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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For The Fiscal Year Ended June 30, 2002

OR

For the Transition Period From _______ To _______

Commission File Number 0-8864

PACER TECHNOLOGY

Issuer’s telephone number (909) 987-0550

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no 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. YES x NO o

         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. x

         The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 18, 2002 was $9,923,351 (computed by reference to the average closing bid and asked prices of such stock on September 18, 2002, as reported on the NASDAQ SmallCap Market).

         The number of shares outstanding of the Registrant’s Common Stock, as of September 18, 2002, was 2,928,401.

Documents Incorporated by Reference

         Items 10, 11, 12 and 13 of Part III of the Form 10-K are incorporated by reference from Registrant’s Definitive Proxy Statement for its Annual Meeting that is expected to be filed on or before October 28, 2002.

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PACER TECHNOLOGY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2002

TABLE OF CONTENTS

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FORWARD LOOKING STATEMENTS

         This Annual Report on Form 10-K (this “Report”) contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Such statements reflect management’s current views of our future financial performance. The forward-looking information is subject to certain risks and uncertainties, including, but not limited to, those described in Part I below under the caption “Certain Factors that Could Affect Future Performance” and in Part II under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers of this Report are urged to read those sections of this Report and are cautioned that, due to such risks and uncertainties, they should not place undue reliance on such forward-looking statements, which speak only as of the date of this Report.

PART I

Item 1. DESCRIPTION OF BUSINESS

Introduction

         Pacer Technology is a leading manufacturer, packager and distributor of advanced technology, high performance glues, epoxies and other adhesives for household, office and other consumer applications, and advanced technology, high performance adhesives, sealants and gaskets used in manufacturing, repair and industrial applications (collectively “Adhesive Products”). We sell our products for the consumer market under such well known brand names as SUPER GLUE, Bondini®, Future Glue®, ProSeal®, ZAP®, Anchor-Tite^TM and Go Spot Go® and those products are sold to consumers at over 77,000 retail store locations in the United States, including Wal-Mart, Target stores, Home Depot stores, Walgreens and Eckerd drug stores and grocery store chains such as Kroger and Safeway. Our Adhesive Products and sealants for manufacturing, repair and industrial applications are sold under the brand names SUPER GLUE, ProSeal® and Pacer Industrial. These products are sold to automotive aftermarket and heavy-duty truck and maintenance and repair operations and manufacturers of medical devices and electronic subassemblies and components. In the fiscal years ended June 30, 2002, 2001 and 2000, our sales of Adhesive Products totaled approximately $25.3 million, $27.8 million and $28.3 million, respectively.

         Additionally, as a result of our acquisitions of the California Chemical and Cook Bates product lines in our fiscal year ended 1998, we have been a manufacturer and supplier of nail care products and implements, including pumice stones, emery boards, tweezers, and nail clippers, for the professional beauty and self-nail care consumer markets. Those products were sold under Company-owned brand names such as “Gem”, “Kurlash” and “Diamon Deb” and, also pursuant to license agreements, under the Oleg Cassini, Brut and Elvira brand names, at more than 26,000 retail establishments in the United States, including Wal-Mart, K-Mart, Walgreens and Eckerd. We subsequently sold the California Chemical and Cook Bates product lines in fiscal 2001 and 2002, respectively. See “Recent Developments” below. We also manufacture our nail care products for other nail product suppliers who market our products under their own brand names. In the fiscal years ended June 30, 2002, 2001 and 2000, our sales of nail care products totaled approximately $5.5 million, $13.9 million and $15.5 million, respectively.

         During the fiscal year ended June 30, 2002, approximately 16% of our sales were made outside of the United States, primarily in Europe and, to a lesser extent, in Canada and Latin America. Those sales consisted almost entirely of our Adhesive Products.

Fiscal 2002 Developments and Outlook For Fiscal 2003

         Recent Developments

         Sale of Nail Care Products Business. During the latter part of fiscal 2001, we concluded that our nail care business was not likely to meet the future performance goals that we had established for that business. In particular, nail care product sales were beginning to decline and our efforts to significantly improve the profitability of that business were being frustrated by, among other things, increased competition and a resulting proliferation of products in the market. We then considered a number of alternatives for improving future sales and increasing the profitability of our nail care products business. However, we concluded that this would require a considerable

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investment in capital and management resources, which could not be justified by the likely return from such an investment. As a result, we determined that the best alternative would be to focus on our core glue, adhesives and sealant businesses and to seek buyers for our nail care products business. That process, which began early in the last quarter of fiscal 2001, led first to the sale, in June 2001, of our California Chemical business, which consisted primarily of the production and sale of bulk liquids and powders for sculptured acrylic finger nail processes. For that sale we received a total of $500,000 in cash plus the transfer by the buyer to Pacer of 145,000 shares of Pacer common stock owned by the buyer, which represented approximately 4.5% of our outstanding shares at the time of the sale.

         Then, in the first quarter of the fiscal year ended June 30, 2002, we sold inventory and certain fixed and intangible assets related to our Cook Bates nail care product line to another manufacturer of nail care products, for a cash purchase price of $5.3 million. The inventory that was sold had a book value of $3.8 million and the net book value of the remaining assets sold totaled $105,000. In connection with the sale, we recorded transaction related costs of $142,000, a $40,000 loss associated with the sale of holiday merchandise at bargain prices and a gain of $1.2 million, which are included in operating income in the accompanying Statement of Operations for the year ended June 30, 2002.

         We believe that the sales of our nail care product businesses will enable us to achieve greater operating efficiencies and to improve the profitability of our core Adhesive Products business operations. Furthermore, the sales of the California Chemical and Cook Bates product lines have strengthened our financial condition by improving the overall quality of our assets and reducing our outstanding bank borrowings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of this Report.

         Management Changes. In February 2001, the Board of Directors appointed Richard S. Kay as its Chairman, after he had worked, since December 2000, in a consulting capacity formulating a new strategic plan for the Company. As Chairman of the Board, Mr. Kay began the process of implementing structural and operational changes at the Company that were designed to strengthen the Company’s financial condition and better enable it to achieve the goals established in the new strategic plan. On July 9, 2001, Mr. Kay was appointed by the Board as Pacer’s new Chief Executive Officer and President, with a mandate to continue those operational changes and to implement the new strategic plan.

         Fiscal 2002 Operating Results. We generated operating income of approximately $2.2 million in the fiscal year ended June 30, 2002. Fiscal 2002 operating income was impacted by actions taken to refocus Pacer’s resources on growing its core Adhesive Products business. Those actions included the sale of the Cook Bates product line that generated a pre-tax gain (included in operating income) of $1.2 million and restructuring charges amounting to $516,000 consisting mainly of lease termination charges and employee termination costs. In addition, operating income was impacted by a provision for bad debts for K-Mart, a long-time major retail customer that filed for Chapter 11 Bankruptcy protection and the sale of our remaining Cook Bates return merchandise at bargain prices. We used the net proceeds from the sale of the Cook Bates product line, which totaled approximately $5.3 million, together with the proceeds from the collection of pre-sale Cook Bates receivables primarily to reduce our outstanding bank borrowings, and at June 30, 2002 we had no bank borrowings outstanding as compared to $7.6 million at June 30, 2001.

     Outlook for Fiscal 2003

         We currently expect improved profitability during the fiscal year ending June 30, 2003, due primarily to improvements made in raw materials sourcing, new marketing and sales initiatives that are designed to achieve increases in our market share in the consumer Adhesive Products markets, and new product releases. However, we expect that our sales in the first two quarters of fiscal 2003 will be lower than in the fiscal 2002 comparable quarters, due to (i) the sale of our nail care products business, which accounted for approximately $5.5 million, or 18%, of our total sales in fiscal 2002 and (ii) the closure, in June 2001, of our United Kingdom facility.

         Our operating results in fiscal 2003 are subject to certain risks and uncertainties discussed below in the section entitled “Certain Factors That Could Affect Our Future Performance” and, due to those and other factors or circumstances, our actual results could differ, possibly significantly, from our current expectations.

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Our Consumer Products

         Super Glue and Other Adhesive Products and Sealants

         Household and Office Products. We manufacture a broad range of glue and Adhesive Products that we market and sell primarily under the Super Glue, Bondini and Future Glue brand names, for household and office uses. These products include a variety of Adhesive Products that we package into easy-to-use tubes, bottles, syringes, glue sticks, glue pens and fasteners, each designed for differing home and office applications. We sell these products to mass merchandisers such as Wal-Mart and Target, drug store chains such as Eckerd and Walgreens, grocery store chains such as Kroger, Safeway and Vons and office products and arts and crafts retailers such as Staples and Michaels. As of June 30, 2002, our household and office Adhesive Products could be purchased at more than 77,000 retail stores located primarily in the United States, and in Europe, Canada and Latin America.

         Marine Products. We manufacture and market a line of high performance epoxies under the brand name Anchor-Tite^TM, which are used in the maintenance and repair of marine vessels, personal watercraft, home swimming pools and other marine applications. Anchor-Tite^TM was recognized at the 2002 National Hardware Show in Chicago by Popular Mechanics Magazine with an Editors Choice award which is given by that magazine to what it judges to be the most innovative new products for 2003.

         Automotive Aftermarket Products. We manufacture and market a line of high performance sealants, instant gaskets and other Adhesive Products that are designed to be used in the maintenance and repair of automobiles and heavy trucks, including ProSeal Instant Gasket, ProWeld, Pro-Lock and ProSeal Gasket Shellac. These products, which are designed to withstand the high temperatures and heavy wear and tear associated with the operation of motor vehicles, are marketed primarily into traditional automotive aftermarket distribution channels and are available for purchase at automobile parts and supply store chains and numerous other retail locations.

         Hobby Products. We also manufacture and market a line of glue and Adhesive Products that are used for various project and model assembly requirements. We market these products primarily under our ZAP brand name, which is the leading adhesive product line in the hobby market, and our Super Glue brand name and these products are sold to mass merchandisers, drug and grocery store chains and craft and hobby stores.

         Other Adhesive Consumer Products. We manufacture and sell a number of our glue and Adhesive Products to suppliers who market these products under their own brand names, either as extensions of their own product lines or in kits that they package with their products.

Our Industrial Products

         We sell a wide range of high performance adhesives and sealants to industrial customers and original equipment manufacturers which use our products in the manufacture of automobile and heavy truck equipment subassemblies and components, and aerospace, medical device and electronic components and for maintenance and repair applications. These products are sold primarily under our Pacer brand name, by our own sales personnel and to master distributors for resale to such customers.

Marketing

         Consumer Products

         Our Adhesive Products for the consumer markets are marketed and sold by our own internal sales personnel who focus on mass merchandisers and other national retail accounts, and by independent sales representative organizations that focus primarily on regional and local drug and grocery store chains. To facilitate sales of our Adhesive Products to mass merchandisers and drug and grocery store chains, we have designed a number of attractive and “eye-catching” product displays that facilitate sales of our products while minimizing the shelf space required to stock those products.

         Our automobile aftermarket products are marketed and sold by our own sales personnel and by independent sales representative organizations to retail automotive, professional repair and installation, agribusiness and heavy duty

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truck outlets. Our hobby products are sold to dealers and model shops through a network of independent master product distributors.

         Industrial Products

         Our high performance industrial adhesive and sealant products are marketed and sold by our own sales personnel and through independent distributors. To facilitate sales of these products we provide technical service and sales support using factory trained personnel and sales representatives.

         Foreign Sales

         Our foreign sales, which accounted for 16% of total revenues in fiscal 2002, 14% in fiscal 2001 and 12% in fiscal 2000, are marketed and sold primarily in Western Europe and, to a lesser extent, in Canada and Latin America by our own sales personnel, independent sales representative organizations and wholesale distributors. Following the sale of our nail care product businesses, foreign sales are expected to represent approximately 18% of total sales.

Sources and Availability of Raw Materials

         The materials used in the manufacture of our products are available from numerous sources, both within and outside the United States. However, to better control the quality and to obtain favorable pricing, we follow the practice of purchasing such materials from one or just a few suppliers. Dependence on a single supplier for any materials or supplies presents risks, including the risk that we may be unable to readily obtain alternative product supply sources in the event a single source supplier encounters quality or other production problems, which could adversely affect our sales. However, we have not experienced any difficulties in meeting our requirements for these materials and supplies from our traditional suppliers and have no reason to expect to encounter such problems in the future. In most instances, we acquire materials on a purchase order basis, with no guaranteed price or delivery agreements. In some instances, however, we contract annually for our material requirements under terms that specify the quantities to be purchased and the prices for those materials.

         The potential work stoppage at Southern California ports associated with the dispute between the International Longshore and Warehouse Union (“ILWU”) and the Pacific Marine Association (“PMA”) subcommittee, should it occur and continue for an extended period of time, could affect our ability to receive materials from international sources and could adversely affect our sales and profitability. During the first quarter of fiscal 2003, we have increased our inventories of materials typically received at effected Southern California ports in anticipation of a potential work stoppage.

         During fiscal 2002, approximately 37% of the materials and supplies we used in our business were obtained from foreign suppliers, as compared to 32% in fiscal 2001. As a result, our business is subject to the risk of fluctuations in the value of the U.S. dollar on foreign currency exchanges and related constraints associated with international trade. In addition, some of the packaging materials we use for our products are petroleum-based and are subject to increases in the cost of oil. However, packaging materials do not represent a significant portion of our total costs of goods and materials. We expect that the percentage of foreign-sourced materials and supplies will decline to approximately 28% in the fiscal year ending June 30, 2003, due largely to the fact that we no longer market and sell nail care products.

         We operate a quality assurance department that conducts random batch testing of the quality of the raw materials that we use in our Adhesive Products, which we warrant to have a shelf lives ranging from six to twelve months. In the event any defects or problems are discovered during testing, the defective batches are removed from production and are replaced by our suppliers. In the past, we have not experienced any material product returns or warranty claims.

Competition

         The markets for our products are characterized by intense competition. Our principal competitors in our Adhesive Products markets include Henkel, which markets its Adhesive Products under the Loctite/Manco brand names; Borden/Elmers/Krazy Glue; Devcon; 3-Bond; and Alteco. The principal competitive factors affecting our

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sales are brand name recognition, pricing, breadth of product line, marketing and service and support. Competition also can be affected by the introduction of new Adhesive Products. We believe we compete favorably with respect to each of these factors. However, some of our competitors have greater name recognition or greater financial and marketing resources.

Certain Factors That Could Affect Our Future Performance

         Dependence on Certain Major Customers. One customer represented approximately 12% of our total sales in fiscal 2002, and our customers include several other large national mass merchandisers and national and regional food and drug store chains, the loss of business from one or more of which could result in unexpected reductions in sales and could possibly cause us to incur operating losses and reductions in cash flow that could increase our dependence on borrowings to fund operations.

         On January 22, 2002, Kmart, a long-time major retail customer, announced that it had filed for Chapter 11 Bankruptcy protection. For the quarters ended December 31, 2001 and June 30, 2002, the Company made a provision for a potential loss on the amounts due from this customer on product sales made to it during the second quarter of our current fiscal year and prior to the customer’s bankruptcy. Due to the lack of information as to the outcome of the Kmart bankruptcy, there can be no assurances that the actual loss that will be incurred on the Kmart receivables will not exceed management’s current estimate.

         Technological Change and Competition. The markets for our products are characterized by frequent new product introductions, declining average selling prices over product life cycles and intense competition. As a result, our future performance is highly dependent upon the timely completion and introduction of new products at competitive prices and performance levels. In addition, we must respond to competitors in the various markets in which we operate. If we are not able to make timely introduction of new products or to respond effectively to competition, our business and operating results could be harmed. Moreover, a number of our competitors have greater financial and marketing resources than we have.

         Risks of Foreign Operations. Approximately 16% of our total sales in fiscal 2002 and 14% in fiscal 2001 were made outside the United States, primarily in Europe, Canada and Latin America and, following the sale of our nail care products business, foreign sales are expected to represent approximately 18% of our total sales. Additionally, approximately 37% of our raw material purchases are made from suppliers based outside the United States. As a result, our operating results could decline due to foreign currency fluctuations and changes in the value of the U.S. Dollar in relation to foreign currencies in the countries where our products are sold and where we obtain some of our raw materials. We do not attempt to hedge the risks of foreign currency fluctuations by means of exchange agreements or other financial instruments.

         Risks associated with Expansion of our Adhesive Products Business. If appropriate opportunities present themselves, we also intend to acquire other Adhesive Products businesses or product lines that we believe will help us to expand our business. The process of integrating an acquired business or product line may result in operating difficulties and expenditures which we cannot anticipate and may absorb significant management attention that would otherwise be available for further development of our existing business. Moreover, the anticipated benefits of any acquisition may not be realized. Any future acquisitions of other businesses or product lines might require us to obtain additional equity or debt financing, which might not be available to us on favorable terms or at all, and might be dilutive to existing shareholders.

         Effect of Adverse Economic Conditions. During fiscal 2002, the U.S. economy fell into recession and the anticipated economic recovery has been slow to develop. A decline in economic conditions or a heightening of tensions or war in the Middle East could lead to declines in consumer demand and increased price competition in our markets that could adversely affect our operating results in the future.

Research and Development

         We conduct on-going product development and research programs, the primary objectives of which are to enhance the quality and durability of our products and to develop new Adhesive Products. Product development and research expenditures were approximately $302,000, $318,000 and $467,000 in the fiscal years ended June 30,

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2002, 2001 and 2000, respectively. The decrease in fiscal 2002 and 2001 was the result of a reduction in product development expenditures relating to the California Chemical product line and the Company’s decision to suspend research and development efforts associated with poultry adhesive/sealants and a medical cyanoacrylate formulation.

Government and Environmental Regulation

         Our business is subject to numerous federal, state and local laws and regulations that relate to product labeling, manufacturing safety and recordkeeping, consumer product safety and air quality and environmental safety. In addition, our Adhesive Products are subject to recall in the event it is determined that they are defective or pose any safety risks. As a result, we take particular care in the packaging and labeling of our products and we have not encountered any material product recalls or incurred any material liabilities arising out of the quality of our products. Additionally, we believe that our manufacturing methods comply with all applicable safety and environmental laws and regulations and we have not incurred any material liabilities or had to make any material capital expenditures under such laws and regulations.

Trademarks, Patents and Licenses

         We have 27 registered trademarks, the most important of which are Pacer, Pacer Technology, ZAP, ProSeal, Future Glue, Anchor-Tite and Go Spot Go, which are used in the marketing of our Adhesive Products. In addition, we also have the exclusive right to the use of a trademark for the Bondini product line. We hold 17 patents, which relate primarily to the packaging of our products. However, we believe that the expiration or loss of any of these patents would not have a material impact on our business.

Employees

         At August 30, 2002, we had 106 full-time employees. At various times during the year we also employ approximately 50 additional personnel on a temporary basis. None of our employees are employed under any collective bargaining agreements, we have not experienced any work stoppages and we believe that we have good relations with our employees.

Item 2. DESCRIPTION OF PROPERTY

         Our headquarters, principal manufacturing and research and development facilities are located in a 47,700 square foot building in Rancho Cucamonga, California that is leased under an operating lease expiring on May 31, 2009. We also occupy 26,406 square feet of a 62,134 square feet distribution facility, also located in Rancho Cucamonga, California that is leased under an operating lease that will expire on November 30, 2003. During fiscal 2002, we relocated our receiving operations to our headquarters building. As a result of the relocation, we obtained an early termination of our existing 62,134 square foot lease at the distribution facility and replaced it with the 26,406 square feet operating lease.

         We also lease a 10,384 square foot facility in Ontario, California to manufacture certain flammable products. This lease expires on October 31, 2004.

         During fiscal 2001, we also maintained a sales and distribution office at a leased facility in Essex, England. This lease expired in July of 2001 and was not renewed. However, we currently maintain a small sales office in Worcestershire, England.

         We also lease a 41,040 square foot facility in Memphis, Tennessee, that we had used to warehouse and distribute products to customers located in the Midwest and East. As part of our restructuring and cost cutting program, we moved those functions to our Rancho Cucamonga, California facility and vacated the Memphis facility in June 2000. The lease for the Memphis facility expires May 31, 2003 and we are currently sub-leasing 27,360 square feet of this facility.

         We believe our present facilities are in good operating condition and are adequate for our present and anticipated future needs.

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Item 3. LEGAL PROCEEDINGS

         None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None

EXECUTIVE OFFICERS OF REGISTRANT

         MR. KAY was appointed Chief Executive Officer and President on July 9, 2001. He was named Chairman of the Company’s Board of Directors on February 21, 2001. Mr. Kay has been a CEO and CFO for several companies operating in different industries, including manufacturing and consumer products, energy and healthcare. He was the CFO for three different companies during their initial public offerings and the CFO for four companies during the course of their merger transactions. Most recently he served as the COO and CFO for TruCost Food Systems, a company formed in 1999 to develop a foodservice web site. Beginning in 1992, he served as CFO of Paragon Steakhouse Restaurants. He was promoted to CEO in 1997 and was responsible for the turnaround for this owner and operator of 73 upscale casual restaurants, with more than 4,000 employees located in eleven states. Paragon was sold in 1999.

         MR. GRAVETTE joined Pacer in December 2000 as the General Sales Manager for the Central United States where his responsibilities included many of Pacer’s key accounts. He was promoted to Vice President, Sales in October 2001. Prior to joining Pacer, Mr. Gravette held numerous sales and sales related positions in a variety of industries, including foodservice, hospitality and publishing. From 1995 to 1998, he served as Associate Publisher for Marcoa Publishing, Inc. and then, from 1998 to 2000, for International Business Publishers, Inc. During this same period, Mr. Gravette also served as a consultant to Stagecoach Properties, Inc., a hotel and restaurant family business enterprise. He earned his Bachelor’s degree from the University of Redlands. Mr. Gravette is the son of Mr. E.T. Gravette who is a director of the Company.

         MR. HUFF was appointed Chief Financial Officer of the Company in September 1999. For more than the previous five years, he served as Assistant Corporate Controller of Stater Bros. Markets, Colton, California, a major grocery store chain, where he was responsible for budgeting and tax accounting and the development and implementation of computerized financial and accounting systems. Prior to joining Stater Bros., Mr. Huff served as a financial and budgeting analyst and cost accountant for a number of the manufacturing divisions of Rockwell International. Mr. Huff holds an MBA from the University of La Verne and a Bachelors degree with an emphasis in accounting from California State University, Long Beach.

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PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Market for Our Shares

         Our common stock is traded in the over-the-counter market and is listed on the NASDAQ SmallCap Market under the symbol “PTCH”. High and low closing prices for each of the quarters in the fiscal years ended June 30, 2002 and 2001 are listed below:

         Number of Record Shareholders

         The approximate number of record holders of our shares as of September 25, 2002 was 1,415 and we have approximately 5,000 beneficial owners.

         Dividends and Share Repurchases

         Pacer has a policy of retaining earnings to support the growth of its business and, therefore, we do not anticipate that any cash dividends will be paid in the foreseeable future. In addition, payment of cash dividends is restricted by our loan agreements.

         In fiscal 2000, we adopted an open market and private stock repurchase program. Through June 30, 2002, we purchased 305,694 shares of Pacer common stock for $1.4 million under that program that were funded with a combination of internally generated funds and borrowings under our bank line of credit. In August 2002, we completed and terminated the program.

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Item 6. SELECTED FINANCIAL DATA

         The consolidated selected operating data set forth below for the fiscal years ended June 30, 2002, 2001 and 2000, and the selected balance sheet data at June 30, 2002 and 2001, are derived from the Company’s audited consolidated financial statements included elsewhere in this Report. The selected financial data for the fiscal years ended June 30, 1999 and 1998 and at June 30, 2000, 1999 and 1998 are derived from audited consolidated financial statements that are not included in this Report. The consolidated selected operating data for the fiscal year ended, and the balance sheet data at June 30, 1999 include the operations of Cook Bates from March 4, 1998, when those operations were acquired by Pacer. The following data should be read in conjunction with our consolidated financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Report.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

General

         In accordance with accounting principles generally accepted in the United States (“GAAP”), we record all of our assets at the lower of cost or fair value. In determining the fair value of some of our assets, principally accounts receivable, inventories and costs in excess of net assets of acquired businesses (commonly known as “goodwill”), we must make judgments, estimates and assumptions regarding future events and circumstances that could affect the value of those assets, such as future economic conditions that will affect our ability to collect our accounts receivable or sell our inventories in future periods. Those judgments, estimates and assumptions are based on current information available to us at the time they are made. Many of those events and circumstances, however, are outside of our control and if changes in those events or circumstances occur thereafter, GAAP may require us to adjust the earlier estimates that are affected by those changes. Any downward adjustments are commonly referred to as “write-downs” of assets involved.

         It is our practice to establish reserves or allowances against which we are able to charge any such downward adjustments or “write-downs” in the fair value of any of these assets. Examples include reserves or allowances established for uncollectible accounts receivable (sometimes referred to as “bad debt reserves”) and reserves for inventory obsolescence based on estimates or judgments that we make about the collectibility of our accounts receivable and the market and salability of the products we have in our inventories. Write-downs of uncollectible accounts or the value of obsolete or slow moving inventories are charged against those reserves or allowances. The reserves or allowances are established and replenished (following write downs), or increased in response to changed economic conditions or other circumstances, by charges to income. With respect to other assets, such as goodwill, we write down their fair value directly upon determining that, due to changes in events or circumstances, the amounts at which they are carried on our books exceed their current fair value, by increases in general and administrative expenses. As a result, our judgments, estimates and assumptions about future events can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.

         Under GAAP, many businesses also must make estimates or judgments regarding the periods during which, and also in the amounts at which, sales are recorded. Those estimates and judgments will depend on such factors as the circumstances under which a customer would be entitled to return the products or reject or adjust the payment for the services. Additionally, in the case of a company that grants its customers contractual rights to return products sold to them, GAAP may require the establishment of reserves or allowances for product returns by means of a reduction in the amount at which its sales are recorded, based primarily on the nature, extensiveness and duration of those rights and its historical product return experience. In addition, promotional allowances and discounts that are extended to customers also may be charged against, and therefore can reduce, reported revenues.

         In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the fair value of those assets and to establish reserves or allowances that are adequate to absorb potential write-downs in the value of accounts receivable and inventories. Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations that are discussed below.

         Revenue Recognition. We provide our customers with limited rights to return products. We recognize revenue from the sale of a product upon its shipment to the customer and establish an allowance based on historical experience with returns of like products.

         Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of business we extend 60-day payment terms to our customers. We regularly review our customers’ accounts and estimate the amount of and establish an allowance for uncollectible amounts or “receivables” in each reporting period. The amount of that allowance is based on several factors, including the age of unpaid amounts, a review of significant past due accounts, and economic conditions that may affect the ability of customers to keep their accounts current.

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         Replenishments of or increases in the amount of the allowance, if determined to be warranted by changed conditions or factors, are recorded in the period they become known. For example, if the financial condition of the Company’s customers or economic conditions were to deteriorate, adversely affecting their ability to make payments, increases in the allowance may be required. Since the allowance is replenished or increased by recording a charge against income, any replenishment of or increase in the allowance will cause a decline in our operating results in the period when that takes place.

         Reserve for Excess and Obsolete Inventory. Inventories are valued at the lower of cost (first-in, first-out) or market and are reduced by an allowance for excess and slow moving or obsolete inventories. The amount of the allowance is determined on the basis of historical experience with our product lines, estimates concerning future economic conditions and estimates of future sales. If there is an economic downturn or a decline in sales, causing inventories of some product lines to accumulate, it may become necessary to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new or competitive products by competitors; however, due to the relative maturity of the markets in which the Company operates, usually these are not significant factors. Increases in this allowance also will cause a decline in operating results as such increases are effectuated by charges against income.

         Long-Lived Assets. Long-lived assets such as goodwill and intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. Currently, estimated undiscounted future cash flows are used to determine if an asset is impaired and, if such a determination were to be made, the carrying value of the asset would be reduced to fair value. Any resulting impairment would be recorded as a charge against income in the period in which the impairment was recorded. Beginning with the fiscal year ending June 30, 2003, however, we will be required to assess our goodwill for impairment based on the new standards established by SFAS No. 142. We will not be able to determine the full effect of these new standards on our financial position or our results of operations until we are able to complete our impairment analysis using the new standards. Under existing accounting standards, our assessment of goodwill indicated that no impairment existed as of June 30, 2002. In the event our analysis under the new standards indicates this goodwill is impaired, we will be required to record a charge, retroactive to July 1, 2002, against our earnings in fiscal 2003, the amount of which is not presently determinable.

         Impact of Recent EITF Guidance

         In accordance with EITF Issue No. 00-10 (EITF 00-10): “Accounting for Shipping and Handling Fees and Costs,” the Company reclassified freight out expense from selling, general and administrative expense to cost of sales for all periods presented. This change has no effect on net income (loss) or earnings (loss) per share. The change increased cost of sales and decreased selling, general and administrative expenses during the fiscal years ended June 30, 2002, 2001 and 2000 by $1.0 million, $1.3 million and $362,000, respectively.

         The results in the accompanying financial statements reflect the application of the consensus reached by the EITF of the FASB in Issue 01-9 (EITF 01-9): “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.” The change requires a reclassification of certain marketing and promotional expenses from operating expenses (selling expenses) to a reduction in sales. The change has no effect on net income (loss) or earnings (loss) per share. Prior period financial statements have been reclassified to comply with this EITF guidance. The change reduced both net sales and selling, general and administrative expenses during the fiscal years ended June 30, 2002, 2001 and 2000 by $1.1 million, $2.3 million and $3.9 million, respectively.

Overview

         In fiscal 2001, we made a strategic decision to sell our nail care product businesses in order to focus on the more profitable glue, adhesive and sealant business. In furtherance of that strategy, we sold our California Chemical acrylics product line at the end of fiscal 2001 and our Cook Bates nail care product line in the first quarter of fiscal 2002. As a result, our sales of nail care products declined by approximately $8.4 million in fiscal 2002 to $5.5 million from $13.9 million in fiscal 2001 and, primarily for that reason, our total net sales for fiscal 2002 declined to $30.8 million from $41.7 million in fiscal 2001.

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         At the same time we implemented cost cutting and restructuring programs that were designed to align our operating costs to match our reduced level of sales and improve our operating efficiencies. Among other things, we consolidated some of our operations into our primary manufacturing facility in Rancho Cucamonga, California, which enabled us to reduce the amount of space we had under lease and we also restructured our sales organization and took steps to reduce staffing. In connection with the program, we incurred restructuring charges of $516,000. See “Results of Operations – Restructuring Charges” below.

         Fiscal 2002 Operating Results. We generated operating income of approximately $2.2 million in the fiscal year ended June 30, 2002. Fiscal 2002 operating income was impacted by actions taken to refocus Pacer’s resources on growing its core Adhesive Products business. Those actions included the sale of the Cook Bates product line that generated a pre-tax gain (included in operating income) of $1.2 million and restructuring charges amounting to $516,000 consisting mainly of lease termination charges and employee termination costs. In addition, operating income was impacted by a provision for bad debts for K-Mart, a long-time major retail customer that filed for Chapter 11 Bankruptcy protection and the sale of our remaining Cook Bates return merchandise at bargain prices. We used the net proceeds from the sale of the Cook Bates product line, which totaled approximately $5.3 million, together with the proceeds from the collection of pre-sale Cook Bates receivables primarily to reduce our outstanding bank borrowings, and at June 30, 2002 we had no bank borrowings outstanding as compared to $7.6 million at June 30, 2001.

         Outlook for Fiscal 2003

         We currently expect improved profitability during the fiscal year ending June 30, 2003, due primarily to improvements in raw materials sourcing, new marketing and sales initiatives that are designed to achieve increases in our market share in the consumer Adhesive Products markets, and new product releases. However, we expect that our sales in the first two quarters of fiscal 2003, will be lower than in the fiscal 2002 comparable quarters, due to the sale of our nail care products business, which accounted for approximately $5.5 million, or 18%, of our total sales in fiscal 2002 and the closure of our United Kingdom facility.

Results of Operations

         The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of the Company’s net sales:

         Fiscal Years Ended June 30, 2002 and 2001

         Net Sales. Net sales in fiscal 2002 declined $10.8 million to $30.8 million, a 26.0% decrease from the prior year. Sales in the United States, which represented 84% of our total sales in fiscal 2002, decreased 27.5% from $35.7 million to $25.9 million. Of that decline, $8.4 million was primarily attributable to the sale of our nail care product lines. Adhesive sales in the United States declined by $1.4 million or 5.9% of net sales, as compared to the prior fiscal year, due to a number of factors including a decision to discontinue sales of products to K-Mart, that accounted for approximately $650,000 of the decrease in U.S. adhesive net sales; consolidation among retailers in the sales channels where we sell our products; increased pricing pressures and new entrants into the marketplace.

         International sales, in fiscal 2002, which consisted primarily of Adhesive Product sales, also contributed to $1.0 million of the total net sales decline, as such sales decreased to approximately $4.9 million, in fiscal 2002, as compared to $5.9 million, in fiscal 2001. The decrease in international sales is primarily attributable to the closure of our facilities in the United Kingdom.

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         In fiscal 2001, net sales declined by $2.1 million to $41.7 million or 4.8% from the prior year. Sales in the United States, that represented 86% of total net sales in fiscal 2001, decreased by $2.8 million or 7.3% from $38.5 million to $35.7 million. The domestic revenue decline of approximately $1.2 million was primarily attributable to the slowing of the United States economy in fiscal 2001. Promotional and advertising expenses decreased by $1.6 million as a result of the sale of the Cook Bates product line that impacted net sales. International sales increased in fiscal 2001 as compared to the prior fiscal year, totaling $6.0 million, or 14% of total net sales for fiscal year 2001, as compared to $5.3 million and 12% of total net sales in fiscal 2000.

         Gross Profit. Our gross margin (gross profits stated as a percentage of net sales) increased to 28.4% in fiscal 2002 from 23.4% in fiscal 2001, due primarily to improved raw material sourcing, the closure of our United Kingdom facility, a reduction of approximately $300,000 in distribution related costs and a favorable shift in product mix associated with the disposition of our nail care product lines.

         Our gross margin declined to 23.4% in fiscal 2001 from 24.9% in fiscal 2000, due primarily to $500,000 of charges in the quarter ended June 30, 2001 resulting from the closure of our United Kingdom facility. Excluding those charges, our gross margin would have remained relatively unchanged at approximately 24.6%.

         We currently anticipate further improvements in our gross margin during the fiscal year ending June 30, 2003, as we expect to realize additional benefits from improvements in raw materials sourcing and our business will no longer be impacted by write-offs associated with the Cook Bates product line.

         Selling, General & Administrative Expenses. Selling, general and administrative (“SG&A”) expenses, decreased by $2.0 million from $9.3 million or 22.2% of net sales in fiscal 2001 to $7.3 million or 23.5% of net sales in fiscal 2002. The decrease in SG&A expenses was primarily the result of workforce reductions that we were able to make as the result of the sale of the Cook Bates product line. The increase in SG&A, as a percentage of net sales in fiscal 2002, is mainly attributable to bad debt expense associated with K-Mart’s, filing, in January 2002, for Chapter 11 Bankruptcy protection and the fact that net sales declined at a greater rate than did SG&A expenses.

         In fiscal 2001, SG&A decreased by $591,000, and as a percent of net sales, declined to 22.2% compared to 22.5% in fiscal 2000. This decline in fiscal 2001 was primarily the result of higher than normal expenses in fiscal 2000 that amounted to $350,000 associated with a costs incurred to defend a proxy contest waged by a group of dissident shareholders at the Annual Meeting held in November 2000.

         Restructuring Charges. During fiscal 2002, we implemented a restructuring program to bring our operating costs in line with our operations following the sale of our nail care product lines. That program included the consolidation of operations, formerly conducted at multiple facilities, into our primary manufacturing facility in Rancho Cucamonga, California and work force reductions. As a result, restructuring charges totaled $516,000 and were mainly lease termination charges and employee termination charges, which represented 1.7% of our net sales in fiscal 2002. There were no restructuring charges in fiscal 2001.

         Gain/Loss on Sale of Product Lines. We sold inventory and certain fixed and intangible assets related to the Cook Bates product line (which consisted largely of personal care manicure implements, seasonal gift sets and Halloween merchandise) for $5.3 million cash. That inventory totaled $3.8 million and the net book value of the remaining assets sold in that transaction totaled $105,000. In connection with the sale, we recorded transaction related costs of $142,000, a $40,000 loss associated with the sale of holiday merchandise at bargain prices and a gain of $1.2 million or 3.9% of net sales, which are included in operating income in the accompanying statement of operations for the year ended June 30, 2002.

         In fiscal year 2001, we sold all of the assets, properties and goodwill of the California Chemical product line, which consisted primarily of bulk liquids and powders for the sculptured acrylic finger nail processes to Esschem, Inc. in exchange for $500,000 cash plus the transfer by Esschem to Pacer of 145,000 shares of Pacer common stock owned by Esschem. As a result of this transaction, we wrote off the remaining goodwill that arose from the acquisition in 1997. The goodwill impairment, a one-time, non-cash charge, of $1.0 million or 2.5% of net sales is included in the accompanying 2001 consolidated statement of operations.

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         Other Expense, Net. Other expense, net, which consists primarily of interest charges on outstanding bank borrowings, was $112,000 in fiscal 2002 as compared to $841,000 in fiscal 2001. Interest expense decreased by $708,000 during fiscal 2002 as a result of reductions in outstanding debt made possible by the Cook Bates sale and, to a lesser extent, declines in prevailing rates of interest.

         Other expense, net, in fiscal 2001, which also consisted primarily of interest charges on outstanding bank borrowings, was $841,000 as compared to $863,000 in fiscal 2000. That decline was due to declining rates of interest in fiscal 2001 as compared to fiscal 2000.

Liquidity and Capital Resources

         Net cash provided by all activities in fiscal 2002 was $728,000 versus net cash provided of $20,000 in the prior year.

         Cash provided by operating activities during fiscal year 2002 was $9.6 million compared to $4.7 million in fiscal year 2001. This increase was due primarily to the receipt of the cash proceeds from the sale of the Cook Bates product line in September 2001 and a $2.9 million reduction in accounts receivable due, in large part, to the collection of accounts receivable from sales of our Cook Bates products prior to the sale of the Cook Bates product line and the sale of our remaining inventories of Cook Bates products.

         We used cash of $467,000 in investing activities to fund capital expenditures in fiscal 2002. In fiscal 2001, the $500,000 in cash proceeds from the California Chemical sale more that offset capital expenditures and, as a result, investing activities provided cash of $22,000 in fiscal 2001.

         We used the cash provided by operations in fiscal 2002, principally generated by the Cook Bates sale, to reduce net borrowings under our bank credit facilities by $7.6 million and to repurchase common shares in our open market and private stock repurchase program. As a result, cash used in financing activities in fiscal 2002 increased to $8.4 million as compared to $4.7 million in fiscal 2001.

         During fiscal 2002, we funded our working capital requirements primarily with a combination of internally generated funds and borrowings under a revolving bank credit line pursuant to which we may borrow up to the lesser of (i) $7 million or (ii) the sum of 70% of the face dollar amount of eligible accounts receivable plus 46% of the cost of our finished goods inventories and approximately 35% of raw material inventories (the “borrowing base”). Borrowings under the credit facility are payable in monthly interest only installments until the maturity date of the credit line, which is October 1, 2003. During fiscal 2002 our credit line borrowings bore interest at the bank’s prime rate (4.75% at June 30, 2002), less 0.25%, or at the bank’s LIBOR base rate, plus 2.50%. Effective June 30, 2002, the rate for LIBOR borrowings will be reduced to the bank’s LIBOR base rate, pursuant to the terms of our bank credit line agreement, because we generated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of more than $1 million for the six months ended June 30, 2002. This new LIBOR borrowing rate will continue in effect provided that we are able to achieve EBITDA of at least $500,000 in each subsequent fiscal quarter.

         At June 30, 2002, we had no borrowings outstanding on our revolving bank credit line and approximately $4.9 million of unused borrowings were available (based on eligible collateral). By comparison, at June 30, 2001, outstanding credit line borrowings totaled $7.6 million.

         We also have a bank credit facility under which we may obtain commercial letters of credit, standby letters of credit, and banker’s acceptances in amounts not exceeding $1.5 million in the aggregate. Any amount outstanding on this additional credit facility will reduce the borrowing base on the revolving bank credit line. This credit facility expires on October 1, 2003. As of June 30, 2002, there were no amounts outstanding under this credit facility.

         From December 1999 to July 2002, we made $1.4 million of repurchases of our common stock pursuant to an open market and private common stock repurchase plan. On March 1, 2001, the amount we could use to repurchase common stock was increased to $800,000 per year, subject to certain bank covenants. The amount of repurchases was also limited by certain Securities and Exchange Commission volume and price restrictions. Pursuant to that plan we used borrowings and internally generated funds totaling $731,000 to repurchase 163,504 of our shares in fiscal

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2002 and bank borrowings of $323,000 to repurchase 87,290 of our shares in fiscal 2001. In August 2002, we completed and terminated the stock repurchase program. We do not currently anticipate making additional share repurchases during the fiscal year ending June 30, 2003.

         We believe that availability under the credit line, together with internally generated funds, will be sufficient to enable us to meet our working capital and other cash requirements over the next twelve months. However, we may take advantage of opportunities to acquire other Adhesive Products businesses, should they arise, or to invest in new product introductions, in which case we may incur borrowings to do so. At the present time, we are introducing our new Anchor-Tite^TM and Go Spot Go® products.

Seasonality and Quarterly Financial Data

         Historically, we have sold a greater volume of nail care products in the third calendar quarter of the year (our first fiscal quarter), than in other quarters, because merchants tend to begin stocking such products during the fall in anticipation of increases in holiday sales during the last calendar quarter of the year. As a result of the sale of the Cook Bates product line, we expect that we will cease to encounter such sizable quarterly variations in our sales and operating results.

         The following table presents unaudited quarterly financial information for each of the fiscal years ended June 30, 2002 and 2001. This information has been prepared by us on a basis consistent with our audited consolidated financial statements included elsewhere in this Report. The information includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly operating results when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Report. These quarterly operating results are not necessarily indicative of results that may be expected in future periods.

         Impact of Recently Issued Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Under the new rules, goodwill and indefinite lived intangible assets will no longer be amortized but will be reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The non-amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting rules beginning July 1, 2002. The Company will be required to reassess the useful lives of other intangible assets within its first fiscal quarter after adoption of SFAS No. 142. We are currently assessing what financial impact, if any, SFAS No. 142 will have on our consolidated financial statements and operating results.

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         In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation when an existing law or contract requires that the obligation be settled. The statement requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. The capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 will be effective for financial statements beginning after January 1, 2003, with earlier application encouraged. The Company is currently evaluating the impact on its consolidated financial statements of adopting this statement.

         In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which is effective for financial statements issued for fiscal years beginning after December 15, 2001. SFAS 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and applies to all long-lived assets (including discontinued operations). We are currently assessing what financial impact, if any, SFAS No. 144 will have on our consolidated financial statements and operating results.

         Impact of Recent EITF Guidance

         In accordance with EITF Issue No. 00-10 (EITF 00-10): “Accounting for Shipping and Handling Fees and Costs,” the Company reclassified freight out expense from selling, general and administrative expense to cost of sales for all periods presented. This change has no effect on net income or earnings per share.

         The change increased cost of sales and decreased selling, general and administrative expenses during the fiscal years ended June 30, 2002, 2001 and 2000 by $1.0 million, $1.3 million and $362,000, respectively.

         The results in the accompanying financial statements reflect the application of the consensus reached by the EITF of the FASB in Issue 01-9 (EITF 01-9): “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.” The change requires a reclassification of certain marketing and promotional expenses from operating expenses (selling expenses) to a reduction in sales. The change has no effect on net income or earnings per share. Prior period financial statements have been reclassified to comply with EITF 00-10 and 01-9.

         The change reduced both net sales and selling, general and administrative expenses during the fiscal years ended June 30, 2002, 2001 and 2000 by $1.1 million, $2.3 million and $3.9 million, respectively.

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Pacer’s exposure to market risk with respect to financial instruments is primarily related to changes in interest rates with respect to borrowing activities, which may adversely affect its financial position, results of operations and cash flows. To a lesser degree, we are exposed to market risk from foreign currency fluctuations associated with our purchases of raw materials and sales of products outside of the United States. We do not use financial instruments for trading or other speculative purposes and we are not party to any derivative financial instruments.

         In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. The fair value of borrowings under our revolving bank credit facility and term note approximate the carrying value of such obligations.

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FORWARD LOOKING STATEMENTS

         This Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are estimates of, or statements about our expectations or beliefs regarding, our future financial performance that are based on current information and that are subject to a number of risks and uncertainties that could cause our actual operating results in the future to differ significantly from those expected at the current time, including the risks and uncertainties described in Part I of this Report under the caption “Item I — Description of Business — Certain Factors That Could Affect Our Future Performance” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.

         Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions based solely on historical financial performance.

         We also disclaim any obligation to update forward-looking statements contained in this Report.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following consolidated financial statements are included herein:

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REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Pacer Technology

We have audited the accompanying consolidated balance sheets of Pacer Technology as of June 30, 2002 and 2001, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15(a) as of June 30, 2002 and 2001 and for the years then ended. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacer Technology at June 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

Orange County, California
August 14, 2002

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PACER TECHNOLOGY

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

See accompanying notes to consolidated financial statements.

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PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share amounts)