2.0 million.





Cost of Sales.    Cost of sales decreased $0.6 million, or 7%, in the three months ended December 31, 2002, to $8.7 million from $9.3 million in the corresponding period of the prior year. As
a percentage of sales, cost of sales was 58% in the first quarter of fiscal 2003, compared to 70% in the first quarter of fiscal 2002. These decreases were principally due to an increase in perchlorate chemicals sales volumes and a change in the mix
of products sold.





Operating Expenses.    Operating (selling, general and administrative)
expenses increased $0.7 million, or 23%, in the three months ended December 31, 2002, to $3.7 million from $3.0 million in the corresponding period of 2001. Operating expenses during the three-month periods ended December 31, 2002 and 2001, include
approximately $0.5 and $0.1 million, respectively, in costs associated with the investigation and evaluation of the trace amounts of perchlorate chemicals found in Lake Mead. (See Note 5 to our Condensed Consolidated Financial Statements.)





Net Interest Expense.    Net interest and other expense increased to $0.9 million in the three
months ended December 31, 2002, from $0.8 million in the corresponding period of the prior year, as a result of lower average interest rates earned on cash balances.





Segment Operating Income (Loss).    Operating income (loss) of our industry segments during the three-month periods ended December 31, 2002 and 2001 was as
follows:





2002


2001Specialty chemicals

$
2,870,000


$
(234,000
)Environmental protection equipment


19,000



(227,000
)Real Estate


(205,000
)


1,296,000Total

$
2,684,000


$
835,000





The increase in operating income in our specialty chemicals industry segment was
principally due to increased perchlorate sales offset in part by a decrease in sodium azide sales. The increase in operating income in our environmental protection equipment segment was attributable to increased sales. The decrease in real estate
segment operating income was attributable to decreased land sales.





INFLATION





General inflation did not have a significant effect on our sales and operating revenues or costs during the three months ended December 31, 2002 and 2001.
General inflation may have an effect on gross profit in the future as certain of our agreements with 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.




17




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LIQUIDITY AND CAPITAL RESOURCES





Cash flows provided by operating activities were $1.4 million and $2.3 million during the three months ended December 31, 2002 and 2001, respectively. We believe that our cash flows from operations and
existing cash balances will be adequate for the foreseeable future to satisfy the needs of our operations, including debt related payments and dividends and the repurchase of our Common Stock under the Program. However, the resolution of litigation
and contingencies, and the timing, pricing and magnitude of orders for AP, sodium azide and Halotron, may have an effect on the use and availability of cash.





As discussed in Note 7 to our Condensed Consolidated Financial Statements, 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, preferred stock and Common Equity.





Capital expenditures were $0.4 million during the three months ended December 31,
2002 and 2001. Capital expenditures relate principally to specialty chemicals segment capital improvement projects. Capital expenditures are expected to be funded from existing cash balances and operating cash flows.





During the three-month period ended December 31, 2002, we repurchased $1.6 million of our Common Stock. As discussed in Note 8 to our Condensed Consolidated
Financial Statements, our Dividend and Stock Repurchase Program has become effective in the current fiscal year. Had the Program been in place during fiscal 2002, approximately $5.8 million would have been used to pay dividends and/or repurchase our
Common Stock.





As discussed in Note 4 to our Condensed Consolidated Financial Statements, we will redeem the Notes on March 1, 2003. The
total cost of the redemption, including interest on the Notes, will be approximately $43.4 million. We will recognize a loss on the redemption of the Notes of approximately $1.5 million. Assuming current interest rates, redemption of the Notes will
save us approximately $2.0 million in annual after-tax net interest costs.





As a result of the litigation and contingencies discussed in
Note 5 to our Condensed Consolidated Financial Statements, we have incurred legal and other costs, and we may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. Any such costs, to
the extent borne by use 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 December 31, 2002. (For the fiscal year ended September 30 except for 2003 which is for the remaining nine months.)





Payments Due by PeriodTotal

2003

2004

2005

2006 and ThereafterContractual ObligationsLong-term debt

$
40,600,000

$
40,600,000Operating leases


1,788,000


413,000

$
550,000

$
550,000

$
275,000SERP obligation


2,105,000


90,000


120,000


120,000


1,775,000Total contractual obligations

$
44,493,000

$
41,103,000

$
670,000

$
670,000

$
2,050,000Amount of Commitment Expiration by PeriodTotal Amounts Committed

2003

2004

2006 and ThereafterOther CommitmentsLetters of credit

$
1,776,000

$
1,048,000

$
586,000

$
142,000Total other commitments

$
1,776,000

$
1,048,000

$
586,000

$
142,000




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FORWARD-LOOKING STATEMENTS/RISK FACTORS





Certain matters discussed in this Report may be 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:





|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 causing a decrease in demand for AP, (c) technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination
of demand for AP, sodium azide or Halotron, (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. |  | Our ability to profitability integrate, manage and operate new businesses and/or investments competitively and cost effectively.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------




|3. |  | 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 recently in the perchlorate market, potential patent coverage issues, and the development or penetration of competing new products, particularly in the
propulsion, airbag inflation and fire extinguishing businesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | Underutilization of our manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs, reductions
in margins, and impairment issues.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | Risks associated with our real estate activities, including, but not limited to, dependence upon the Las Vegas commercial and industrial real estate markets,
changes in general or local economic conditions, interest rate fluctuations affecting the availability and cost of financing and regulatory and environmental matters that may have a negative impact on sales.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|7. |  | The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those described in Note 5 to our Condensed
Consolidated Financial Statements.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|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, the potential 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.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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