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, 2002





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)

(IRS Employer Identification
No.)





3770 Howard Hughes Parkway, Suite 300, Las Vegas, Nevada

89109(Address of principal executive office)

(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.





YesxNo  ̈





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.  ̈





The aggregate market value of the voting stock held by non-affiliates of the registrant as of October 31, 2002, was approximately $56.0 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 October 31, 2002, was 7,255,000.







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DOCUMENTS INCORPORATED BY REFERENCE





Part III Hereof





Definitive Proxy Statement for 2003 Annual Meeting of Stockholders to be filed not later than January 28, 2003.





Part IV Hereof





S-14 Registration Statement (2-70830); Annual
Reports on Forms 10-K for the years ended September 30, 2000, 1999, 1997 and 1995; 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 (33-52898); S-8 Registration Statement (333-53449); S-8 Registration Statement (333-62566); S-4 Registration Statement (333-49883) and Current Reports on Forms 8-K dated February 28, 1992 and November
9, 1999.




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PART I





Item 1.    Business





Overview





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. 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. 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. 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.





We also produce a variety of other specialty chemicals and environmental protection equipment for niche applications, including: (i) other perchlorate chemicals used
principally in explosives and the inflation of automotive airbags; (ii) sodium azide, used primarily in the inflation of automotive airbags and certain pharmaceutical applications; (iii) Halotron products, used to extinguish fires; and (iv) water
treatment equipment, used to disinfect effluents from sewage treatment and industrial facilities and for the treatment of seawater. In addition, we have interests in two real estate assets in the Las Vegas, Nevada area. These interests consist of
approximately 34 remaining acres of improved undeveloped land in an industrial park and a 50% interest in a master planned residential community. All homes in the residential community have been sold and the venture is currently winding down its
operations. We do not expect to receive any significant cash returns from this venture in the future.





See Note 11
to our Consolidated Financial Statements for financial information concerning our operating segments. Our perchlorate chemicals accounted for approximately 73%, 68% and 69% of revenues during the years ended September 30, 2002, 2001 and 2000,
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 effectively became the only North American producer of AP. Our strategy is to maintain and enhance our position as the premier world-wide producer of AP and other 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.




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We have supplied AP for use in space programs for over 40 years, beginning with
the Titan program in the early 1960s. 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 are also a qualified supplier of AP to 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 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 with Kerr-McGee. See Perchlorate Chemicals
 Kerr-McGee 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.





We are exploring other uses for propellant and non-propellant grade AP that include explosives and munitions applications. In addition, we produce other perchlorate chemicals including sodium
perchlorate, which is used principally in explosives, and potassium perchlorate, which is primarily used in the inflation of certain types of automotive airbags. The dollar amount of sales of sodium and potassium perchlorates has historically been
relatively small compared to AP sales.





Customers





Prospective purchasers of AP consist principally of contractors in programs of NASA and the DOD. As a practical matter, the specialized nature of the activities of these
contractors restricts competitive entry by others. Therefore, there are relatively few potential customers for AP, and individual 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 51%, 60% and 51% of our revenues during the fiscal years 2002, 2001 and 2000, respectively.





Thiokol Agreement





In connection with the Acquisition, we entered into an agreement with 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%. After the adjustment, AP unit prices continue to 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.





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 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




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our 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.





Backlog





As of November 15, 2002, we had a backlog of approximately $8.1 million
for delivery of perchlorate chemicals in fiscal 2003.





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 AP annually and is readily expandable to 40.0 million pounds annually. We also produce commercial quantities of other perchlorate chemicals at this facility. 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 and Atlas programs.





Our AP 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 AP customers, insurance carriers and governmental authorities.





AP is manufactured by electrochemical processes using our proprietary technology. The principal raw materials used in the manufacture of
AP (other than electrical energy) are salt, sodium chlorate, graphite, ammonia and hydrochloric acid. All of the raw materials used in the AP manufacturing process have been available in commercial quantities, and we have had no difficulty in
obtaining necessary raw materials.





During the first six months of fiscal 2001, we received power bills from Utah
Power that were approximately $1.5 million in excess of average historical amounts. During this period, we purchased greater quantities of certain raw materials because of these excessive power costs. In the second half of 2001, we recovered the
excessive power costs through a settlement and curtailment arrangement with Utah Power. This arrangement resulted in net power costs that were approximately $1.0 million less in fiscal 2001 compared to average historical annual amounts. We now
purchase power from Utah Power under the equivalent of Utahs Electric Service Schedule No. 9.





Competition





Upon consummation of the Acquisition, we effectively became the sole North American producer of AP. We are aware of production
capacity for AP in France, Japan and possibly China and Taiwan. Although we have limited information with respect to these facilities, we believe that these foreign AP 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 an AP 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




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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.





Under the purchase agreement, Kerr-McGee
has agreed to indemnify us against loss or liability from claims associated with the ownership and use of the Rights prior to consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. We have
agreed to indemnify Kerr-McGee against loss and liability from claims associated with the ownership and use of the Rights after consummation of the Acquisition or resulting from any breach of our warranties, representations and covenants. The
indemnification obligations under the purchase agreement expire on March 12, 2003, except as to any claim in respect of which notice is given prior to that date.





Financing





On March 12, 1998, we sold $75.0 million in principal amount of
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. The Notes mature on March 1, 2005. Interest on the Notes is paid in cash at a rate of 9-1/4%
per annum on each March 1 and September 1, which commenced September 1, 1998. The indebtedness evidenced by the Notes represents a senior unsecured obligation, ranks pari passu in right of payment with all existing and future senior indebtedness and
is senior in right of payment to all future subordinated indebtedness. The Indenture under which the Notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and
(iii) limitations on restricted payments such as dividends, stock repurchases and investments. Since their issuance, we have repurchased and retired approximately $34.4 million in principal amount of Notes.





The Notes are redeemable at our option through February 28, 2003, at a redemption price of 104.625% of the principal amount of the Notes.
During the twelve-month period beginning March 1, 2003, the Notes are redeemable at a redemption price of 102.313% of the principal amount of the Notes. We intend to 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 $0.9 million.





Sodium Azide





Sodium Azide Facility





In July 1990, we entered into agreements with Dynamit Nobel A.G. (Dynamit Nobel) under which it has licensed to us on an exclusive basis for the North American
market its technology and know-how for the production of sodium azide, the principal component of a gas generant used in certain automotive airbag safety systems. In addition, Dynamit Nobel provided technical support for the design, construction and
startup of the facility. The facility was constructed on land owned by us in Iron County, Utah for its owner and operator, American Azide Corporation (AAC), our wholly-owned indirect 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 our 11% noncallable
subordinated secured term notes (the Azide Notes). On March 12, 1998, we repurchased the then remaining $25.0 million principal amount outstanding




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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 the purchasers of the Azide Notes, which are exercisable for a 10-year period on or after December 31, 1993, to purchase shares of our Common Stock. The exercise price of
the Warrants is $14.00 per share. At a $14.00 per share exercise price, 2,857,000 shares could be purchased under the Warrants. The Warrants contain additional provisions for a reduction in exercise price in the event that we issue or are deemed to
issue stock, rights to purchase stock or convertible debt at a price less than the exercise price in effect, or in the event of certain stock dividends or in the event of certain stock splits, mergers or similar transactions. The Warrants are
exercisable, at the option of their holders, to purchase up to 20% of the Common Stock of AAC, rather than our Common Stock. In the event of such an election, the exercise price of the Warrants will be based upon a pro rata share of AACs
capital, adjusted for earnings and losses, plus interest from the date of contribution.





We may call up to 50% of
the Warrants at prices that would provide a 30% internal rate of return to the holders thereof through the date of call (inclusive of the Azide Notes yield). The holders of the Warrants were also granted the right to require that the Common
Stock underlying the Warrants be registered under the Securities Act of 1933, as amended, on one occasion, as well as certain incidental registration rights.





Market





A number of firms have devoted extensive efforts to the development of
automotive airbag safety systems. These efforts initially resulted in the acceptance by the automobile industry and the consuming public of an inflator for automotive airbags that was based principally upon sodium azide, combined in tablet or
granule form with limited amounts of other materials. A number of other inflator technologies have since been commercially developed and have gained substantial market share, resulting in a decline in demand for sodium azide. Based principally upon
market information received from 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. Currently, demand for sodium azide is substantially less
than supply on a worldwide basis.





In January 1996, we filed an antidumping petition against certain Japanese
importers of sodium azide with the United States International Trade Commission (the ITC) and the United States Department of Commerce (Commerce). In August 1996, Commerce issued a preliminary determination that Japanese
imports of sodium azide had been sold in the United States at prices that were significantly below fair value. Commerces preliminary dumping determination applied to all Japanese imports of sodium azide, regardless of end-use. Commerces
preliminary determination followed a March 1996 preliminary determination by the ITC that dumped Japanese imports had caused material injury to the U.S. sodium azide industry.





On January 7, 1997, the antidumping investigation initiated by Commerce, based upon our petition, against the three Japanese producers of sodium azide was suspended by
agreement. It is our understanding that, by reason of the Suspension Agreement, two of the three Japanese sodium azide producers have ceased their exports of sodium azide to the United States for an indeterminate period. As to the third and largest
Japanese sodium azide producer, which has not admitted any prior unlawful conduct, the Suspension Agreement required that it make all necessary price revisions to eliminate all United States sales at below Normal Value, and that it
conform to the requirements of sections 732 and 733 of the Tariff Act of 1930, as amended, in connection with its future sales of sodium azide in the United States. The Suspension Agreement expired on December 31, 2001.





Customers





Autoliv
ASP, Inc. (Autoliv) accounted for approximately 8%, 12% and 14% of our revenues during the fiscal years 2002, 2001 and 2000, respectively. We are also qualified to supply sodium azide to TRW, Inc. (TRW), the other major
supplier of airbag inflators in the United States, but TRWs requirements have been supplied by our competitors.




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Competition





We believe that current competing production capacity includes one producer in Japan and at least three producers in India. In addition, certain capacity has been idled in
Canada and Japan. As noted above, worldwide demand for sodium azide is substantially less than worldwide supply.





In the fiscal years 2000 and 1997, we recognized impairment charges of $9.1 million and $52.6 million, respectively, relating to the fixed assets used in the production of sodium azide. (See Note 12 to our Consolidated Financial
Statements.)





Halotron





Halotron is a fire extinguishing system composed of proprietary chemicals and hardware designed to replace halons, which are brominated CFC chemicals that have been widely used as fire extinguishing
agents in military, industrial, and commercial applications 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 stratospheric ozone
layer, which acts as a shield against harmful solar ultraviolet radiation.





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. Halon 1211, principally a streaming agent, was used on aircraft and aircraft
flightlines, on small boats and ships, in chemically clean rooms and laboratories, telecommunication facilities, hotels, manufacturing facilities and other commercial and industrial facilities, including those in the petroleum industries. Its
worldwide production peaked in 1988 at 20,000 metric tons. Halon 1301, principally a flooding agent, protects such installations as computer, electronic and equipment rooms, ship and other engine room spaces, petroleum handling stations and
repositories of literature and cultural heritage. Its worldwide production peaked in 1988 at 12,500 metric tons.





Customers and Market





The end-user market for halons and consequently, Halotron, is divided into several segments. The government
segment consists of the armed services and other agencies, including the Department of Energy, NASA and governmental offices, laboratories and data processing centers. Historically, military applications have predominated in this segment. It will be
critical to our efforts to market Halotron to the military that military specifications for the procurement of halon replacements include Halotron. We are not aware of any military specifications for halon replacements that have been issued to date.





Commercial market segments include fire critical industries such as utilities, telecommunications, oil and gas
exploration and production, manufacturing, railroad, retail, wholesale, ocean transport and commercial aviation. Other market segments include schools, hotels, other business organizations and small users that typically follow selections made by the
industry users described above.





Halotron I, the first phase of Halotron, has been extensively and successfully
tested. In 1993, Halotron I was approved by the United States Environmental Protection Agency (the EPA) as a replacement agent for Halon 1211. During 1995, the Federal Aviation Administration (FAA) approved Halotron I as an
acceptable airport ramp firefighting agent, concluding that Halotron I will extinguish flightline fires in a manner similar to




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Halon 1211. Furthermore, in 2002, the FAA approved a Halotron I extinguisher for use on civilian
commercial transport aircraft.





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. We now have four of the five major domestic fire extinguisher companies 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 recently introduced
Halotron II, a total flooding agent designed for 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
not been significant.





In order for us to increase market share for Halotron I and Halotron II and achieve a long
term presence in the industry, it may be necessary to expend considerable additional funds and effort in research and development. Although Halotron I has an ODP that is virtually zero and therefore significantly lower than that of halons and that
meets current environmental standards, potential users of halon replacements may eventually require a product with an absolute zero ODP. Accordingly, the product life of Halotron I may be limited, and we may be required to produce other agents that
can meet increasingly stringent standards. There can be no assurance that we will be capable of identifying and producing such agents or that a competitor or competitors will not develop fire extinguishing agents with comparable or superior
qualities.





Competition





Potential halon alternatives (not in-kind) and substitutes (halocarbons) compete as to performance characteristics, environmental effects and cost. Performance characteristics include throwability,
visibility after application, after-fire damage, equipment portability and versatility, low and high temperature performance, corrosion probability, shelf life and efficiency. The environmental and human health effects include ODP, GWP and toxicity.
Potential halon alternatives include water, carbon dioxide and a variety of chemicals in liquid, foam and powder form. It is likely that competitors producing alternatives and substitutes will be larger, will have as much or more experience in the
production of fire extinguishing chemicals and systems and will have greater financial resources than those available to us.





FE-36  , a Dupont product, is our primary competition in the streaming agent market,
or for Halotron I. In 2001, 3M introduced a Halon 1211 and Halon 1301 replacement agent called Novec 1230  , although we do not believe this agent has achieved any significant market share. Great Lakes Chemical Corp. and Dupont have products that are widely used in the total flooding market. In addition, there are currently no
domestic use restrictions on halon, so that potential customers for halon substitutes may continue to use existing halon-based systems in their possession until the supply is exhausted, which could be a substantial period of time for some users.





Halotron Facility





We have designed and constructed a clean fire extinguishing agent manufacturing facility that has an annual capacity of at least 6.0 million pounds, located on our land in Iron County, Utah.





Real Estate Assets





At September 30, 2002, we owned approximately 34 acres of improved undeveloped land at the Gibson Business Park near Las Vegas, Nevada. This land is held for sale. We also own approximately 4,700 acres of




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land and certain water rights at our site in Iron County, Utah that are dedicated to our growth and
diversification.





In addition, 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 is currently winding down its operations. We do not expect to receive any significant cash returns from the venture in the future.





Environmental Protection Equipment





We engineer and manufacture equipment for a wide range of 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 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 the attendance of key trade shows.





We compete both with companies that utilize other
technologies and those that utilize technologies similar to ours. Most of these companies are substantially larger than us. Our success depends principally upon our ability to be cost competitive and, at the same time, to provide a quality product.





As of October 31, 2002, our environmental protection equipment division had a backlog of approximately $1.3
million.





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 ® , OdorMaster ® , and ChlorMaster ® .





Product Development and Enhancement





Our existing laboratory facilities are located on the
premises of our perchlorate production activities 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.




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Insurance





Our insurance currently includes property insurance on all of our facilities and business interruption insurance. We also maintain certain liability insurance. We believe that the nature and extent of
our current insurance coverages are adequate. We have not experienced difficulty obtaining these types of insurance, although the cost of such insurance has increased significantly over the last few years.





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 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 EPA. However, perchlorates have been added to the EPAs Contaminant Candidate List and will likely be regulated. We manufactured AP at a facility on the Henderson site until the
facility was destroyed in the May 1988 incident, described below, after which we relocated our AP production to our current facilities in Iron County, Utah. For many years, 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 $4.5 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




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years. However, we recently began 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 also 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.





Safety Considerations





We have one major operating facility located in Iron County, Utah. The loss or shutdown of operations over an extended period of time at such facility 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 IV oxidizer. Such classification indicates that the DOT considers AP to be non-explosive, non-flammable and non-toxic. Our AP 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 AP 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




12




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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.





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 been working with Utah OSHA to gather evidence of the exact cause
and origin of the incident. We believe that we have statutory immunity as an employer under the applicable workers compensation laws of the State of Utah. However, we have been fined by Utah OSHA as a result of this incident. We believe that
the ultimate payment by us for these fines will be less than $200,000.





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. See Item 3. Legal Proceedings.





Employees





At September 30, 2002, we employed approximately 215 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.





Item 2.    Properties





The following table sets forth certain information regarding our properties at September 30, 2002.





Location

Principal Use

Approximate Area or Floor Space

Status


Approximate Annual RentIron County, UT

Perchlorate Manufacturing Facility (a)

217 acres

Owned



Iron County, UT

Sodium Azide Manufacturing Facility (b)

41 acres

Owned



Iron County, UT

Halotron Manufacturing Facility (c)

6,720 sq. ft.

Owned



Las Vegas, NV

Executive Offices

22,262 sq. ft.

Leased (d
)

$
550,000





|(a) |  | This facility is used for the production of perchlorate products and environmental protection equipment. It consists of approximately 112,000 sq. ft. of
enclosed manufacturing space, a 12,000 sq. ft. administration building and a 3,200 sq. ft. laboratory building. Perchlorate capacity utilization rates for this production facility were approximately 66%, 51% and 69% during the fiscal years ended
September 30, 2002, 2001 and 2000, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13




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|(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 30%, 33% and 40% during the fiscal years ended September 30, 2002, 2001 and 2000, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(c) |  | Capacity utilization rates for the Halotron production facility were approximately 8%, 11% and 7% during the fiscal years ended September 30, 2002, 2001 and
2000, 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.)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We consider our facilities to be adequate for our present needs and suitable for their current use. See Item 1. Business 
Real Estate Assets 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 names a number of defendants, including AACs principal sodium azide customer, 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 yet 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 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.





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.





Item 4.    Submission of Matters to a Vote of Security Holders





Not Applicable.







14




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PART II





Item 5.    Market for Registrants Common Equity and Related Stockholder Matters





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 20021st Quarter

$
8.94

$
6.462nd Quarter


10.40


8.063rd Quarter


11.40


9.114th Quarter


9.68


7.83High

LowFiscal Year 20011st Quarter

$
6.94

$
4.502nd Quarter


6.44


4.003rd Quarter


6.62


4.754th Quarter


8.43


4.81





At October 31, 2002, there were approximately 1,130 shareholders of
record of our Common Stock. We have not paid a dividend on the Common Stock since our incorporation. In addition, covenants contained in the Indenture associated with the Notes restrict our ability to pay dividends. (See Note 5 to our Consolidated
Financial Statements.)







15




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Item 6.    Selected Financial Data





FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA


FOR THE YEARS ENDED SEPTEMBER 30,





2002

2001

2000


1999

1998(in thousands except per share amounts)STATEMENT OF OPERATIONS DATA:Sales and operating revenues

$
73,588

$
63,089

$
67,369


$
72,834

$
52,339Cost of sales


43,529


38,186


44,279



45,834


35,792Gross profit


30,059


24,903


23,090



27,000


16,547Operating expenses


13,776


10,050


10,236



10,024


9,246Impairment charge








9,084Operating income


16,283


14,853


3,770



16,976


7,301Interest and other income


945


1,877


1,987



1,588


1,594Interest and other expense


4,180


4,467


5,568



6,951


5,734Income before income taxes


13,048


12,263


189



11,613


3,161Income taxes


4,301


4,537


(15,136
)Net income before extraordinary loss


8,747


7,726


15,325



11,613


3,161Extraordinary loss-debt extinguishments


105





1,594



174


5,172Net income (loss)


8,642


7,726


13,731



11,439


(2,011
)Basic net income (loss) per share


1.21


1.10


1.88



1.41


(.24
)Diluted net income (loss) per share

$
1.18

$
1.10

$
1.86


$
1.39

$
(.24
)BALANCE SHEET DATA:Cash and cash equivalents

$
65,826

$
51,471

$
30,128


$
40,434

$
20,389Inventories and receivables


21,156


19,736


20,813



18,883


23,193Property, plant and equipment  net


7,522


7,107


7,064



17,254


19,529Intangible assets  net


21,017


25,411


29,805



34,210


38,252Deferred income taxes


10,128


11,103


15,406Total assets


131,971


123,042


117,590



132,882


130,759Working capital


82,179


67,822


43,758



53,088


34,786Long-term debt


40,600


44,175


44,175



67,000


70,000Shareholders equity

$
75,637

$
66,955

$
59,609


$
52,204

$
44,029





Item 7.    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




16




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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 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 Consolidated Financial Statements were prepared.





Sales and Operating Revenues.    Sales of our perchlorate chemical products, consisting almost entirely of AP sales, accounted for approximately
73%, 68% and 69% of revenues during the fiscal years ended September 30, 2002, 2001 and 2000, respectively. In general, demand for AP is driven by a relatively small number of DOD and NASA contractors. As a result, any one individual AP customer
usually accounts for a significant portion of our revenues. For example, Alliant accounted for approximately 51%, 60% and 51% of our revenues during the fiscal years ended September 30, 2002, 2001 and 2000, respectively.





In connection with the Acquisition, we entered into an agreement with 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 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 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.





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.




17




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Sodium azide sales accounted for approximately 12%, 15% and 18% of sales during
fiscal years ended September 30, 2002, 2001 and 2000, respectively. Autoliv, our principal sodium azide customer, accounted for approximately 8%, 12% and 14% of our revenues during fiscal 2002, 2001 and 2000, respectively.





Worldwide sodium azide demand 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. We recognized impairment charges of $9.1 million in fiscal 2000 and $52.6 million in
fiscal 1997 related to our sodium azide operations. (See Note 12 to our Consolidated Financial Statements.)





Sales
of Halotron amounted to approximately 5%, 6% and 4% of revenues during the fiscal years ended September 30, 2002, 2001 and 2000, 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 9%, 5% and 4% of revenues during the fiscal years ended September 30, 2002, 2001 and 2000, 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. In addition, real estate sales are currently estimated to be completed by the end of fiscal 2004. We do not expect to receive any
significant cash returns in the future from our interest in our residential joint venture project. (See Note 4 to our Consolidated Financial Statements.)





Environmental protection equipment sales accounted for approximately 1%, 6% and 5% of revenues during the fiscal years ended September 30, 2002, 2001 and 2000, 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.





During the first six months of fiscal 2001, we received power bills from Utah Power that were approximately $1.5 million in excess of average historical amounts. During this period, we purchased
greater quantities of certain raw materials because of these excessive power costs. In the second half of fiscal 2001, we recovered the excessive power costs through a settlement and curtailment arrangement with Utah Power. As a result of these
arrangements, our net power costs were approximately $1.0 million less in fiscal 2001 compared to average historical annual amounts. We now purchase power from Utah Power under the equivalent of Utah Electric Service Schedule No. 9.





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.





Income Taxes.    In fiscal 1997, we established a deferred tax valuation allowance. In fiscal 2000, we released our deferred tax valuation
allowance and recognized approximately $15.4 million in net deferred tax assets. (See Note 7 to our Consolidated Financial Statements).




18




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Net Income.    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 9 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.)





Results of Operations





Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30, 2001





Sales and Operating Revenues.    Sales increased $10.5 million, or 17%, to $73.6 million in fiscal 2002, from
$63.1 million in fiscal 2001. This increase was principally attributable to an increase in specialty chemicals sales of $9.1 million and an increase in real estate sales of $4.4 million. This increase was partially offset by a decrease in
environmental protection equipment sales of approximately $3.0 million. The increase in specialty chemicals sales resulted principally from increased perchlorate shipments, offset in part by a decrease in shipments of sodium azide and Halotron.





Real estate sales increased $4.4 million, or 169%, to $7.0 million in fiscal 2002, from $2.6 million in fiscal
2001, due to an increase in land sales in fiscal 2002 compared to fiscal 2001. These sales are expected to decline substantially in 2003 and 2004 by reason of the complete depletion of our real estate in Nevada that is held for sale.





Environmental protection equipment sales decreased $3.0 million, or 81%, to $0.7 million in fiscal 2002, from $3.7 million in
fiscal 2001. As of October 31, 2002, this segment had a backlog of approximately $1.3 million.





Cost of
Sales.    Cost of sales decreased $5.3 million, or 14%, to $43.5 million in fiscal 2002, from $38.2 million in fiscal 2001. As a percentage of sales, cost of sales was 59% in fiscal 2002, compared to 61% in fiscal 2001. The
decrease in the percentage of cost of sales to sales was principally attributable to increased perchlorate shipments and an increase in real estate sales, which generally have a higher gross margin than our other products.





Operating Expenses.    Operating (selling, general and administrative) expenses increased $3.7 million, or 37%,
in fiscal 2002 to $13.8 million, from $10.1 million in fiscal 2001. Most of the increases in operating expenses relate to costs incurred in connection with corporate and product development activities. We have incurred increased costs relating to
the evaluation and investigation of the potential for alternative uses and applications of certain of our existing and related products. Some of these opportunities may involve partnering or possible joint venture arrangements with others. In
addition, during the fiscal year ended September 30, 2002, we have experienced increases in operating expenses as a result of detailed due diligence activities directly related to corporate development opportunities. Operating expenses during each
of the fiscal years 2002 and 2001, also include approximately $0.9 million in costs associated with the investigation and evaluation of trace amounts of perchlorate chemicals found in Lake Mead. (See Note 9 to our Consolidated Financial Statements.)




19




---




Segment Operating Income (Loss).    Operating income
(loss) of our operating segments during the fiscal years ended September 30, 2002 and 2001 was as follows:





2002


2001Specialty chemicals

$
13,551,000


$
13,479,000Environmental protection equipment


(1,046,000
)


140,000Real estate


3,778,000



1,234,000Total

$
16,283,000


$
14,853,000





The increases in operating income in our specialty chemicals
industry segment was primarily attributable to an increase in perchlorate chemical shipments, offset partially by decreased Halotron and sodium azide shipments. The increase in operating income of our real estate segment was principally due to
increased land sales. The operating loss incurred in our environmental protection equipment business in fiscal 2002 was primarily due to decreased sales.





Interest and Other Income.    Interest and other income decreased to $0.9 million in fiscal 2002 from $1.9 million in fiscal 2001. The decrease was principally due to lower
average interest rates earned on cash and cash equivalent balances.





Interest and Other
Expense.    Interest and other expense was $4.2 million in fiscal 2002 compared to $4.5 million in fiscal 2001. This decrease was due to the repurchase of $3.6 million in Notes in January 2002.





Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30, 2000





Sales and Operating Revenues.    Sales decreased $4.3 million, or 6%, to $63.1 million in fiscal 2001, from
$67.4 million in fiscal 2000. This decrease was principally attributable to lower specialty chemicals sales. Perchlorate chemical and sodium azide sales decreased approximately $5.9 million due to lower volumes. This decrease was partially offset by
an increase in Halotron sales of approximately $1.3 million





In March 2000, we received notification from Thiokol
of a change in the fiscal 2000 purchase order for AP that resulted in a decrease of approximately 3.23 million pounds of AP (from 10.48 million pounds of AP). We submitted a price adjustment claim under the change order and, in September 2000,
negotiated and settled the claim which resulted in a $3.0 million payment from Thiokol. Sales volume levels for AP declined from approximately 16.4 million pounds in fiscal 2000 to approximately 12.6 million pounds in fiscal 2001. AP sales volumes
in fiscal 1999 were approximately 20.2 million pounds. See above for a discussion of the current status of the AP market.





Real estate sales increased $0.1 million, or 4%, to $2.6 million in fiscal 2001, from $2.5 million in fiscal 2000, due to an increase in land sales in fiscal 2001 compared to fiscal 2000.





Environmental protection equipment sales increased $0.2 million, or 6%, to $3.7 million in fiscal 2001, from $3.5 million in fiscal 2000.





Cost of Sales.    Cost of sales decreased $6.1 million, or 14%, to $38.2 million in
fiscal 2001, from $44.3 million in fiscal 2000. As a percentage of sales, cost of sales was 61% in fiscal 2001, compared to 66% in fiscal 2000. The decrease in the percentage of cost of sales to sales was principally attributable to decreased
depreciation expense associated with our sodium azide operations, as a result of the impairment charge in fiscal 2000 discussed above. In addition, because of the settlement and curtailment arrangement discussed above, net power costs were
approximately $1.0 million less in fiscal 2001 as compared to normalized historical annual amounts.




20




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Operating Expenses.    Operating (selling, general and
administrative) expenses decreased $0.1 million, or 1%, in fiscal 2001 to $10.1 million, from $10.2 million in fiscal 2000. Operating expenses during the fiscal years ended 2001 and 2000 include approximately $0.9 million and $1.0 million,
respectively, in costs associated with the investigation and evaluation of trace amounts of perchlorate chemicals found in Lake Mead. (See Note 9 to our Consolidated Financial Statements.)





Segment Operating Income.    Operating income of our operating segments during the fiscal years ended September 30, 2001 and 2000 was as follows:





2001

2000Specialty chemicals

$
13,479,000

$
2,446,000Environmental protection equipment


140,000


453,000Real estate


1,234,000


871,000Total

$
14,853,000

$
3,770,000





The increase in operating income in our specialty chemicals
industry segment was primarily attributable to an impairment charge of $9.1 million recognized in fiscal 2000. The increase in operating income of our real estate segment was principally due to better margins on land sales.





Interest and Other Income.    Interest and other income decreased to $1.9 million in fiscal 2001 from $2.0
million in fiscal 2000. The decrease was principally due to lower average interest rates earned on cash and cash equivalent balances.





Interest and Other Expense.    Interest and other expense decreased to $4.5 million in fiscal 2001 from $5.6 million in fiscal 2000 principally as a result of lower average debt balances.





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, 2002. 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. As discussed above, we have
recently experienced increases in certain raw material costs and power costs, although we believe that such increases are not specifically related to the effects of general inflation.





Liquidity and Capital Resources





Cash flows provided by
operating activities were $16.8 million, $18.2 million and $19.0 million during the fiscal years ended September 30, 2002, 2001 and 2000, 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. 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.





Capital expenditures were $2.1 million, $1.6 million and $2.5 million
during the fiscal years ended September 30, 2002, 2001 and 2000, respectively. Capital expenditures relate principally to specialty chemicals segment capital improvement projects. Capital expenditures are expected to be funded from existing cash
balances and operating cash flow.




21




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During the three-year period ended September 30, 2002, we made debt related payments of approximately $28.5 million,
repurchased $7.4 million of our Common Stock and issued $2.3 million of our Common Stock as a result of the exercise of outstanding stock options. We may (but are not obligated to) continue to repurchase our Common Stock, but we are limited in our
ability to use cash to repurchase stock by certain covenants contained in the Indenture governing the Notes. Our Board of Directors has approved a provision in our Common Stock repurchase program to permit repurchase of Common Stock from employees
and directors.





The Notes are redeemable at our option through February 28, 2003, at a redemption price of
104.625% of the principal amount of the Notes. During the twelve-month period beginning March 1, 2003, the Notes are redeemable at a redemption price of 102.313% of the principal amount of the Notes. We intend to 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 $0.9 million.





During the three-year period ended September 30, 2002, we received cash of approximately $11.0 million from our Ventana Canyon residential joint venture. The venture is
winding down its operations and we do not expect to receive any significant cash returns from this venture in the future. (See Note 4 to our Consolidated Financial Statements.)





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, 2002.





Payments Due by PeriodTotal

2003

2004

2005

2006 and ThereafterContractual ObligationsLong-term debt

$
40,600,000







$
40,600,000Operating leases


1,925,000

$
550,000

$
550,000


550,000

$
275,000SERP obligation


2,130,000


120,000


120,000


120,000


1,770,000Total contractual obligations

$
44,655,000

$
670,000

$
670,000

$
41,270,000

$
2,045,000Amount of Commitment Expiration by PeriodTotal Amounts Committed

2003

2004

2005

2006 and ThereafterOther CommitmentsLetters of credit

$
2,000,000

$
1,200,000

$
600,000

$


$
200,000Total other commitments

$
2,000,000

$
1,200,000

$
600,000

$


$
200,000





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.




22




---

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, (e) the fact that
perchlorate chemicals, sodium azide, Halotron and our environmental products have limited applications and highly concentrated customer bases.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|2. |  | 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.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Underutilization of our manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs, reductions
in margins, and impairment issues.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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




|5. |  | 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those described in Note 9 to our Consolidated
Financial Statements and claims made by or against us relative to patents or property rights.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|7. |  | The dependence upon a single facility for the production of most of our products.
|-- |  | ---------------------------------------------------------------------------------




|8. |  | 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.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 7A.    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 but do not currently maintain a
revolving or other bank credit facility. We believe that any market risk arising from our fixed-rate debt is not material. At September 30, 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.







23




---




Item 8.    Financial Statements and Supplementary Data





Financial statements called for hereunder are included herein on the following pages:





Page(s)Independent Auditors Report

33Consolidated Balance Sheets

34Consolidated Statements of Income

35Consolidated Statements of Cash Flows

36Consolidated Statements of Changes in Shareholders Equity

37Notes to Consolidated Financial Statements

38-50





SUMMARIZED QUARTERLY FINANCIAL DATA


(unaudited)


(amounts in thousands except per share amounts)





Quarters For Fiscal Year 20021st


2nd

3rd

4th

TotalSales and Operating Revenues

$
13,117


$
20,046

$
18,542

$
21,883

$
73,588Gross Profit


3,839



7,887


7,383


10,950


30,059Net Income (Loss)


(5
)


2,566


1,991


4,090


8,642Diluted Net Income (Loss) Per Share

$
(.00
)

$
.35

$
.27

$
.55

$
1.18Quarters For Fiscal Year 20011st


2nd

3rd

4th

TotalSales and Operating Revenues

$
11,879


$
14,830

$
15,353

$
21,027

$
63,089Gross Profit


2,714



5,074


6,211


10,904


24,903Net Income (Loss)


(45
)


1,130


1,940


4,701


7,726Diluted Net Income (Loss) Per Share

$
(.01
)

$
.16

$
.28

$
.67

$
1.10





Item 9.    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure





Not Applicable.




24




---

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 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later
than January 28, 2003.





Item 11.    Executive Compensation





The required information regarding executive compensation is incorporated herein by reference from our definitive proxy statement for the
2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than January 28, 2003.





Item
12.    Security Ownership of Certain Beneficial Owners and Management





The required
information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than January 28, 2003.





Item 13.    Certain Relationships and Related Transactions





The required information regarding certain relationships and related transactions is incorporated by
reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than January 28, 2003.





Item 14.    Controls and Procedures





Based on their evaluation, as of a date within 90 days of the filing of this Form 10-K, the Companys 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.




25




---

PART IV





Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K





(a) (1)  Financial Statements





See Part II, Item 8 for an index to the
Registrants financial statements and supplementary data.





(2)  Financial Statement Schedules





None applicable.





(3)  Exhibits





The 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 1991 Nonqualified Stock Option Plan, incorporated by reference to Exhibit 10.26 to the
Registrants Registration Statement on Form S-8 (File No. 33-52898).4.2

Stock Option Agreement between Registrant and General Technical Services, Inc. dated July 11, 1995, incorporated by
reference to Exhibit 10.35 to the Registrants Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the 1995 10-K).4.3

Stock Option Agreement between Registrant and John R. Gibson dated July 8, 1997, incorporated by reference to Exhibit
10.18 to the Registrants Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the 1997 10-K).




26




---




4.4

Stock Option Agreement between Registrant and David N. Keys dated July 8, 1997, incorporated by reference to Exhibit
10.19 to the 1997 10-K.4.5

Form of Stock Option Agreement between Registrant and certain Directors dated May 21, 1997, incorporated by reference
to Exhibit 10.21 to the 1997 10-K.4.6

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).4.7

Form of Option Agreement under the 1997 Plan, incorporated by reference to Exhibit 4.2 to the 1998 S-8.4.8

American Pacific Corporation 2001 Stock Option Plan (the 2001 Plan), incorporated by reference to Exhibit
4.1 to Registrants Form S-8 (File No. 333-62566) (the 2001 S-8).4.9

Form of Option Agreement under the 2001 Plan, incorporated by reference to Exhibit 4.2 to the 2001 S-8.4.10

Form of Note and Warrants Purchase Agreement dated February 21, 1992, relating to the Registrants previously
outstanding Subordinated Secured Term Notes, incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K dated February 28, 1992 (the 1992 8-K).4.11

Form of Warrant to purchase Common Stock of the Registrant dated February 21, 1992, incorporated by reference to
Exhibit 10.4 to the 1992 8-K.4.12

Form of Warrant to purchase Common Stock of American Azide Corporation dated February 21, 1992, incorporated by
reference to Exhibit 10.5 to the 1992 8-K.4.13

Indenture dated as of March 1, 1998, by and between the Registrant and United States Trust Company of New York,
incorporated by reference to Exhibit 4.1 to Form S-4 (File No. 333-49883) (the 1998 S-4).4.14

Form of Tender for outstanding 91⁄4% Senior Notes Due 2005 in exchange for 91⁄4% Senior Notes due 2005 of the
Registrant, incorporated by reference to Exhibit 99.3 to the 1998 S-4.4.15

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).4.16

Form of Letter to Stockholders with copies of Summary of Rights to Purchase Preference Shares, incorporated by
reference to the Form 8-A.*10.1

Employment agreement dated January 1, 2002, between the Registrant and David N. Keys.*10.2

Employment agreement dated January 1, 2002, between the Registrant and John R. Gibson.10.3

Amended and Restated American Pacific Corporation Defined Benefit Pension Plan, incorporated by reference to Exhibit
10.4 to the 1999 10-K.




27




---




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.*21

Subsidiaries of the Registrant.*23

Consent of Deloitte & Touche LLP.*24

Power of Attorney, included on Page 31.*99.1

Certification of Principal Executive Officer.*99.2

Certification of Principal Financial Officer.





|* |  | Filed herewith.
|- |  | ---------------




(b)  Reports on Form 8-K





None applicable.





(c)  See (3) above.





(d)  None applicable.







28




---

SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Dated: November 19, 2002



AMERICAN PACIFIC CORPORATION (Registrant)By:

/s/    JOHN R. GIBSONJohn R. Gibson President & Chief Executive Officer





By:

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










29




---

POWER OF ATTORNEY





American Pacific Corporation and each of the undersigned do hereby appoint John R. Gibson and David N. Keys 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 on behalf of the Registrant by the following persons in the capacities and on the dates indicated.





/s/    JOHN R. GIBSON



Date:    November 19, 2002John R. Gibson, Chief Executive Officer, President, and Director/s/    DAVID N. KEYS



Date:    November 19, 2002David N. Keys, Executive Vice President, Chief Financial Officer, Secretary
and Treasurer; Principal Financial and Accounting Officer and Director/s/    FRED D. GIBSON, JR.



Date:    November 19, 2002Fred D. Gibson, Jr., Director/s/    JAN H. LOEB



Date:    November 19, 2002Jan H. Loeb, Director/s/    BERLYN D. MILLER



Date:    November 19, 2002Berlyn D. Miller, Director/s/    NORVAL F. POHL



Date:    November 19, 2002Norval F. Pohl, Ph.D., Director/s/    C. KEITH ROOKER



Date:    November 19, 2002C. Keith Rooker, Director/s/    VICTOR M. ROSENZWEIG



Date:    November 19, 2002Victor M. Rosenzweig, Director/s/    DEAN M. WILLARD



Date:    November 19, 2002Dean M. Willard, Director/s/    JANE L. WILLIAMS



Date:    November 19, 2002Jane L. Williams, Director







30




---

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER


Section 302 Certification





I, John R. Gibson, certify that:





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




| | 2. |  | Based on my knowledge, this annual 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 annual report;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual
report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this annual 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 annual 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: November 19, 2002



By:

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




31




---

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER


Section 302 Certification





I, David N. Keys, certify that:





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




| | 2. |  | Based on my knowledge, this annual 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 annual report;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual
report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this annual 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 annual 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: November 19, 2002



By:

/s/    David N. KeysDavid N. Keys Principal Financial Officer




32




---




INDEPENDENT AUDITORS REPORT





To the Board of Directors of


American Pacific Corporation:





We have audited the accompanying consolidated balance sheets of American Pacific Corporation and its Subsidiaries (the Company) as of September 30, 2002 and 2001, and the related
consolidated statements of income, cash flows and changes in shareholders equity for each of the three years in the period ended September 30, 2002. 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
auditing standards generally accepted in the United States of America. 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 the Company at September 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended
September 30, 2002 in conformity with accounting principles generally accepted in the United States of America.





/s/    Deloitte & Touche LLP





DELOITTE & TOUCHE LLP





Las Vegas, Nevada


November 15, 2002







33




---

AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER 30, 2002 AND 2001


---




2002


2001ASSETSCURRENT ASSETS:Cash and cash equivalents

$
65,826,000


$
51,471,000Accounts and notes receivable


6,787,000



5,401,000Related party notes and accrued interest receivable


380,000



427,000Inventories


13,989,000



13,908,000Prepaid expenses and other assets


841,000



770,000Deferred income taxes


435,000



443,000Total Current Assets


88,258,000



72,420,000PROPERTY, PLANT AND EQUIPMENT, NET


7,522,000



7,107,000INTANGIBLE ASSETS, NET


21,017,000



25,411,000DEFERRED INCOME TAXES


9,693,000



10,660,000OTHER ASSETS, NET


5,481,000



7,444,000TOTAL ASSETS

$
131,971,000


$
123,042,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities

$
6,079,000


$
4,598,000Total Current Liabilities


6,079,000



4,598,000LONG-TERM DEBT


40,600,000



44,175,000OTHER LONG-TERM LIABILITIES


6,086,000



3,745,000TOTAL LIABILITIES


52,765,000



52,518,000COMMITMENTS AND CONTINGENCIESWARRANTS TO PURCHASE COMMON STOCK


3,569,000



3,569,000SHAREHOLDERS EQUITY:Common stock$.10 par value, 20,000,000 authorized, issued8,824,541 in 2002 and 8,515,791 in
2001


881,000



852,000Capital in excess of par value


82,249,000



80,106,000Retained earnings (accumulated deficit)


6,820,000



(1,822,000
)Treasury stock (1,570,087 shares in 2002, and 1,518,587 shares in 2001)


(12,483,000
)


(12,170,000
)Note receivable from the sale of stock






(11,000
)Accumulated other comprehensive loss


(1,830,000
)Total Shareholders Equity


75,637,000



66,955,000TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
131,971,000


$
123,042,000





See Notes to Consolidated Financial Statements.







34




---

AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF INCOME


FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000


---




2002


2001

2000SALES AND OPERATING REVENUES

$
73,588,000


$
63,089,000

$
67,369,000COST OF SALES


43,529,000



38,186,000


44,279,000GROSS PROFIT


30,059,000



24,903,000


23,090,000OPERATING EXPENSES


13,776,000



10,050,000


10,236,000IMPAIRMENT CHARGE









9,084,000OPERATING INCOME


16,283,000



14,853,000


3,770,000INTEREST AND OTHER INCOME


945,000



1,877,000


1,987,000INTEREST AND OTHER EXPENSE


4,180,000



4,467,000


5,568,000INCOME BEFORE INCOME TAXES


13,048,000



12,263,000


189,000INCOME TAXES


4,301,000



4,537,000


(15,136,000
)NET INCOME BEFORE EXTRAORDINARY LOSS


8,747,000



7,726,000


15,325,000EXTRAORDINARY LOSS-DEBT EXTINGUISHMENTS


105,000






1,594,000NET INCOME

$
8,642,000


$
7,726,000

$
13,731,000BASIC NET INCOME PER SHARE:INCOME BEFORE EXTRAORDINARY LOSS

$
1.22


$
1.10

$
2.09EXTRAORDINARY LOSS


(.01
)





(.22
)NET INCOME

$
1.21


$
1.10

$
1.88AVERAGE SHARES OUTSTANDING


7,145,000



7,034,000


7,319,000DILUTED NET INCOME PER SHARE:INCOME BEFORE EXTRAORDINARY LOSS

$
1.19


$
1.10

$
2.08EXTRAORDINARY LOSS


(.01
)





(.21
)NET INCOME

$
1.18


$
1.10

$
1.86DILUTED SHARES


7,335,000



7,052,000


7,385,000





See Notes to Consolidated Financial Statements.







35




---

AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF CASH FLOWS


FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000


---




2002


2001


2000CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
8,642,000


$
7,726,000


$
13,731,000Adjustments to reconcile net income to net cash from operating activities:Depreciation and amortization


6,384,000



6,303,000



8,931,000Basis in development property sold


2,517,000



769,000



1,018,000Impairment charge










9,084,000Extraordinary debt charges


105,000







1,594,000Changes in assets and liabilities:Accounts and notes receivable


(1,328,000
)


4,166,000



(612,000
)Inventories


(81,000
)


(3,033,000
)


(1,831,000
)Prepaid expenses and other


(2,412,000
)


(176,000
)


1,156,000Deferred income taxes


975,000



4,303,000



(15,406,000
)Accounts payable and other liabilities


1,992,000



(1,894,000
)


1,323,000Total adjustments


8,152,000



10,438,000



5,257,000Net cash from operating activities


16,794,000



18,164,000



18,988,000CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures


(2,080,000
)


(1,624,000
)


(2,458,000
)Real estate equity returns


1,385,000



5,239,000



4,399,000Net cash from investing activities


(695,000
)


3,615,000



1,941,000CASH FLOWS FROM FINANCING ACTIVITIES:Debt related payments


(3,603,000
)






(24,889,000
)Issuance of common stock


2,172,000



12,000



342,000Treasury stock acquired


(313,000
)


(448,000
)


(6,688,000
)Net cash from financing activities


(1,744,000
)


(436,000
)


(31,235,000
)NET CHANGE IN CASH AND CASH EQUIVALENTS


14,355,000



21,343,000



(10,306,000
)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


51,471,000



30,128,000



40,434,000CASH AND CASH EQUIVALENTS, END OF YEAR

$
65,826,000


$
51,471,000


$
30,128,000SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during year for interest

$
3,800,000


$
4,100,000


$
5,000,000Cash paid during year for income taxes

$
2,400,000


$
200,000


$
300,000





See Notes to Consolidated Financial Statements.







36




---

AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY


FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000


---




Net Outstanding Number of Common Shares


Par Value of Shares Issued

Capital in excess of Par
Value

Retained Earnings (Accumulated Deficit)


Treasury Stock


Note Receivable from the Sale of Stock


Accumulated Other Comprehensive LossBALANCES, OCTOBER 1, 1999

7,832,437


$
847,000

$
79,757,000

$
(23,279,000
)

$
(5,034,000
)

$
(87,000
)Net income











13,731,000Issuance of common stock

45,500



5,000


337,000Treasury stock acquired

(799,300
)












(6,688,000
)Note payments



















20,000BALANCES, SEPTEMBER 30, 2000

7,078,637



852,000


80,094,000


(9,548,000
)


(11,722,000
)


(67,000
)Net income











7,726,000Issuance of common stock

2,500






12,000Treasury stock acquired

(83,933
)












(448,000
)Note payments



















56,000BALANCES, SEPTEMBER 30, 2001

6,997,204



852,000


80,106,000


(1,822,000
)


(12,170,000
)


(11,000
)Net income











8,642,000Other comprehensive loss






















$
(1,830,000
)Issuance 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
)





$
(1,830,000
)





See Notes to Consolidated Financial Statements.







37




---

AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000


---




1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles 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, 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 Consolidated Financial Statements were prepared.





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.





Our investment securities, along with certain cash and cash equivalents that are not deemed securities under
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, are carried on our Consolidated Balance Sheets in the Cash and Cash Equivalents category. SFAS No.
115 requires all securities to be classified as either held-to-maturity, trading or available-for-sale. We determine the appropriate classification of our investment securities at the time of purchase and re-evaluate such determination at each
balance sheet date. Pursuant to the criteria that are prescribed by SFAS No. 115, we have classified our investment securities as available-for-sale. Available-for-sale securities are required to be carried at fair value, with material unrealized
gains and losses, net of tax, reported in a separate component of shareholders equity. Realized gains and losses are taken into income in the period of realization. The estimated fair value of our portfolio of investment securities at
September 30, 2002 and 2001 closely approximated amortized cost. There were no material unrealized gains or losses on investment securities and no recorded adjustments to amortized cost at September 30, 2002 and 2001.





Related Party Notes and Accrued Interest Receivable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.





InventoriesInventories are stated at the lower of cost or market. Cost of the specialty chemicals segment inventories is determined principally on a moving average basis and cost of the environmental protection equipment
segment inventories is determined principally 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 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
carrying amount. An impairment charge of $9.1 million relating to certain specialty chemical assets was recognized in fiscal 2000. (See Note 12.) Depreciation is computed on the straight-line method over




38




---




the estimated productive lives of the assets (3 to 12 years for machinery and
equipment and 15 to 31 years for buildings and improvements).





Debt Issue CostsDebt issue costs
(included in Other Assets) are amortized on the effective interest method over the terms of the related indebtedness.





Intangible AssetsDuring the first quarter of fiscal 2002, we adopted 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 asset, related to our perchlorate acquisition in fiscal 1998, will continue to be amortized under its originally assigned life of ten years. At September 30,
2002, our intangible asset had a gross carrying value of approximately $39.0 million and accumulated amortization of approximately $18.0 million. Amortization expense was approximately $4.4 million during fiscal 2002 and fiscal 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.





Fair Value Disclosure as of September 30, 2002:





Cash and cash equivalents,
accounts and notes receivable, accounts payable and accrued liabilities, and other long-term liabilitiesThe carrying value of these items is a reasonable estimate of their fair value due to their short-term nature.





Long-term debt and warrantsMarket quotations are not available for our Warrants. However, the $14 strike price of the
Warrants (see Note 5) is substantially in excess of the recent trading prices of our Common Stock. On March 1, 2003, we intend to redeem our unsecured senior notes at a redemption price of 102.313% of par. (See Note 5.)





Sales and Revenue RecognitionSales of the specialty chemicals segment are recognized as the product is shipped and billed
pursuant to outstanding purchase orders. 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.





Net Income Per Common ShareBasic per share amounts are computed by dividing net income by average shares outstanding during
the period. Diluted net income per share amounts are computed by dividing net income by average shares outstanding plus the dilutive effect of common share equivalents. The effect of stock options and warrants outstanding to purchase approximately
2.9 million shares, 3.2 million shares and 3.3 million shares during the fiscal years 2002, 2001 and 2000, respectively, were not included in diluted per share calculations as the average exercise price of such options and warrants was greater than
the average price of our Common Stock. The dilutive effect of the assumed exercise of stock options increased the weighted average number of common shares by 190,000, 18,000 and 66,000 during the years ended September 30, 2002, 2001 and 2000,
respectively.





Income TaxesWe account for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. (See Note 7.)





Comprehensive LossOther comprehensive loss is
reported in our Consolidated Statements of Shareholders Equity and Accumulated other comprehensive loss is reported on our Consolidated Balance Sheets. Our only component of other comprehensive loss represents a minimum pension liability
adjustment. (See Note 8.)





Recently Issued Accounting StandardsIn April 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. 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




39




---




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. SFAS No. 145 is
effective for us beginning October 1, 2002. We will reclassify previously reported extraordinary losses on debt extinguishments to a separate line item above income before income taxes in our Consolidated Statement of Income.





ReclassificationsCertain reclassifications have been made in the 2001 and 2000 Consolidated Financial Statements
in order to conform to the presentation used in 2002.





2.    INVENTORIES





Inventories at September 30, 2002 and 2001 consist of the following:





2002

2001Work-in-process

$
6,923,000

$
8,239,000Raw material and supplies


7,066,000


5,669,000Total

$
13,989,000

$
13,908,000





3.    PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment at September 30, 2002 and 2001 are summarized as follows:





2002

2001Land

$
117,000

$
117,000Buildings, machinery and equipment


16,284,000


14,761,000Construction in progress


695,000


425,000Total


17,096,000


15,303,000Less: accumulated depreciation


9,574,000


8,196,000Property, plant and equipment, net

$
7,522,000

$
7,107,000





Depreciation expense was approximately $2.2 million, $2.1 million
and $4.6 million during the years ended September 30, 2002, 2001 and 2000, respectively.





4.    REAL ESTATE ASSETS





At September 30, 2002, we owned approximately 34 acres of improved undeveloped land at the Gibson Business
Park near Las Vegas, Nevada. This land is held for sale. 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 is currently winding down its operations. During the three-year period ended September 30, 2002, we received cash returns from this venture of approximately $11.0 million. We do not expect to receive any significant 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.)




40




---




Our real estate assets, grouped with Other Assets in our Consolidated Balance
Sheet, had a total carrying value of approximately $2.5 million at September 30, 2002.





5.    LONG-TERM DEBT





Long-term debt at September 30, 2002 and 2001 is summarized as follows:





2002

20019-1⁄4% Senior unsecured notes

$
40,600,000

$
44,175,000Less current portion





Total

$
40,600,000

$
44,175,000





On March 12, 1998, we sold $75.0 million principal amount of
unsecured senior notes (the Notes), consummated an acquisition (the Acquisition) of certain assets from Kerr-McGee Chemical Corporation (Kerr-McGee) described in Note 6 and repurchased the remaining $25.0 million
principal amount outstanding of subordinated secured notes (the Azide Notes).





The Notes mature on
March 1, 2005. Interest on the Notes is payable in cash at a rate of 9-1/4% per annum on each March 1 and September 1, commencing September 1, 1998. The indebtedness evidenced by the Notes represents a senior unsecured obligation, ranks pari passu
in right of payment with all existing and future senior indebtedness and is senior in right of payment to all future subordinated indebtedness. The Indenture under which the Notes were issued contains various limitations and restrictions including
(i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on restricted payments such as dividends, stock repurchases and investments. We believe we have complied with these limitations and restrictions.





Since the original issuance of the Notes, we have repurchased and retired approximately $34.4 million in principal amount of
Notes at a weighted average cost of approximately 102.6% of par value. We incurred total extraordinary losses on debt extinguishment on these transactions of approximately $1.9 million.





The Notes are redeemable at our option through February 28, 2003, at a redemption price of 104.625% of the principal amount of the Notes. During the twelve-month period
beginning March 1, 2003, the Notes are redeemable at a redemption price of 102.313% of the principal amount of the Notes. We intend to 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 $0.9 million.





We issued to the purchasers of the Azide Notes warrants (the Warrants), exercisable for a ten-year period commencing on December 31, 1993, to purchase shares of Common Stock at an exercise price of $14.00 per share. The
maximum number of shares purchasable upon exercise of the Warrants is 2,857,000 shares. The Warrants are 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 the event of such an election, the exercise price of the Warrants will be based upon a pro rata share of AACs capital, adjusted for earnings and losses, plus interest from the date
of contribution. The Warrants contain certain provisions for a reduction in exercise price in the event we issue or are deemed to issue stock, rights to purchase stock or convertible debt at a price less than the exercise price in effect, or in the
event of certain stock dividends, stock splits, mergers or similar transactions.





We may call up to 50% of the
Warrants at prices that would provide a 30% internal rate of return to the holders thereof through the date of call (inclusive of the 11% Azide Notes yield). The holders of the Warrants were also granted the right to require that the Common
Stock underlying the Warrants be registered on one occasion, as well as certain incidental registration rights.




41




---




We have accounted for the proceeds of the financing applicable to the Warrants as
temporary capital. Any adjustment of the value assigned at the date of issuance will be reported as an adjustment to retained earnings. 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.





6.    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.





Under the purchase agreement, Kerr-McGee has agreed to indemnify us against loss or liability from claims associated with the ownership and use of the Rights prior to consummation of the Acquisition or resulting from any breach of
its warranties, representations and covenants. We have agreed to indemnify Kerr-McGee against loss and liability from claims associated with the ownership and use of the Rights after consummation of the Acquisition or resulting from any breach of
our warranties, representations and covenants. The indemnification obligations under the purchase agreement expire on March 12, 2003, except as to any claim in respect of which notice is given prior to that date.





In connection with the Acquisition, we entered into an agreement with the Thiokol Propulsion Division (Thiokol) of Alcoa 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 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 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 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 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.





7.    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




42




---




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.





The following table provides an analysis of our income taxes for the years ended September 30:





2002

2001

2000Current

$
3,282,000

$
234,000

$
270,000Deferred (federal and state)


975,000


4,303,000


(15,406,000
)Income taxes

$
4,257,000

$
4,537,000

$
(15,136,000
)





A valuation allowance for net deferred tax assets was established
in 1997. In accordance with the provisions of SFAS No. 109, in fiscal 2000 we released our deferred tax valuation allowance and recognized the benefits of our net deferred tax assets. Net deferred tax assets are composed, for the most part, of
depreciation and amortization, accruals and alternative minimum tax credits. The alternative minimum tax credit carryforward, valued at approximately $0.7 million, may be carried forward indefinitely as a credit against regular tax.





Income taxes for the years ended September 30, 2002, 2001 and 2000 differ from the amount computed at the federal and state
income tax statutory rates as a result of the following:





2002


%


2001

%


2000


%Expected provision (credit) for Income taxes

$
4,515,000


35.0
%

$
4,169,000

34.0
%

$
(435,000
)

(34.0
)%Adjustment:Nondeductible expenses


24,000


0.2
%


43,000

0.3
%


30,000


2.4
%Other


(282,000
)

(2.2
)%


325,000

2.7
%


(14,731,000
)

(1150.9
)%Credit for income taxes

$
4,257,000


33.0
%

$
4,537,000

37.0
%

$
(15,136,000
)

(1182.5
)%





The components of net deferred taxes at September 30, 2002, 2001
and 2000 consisted of the following:





2002


2001


2000Deferred tax assets:Amortization

$
3,004,000


$
2,003,000


$
1,228,000Property


7,231,000



6,860,000



5,428,000Net operating losses






1,314,000



7,485,000Alternative minimum tax credits


706,000



1,643,000



1,460,000Reorganization costs


160,000



219,000



129,000Inventory capitalization


156,000



259,000



375,000Accruals


1,549,000



1,988,000



1,313,000Other


1,524,000



1,119,000



677,000Total deferred tax assets

$
14,330,000


$
15,405,000


$
18,095,000Deferred tax liabilities:Accrued income and expenses

$
(2,102,000
)

$
(1,740,000
)

$
(1,689,000
)Other


(2,100,000
)


(2,563,000
)


(400,000
)Total deferred tax liabilities


(4,202,000
)


(4,302,000
)


(2,689,000
)Net deferred tax assets

$
10,128,000


$
11,103,000


$
15,406,000





8.    EMPLOYEE BENEFIT PLANS





We 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. We do not presently match any portion of employee ESOP contributions.




43




---




All full-time employees age 21 and over with one year of service are eligible to
participate in the Plan. Benefits are paid based on an average of earnings, retirement age, and length of service, among other factors.





The tables below provide relevant financial information about the Plan as of and for the fiscal years ended September 30:





2002


2001Change in Benefit Obligation:Benefit obligation, beginning of year

$
18,231,000


$
15,693,000Service cost


615,000



713,000Interest cost


1,245,000



1,192,000Actuarial (gains)/losses


821,000



1,341,000Benefits paid


(752,000
)


(708,000
)Benefit obligation, end of year

$
20,160,000


$
18,231,000Change in Plan Assets:Fair value of plan assets, beginning of year

$
12,124,000


$
13,568,000Actual return (loss) on plan assets


(920,000
)


(1,320,000
)Employer contribution


780,000



584,000Benefits paid


(752,000
)


(708,000
)Fair value of plan assets, end of year

$
11,232,000


$
12,124,000Reconciliation of Funded Status:Funded status

$
(8,928,000
)

$
(6,107,000
)Unrecognized net actuarial (gains)/losses


5,728,000



3,086,000Unrecognized transition obligation






153,000Unrecognized prior service costs


280,000



315,000Accrued benefit liability

$
2,920,000


$
2,553,000Amounts Recognized:Accrued benefit liability

$
5,030,000


$
2,553,000Intangible assets


(280,000
)Other comprehensive loss


(1,830,000
)Net amount recognized

$
2,920,000


$
2,553,000





2002


2001


2000Net Periodic Pension Cost:Service cost

$
615,000


$
713,000


$
702,000Interest cost


1,245,000



1,192,000



1,098,000Expected return on assets


(966,000
)


(1,075,000
)


(925,000
)Net total of other components


254,000



189,000



189,000Net periodic pension cost

$
1,148,000


$
1,019,000


$
1,064,000Actuarial Assumptions:Discount rate


6.75
%


7.25
%


7.75
%Rate of compensation increase


4.50
%


5.00
%


5.00
%Expected return on plan assets


8.00
%


8.00
%


8.00
%





Participants in the SERP include only our Chief Executive Officer,
Chief Financial Officer and our former Chief Executive Officer. Benefits paid under the SERP were approximately $0.1 million in each of the fiscal years 2002, 2001 and 2000. Net periodic pension cost was approximately $0.2 million during the year
ended September 30, 2002, and approximately $0.3 million during both of the years ended September 30, 2001 and 2000. At September 30, 2002 and 2001, the accrued benefit liabilities recognized for the SERP were approximately $2.1 million and $2.0
million, respectively. During fiscal 2002, we established and funded a trust for the SERP. The balance of $2.0 million was invested in cash




44




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equivalents at September 30, 2002, and is included in Other Assets in our
Consolidated Balance Sheet. The non-current portions of the accrued benefit liabilities under the Plan and SERP of approximately $6.1 million and $3.7 million at September 30, 2002 and 2001, respectively, are included in Other Long-Term Liabilities
in our Consolidated Balance Sheet.





9.    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 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 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 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 $4.5 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 recently began 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, 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 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




45




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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. (See Note 5.) 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.





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 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, 2002, 2001 and 2000. We received approximately $130,000 in fiscal 2002 associated with sublet arrangements of certain of this office space.
Future gross minimum rental payments under this lease for the years ending September 30, are as follows:





2003

$
550,0002004


550,0002005


550,0002006


275,000Total

$
1,925,000





As of September 30, 2002, we had approximately $2.0 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 EQUITY





Preferred Stock and Purchase Rights





We have authorized the
issuance of 3,000,000 shares of preferred stock, of which 125,000 shares have been designated as Series A, 125,000 shares have been designated as Series B and 15,340 shares have been designated as Series C redeemable convertible preferred stock. No
Series A or Series B preferred stock is issued or outstanding. The Series C redeemable convertible preferred stock was redeemed in December 1989, and is no longer authorized for issuance.





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




46




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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 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 Warrants





We 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:





Shares Under Options and Warrants


Option PriceOctober 1, 1999

3,888,000


$4.88  $14.00Exercised

(45,000
)

7.00      7.50Expired

(46,000
)

4.88      7.50September 30, 2000

3,797,000


4.88    14.00Granted

206,000


4.88Exercised

(3,000
)

4.88Expired

(102,000
)

7.00      7.50September 30, 2001

3,898,000


4.88    14.00Exercised

(309,000
)

4.88    7.875Expired

(86,000
)

6.38      7.13September 30, 2002

3,503,000


$4.88 $14.00





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, 2002 include approximately 2,857,000 Warrants at a price of $14 per Warrant. The Warrants expire on December 31, 2003.





The following table summarizes information about stock options and warrants outstanding at September 30, 2002:





Options and Warrants Outstanding

Options ExercisableRange of Exercise Price

Number Outstanding

Average Remaining Contractual Life (Years)

Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price$
4.88

178,500

7.70

$
4.88

178,500

$
4.886.38    7.78

467,500

1.21


7.16

467,500


7.1614.00

2,857,000

1.25


14.00

2,857,000


14.003,503,000

1.63

$
13.31

3,503,000

$
13.31





We have adopted the disclosures-only provision of SFAS No. 123,
Accounting for Stock-Based Compensation. We apply Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for our stock options. Under APB No. 25, no compensation cost has been recognized in
the financial statements for stock options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Had compensation cost for the stock option grants been determined based on the
fair value at the date of grant for awards







47




---

consistent with the provision of SFAS No. 123, our diluted net income per common share would have changed to the pro
forma amounts indicated below for the years ended September 30:





2002

2001

2000Net income  as reported

$
8,642,000

$
7,726,000

$
13,731,000Net income  pro forma

$
8,484,000

$
7,353,000

$
13,429,000Diluted net income per share  as reported

$
1.18

$
1.10

$
1.86Diluted net income per share  pro forma

$
1.16

$
1.04

$
1.82





We did not grant stock options in fiscal 2002 or fiscal 2000. Stock
options for 206,000 shares of Common Stock were granted in fiscal 2001. The weighted average fair value of each option granted in fiscal 2001 was estimated using the following assumptions for the Black-Scholes options pricing model: (i) no
dividends; (ii) expected volatility ranging from 50% to 60%, (iii) risk free interest rates averaging 4.6%, and (iv) an expected average life of 4.5. The weighted average fair value of the options granted in fiscal 2001 was $2.57. Because the SFAS
No. 123 method of accounting has not been applied to options granted prior to October 1, 1996, the resulting pro forma net income may not be representative of that to be expected in future years.





11.    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. Our accounting policies of each reportable operating segment are the same as those of set
forth in Note 1 to our Consolidated Financial Statements.





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 Halotron clean gas fire extinguishing agents
designed to replace halons. The specialty chemicals segments production facilities are located in Iron County, Utah. Perchlorate chemical sales comprised approximately 81%, 76% and 76% of specialty chemicals segment sales during the fiscal
years ended September 30, 2002, 2001 and 2000, 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

2002

2001

2000A

Perchlorates

$37,182,000

$37,567,000

$33,858,000B

Sodium Azide

6,205,000

7,436,000

9,556,000





In fiscal 1998, we acquired certain intangible assets related to
the production and sale of AP from Kerr-McGee and entered into long-term agreements with respect to the supply of AP to certain domestic users. (See Note 6). In fiscal 2000, we recognized a fixed asset impairment charge of $9.1 million relating to
certain fixed assets in our specialty chemicals segment. (See Note 12.)





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).




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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 September 30, 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. Activity during the last three fiscal years has consisted of sales of land parcels.





Additional information about our operations in different segments for each of the last three fiscal years ended September 30, is provided below.





2002


2001


2000Revenues:Specialty chemicals

$
65,811,000


$
56,803,000


$
61,423,000Environmental protection


726,000



3,660,000



3,464,000Real estate


7,051,000



2,626,000



2,482,000Total revenues

$
73,588,000


$
63,089,000


$
67,369,000Gross profit (loss):Specialty chemicals

$
25,714,000


$
22,131,000


$
20,621,000Environmental protection


(189,000
)


915,000



999,000Real estate


4,534,000



1,857,000



1,470,000Total segment gross profit

$
30,059,000


$
24,903,000


$
23,090,000Operating income (loss):Specialty chemicals

$
13,551,000


$
13,479,000


$
2,446,000Environmental protection


(1,046,000
)


140,000



453,000Real estate


3,778,000



1,234,000



871,000Total operating income


16,283,000



14,853,000



3,770,000Net interest and other


(3,235,000
)


(2,590,000
)


(3,581,000
)Income before income taxes and extraordinary losses

$
13,048,000


$
12,263,000


$
189,000Depreciation and amortization:Specialty chemicals

$
5,940,000


$
5,852,000


$
8,155,000All other segments and corporate


119,000



123,000



348,000Total depreciation and amortization

$
6,059,000


$
5,975,000


$
8,503,000Capital Expenditures:Specialty chemicals

$
2,058,000


$
1,453,000


$
2,332,000All other segments and corporate


22,000



171,000



126,000Total capital expenditures

$
2,080,000


$
1,624,000


$
2,458,000Assets:Specialty chemicals

$
45,726,000


$
50,859,000


$
55,739,000Environmental protection


1,353,000



932,000



1,126,000Real estate


3,130,000



6,752,000



12,698,000Corporate


80,880,000



64,499,000



48,027,000Total assets

$
131,089,000


$
123,042,000


$
117,590,000





Our operations are located in the United States. Export sales,
consisting mostly of AP sales to Europe and environmental protection equipment sales to the Far and Middle East, have represented less than 10% of our revenues during each of the last three fiscal years.





12.    SODIUM AZIDE





In January 1996, we filed an antidumping petition against certain Japanese importers of sodium azide with the United States International Trade Commission (ITC) and the United States Department of Commerce
(Commerce). In August 1996, Commerce issued a preliminary determination that Japanese imports of sodium azide had been sold in the United States at prices that were significantly




49




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below fair value. Commerces preliminary dumping determination applied to
all Japanese imports of sodium azide, regardless of end-use. Commerces preliminary determination followed a March 1996 preliminary determination by the ITC that dumped Japanese imports had caused material injury to the U.S. sodium azide
industry.





On January 7, 1997, the antidumping investigation initiated by Commerce, based upon our petition,
against the three Japanese producers of sodium azide was suspended by agreement. It is our understanding that, by reason of the Suspension Agreement, two of the three Japanese sodium azide producers have ceased their exports of sodium azide to the
United States for an indeterminate period. As to the third and largest Japanese sodium azide producer, which has not admitted any prior unlawful conduct, the Suspension Agreement required that it make all necessary price revisions to eliminate all
United States sales at below Normal Value, and that it conform to the requirements of sections 732 and 733 of the Tariff Act of 1930, as amended, in connection with its future sales of sodium azide in the United States. The Suspension
Agreement expired on December 31, 2001.





Worldwide sodium azide demand 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. As a result of these market
conditions and in accordance with the requirements of SFAS No. 121, we recognized an impairment charge of $9.1 million in fiscal 2000 relating to the fixed assets (property, plant and equipment) used in the production of sodium azide. The present
value of estimated future cash flows was used to determine the amount of impaired fixed assets. The impairment charge was recorded as a reduction of building and equipment and accumulated depreciation of $14.7 million and $5.6 million, respectively.










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