Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES ~~SECURITIES~~ ~~AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For ~~The~~the ~~Fiscal~~fiscal ~~Year~~year ~~Ended~~ended June 30, ~~2002~~ 2003

o¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the ~~Transition~~transition ~~Period~~period ~~From _______ To _______~~from to

Commission ~~File~~file ~~Number~~number 0-8864

PACER TECHNOLOGY

(Exact name of ~~the~~Registrant ~~registrant~~ as specified in its charter)

California		77-0080305
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Incorporation or organization)
9420 Santa Anita Avenue
Rancho Cucamonga, California		91730
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number (909) 987-0550

9420 Santa Anita Avenue, Rancho Cucamonga, California		91730
(Address of principal executive offices)		(Zip Code)

~~Securities registered under Section 12~~(b909) ~~of the Exchange Act: None~~987-0550

~~Securities registered under Section 12~~(g)Registrant’s oftelephone ~~the Exchange Act: Common Stock~~number, noincluding ~~par~~area ~~value~~ code)

~~Indicate~~Securities byregistered ~~check~~pursuant ~~mark whether the registrant(1) has filed all reports required~~ to ~~be filed by~~ Section 13 ~~or 15~~12(db) 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~~None 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~~Securities ~~the~~registered ~~registrant~~pursuant asto ofSection ~~September 18, 2002 was $9,923,351~~ 12(~~computed~~g) ~~by reference to the average closing bid and asked prices~~ of ~~such stock on September 18, 2002, as reported on~~ the ~~NASDAQ~~Act: ~~SmallCap Market).~~

~~The number of shares outstanding of the Registrant’s~~ Common Stock, ~~as of September~~ ~~18,~~without par value ~~2002, was 2,928,401.~~

(Title of Class)

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 ¨

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Securities Exchange Act Rule 12b-2). Yes ¨ No x

The aggregate market value, as of December 31, 2002, of the outstanding shares of registrant’s common stock held by registrant’s non-affiliates was $7,705,739 (computed by reference to the average closing bid and asked prices of such stock on December 31, 2002, as reported on the NASDAQ SmallCap Market).

The number of shares outstanding of the Registrant’s Common Stock, as of September 22, 2003, was 2,939,851.

Documents Incorporated by Reference

Except as otherwise stated therein, 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~~2003.

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS
PART I
	Item 1. DESCRIPTION OF BUSINESS
		Introduction
		Fiscal 2002 Developments and Outlook For Fiscal 2003
		Our Consumer Products
		Our Industrial Products
		Marketing
		Sources and Availability of Raw Materials
		Competition
		Certain Factors That Could Affect Our Future Performance
		Research and Development
		Government and Environmental Regulation
		Trademarks, Patents and Licenses
		Employees
	Item 2. DESCRIPTION OF PROPERTY
	Item 3. LEGAL PROCEEDINGS
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
		EXECUTIVE OFFICERS OF REGISTRANT
PART II
	Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	Item 6. SELECTED FINANCIAL DATA
	Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
		FORWARD LOOKING STATEMENTS
	Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
	Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	Item 11. EXECUTIVE COMPENSATION
	Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
	Item 14. CONTROLS AND PROCEDURES
PART IV
	Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 4.2
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 99.1
EXHIBIT 99.2

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

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2003

TABLE OF CONTENTS

					PAGE
				Page
FORWARD LOOKING STATEMENTS				1		3
~~PART I~~	PART I
~~Item 1~~	Item 1	Description of Business
		Introduction	~~Introduction~~	1		3
			Fiscal 2002 Developments and Outlook For Fiscal 2003			3
		Our Consumer Products		3
			Our Consumer Products			5
		Our Industrial Products		3
			Our Industrial Products			5
		Marketing and Distribution		3
			Marketing			5
		Sources and Availability of Raw Materials		4
			Sources and Availability of Raw Materials			6
		Competition		5
			Competition			6
		Certain Factors that Could Affect Our Future Performance		5
			Certain Factors that Could Affect Our Future Performance			7
		Research and Development		6
			Research and Development			7
		Government and Environmental Regulation		6
			Government and Environmental Regulation			8
		Trademarks, Patents and Licenses		6
			Trademarks, Patents and Licenses			8
		Employees		6
			Employees			8
	Item 2	Description of Property		6
Item 2		Description of Property				8
	Item 3	Legal Proceedings		7
Item 3		Legal Proceedings				9
	Item 4	Submission of Matters to a Vote of Security Holders		7
Item 4		Submission of Matters to a Vote of Security Holders				9
		Executive Officers of Registrant		7
		Executive Officers of Registrant				9
	PART II
PART II
	Item 5	Market for Common Equity and Related Stockholder Matters		8
Item 5		Market for Common Equity and Related Stockholder Matters				10
	Item 6	Selected Financial Data		9
Item 6		Selected Financial Data				11
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations				12
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk		15
Item 7A		Quantitative and Qualitative Disclosures About Market Risk				18
	Item 8	Financial Statements and Supplementary Data		16
		Forward Looking Statements				19
		Report of Independent Auditors		17
Item 8		Financial Statements and Supplementary Data				20
		Consolidated Balance Sheets—June 30, 2003 and 2002		18
Item 9		Changes In and Disagreements With Accountants on Accounting and Financial Disclosure				40
		Consolidated Statements of Operations—Fiscal Years Ended June 30, 2003, 2002 and 2001		19
PART III
		Consolidated Statements of Shareholders’ Equity—Fiscal Years Ended June 30, 2003, 2002 and 2001		20
Item 10		Directors and Executive Officers of the Registrant				40
		Consolidated Statements of Cash Flows—Fiscal Years Ended June 30, 2003, 2002 and 2001		21
Item 11		Executive Compensation				40
		Notes to Consolidated Financial Statements		22
Item 12		Security Ownership of Certain Beneficial Owners and Management				40
		Schedule II—Valuation and Qualifying Accounts—Fiscal years ended June 30, 2003, 2002 and 2001		36
Item 13		Certain Relationships and Related Party Transactions				40
	Item 9	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		37
Item 14		Controls and Procedures				40
	Item 9A	Controls and Procedures		37
PART IV
	PART III
Item 15		Exhibits, Financial Statement Schedules, and Reports on Form 8-K				40
	Item 10	Directors and Executive Officers of the Registrant		37
SIGNATURES						S – 1
	Item 11	Executive Compensation		37
CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF SARBANES-OXLEY ACT						S – 2
	Item 12	Security Ownership of Certain Beneficial Owners and Management		37
CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 OF SARBANES-OXLEY ACT						S – 3
	Item 13	Certain Relationships and Related Party Transactions		38
INDEX TO EXHIBITS						E – 1
	PART IV
	Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		38
SIGNATURES				S–1
INDEX TO EXHIBITS				E–1

2 i

FORWARD LOOKING STATEMENTS

~~This~~Statements ~~Annual~~contained in this Report onthat ~~Form 10-K~~are ~~(this~~not ~~“Report”)~~historical ~~contains~~facts or that discuss our expectations or beliefs regarding our future operations or future financial performance, or financial or other trends in our business, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as ~~defined~~amended in (the ~~Private~~“1933 ~~Securities~~Act”) ~~Litigation~~and ~~Reform~~Section 21E of the Securities Exchange Act of ~~1995~~1934, as amended (the “1934 Act”). ~~Such~~Forward-looking statements ~~reflect~~can ~~management’s~~be identified by the fact that they do not relate strictly to historical or current ~~views~~facts. Often, such statements include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of ~~our~~similar meaning, or future ~~financial performance.~~or ~~The~~conditional ~~forward~~verbs such as “will,” “would,” “should,” “could,” or “may.” Forward-looking statements are based on current information isand are subject to ~~certain~~a number of risks and uncertainties, ~~including,~~that ~~but~~could ~~not~~cause ~~limited~~our financial condition or operating results in the future to, differ significantly from those expected at the current time. Those risks and uncertainties are 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~~Operation.” ~~Readers~~Accordingly, readers of this Report are urged to read ~~those~~ ~~sections~~the ofcautionary ~~this Report and are cautioned that, due to such risks and uncertainties, they should not place undue reliance on such forward-looking~~ statements, ~~which~~contained ~~speak~~in ~~only~~those asSections of ~~the date of~~ this Report.

Due to these uncertainties and risks, readers are cautioned not to place undue reliance on forward-looking statements contained in this Report, which speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. DESCRIPTION OF BUSINESS

Introduction

Pacer ~~Technology is a leading manufacturer, packager and distributor of~~’s ~~advanced~~Business 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-TiteTM 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,~~Pacer asTechnology is a ~~result~~leading ~~of our acquisitions of the California Chemical and Cook Bates product lines in our fiscal year ended 1998~~manufacturer, ~~we have been a~~ ~~manufacturer~~packager and ~~supplier~~distributor of ~~nail~~advanced ~~care products and implements~~technology, ~~including pumice~~high ~~stones,~~performance ~~emery boards~~glues, ~~tweezers,~~epoxies and ~~nail~~other ~~clippers,~~adhesives for ~~the~~household, ~~professional beauty~~office and ~~self-nail~~other ~~care~~ consumer ~~markets. Those products were sold under Company-owned brand names such as “Gem”~~applications, ~~“Kurlash”~~ and ~~“Diamon~~advanced ~~Deb” and~~technology, ~~also pursuant~~high toperformance ~~license agreements~~adhesives, ~~under~~sealants ~~the Oleg Cassini, Brut~~ and ~~Elvira~~gaskets ~~brand names,~~used ~~at more than 26,000 retail establishments~~ in ~~the United States,~~ ~~including Wal-Mart~~manufacturing, ~~K-Mart,~~repair ~~Walgreens~~ and ~~Eckerd.~~industrial ~~We subsequently sold the California Chemical and Cook Bates product lines in fiscal 2001 and 2002, respectively~~applications. 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~~We sell our high performance glue, adhesive and sealant products for the ~~fiscal~~consumer ~~year~~market ~~ended~~under ~~June 30~~such well known brand names as SUPER GLUE, ~~2002~~Bondini®, ~~approximately~~Future ~~16%~~Glue®, ofProSeal®, ~~our~~ZAP®, ~~sales~~Anchor-TiteTM and Go Spot Go® 1 and those products are sold to consumers at over 77,000 ~~were~~retail ~~made~~store ~~outside~~locations ofin the United States, ~~primarily~~including inWal-Mart, ~~Europe~~Target stores and The Home Depot stores. Our adhesive products, tosealants aand ~~lesser extent~~gaskets for manufacturing, inrepair ~~Canada~~and industrial applications are sold under the brand names SUPER GLUE, ProSeal® and ~~Latin~~Pacer ~~America~~Industrial. ~~Those~~These ~~sales~~products ~~consisted~~are ~~almost~~sold ~~entirely~~to ofautomotive aftermarket and ~~our~~heavy-duty ~~Adhesive~~truck ~~Products~~and maintenance and repair operations and manufacturers of medical devices and electronic subassemblies and components. We are also a private label manufacturer for many major cosmetic, industrial and household adhesives.

~~Fiscal~~Recent ~~2002~~ Developments—Merger ~~and~~Agreement ~~Outlook~~with ~~For~~Cyan ~~Fiscal 2003~~Holding Co.

~~Recent~~As ~~Developments~~previously reported, on July 29, 2003 Pacer entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cyan Holding Co., a subsidiary of Cyan Investments, LLC (“Cyan”). Cyan and its affiliates own a total of approximately 30% of Pacer’s outstanding shares of common stock and one of the two principal owners of Cyan is Ellis T. Gravette, Jr., who served as a director of Pacer from March 2000 to March 2003 and as Chairman of its Board of Directors from March 2000 to February 2001.

~~Sale~~1 ofFuture ~~Nail Care Products Business. During the latter part of fiscal 2001~~Glue®, ~~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~~ProSeal®, ~~nail~~ZAP® ~~care product sales were beginning to decline~~ and ~~our~~Go ~~efforts to~~Spot ~~significantly~~Go® ~~improve~~are ~~the~~registered ~~profitability~~trademarks ofowned ~~that business were being frustrated~~ by, ~~among~~Pacer. ~~other~~See ~~things~~“Trademarks, ~~increased~~Patents ~~competition~~ and ~~a resulting proliferation of products in the market~~Licenses. ~~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~~ ”

3 1

The ~~investment~~Merger inAgreement ~~capital~~provides ~~and~~for ~~management resources, which could not be justified by the likely return from such an investment. As~~ a ~~result,~~merger ~~we determined~~of ~~that~~Pacer ~~the best alternative would be to focus on our core glue, adhesives~~ and ~~sealant~~a ~~businesses~~wholly ~~and~~owned tosubsidiary ~~seek buyers for our nail care products business. That process, which began early in the last quarter~~ of ~~fiscal~~Cyan ~~2001, led first to~~ (the ~~sale, in June 2001, of our California Chemical business, which~~ ~~consisted~~“Merger”) ~~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~~ inif ~~cash plus the transfer by the buyer to Pacer of 145~~consummated,~~000~~ ~~shares~~will ~~of Pacer~~result ~~common~~in: ~~stock owned by the buyer, which represented approximately 4.5% of our outstanding shares at the time of the sale.~~

~~Then,~~• ineach ~~the~~shareholder ~~first quarter~~ of ~~the~~Pacer ~~fiscal~~(other ~~year~~than ~~ended~~Cyan ~~June 30, 2002, we sold inventory~~ and ~~certain~~its ~~fixed~~affiliates and ~~intangible~~any ~~assets~~dissenting ~~related~~shareholders) toreceiving ~~our Cook Bates nail care product line to another manufacturer of nail care products, for a cash purchase price of~~ $56.~~3 million.~~95 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~~cash ~~income~~for ineach ~~the accompanying Statement~~ of ~~Operations~~their ~~for~~Pacer ~~the~~shares; ~~year ended June 30, 2002.~~ and

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

~~Management~~The ~~Changes.~~Merger InAgreement ~~February~~also ~~2001,~~provides ~~the~~for ~~Board~~cancellation of ~~Directors~~Pacer’s ~~appointed Richard~~outstanding S.stock ~~Kay~~options, aswhich ~~its~~are ~~Chairman,~~held ~~after~~primarily heby officers, ~~had~~directors ~~worked,~~and ~~since~~other ~~December~~Pacer ~~2000~~employees, in ~~a consulting~~return ~~capacity~~for ~~formulating~~which aeach ~~new~~option ~~strategic~~holder ~~plan~~would ~~for~~receive ~~the~~a ~~Company.~~cash ~~As Chairman~~amount ofequal ~~the~~to ~~Board, Mr~~$6. ~~Kay~~95 ~~began~~minus the ~~process~~per ofshare ~~implementing~~exercise ~~structural~~price ~~and operational~~of ~~changes~~such ~~at the Company that were designed to strengthen the Company~~holder’s ~~financial condition and better enable it to achieve the goals established in the new strategic plan. On July 9~~option, ~~2001,~~multiplied ~~Mr. Kay was appointed~~ by the ~~Board~~number asof ~~Pacer’s~~shares ~~new~~of ~~Chief~~common ~~Executive Officer and President, with a~~stock ~~mandate~~issuable toupon ~~continue~~exercise ~~those~~of ~~operational changes and to implement~~ the ~~new strategic plan~~option.

~~Fiscal~~The ~~2002~~price ~~Operating Results. We generated operating income~~ of ~~approximately~~ $26.~~2 million~~95 into ~~the fiscal year ended June 30, 2002. Fiscal 2002~~be ~~operating~~paid ~~income~~for ~~was~~each ~~impacted~~of ~~by actions taken to refocus~~ Pacer’s ~~resources~~shares ~~on growing~~in ~~its~~the ~~core~~proposed ~~Adhesive~~Merger, ~~Products~~together ~~business.~~with ~~Those actions included~~ the ~~sale of~~cash ~~the Cook Bates product line~~ that ~~generated~~will abe ~~pre-tax~~paid 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~~the ~~debts~~Pacer ~~for K-Mart~~options, aplaces ~~long-time major retail customer that filed for Chapter 11 Bankruptcy protection and~~ the ~~sale~~aggregate value of ~~our~~Pacer’s ~~remaining~~shares ~~Cook~~(inclusive ~~Bates return merchandise at bargain prices. We used the net proceeds from the sale~~ of the ~~Cook~~ ~~Bates~~shares ~~product~~held ~~line,~~by ~~which~~Cyan ~~totaled~~and ~~approximately $5.3 million, together with~~ the ~~proceeds~~Pacer ~~from~~options) ~~the collection of pre-sale Cook Bates receivables primarily to reduce our outstanding bank borrowings, and~~ at ~~June 30, 2002 we~~ ~~had~~approximately ~~no bank borrowings outstanding as compared to~~ $722.6 ~~million at~~ ~~June 30, 2001~~million.

~~Outlook~~Cyan ~~for~~initially ~~Fiscal~~submitted a proposal, in March 2003, to acquire all of the Pacer shares it and its affiliates did not own for a price of $6.00 per share in cash. Following the receipt of that initial proposal Pacer’s Board of Directors established a Special Committee, comprised solely of disinterested directors, to consider and evaluate and to respond to that proposal. The Special Committee retained Houlihan Lokey Howard and Zukin (“Houlihan Lokey”), as its financial advisor to assist it in that evaluation. Following that evaluation, the Special Committee advised Cyan that it could not accept Cyan’s $6.00 per share proposal and directed Houlihan Lokey to contact other potential financial and strategic buyers that might have an interest in an acquisition of or other strategic transaction with Pacer. Those contacts, and a resulting bidding contest that followed, led to an increase by Cyan in its offer to $6.95 per share in cash.

WeOn ~~currently~~July ~~expect improved profitability during the fiscal year ending June 30~~29, 2003, ~~due~~the ~~primarily~~Special toCommittee ~~improvements~~voted ~~made~~unanimously into ~~raw~~recommend ~~materials sourcing,~~that ~~new~~Pacer’s ~~marketing~~Board ~~and~~of ~~sales~~Directors ~~initiatives~~approve ~~that~~the ~~are~~proposed ~~designed~~Merger towith ~~achieve~~Cyan. ~~increases~~That ~~in our~~recommendation ~~market~~was ~~share~~based inon ~~the~~a ~~consumer~~number ~~Adhesive~~of ~~Products markets~~factors, ~~and~~including ~~new~~an ~~product releases.~~opinion ~~However,~~received wefrom ~~expect~~Houlihan Lokey that ~~our sales in~~ the ~~first~~proposed ~~two~~cash ~~quarters~~price of ~~fiscal~~ ~~2003~~$6.95 ~~will~~per beshare ~~lower~~was ~~than~~fair, infrom ~~the~~a ~~fiscal~~financial point ~~2002~~of ~~comparable quarters~~view, ~~due~~ to ~~(i) the~~ ~~sale~~Pacer’s ofshareholders ~~our~~(other ~~nail~~than ~~care~~Cyan ~~products~~and ~~business,~~its ~~which~~affiliates). ~~accounted~~Later ~~for approximately~~that ~~$5.5 million~~same day, orthe ~~18%,~~Board of ~~our~~Directors ~~total~~unanimously ~~sales~~approved inthe ~~fiscal~~Merger ~~2002~~Agreement and ~~(ii) the closure, in June 2001, of our United Kingdom facility~~Merger.

~~Our~~Consummation ~~operating~~of ~~results~~the inMerger ~~fiscal~~is ~~2003 are~~ subject to satisfaction of certain ~~risks~~conditions, ~~and uncertainties~~all ~~discussed~~as ~~below~~more fully set forth in the ~~section~~Merger Agreement. ~~entitled~~Those ~~“Certain~~conditions ~~Factors~~include, ~~That Could~~among ~~Affect~~others, ~~Our~~that ~~Future~~any ~~Performance”~~third ~~and,~~party ~~due~~consents torequired ~~those~~for the Merger be obtained and ~~other~~that ~~factors~~the orMerger Agreement be approved by the holders of at least 50% of the Pacer shares not owned by Cyan. Cyan’s ~~circumstances,~~obligation ~~our~~to ~~actual~~consummate ~~results~~the ~~could~~Merger ~~differ,~~is ~~possibly~~not ~~significantly~~conditioned on obtaining of financing, ~~from our~~and ~~current~~Cyan ~~expectations~~provided to the Special Committee evidence of Cyan’s ability to fund the Merger consideration.

4A Special Meeting of Pacer’s Shareholders has been scheduled for November 12, 2003, at which Pacer’s shareholders will be asked to vote on approval of the Merger Agreement. Pacer has filed preliminary proxy materials with the Securities and Exchange Commission, for the purpose of soliciting proxies from shareholders which would be voted at the Meeting to approve the Merger. Once the proxy materials have been finalized, definitive proxy materials, including a proxy statement and a copy of the Merger Agreement, will be mailed to shareholders no less than 20 days prior to the date of that meeting.

The definitive proxy materials will contain important information regarding the proposed Merger. Shareholders are advised to read the definitive proxy materials, including the proxy statement and the Agreement and Plan of Merger, before making any decisions regarding the Merger. It will be possible to obtain copies of the proxy materials, and any amendments or supplements to those materials, without charge, at the SEC’s website at www.sec.gov or Pacer’s website at www.pacertechnology.com, as they become available.

Our Consumer Products

Super Glue and Other Adhesive Products and Sealants

Household and Office Products. We ~~manufacture~~formulate and package a broad range of glue and ~~Adhesive~~ ~~Products~~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~~adhesive ~~Products~~products that weare ~~package~~packaged into easy-to-use tubes, bottles, syringes, glue sticks, glue pens and fasteners, each designed for differing home and office applications. WeThese ~~sell these~~ products are sold to mass merchandisers such as Wal-Mart, ~~and~~ Target, ~~drug store chains such as Eckerd~~ and ~~Walgreens,~~The ~~grocery~~Home ~~store~~Depot ~~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~~2003, our household and office ~~Adhesive~~adhesive ~~Products~~products could be purchased at more than 77,000 retail stores ~~located~~locations primarily in the ~~United~~ United States, and some of which, are located in Europe, Canada and Latin America.

~~Marine~~In ~~Products.~~fiscal We2003, ~~manufacture~~we ~~and~~introduced ~~market~~ a ~~line~~new ofconsumer ~~high~~adhesive ~~performance epoxies~~product, under the brand name “Anchor-~~TiteTM~~Tite Permanent Patch, which ~~are~~is ~~used~~a insunlight ~~the~~and ~~maintenance~~ultra violet (UV) light curable glass reinforced polyester material, layered with 2 nylon sheets. This product utilizes a “peel and stick” formulation that can be molded and cut to any shape or size in order to provide a permanent repair ofthat ~~marine~~is ~~vessels~~heat resistant, ~~personal~~waterproof ~~watercraft,~~and ~~home~~can ~~swimming~~be ~~pools~~drilled, sanded and ~~other~~painted. This new product, which can be used for household, landscape and plumbing, and automotive and marine applications., ~~Anchor-TiteTM~~ was ~~recognized~~recently atawarded the ~~2002~~Editors ~~National Hardware~~Choice ~~Show~~Award ~~in Chicago~~ by Popular Mechanics Magazine ~~with~~at anthe ~~Editors~~2003 ~~Choice award~~National ~~which~~Hardware isShow. ~~given~~That award byrecognizes what that magazine ~~to what it~~ judges to be the most innovative of the new products for ~~2003~~the year introduced at that Show.

~~Automotive~~Marine ~~Aftermarket~~ Products. We manufacture and market a line of high performance ~~sealants,~~epoxies ~~instant~~under ~~gaskets~~the ~~and~~brand ~~other~~name ~~Adhesive~~Anchor-Tite, ~~Products~~which ~~that~~ are ~~designed~~ ~~to be~~ used in the maintenance and repair of ~~automobiles~~marine ~~and heavy trucks~~vessels, ~~including~~personal ~~ProSeal Instant Gasket~~watercraft, ~~ProWeld,~~home ~~Pro-Lock~~swimming pools and ~~ProSeal Gasket~~other ~~Shellac~~marine applications. ~~These~~The ~~products,~~Anchor-Tite ~~which~~underwater ~~are~~epoxy ~~designed~~was torecognized ~~withstand~~at the ~~high temperatures~~2002 ~~and~~National ~~heavy~~Hardware ~~wear~~Show ~~and~~in ~~tear~~Chicago ~~associated~~by ~~with~~Popular ~~the~~Mechanics ~~operation~~Magazine ofwith ~~motor~~an ~~vehicles,~~Editor’s ~~are~~Choice ~~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~~award.

~~Hobby~~Automotive Aftermarket Products. We ~~also~~ manufacture and market a line of ~~glue~~high ~~and~~performance ~~Adhesive Products~~sealants, ~~that~~instant ~~are~~gaskets ~~used for various project~~ and ~~model~~other ~~assembly~~adhesive ~~requirements.~~products ~~We market~~that ~~these~~are ~~products~~designed ~~primarily~~to ~~under~~be ~~our~~used ~~ZAP~~in ~~brand~~the ~~name,~~maintenance ~~which~~and isrepair ~~the~~of ~~leading adhesive~~automobiles ~~product~~and ~~line~~heavy intrucks, ~~the~~including ~~hobby~~ProSeal ~~market~~Instant Gasket, ProWeld, Pro-Lock and ~~our~~ProSeal ~~Super~~Gasket ~~Glue~~Shellac. ~~brand~~These ~~name and these~~ products are ~~sold~~designed to ~~mass~~withstand ~~merchandisers,~~the ~~drug~~high temperatures and ~~grocery~~heavy ~~store~~wear ~~chains~~ and ~~craft~~tear ~~and~~associated ~~hobby~~with ~~stores~~the operation of motor vehicles.

~~Other~~Hobby ~~Adhesive Consumer~~ Products. We also manufacture and ~~sell~~market a ~~number~~line of ~~our~~ glue and ~~Adhesive~~adhesive ~~Products~~products tothat ~~suppliers~~are ~~who~~used for various project and model assembly requirements. We market these products primarily under ~~their own~~the ZAP brand ~~names~~name, ~~either~~which asis ~~extensions~~the ofleading ~~their~~adhesive ~~own~~ product ~~lines~~line or in ~~kits that~~the ~~they~~hobby ~~package~~market, ~~with~~and ~~their~~the ~~products~~Super Glue brand name.

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~~ these 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~~ Marketing and Distribution

Consumer Products

Our ~~Adhesive~~adhesive ~~Products~~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~~3 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

adhesive ~~truck~~products ~~outlets.~~to ~~Our~~mass ~~hobby~~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 ~~are~~while ~~sold~~minimizing the shelf space required to ~~dealers~~stock these products. Larger national mass merchandisers and ~~model~~national ~~shops through~~and regional food and drug store chains account for a ~~network~~substantial portion of ~~independent~~our consumer ~~master~~ product ~~distributors~~sales. See “DESCRIPTION OF BUSINESS—Certain Factors That Could Affect Our Future Performance—Dependence on Certain Major Customers” below in this Report.

Our automobile aftermarket products are marketed and sold by internal sales personnel and by independent sales representative organizations to retail automotive, professional repair and installation, agribusiness and heavy duty truck outlets. Our hobby products are sold to dealers and to mass merchandisers, drug and grocery store chains and craft and hobby stores through a network of independent master product distributors.

Industrial Products

Our high performance industrial adhesive and sealant products are marketed and sold by ~~our~~internal ~~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 1618% of total revenues in fiscal ~~2002~~ 2003, 1416% in fiscal ~~2001~~2002 and 1214% in fiscal ~~2000~~2001, are marketed and sold primarily in Western Europe and, to a lesser extent, in Canada and Latin America by ~~our~~internal ~~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. During the fiscal years ended June 30, 2003, 2002 and 2001, one of those suppliers accounted for 20%, 18% and 11%, respectively, of our requirements for such materials. Dependence on a single supplier for any materials or supplies presents risks, ~~including the risk~~ that wecould ~~may~~adversely beaffect ~~unable~~our tosales. ~~readily~~See, ~~obtain~~“DESCRIPTION ~~alternative~~OF ~~product~~BUSINESS—Certain ~~supply~~Factors ~~sources in~~That ~~the~~Could ~~event~~Affect aOur ~~single~~Future ~~source~~Performance—Dependence ~~supplier~~on ~~encounters~~a ~~quality~~Limited orNumber ~~other~~of ~~production~~Raw ~~problems,~~Materials ~~which~~Suppliers” ~~could~~below ~~adversely~~in ~~affect~~this ~~our sales~~Report. 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~~During fiscal ~~potential~~2003, ~~work~~approximately ~~stoppage~~29% atof ~~Southern~~the ~~California~~materials ~~ports~~and ~~associated~~supplies ~~with~~we ~~the dispute~~used ~~between~~in ~~the~~our ~~International~~business ~~Longshore~~were ~~and~~obtained ~~Warehouse~~from ~~Union~~foreign ~~(“ILWU”)~~suppliers, ~~and~~as ~~the Pacific~~compared ~~Marine~~to ~~Association~~37% ~~(“PMA”)~~in ~~subcommittee,~~fiscal ~~should~~2002 ~~it occur~~ and ~~continue for~~32% anin ~~extended~~fiscal ~~period~~2001. ofAs ~~time~~a result, ~~could~~our ~~affect~~business ~~our~~is ~~ability~~subject to ~~receive~~the ~~materials~~risk of fluctuations in ~~from~~the ~~international~~value ~~sources~~of ~~and~~the ~~could~~U.S. ~~adversely~~dollar ~~affect~~on ~~our~~foreign ~~sales~~currency exchanges and ~~profitability~~ related constraints associated with international trade. ~~During~~The ~~the~~decline ~~first~~in ~~quarter~~foreign ofpurchases in fiscal 2003, wewas ~~have~~primarily ~~increased~~due ~~our inventories~~to ofthe ~~materials~~sale, ~~typically~~in ~~received~~fiscal at2002, ~~effected~~of ~~Southern~~our ~~California~~nail care implements ~~ports~~business, inwhich ~~anticipation~~purchased a high percentage of aits ~~potential~~inventories ~~work~~from ~~stoppage~~foreign sources.

~~During~~Some ~~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~~ 4

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

~~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.

The markets for our products are characterized by intense competition. Our principal competitors 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 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 and greater financial and marketing resources than we have (see “DESCRIPTION OF BUSINESS—Certain Factors That Could Affect Our Future Performance” below).

Certain Factors That Could Affect Our Future Performance

Dependence on Certain Major Customers. ~~One~~In ~~customer~~fiscal ~~represented~~2003, The Home Depot accounted for approximately 14% and Pacific World Corporation accounted for approximately 11% of net sales and The Home Depot accounted for approximately 12% of ~~our~~net ~~total~~ sales in fiscal 2002,. ~~and~~Other ~~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~~significant ~~us to incur operating losses and~~ reductions in ~~cash~~sales ~~flow~~and ~~that could increase our dependence on borrowings to fund operations~~earnings.

OnDependence ~~January 22,~~on ~~2002,~~a ~~Kmart,~~Limited aNumber ~~long-time~~of ~~major~~Raw ~~retail~~Materials ~~customer,~~Suppliers. ~~announced that~~Although itthe ~~had~~materials ~~filed~~used ~~for~~in ~~Chapter 11~~the ~~Bankruptcy~~manufacture ~~protection.~~of ~~For~~our ~~the~~products ~~quarters~~are ~~ended December 31~~available from numerous sources, ~~2001~~both within and ~~June 30,~~outside ~~2002~~the United States, ~~the~~it ~~Company~~has ~~made~~been aour ~~provision~~practice ~~for~~to purchase such materials from one or just a ~~potential~~ ~~loss~~few onsuppliers in order to control the ~~amounts~~quality ~~due~~of ~~from~~and ~~this~~to ~~customer~~obtain onfavorable ~~product~~pricing ~~sales~~for ~~made~~such ~~to it~~materials. ~~during~~One ~~the~~of ~~second~~those ~~quarter~~suppliers accounted for 20%, 18% and 11%, respectively, of our ~~current~~requirements for such materials during the fiscal ~~year~~years ~~and~~ended ~~prior~~June to30, ~~the customer’s~~2003, ~~bankruptcy~~2002 and 2001. ~~Due~~Dependence toon a single supplier for any materials or supplies presents risks, including the ~~lack~~risk ofthat ~~information~~we asmay be unable to ~~the~~readily ~~outcome~~obtain ofalternative product supply sources in the ~~Kmart~~event ~~bankruptcy,~~a ~~there~~single ~~can~~source besupplier noencounters ~~assurances~~quality ~~that~~or ~~the~~other ~~actual~~production ~~loss~~problems ~~that~~or ~~will~~our ~~be incurred~~relationship onwith the ~~Kmart~~supplier ~~receivables~~changes, ~~will~~which ~~not~~could ~~exceed~~adversely ~~management’s~~affect ~~current estimate~~our sales.

~~Technological~~Risks ~~Change~~of ~~and~~Foreign ~~Competition~~Operations. ~~The~~Our ~~markets~~operating ~~for~~results ~~our~~could ~~products~~decline ~~are characterized~~as bya ~~frequent~~result ~~new~~of ~~product introductions~~war, ~~declining~~economic ~~average~~disruption ~~selling~~or foreign ~~prices~~currency ~~over~~fluctuations ~~product life cycles~~ and ~~intense~~changes ~~competition.~~in Asthe avalue ~~result,~~of ~~our future~~the ~~performance~~U.S. isDollar ~~highly~~in ~~dependent~~relation ~~upon~~to ~~the~~foreign ~~timely~~currencies ~~completion~~in ~~and introduction~~countries ofin ~~new~~Europe, ~~products~~Asia ~~at competitive prices~~ and ~~performance~~Latin ~~levels.~~America ~~In addition,~~where we ~~must~~sell ~~respond~~products toand ~~competitors~~where inwe ~~the~~obtain ~~various~~some ~~markets~~of inour ~~which~~raw ~~we operate~~materials. IfForeign wesales ~~are~~accounted ~~not~~for ~~able to make timely introduction~~ 18% of ~~new~~our ~~products~~total orrevenues ~~to respond~~in ~~effectively~~fiscal toyear ~~competition,~~2003. ~~our~~Purchases ~~business~~of ~~and~~raw ~~operating~~materials ~~results~~from ~~could~~foreign ~~be harmed.~~countries ~~Moreover,~~were a29% ~~number~~ of ~~our~~all ~~competitors~~raw ~~have~~materials ~~greater~~purchased ~~financial~~by ~~and marketing~~us ~~resources~~in ~~than~~fiscal weyear ~~have~~2003.

~~Risks~~Change ofin ~~Foreign~~Business Strategy and Operations. ~~Approximately~~We ~~16%~~sold of our ~~total~~California ~~sales~~Chemical ~~in fiscal~~nail ~~2002~~acrylics ~~and~~business ~~14%~~ in ~~fiscal~~June 2001 ~~were~~and ~~made~~our ~~outside~~Cook ~~the~~Bates ~~United~~nail ~~States,~~care ~~primarily~~implements business in ~~Europe~~September 2001, ~~Canada~~in ~~and~~order ~~Latin~~to ~~America~~focus and, ~~following~~grow ~~the sale of~~ our ~~nail~~ ~~care~~core adhesives products business,. ~~foreign~~Although ~~sales~~these ~~are~~actions ~~expected~~resulted toin ~~represent approximately~~a ~~18%~~significant ofdecline ~~our~~in ~~total~~net sales. ~~Additionally~~in the fiscal year ended June 30, ~~approximately~~2003, ~~37%~~when ofnet ~~our~~sales totaled ~~raw~~approximately ~~material~~$24.4 ~~purchases~~million, ~~are~~as ~~made~~compared ~~from~~to ~~suppliers~~net ~~based~~sales ~~outside~~of ~~the~~approximately ~~United States~~$30. As8 amillion ~~result,~~and ~~our~~$41.7 ~~operating~~million ~~results~~in ~~could~~the ~~decline~~fiscal ~~due~~years toended ~~foreign~~June ~~currency fluctuations~~30, 2002 and ~~changes~~2001, inrespectively, we believe that the ~~value~~sales of ~~the~~these ~~U.S.~~nail ~~Dollar~~care inproducts ~~relation~~businesses towill ~~foreign~~enable us to ~~currencies~~improve inour ~~the~~profitability. ~~countries~~However, ~~where~~future ~~our~~profitability ~~products~~also ~~are~~could ~~sold~~be ~~and~~adversely ~~where~~affected if we ~~obtain some~~are ofnot ~~our~~able ~~raw~~to ~~materials.~~reduce Weand, dothereby, ~~not~~align ~~attempt~~our future operating costs to ~~hedge~~match ~~the~~sales ~~risks~~levels ofin ~~foreign currency~~future ~~fluctuations~~periods byor ~~means~~if ofwe ~~exchange~~are ~~agreements~~unable orto ~~other~~grow ~~financial~~and thereby ~~instruments~~meaningfully increase the revenues of our core adhesives business.

~~Risks~~Costs ~~associated~~and ~~with~~Expenses ~~Expansion~~Related ofTo ~~our~~The ~~Adhesive~~Proposed ~~Products~~Merger ~~Business~~with Cyan. ~~If appropriate~~We ~~opportunities~~have ~~present~~expended ~~themselves,~~a wesubstantial ~~also~~amount ~~intend~~of totime ~~acquire~~and ~~other Adhesive~~resources ~~Products~~relating ~~businesses~~to orthe ~~product~~proposed ~~lines~~Merger ~~that~~with weCyan ~~believe~~and ~~will~~administrative ~~help~~expenses ushave increased due to transaction related ~~expand~~expenses ~~our~~associated ~~business~~with the merger. ~~The~~These ~~process~~increased ofadministrative ~~integrating~~expenses anreduced ~~acquired~~our ~~business~~fourth orquarter ~~product line~~and ~~may~~fiscal ~~result~~year in2003 operating ~~difficulties~~income and ~~expenditures~~net ~~which~~earnings. weSee ~~cannot anticipate~~“SELECTED FINANCIAL DATA” and ~~may~~“ ~~absorb~~MANAGEMENT’S ~~significant~~DISCUSSION ~~management~~AND ANALYSIS ~~attention~~OF ~~that~~FINANCIAL ~~would~~CONDITION ~~otherwise be~~AND ~~available~~RESULTS ~~for~~OF ~~further~~OPERATIONS” ~~development~~in ofPart ~~our~~II ~~existing~~of ~~business~~this Report. ~~Moreover,~~We ~~the anticipated~~expect ~~benefits~~to ofincur ~~any~~additional ~~acquisition~~administrative ~~may~~expenses ~~not~~during bethe ~~realized.~~first ~~Any~~and ~~future acquisitions~~second quarters of ~~other~~fiscal ~~businesses~~year or2004 ~~product~~in ~~lines~~connection ~~might~~with ~~require~~proceedings us to ~~obtain~~complete the ~~additional~~Merger, ~~equity~~which orwill ~~debt~~reduce ~~financing,~~operating ~~which~~results ~~might~~in those quarters. If the proposed Merger is not beconsummated ~~available~~for any reason, including failure to usobtain ~~on favorable~~required ~~terms~~shareholder approval or atto ~~all~~satisfy other conditions to the Merger, the costs and ~~might~~expenses incurred beby ~~dilutive~~us toas ~~existing~~a ~~shareholders~~result of the Merger will negatively affect our operating results in fiscal 2004.

~~Effect~~5 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,

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

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 $254,000, $302,000 and $318,000 in the fiscal years ended June 30, 2003, 2002 and 2001, respectively.

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 to date 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 2737 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~~ 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,~~September ~~2002~~2, 2003, we had ~~106~~113 full-time employees. At various times during the year we also employ approximately 5030 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~~October 31, ~~2003~~2004. 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. We also currently maintain a small sales office in Worcestershire, England.

~~During~~We ~~fiscal~~also ~~2001~~had leased a 41,040 square foot facility in Memphis, Tennessee, that we ~~also~~had ~~maintained~~used ato ~~sales~~warehouse and ~~distribution~~distribute ~~office~~products atto customers located in the Midwest and East. As part of a ~~leased~~restructuring ~~facility~~and incost ~~Essex~~cutting program, ~~England.~~we ~~This~~moved ~~lease~~those ~~expired~~functions into ~~July~~our ofRancho ~~2001~~Cucamonga, California facility and ~~was not~~vacated ~~renewed~~the Memphis facility in June 2000. ~~However,~~The welease ~~currently~~for ~~maintain~~the aMemphis ~~small~~facility ~~sales~~expired ~~office~~May ~~in Worcestershire~~31, ~~England~~2003.

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.

8 6

Item 3. LEGAL PROCEEDINGS

None

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

None

EXECUTIVE OFFICERS OF REGISTRANT

Set forth below is information, as of September 2, 2003, regarding the Company’s executive officers.

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.

Name of officer	Age	Office
Richard S. Kay	61	Chairman of the Board of Directors, Chief Executive Officer and President; Acting Chief Financial Officer*
Ronald T. Gravette	53	Vice President, Sales

~~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~~Kay ~~numerous~~assumed ~~sales~~the ~~and~~position ~~sales related positions in a variety~~ of ~~industries,~~acting ~~including~~Chief ~~foodservice, hospitality~~Financial ~~and~~Officer ~~publishing.~~on ~~From~~August ~~1995 to 1998~~28, ~~he served as Associate Publisher for Marcoa Publishing~~2003, ~~Inc.~~when ~~and~~Laurence ~~then~~Huff, ~~from~~who ~~1998~~had tobeen ~~2000,~~the 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 BachelorCompany’s ~~degree~~Chief ~~from the~~Financial ~~University~~Officer ofsince ~~Redlands.~~September ~~Mr. Gravette~~1999, isleft the ~~son~~Company ofto ~~Mr. E.T.~~accept ~~Gravette~~another ~~who is~~employment ~~a director of the Company~~opportunity.

MRRichard S. ~~HUFF~~ Kay. Mr. Kay was appointed Chief ~~Financial~~Executive Officer and President of ~~the~~Pacer ~~Company~~on inJuly ~~September 1999~~9, 2001. ~~For~~He ~~more~~was ~~than~~named Chairman of the ~~previous~~Company’s ~~five~~Board ~~years~~of Directors on February 21, he2001. ~~served~~Mr. asKay ~~Assistant~~has ~~Corporate~~been a CEO ~~Controller~~and ofCFO ~~Stater~~for ~~Bros.~~several ~~Markets,~~companies ~~Colton,~~operating ~~California~~in different industries, aincluding ~~major~~manufacturing ~~grocery~~and ~~store chain~~consumer products, ~~where~~energy heand healthcare. He was ~~responsible~~the CFO for ~~budgeting~~three ~~and~~different ~~tax~~companies ~~accounting~~during ~~and~~their ~~the development~~initial ~~and~~public ~~implementation~~offerings ofand ~~computerized~~the ~~financial~~CFO ~~and~~for ~~accounting~~four companies ~~systems.~~during ~~Prior~~the tocourse ~~joining~~of ~~Stater~~their ~~Bros.,~~merger Mrtransactions. ~~Huff~~ Most recently he served as athe ~~financial~~COO and ~~budgeting~~ ~~analyst~~CFO ~~and~~for ~~cost~~TruCost ~~accountant~~Food ~~for~~Systems, a ~~number~~company offormed ~~the~~in ~~manufacturing divisions~~1999 ofto ~~Rockwell~~develop ~~International~~a foodservice web site. MrBeginning in 1992, he served as CFO of Paragon Steakhouse Restaurants. ~~Huff~~ He ~~holds~~was anpromoted ~~MBA~~to ~~from~~CEO in 1997 and was responsible for the ~~University of~~turnaround Lafor ~~Verne~~this owner and aoperator ~~Bachelors~~of ~~degree~~73 upscale casual restaurants, with anmore ~~emphasis~~than 4,000 employees located in ~~accounting~~eleven ~~from California~~states. ~~State~~Paragon ~~University,~~was ~~Long~~sold ~~Beach~~in 1999.

9Ronald T. Gravette. 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 former director of the Company and one of the principal owners of Cyan (see “DESCRIPTION OF BUSINESS—Introduction—Recent Developments—Merger Agreement with Cyan Holding Co.).

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~~2003 and ~~2001~~2002 are ~~listed~~ set forth below:

		High(1)	~~High(1)~~		Low(1)		~~Low(1)~~
Fiscal year ended June 30, 2002:
Fiscal year ended June 30, 2003:
First Quarter	~~First Quarter~~	$	$5.15	~~3.530~~	$	3.80	$	~~2.380~~
Second Quarter	~~Second Quarter~~		4.16	~~4.990~~		3.06		~~3.050~~
Third Quarter	~~Third Quarter~~		4.29	~~4.730~~		3.35		~~3.800~~
Fourth Quarter	~~Fourth Quarter~~		5.86	~~5.630~~		4.01		~~4.200~~
Fiscal year ended June 30, 2001:
Fiscal year ended June 30, 2002:
First Quarter	~~First Quarter~~	$	$3.53	~~5.000~~	$	2.38	$	~~3.750~~
Second Quarter	~~Second Quarter~~		4.99	~~4.375~~		3.05		~~1.969~~
Third Quarter	~~Third Quarter~~		4.73	~~3.250~~		3.80		~~2.313~~
Fourth Quarter	~~Fourth Quarter~~		5.63	~~3.300~~		4.20		~~2.063~~

(1)

All amounts give retroactive effect to a 1-for-5 reverse stock split approved by shareholders on November 21, 2000.

Number of Record Shareholders

~~The~~As of September 22, 2003, the approximate number of record holders of our shares ~~as of September 25, 2002~~ was 1,~~415~~369 and wethere ~~have~~were approximately 54,000 beneficial owners of our shares.

Dividends and Share Repurchases

~~Pacer~~We ~~has~~have a policy of retaining earnings to support the growth of ~~its~~ our 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~~August 31, 2002, when we terminated that program, we had purchased ~~305~~314,~~694~~070 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.~~

10 8

Item 6. SELECTED FINANCIAL DATA

The consolidated selected operating data set forth below for the fiscal years ended June 30, ~~2002~~2003, ~~2001~~2002 and ~~2000~~2001, and the selected balance sheet data at June 30, ~~2002~~2003 and ~~2001~~2002, are derived from ~~the Company~~Pacer’s audited consolidated ~~financial~~ financial statements included elsewhere in this Report. The selected ~~financial~~ operating data for the fiscal years ended June 30, ~~1999~~2000 and ~~1998~~1999, and the selected balance sheet data at June 30, ~~2000~~2001, ~~1999~~ 2000 and ~~1998~~1999, are derived from audited consolidated financial statements that are not included in this Report. The consolidated selected operating data for the fiscal year ended June 30, 1999, 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, and the consolidated selected operating data for the fiscal year ended June 30, 2002, and the balance sheet data at June 30, 2002 include the operations of Cook Bates only until September 28, 2001, when the Cook Bates product line was sold. The following data should be read in conjunction with ~~our~~ Pacer’s 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.

			Year Ended June 30,
		Years Ended June 30,
			(All amounts in thousands except per share amounts)
		2003				2002				2001				2000			1999
Selected Operating Data:			2002				2001				2000				1999			1998
		(In thousands, except per share data)
Net sales(1)			$	30,820			$	41,658			$	43,792			$	44,861		$	31,364
Selected Operating Data:
Gross profit(1)(2)				8,747				9,742				10,901				13,336			10,543
Net sales(1)		$	24,402			$	30,820			$	41,658			$	43,792		$	44,861
Selling, general & administrative(1)(2)				7,245				9,268				9,859				10,296			7,573
Gross profit(1)(2)			7,783				8,747				9,742				10,901			13,336
Restructuring charges				516				—				315				—			—
Selling, general and administrative(1)(2)			6,407				7,245				9,268				9,859			10,296
(Gain)/loss on sales of product lines				(1,211	)			1,042				—				—			—
Restructuring charges			—				516				—				315			—
Operating income (loss)				2,197				(568	)			727				3,040			2,972
(Gain)/loss on sales of product lines			—				(1,211	)			1,042				—			—
Other expense, net				112				841				863				803			309
Operating income (loss)			1,376				2,197				(568	)			727			3,040
Income (loss) before income taxes				2,085				(1,409	)			(136	)			2,237			2,663
Other (income) expense, net			(5	)			112				841				863			803
Income tax expense (benefit)				842				(393	)			(439	)			951			1,122
Income (loss) before income taxes			1,381				2,085				(1,409	)			(136	)		2,237
Net income (loss)			$	1,243			$	(1,016	)		$	303			$	1,286		$	1,541
Income tax expense (benefit)			532				842				(393	)			(439	)		951
Earnings (loss) per share(3):
Net income (loss)		$	849			$	1,243			$	(1,016	)		$	303		$	1,286
	Basic		$	0.41			$	(0.31	)		$	0.09			$	0.40		$	0.49
Earnings (loss) per share(3)
	Diluted		$	0.40			$	(0.31	)		$	0.09			$	0.38		$	0.44
Basic		$	0.29			$	0.41			$	(0.31	)		$	0.09		$	0.40
Diluted		$	0.28			$	0.40			$	(0.31	)		$	0.09		$	0.38

	As of June 30,
Balance Sheet Data:	2002			2001				2000			1999		1998
	2003		2002			2001			2000		1999
Total assets	$	13,933		$	22,871			$	29,618		$	30,618	$	27,799
	(In thousands, except per share data)
Working capital		8,990			8,244				8,267			18,825		14,504
Balance Sheet Data:
Borrowings(4)		167			7,856				12,252			12,703		9,869
Total assets	$	15,490	$	13,933		$	22,871		$	29,618	$	30,618
Shareholders’ equity		11,586			11,074				12,699			12,641		10,632
Working capital		10,170		8,990			8,244			8,267		18,825
Borrowings(4)		122		167			7,856			12,252		12,703
Shareholders’ equity		12,492		11,586			11,074			12,699		12,641
Book value per share	$	4.25

(1)		In accordance with the consensus reached by the Emerging Issue Task Force (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 Company reclassified certain marketing and promotional expenses from selling expenses to a reduction in sales. The change had no effect on net income (loss) or earnings (loss) per share. Prior period financial statements have been reclassified to comply with this EITF guidance.
(2)		In accordance with the consensus reached by the EITF of the FASB in 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 goods sold for all periods presented. The change had no effect on net income (loss) or earnings (loss) per share. Prior period financial statements have been reclassified to comply with this EITF guidance.
(3)		See Note 10 to the Consolidated Financial Statements included elsewhere in this Report. Per share amounts have been retroactively adjusted to give effect for a 1-for-5 reverse stock split approved by shareholders on November 21, 2000.
(4)		Includes current portion of long-term debt. For additional information regarding borrowings, see Note 4 to the Company’s Consolidated Financial Statements.

(1)

In accordance with the consensus reached by the Emerging Issue Task Force (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,” we reclassified certain marketing and promotional expenses from selling expenses to a reduction in sales. The change had no effect on net income (loss) or earnings (loss) per share. Prior period financial statements have been reclassified to comply with this EITF guidance.

11 (2) In accordance with the consensus reached by the EITF of the FASB in Issue No. 00-10 (EITF 00-10): “Accounting for Shipping and Handling Fees and Costs,” we reclassified freight out expense from selling, general and administrative expense to cost of goods sold for all periods presented. The change had no effect on net income (loss) or earnings (loss) per share. Prior period financial statements have been reclassified to comply with this EITF guidance.

(3)

See Note 12 to the consolidated financial statements included elsewhere in this Report. Per share amounts have been retroactively adjusted to give effect for a 1-for-5 reverse stock split approved by shareholders on November 21, 2000.

(4)

Includes current portion of long-term debt. For additional information regarding borrowings, see Note 4 to the Company’s consolidated financial statements.

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”), wePacer ~~record~~records all of ~~our~~its 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”), wePacer must make judgments, estimates ~~and~~ and assumptions regarding future events and circumstances that could affect the value of those assets, such as future economic conditions that will affect ~~our~~ its 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 usPacer at the time they are made. Many of those events and circumstances, however, are outside of ~~our~~Pacer’s control and if changes in those events or circumstances occur thereafter, GAAP may require usPacer 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~~Pacer’s practice to establish reserves or allowances against which we ~~are~~Pacer is 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 wePacer ~~make~~makes about the collectibility of ~~our~~its 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~~operations. With respect to other assets, such as goodwill, wePacer ~~write~~ writes down their fair value directly upon determining that, due to changes in events or circumstances, the amounts at which they are carried on ~~our~~its books exceed their current fair value, by increases in ~~general~~operating ~~and administrative~~ expenses. As a result, ~~our~~ judgments, estimates and assumptions about future events can and will affect not only the amounts at which wePacer ~~record~~records these assets on ~~our~~ its balance sheet, but also ~~our~~Pacer’s 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~~products. 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 wePacer ~~follow~~follows GAAP and accounting practices applicable to ~~our~~its business that weit ~~believe~~ believes will enable usit 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 wePacer ~~believe~~believes are material to an understanding of ~~our~~its financial condition and results of operations that are discussed below.

Revenue Recognition and Shipping Costs. WePacer ~~provide~~provides ~~our~~its customers with limited rights to return products. WePacer recognizes ~~recognize~~ revenue ~~from~~upon ~~the~~concluding ~~sale~~that all of athe ~~product~~fundamental ~~upon~~criteria ~~its shipment~~for torevenue recognition have been met. The criteria are usually met at the ~~customer~~time ~~and~~of ~~establish~~product shipment. Pacer establishes an allowance based on historical experience with returns of like products. Shipping costs are included as a component of cost of sales.

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of business wePacer ~~extend~~extends 60-day payment terms to ~~our~~its customers. We Pacer regularly ~~review~~reviews ~~our~~its customers’ accounts and estimates ~~estimate~~ the amount of and ~~establish~~ establishes 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.

12 10

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~~Pacer’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~~Pacer’s operating results in the period when that takes place.

~~Reserve~~Costs ~~for~~in Excess ~~and~~of ~~Obsolete~~Assets ~~Inventory~~Acquired. ~~Inventories~~Pacer adopted ~~are~~SFAS ~~valued~~No. at142 in the ~~lower~~ first quarter of ~~cost~~fiscal ~~(first-in,~~2003. ~~first-out)~~SFAS or142 ~~market~~requires that goodwill and ~~are~~intangible ~~reduced~~assets bythat anhave ~~allowance~~ indefinite useful lives will not be amortized but rather will be tested at least annually for ~~excess~~impairment, and ~~slow~~upon ~~moving~~adoption through ora ~~obsolete~~transitional ~~inventories~~impairment test. ~~The~~Intangible ~~amount~~assets ofthat ~~the allowance~~have isfinite ~~determined~~useful onlives ~~the~~will ~~basis~~continue ofto ~~historical~~be ~~experience~~amortized ~~with~~over ~~our~~their ~~product lines,~~useful ~~estimates~~lives. ~~concerning~~The ~~future~~goodwill ~~economic~~test ~~conditions~~for ~~and~~impairment ~~estimates~~consists of ~~future sales.~~a Iftwo-step ~~there~~process isthat begins with an ~~economic~~estimation ~~downturn~~of orthe fair value of a ~~decline~~reporting inunit. ~~sales,~~The ~~causing inventories~~first ofstep ~~some~~is ~~product~~a ~~lines~~screen tofor ~~accumulate,~~potential itimpairment ~~may~~and ~~become~~the ~~necessary~~second ~~to increase~~step measures the ~~allowance.~~amount ~~Other~~of ~~factors~~impairment, ~~that~~if ~~can~~any. ~~require~~For ~~increases~~purposes inof ~~the allowance~~this orimpairment ~~inventory~~test, ~~write~~Pacer ~~downs~~is ~~are~~considered ~~reductions~~to inhave ~~pricing~~only orone ~~introduction~~reporting ofunit. Pacer has ~~new~~completed orthe ~~competitive~~transitional ~~products~~goodwill byimpairment ~~competitors;~~tests ~~however,~~and ~~due~~have todetermined that the ~~relative maturity~~fair value of the ~~markets~~net inassets ~~which~~exceeded the ~~Company~~carrying ~~operates,~~value ~~usually~~of ~~these~~those ~~are~~assets ~~not significant~~and ~~factors.~~that, ~~Increases~~as ina ~~this~~result, ~~allowance~~no ~~also~~goodwill ~~will~~impairment ~~cause~~had aoccurred ~~decline~~and ~~in operating~~it ~~results~~was asnot ~~such~~be ~~increases~~necessary ~~are~~to record ~~effectuated~~an byimpairment ~~charges~~charge ~~against~~in ~~income~~fiscal 2003.

~~Long~~Stock-~~Lived Assets~~Based Compensation. ~~Long-lived~~In ~~assets~~December ~~such~~2002, asthe ~~goodwill~~Financial ~~and~~Accounting ~~intangible assets~~Standards ~~are~~Board ~~reviewed~~(“FASB”) ~~for~~issued ~~impairment~~Statement ~~when~~of ~~events~~Financial orAccounting ~~circumstances~~Standards ~~indicate that the carrying value may not be recoverable~~No. ~~Currently~~148, ~~estimated~~“Accounting ~~undiscounted future~~for ~~cash~~Stock-Based ~~flows~~Compensation—Transition ~~are used to determine if an asset is impaired~~ and, ifDisclosure” ~~such a~~(“FAS ~~determination were to be made~~148”), ~~the~~which ~~carrying~~amends ~~value~~Statement of ~~the~~Financial ~~asset~~Accounting ~~would~~Standards ~~be reduced to fair value~~No. ~~Any~~123, ~~resulting~~“Accounting ~~impairment~~for ~~would~~Stock-Based beCompensation” ~~recorded~~(“FAS as123”). aFAS ~~charge~~148 ~~against income~~provides inalternative ~~the~~methods ~~period~~of intransition ~~which~~for ~~the~~a ~~impairment~~voluntary ~~was~~change ~~recorded.~~to ~~Beginning~~the ~~with~~fair ~~the~~value ~~fiscal~~based ~~year~~method ~~ending~~of ~~June 30,~~accounting ~~2003, however, we will be required to assess our goodwill~~ for ~~impairment~~ stock-based onemployee ~~the new standards established by SFAS No~~compensation. ~~142. We~~ ~~will~~In ~~not~~addition, beFAS ~~able~~148 toamends ~~determine~~ the ~~full~~disclosure ~~effect~~requirements of ~~these~~FAS ~~new~~123 ~~standards~~to onrequire ~~our financial~~more ~~position~~prominent orand ~~our~~more ~~results~~frequent ofdisclosures ~~operations~~in ~~until~~financial westatements ~~are~~of ~~able to complete our impairment analysis using~~ the ~~new~~effects ~~standards.~~of ~~Under existing accounting~~stock-based ~~standards,~~compensation. ~~our~~The ~~assessment~~transition ofguidance ~~goodwill~~and ~~indicated~~annual ~~that~~disclosure noprovisions ~~impairment existed as~~ of ~~June 30,~~FAS ~~2002.~~148 Inare ~~the~~effective ~~event~~for ~~our~~fiscal ~~analysis~~years ~~under~~ending ~~the~~after ~~new~~December ~~standards indicates this goodwill is impaired~~15, we2002. ~~will~~The beCompany ~~required~~adopted toFAS ~~record~~148 aas ~~charge,~~of ~~retroactive to~~January ~~July~~ 1, ~~2002,~~2003 ~~against~~through ~~our~~its ~~earnings~~continued inapplication ~~fiscal~~of ~~2003,~~ the ~~amount~~intrinsic value method of ~~which~~accounting ~~is not~~under ~~presently~~APB ~~determinable~~25.

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.

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~~Pacer’s net sales:

	2002				2001				2000
	2003			2002			2001
Net sales	100.0	~~100.0~~%	%	100.0	%	~~100.0~~	%100.0	%		~~100.0~~	%
Cost of sales	68.1	~~71.6~~%	%	71.6	%	~~76.6~~	%76.6	%		~~75.1~~	%
Gross profit	31.9	~~28.4~~%	%	28.4	%	~~23.4~~	%23.4	%		~~24.9~~	%
Selling, general & administrative expenses		23.5	%			22.2	%			22.5	%
Selling, general and administrative expenses	26.3	%		23.5	%		22.2	%
Restructuring charges	—	~~1.7~~	%	1.7	%	—	—			~~0.7~~	%
(Gain)/loss on sale of product lines	—	~~(3.9~~	)%	(3.9	)%	~~2.5~~	%2.5	%		—
Other expense, net		0.3	%			2.1	%			2.0	%
Operating income (loss)	5.6	%		7.1	%		(1.3	)%
Income (loss) before taxes		6.8	%			(3.4	)%			(0.3	)%
Other expense, net	—			0.3	%		2.1	%
Net income (loss)		4.0	%			(2.4	)%			0.7	%
Income (loss) before taxes	5.6	%		6.8	%		(3.4	)%
Net income (loss)	3.5	%		4.0	%		(2.4	)%

Fiscal Years Ended June 30, ~~2002~~2003 and ~~2001~~ 2002

Net Sales. Net sales in fiscal ~~2002~~2003 declined $106.8 4 million to $3024.8 4 million, a 2620.08% decrease from the prior year. ~~Sales~~That indecrease, ~~the~~which ~~United~~was ~~States~~expected, ~~which~~ ~~represented~~was ~~84%~~primarily the result of ~~our~~the ~~total~~sale ~~sales~~of inthe ~~fiscal~~Cook ~~2002,~~Bates ~~decreased~~product ~~27.5%~~line ~~from $35.7 million~~in tothe ~~$25.9 million.~~first Ofquarter ~~that~~of ~~decline,~~fiscal $82002.~~4 million~~ ~~was~~The ~~primarily~~Cook Bates ~~attributable~~product toline ~~the~~accounted ~~sale~~for ~~of our nail care product lines~~$5.5 ~~Adhesive~~million of sales in the ~~United~~ ~~States~~year ~~declined~~ended byJune ~~$1.4 million~~30, ~~or 5.9% of net sales~~2002, as compared to ~~the prior~~no ~~fiscal~~sales ~~year,~~in ~~due~~the toyear aended ~~number~~June of30, ~~factors~~2003. ~~including~~Adhesive ~~a decision to discontinue~~ sales ofin ~~products~~the toUnited ~~K-Mart~~States, ~~that~~which ~~accounted~~represented ~~for~~82% ~~approximately $650,000~~ of ~~the~~our ~~decrease~~total ~~in U.S. adhesive net~~ sales; ~~consolidation among retailers~~ in ~~the~~fiscal ~~sales~~2003, ~~channels~~decreased ~~where we sell our products; increased pricing~~by ~~pressures~~$460,000 ~~and~~when ~~new~~compared ~~entrants~~to ~~into~~ the ~~marketplace~~prior year.

International ~~sales, in fiscal 2002, which consisted primarily of Adhesive~~ ~~Product~~adhesive sales, ~~also~~accounted ~~contributed~~for toapproximately $~~1.0 million~~581,000 of the total net sales decline in fiscal 2003, as ~~such~~which sales decreased to approximately $4.9 3 million, infrom ~~fiscal 2002, as compared to~~ $54.9 million, in fiscal ~~2001~~2002. ~~The~~This decrease inwas ~~international sales is~~ primarily attributable to ~~the~~a ~~closure~~major ofEuropean customer’s ~~our~~decision ~~facilities~~to inpurchase ~~the~~some ~~United Kingdom~~adhesive products from an alternate source.

14 11

InNet ~~fiscal~~sales ~~2001,~~in ~~net~~fiscal ~~sales~~2002 declined by $210.1 8 million to $4130.7 8 million, ~~or 4~~a 26.80% decrease from the prior year. Sales in the United States, ~~that~~which represented 8684% of ~~total~~ ~~net~~Pacer’s total sales in fiscal ~~2001~~2002, decreased ~~by $2~~27.~~8 million or 7.3~~5% from $3835.5 7 million to $3525.7 9 million. ~~The~~Of ~~domestic~~that ~~revenue~~ decline, ~~of approximately~~ $18.2 4 million was primarily attributable to the ~~slowing~~sale of ~~the~~Pacer’s ~~United~~nail ~~States~~care ~~economy~~product inlines. ~~fiscal~~Adhesive ~~2001.~~sales ~~Promotional~~in ~~and~~the ~~advertising~~United ~~expenses~~States ~~decreased~~declined by $1.6 4 million as aor ~~result~~5.9% of net sales, as compared to the ~~sale~~prior fiscal year, due to a number of ~~the~~factors ~~Cook~~including ~~Bates~~a ~~product~~decision ~~line~~to discontinue sales of products to K-Mart, that ~~impacted~~accounted for approximately $650,000 of the decrease in U.S. adhesive net sales~~. International~~; consolidation among retailers in the sales channels where Pacer sells its products; increased inpricing ~~fiscal~~pressures ~~2001~~and asnew ~~compared~~entrants tointo the ~~prior~~marketplace. ~~fiscal year,~~International ~~totaling~~sales contributed to $61.0 million, ~~or 14%~~ of the total net sales ~~for~~decline ~~fiscal~~when ~~year 2001, as~~ compared to $5fiscal 2001.~~3 million~~ ~~and~~The ~~12%~~decrease ofin ~~total~~international ~~net~~ sales is primarily attributable to the closure of our facilities in ~~fiscal~~the ~~2000~~United Kingdom.

Gross Profit. ~~Our~~Pacer’s gross margin (gross profits stated as a percentage of ~~net~~ sales) increased to 2831.49% in fiscal ~~2002~~2003 from 2328.4% in fiscal ~~2001,~~2002. ~~due primarily~~These improvements in gross margin were attributable to ~~improved~~a ~~raw~~number ~~material~~of ~~sourcing~~factors, ~~the~~including ~~closure~~improved ofoperating ~~our~~efficiencies ~~United~~that ~~Kingdom facility,~~resulted afrom ~~reduction~~the sale of ~~approximately~~Pacer’s ~~$300~~nail care businesses,~~000~~ reductions in ~~distribution~~raw ~~related~~material costs and a favorable shift in product mix ~~associated with the disposition of our nail care product lines~~.

~~Our~~Gross ~~gross~~ margin ~~declined~~increased to 2328.4% in fiscal ~~2001~~2002 from 2423.94% in fiscal ~~2000~~ 2001, due primarily to ~~$500,000~~improved ofraw ~~charges~~material ~~in the quarter ended June 30~~sourcing, ~~2001 resulting from~~ the closure of our United Kingdom facility., ~~Excluding~~a ~~those charges~~reduction of approximately $300,000 ~~our~~in distribution ~~gross~~related ~~margin~~costs ~~would~~and ~~have~~a ~~remained~~favorable ~~relatively~~shift ~~unchanged~~in ~~at approximately~~product 24mix associated with the disposition of Pacer’s nail care product lines.~~6%.~~

WeSelling, ~~currently~~General ~~anticipate~~and ~~further~~Administrative ~~improvements~~Expenses. inSelling, ~~our~~general ~~gross~~and ~~margin~~administrative ~~during the~~(“SG&A”) ~~fiscal~~expenses ~~year~~decreased ~~ending~~by ~~June 30~~$838,000 ~~2003~~from $7.2 million, asor we23.5% ~~expect~~of net sales, in fiscal 2002, to ~~realize~~$6.4 ~~additional benefits~~million, ~~from~~or ~~improvements~~26.3% inof ~~raw~~net ~~materials~~sales, ~~sourcing~~in ~~and~~fiscal ~~our~~2003. ~~business~~Fiscal ~~will~~2003 ~~no longer~~administrative beexpenses were favorably impacted by ~~write-offs~~workforce ~~associated~~reductions ~~with~~that were the result of the sale of the Cook Bates product line and the restructuring program described below. Included in the current year SG&A expense is $415,000 of transaction related costs associated with the Cyan acquisition transaction. If the transaction related costs were excluded, SG&A would have decreased $1.3 million over fiscal 2002.

~~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 wePacer ~~were~~was 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 11 Bankruptcy protection and the fact that net sales declined at a greater rate than did SG&A expenses.

InRestructuring Charges. During fiscal ~~2001~~2002, ~~SG&A~~Pacer ~~decreased~~implemented bya ~~$591,000,~~restructuring ~~and~~program asto abring ~~percent~~its ofoperating ~~net~~costs ~~sales, declined~~in toline ~~22.2%~~with ~~compared~~its tooperations following ~~22.5%~~the insale ~~fiscal~~of ~~2000.~~its ~~This~~nail ~~decline~~care inproduct ~~fiscal 2001~~lines. ~~was~~That ~~primarily~~program included the ~~result~~consolidation of ~~higher~~operations, ~~than~~formerly ~~normal~~conducted ~~expenses~~at multiple facilities, into Pacer’s primary manufacturing facility in ~~fiscal~~Rancho ~~2000~~Cucamonga, California and work force ~~that~~reductions. ~~amounted~~As toa result, restructuring charges totaled $~~350~~516,000 ~~associated~~and ~~with~~were amainly ~~costs~~lease ~~incurred~~termination tocharges ~~defend~~and aemployee ~~proxy contest~~termination ~~waged~~charges, bywhich arepresented ~~group~~1.7% of ~~dissident~~Pacer’s ~~shareholders~~net atsales ~~the~~in ~~Annual~~fiscal ~~Meeting~~2002. ~~held~~ There were no restructuring charges in fiscal ~~November~~2003 ~~2000~~or 2001.

~~Restructuring~~Gain/Loss ~~Charges~~on Sale of Product Lines. ~~During~~Pacer ~~fiscal~~sold ~~2002,~~inventory weand ~~implemented~~certain afixed ~~restructuring program~~and tointangible ~~bring~~assets ~~our~~related ~~operating~~to ~~costs~~the inCook ~~line~~Bates ~~with~~product ~~our~~line ~~operations~~(which ~~following~~consisted ~~the sale~~largely of ~~our~~personal ~~nail~~ care ~~product~~manicure ~~lines~~implements, seasonal gift sets and Halloween merchandise) for $5.3 million cash. That inventory ~~program~~totaled ~~included~~$3.8 million and the ~~consolidation~~ net book value of ~~operations,~~the ~~formerly~~remaining ~~conducted~~assets atsold ~~multiple~~in ~~facilities,~~that ~~into~~transaction ~~our~~totaled ~~primary manufacturing~~$105,000. ~~facility~~In inconnection ~~Rancho~~with ~~Cucamonga~~the sale, ~~California~~Pacer ~~and~~recorded ~~work~~transaction ~~force reductions.~~related Ascosts aof ~~result~~$142,000, ~~restructuring~~a ~~charges totaled~~ $~~516~~40,000 ~~and~~loss ~~were~~associated with the sale of ~~mainly~~holiday ~~lease~~merchandise ~~termination~~at ~~charges~~bargain prices and ~~employee~~a ~~termination~~gain ~~charges,~~of ~~which represented~~ $1.72 million or 3.9% of ~~our~~ net sales, which are included in ~~fiscal~~operating ~~2002.~~income ~~There~~in ~~were~~the noaccompanying ~~restructuring charges~~statement inof ~~fiscal~~operations ~~2001~~for the year ended June 30, 2002.

~~Gain/Loss~~In onfiscal ~~Sale~~year of2001, ~~Product~~Pacer ~~Lines. We~~ sold ~~inventory~~all ~~and~~of ~~certain~~the ~~fixed and intangible~~ assets, ~~related~~properties toand goodwill of the ~~Cook~~California ~~Bates~~Chemical product line ~~(which~~to ~~consisted largely of personal care manicure implements~~Esschem, ~~seasonal~~Inc. ~~gift~~in ~~sets~~exchange ~~and Halloween merchandise)~~ for $~~5.3 million~~500,000 cash. ~~That~~plus ~~inventory~~the ~~totaled~~transfer ~~$3.8 million~~by ~~and the~~Esschem ~~net~~to ~~book~~Pacer ~~value~~ of ~~the~~145,000 ~~remaining~~shares ~~assets~~of ~~sold~~Pacer incommon ~~that~~stock ~~transaction~~owned ~~totaled $105,000~~by Esschem. InAs ~~connection~~a ~~with~~result ~~the~~of ~~sale,~~this ~~we recorded~~ transaction, ~~related costs~~Pacer ofwrote ~~$142,000,~~off athe ~~$40,000~~remaining goodwill ~~loss~~that ~~associated~~arose ~~with~~from the ~~sale~~acquisition ofin ~~holiday merchandise~~1997. atThe ~~bargain~~goodwill ~~prices~~impairment, ~~and~~ a ~~gain~~one-time, non-cash charge, of $1.2 0 million or 32.95% of net sales~~, which~~ ~~are~~is included in ~~operating income in~~ the ~~accompanying~~2001 consolidated statement of ~~operations~~ ~~for the year ended June 30, 2002~~operations.

In12 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.

~~Other~~Operating ~~Expense,~~income ~~Net~~(loss). ~~Other~~For ~~expense~~the year ended June 30, ~~net~~2003, ~~which~~income ~~consists~~from ~~primarily~~operations oftotaled $1.4 ~~interest~~million ~~charges~~or on5.6% ~~outstanding~~of ~~bank~~net ~~borrowings,~~sales ~~was~~compared to $~~112~~2.2 million,~~000~~ inor ~~fiscal~~7.1% of sales for the year ended June 30, 2002, ~~as compared~~of towhich $~~841~~1.2 million,~~000~~ or 3.9% of net sales, represented the gain on the sale of the Cook Bates product line in ~~fiscal~~the ~~2001~~first quarter of fiscal 2002. ~~Interest~~Excluding ~~expense~~that ~~decreased~~gain, byand the $~~708~~516,000 ~~during~~ ~~fiscal~~restructuring ~~2002~~charge asdiscussed aabove ~~result~~(which ofrepresented ~~reductions~~1.7% inof ~~outstanding~~net ~~debt~~sales), ~~made~~operating ~~possible by~~income for the ~~Cook~~year ~~Bates~~ended ~~sale~~June ~~and~~30, to2002 awould ~~lesser~~have ~~extent,~~been ~~declines~~$1.5 inmillion ~~prevailing~~or ~~rates~~4.9% of ~~interest~~ net sales.

~~Other~~For ~~expense~~the year ended June 30, ~~net~~2002, inincome ~~fiscal~~from ~~2001,~~operations ~~which~~totaled ~~also~~$2.2 ~~consisted~~million or ~~primarily~~7.1% of ~~interest~~ ~~charges~~net onsales ~~outstanding~~compared ~~bank~~to ~~borrowings,~~an ~~was~~operating loss of $~~841~~568,000 asmillion, ~~compared~~or ~~to $863~~1.3% of sales for the year ended June 30,~~000~~ in2001, ~~fiscal~~of ~~2000~~which $1.0 ~~That~~million, ~~decline~~or ~~was~~2.5% ~~due~~of tonet ~~declining~~sales, ~~rates~~represented ofa ~~interest~~one-time non-cash charge for goodwill impairment associated with the sale of the California Chemical product line in fiscal 2001. asExcluding ~~compared~~that tocharge ~~fiscal~~discussed ~~2000~~above, operating income for the year ended June 30, 2001 would have been $474,000 million or 1. 1% of net sales.

Other (Income) Expense, Net. Other expense, net totaling $112,000 in fiscal 2002 consists primarily of interest expense on outstanding bank borrowings. Interest expense decreased by $141,000 during fiscal 2003 as a result of reductions in outstanding debt made possible by the Cook Bates sale.

Other expense, net, in fiscal 2002, which consisted primarily of interest charges on outstanding bank borrowings, was $112,000 compared to $841,000 in fiscal 2001. That decline was due to declining rates of interest and a reduction of outstanding bank borrowings in fiscal 2002.

Net income (loss). Pacer generated net income of $849,000, or 3.5% of net sales, in the fiscal year ended June 30, 2003, as compared to net income of $1.2 million, or 4.0% of net sales, in the year ended June 30, 2002. However, operating results for the year ended June 30, 2002 included a pre-tax gain of $1.2 million on the sale of the Cook Bates product line and restructuring charges of $516,000.

Pacer generated net income of $1.2 million in the fiscal year ended June 30, 2002, as compared to a net loss of $1.0 million, or 2.4% of net sales, in the year ended June 30, 2001. However, operating results for the year ended June 30, 2001 included a goodwill impairment charge of $1.0 million on the sale of the California Chemical product line.

Liquidity and Capital Resources

Net cash provided by all activities in fiscal ~~2002~~2003 was $~~728,000~~2.1 million versus net cash provided of $20728,000 in the prior year.

Cash provided by operating activities during fiscal year ~~2002~~2003 was $92.63 million compared to $49.7 6 million in fiscal year ~~2001~~2002. ~~This~~Cash ~~increase~~provided ~~was~~by ~~due primarily~~operations toin the prior year included 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~~ ofholiday ~~our~~sales ~~Cook Bates products prior to the sale~~ of ~~the~~ Cook Bates ~~product line and the sale of our remaining inventories of Cook Bates~~ products.

WePacer used cash of $236,000 and $467,000 in investing activities to fund capital expenditures in fiscal ~~2002.~~2003 Inand fiscal ~~2001~~2002, ~~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~~respectively.

WeCash ~~used~~provided by financing activities during fiscal 2003 was $12,000, generated primarily by the exercise of stock options, as compared to cash ~~provided~~used byof ~~operations~~$8.4 million in fiscal 2002, ~~principally~~ when Pacer used cash generated by the Cook Bates sale, to reduce ~~net~~outstanding ~~borrowings under our~~ bank ~~credit~~ ~~facilities~~borrowings ~~by $7.6 million~~ and to repurchase common shares in Pacer’s ~~our~~ open market and private stock repurchase program. Asand aan ~~result,~~odd-lot ~~cash~~share ~~used~~repurchase ~~in financing activities in fiscal 2002 increased to $8~~program.~~4 million~~ ~~as compared to $4.7 million in fiscal 2001.~~

During fiscal ~~2002~~2003, wePacer funded ~~our~~its working capital requirements ~~primarily~~ with ~~a combination of~~ internally generated funds. ~~and~~However, ~~borrowings~~Pacer ~~under~~maintains a revolving bank credit line pursuant to which weit 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~~its 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~~the ~~2002~~year ~~our~~ended June 30, 2003, Pacer’s credit line ~~borrowings~~ bore interest at the bank’s prime rate (4.7500% atas of June 30, ~~2002~~2003), less 0.25%, or at the bank’s LIBOR base rate, plus 2.50%. ~~Effective~~As of June 30, ~~2002~~2003, ~~the~~Pacer ~~rate~~had ~~for~~no ~~LIBOR~~ borrowings ~~will~~ beoutstanding ~~reduced~~on toits ~~the~~revolving 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~~approximately ~~(“EBITDA”) of more than~~ $~~1 million for the six months ended June 30, 2002~~4.2 ~~This~~million ~~new LIBOR borrowing rate will continue in effect provided that we are able to achieve EBITDA~~ of atunused ~~least~~borrowings ~~$500,000~~were ~~in each~~ ~~subsequent fiscal quarter.~~

At13 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

available ~~2002~~(based ~~and~~on ~~bank~~eligible ~~borrowings~~collateral). As of ~~$323,000~~June ~~to repurchase 87~~30,~~290~~ ~~of our shares in fiscal 2001. In August 2002~~2003, wethere ~~completed~~were ~~and~~no ~~terminated~~amounts ~~the~~outstanding ~~stock~~under ~~repurchase program.~~this Wecredit ~~do not currently anticipate making additional share repurchases during the fiscal year ending June 30, 2003~~facility.

WePacer ~~believe~~also ~~that~~has ~~availability~~a ~~under~~bank ~~the~~ credit ~~line,~~facility ~~together~~under ~~with internally~~which ~~generated~~it ~~funds,~~may ~~will~~obtain becommercial letters ~~sufficient~~of tocredit, ~~enable~~standby usletters toof ~~meet~~credit, ~~our working capital~~ and ~~other~~banker’s ~~cash~~acceptances ~~requirements~~in ~~over~~amounts ~~the~~not ~~next~~exceeding ~~twelve months~~$1.5 ~~However,~~million ~~we may~~in ~~take~~the ~~advantage~~aggregate. ofAny ~~opportunities~~amount tooutstanding ~~acquire~~on ~~other~~this ~~Adhesive~~additional ~~Products businesses,~~credit ~~should~~facility ~~they~~will ~~arise,~~reduce orthe toborrowing ~~invest~~base inon ~~new~~the ~~product~~revolving ~~introductions,~~bank incredit ~~which~~line. ~~case~~This wecredit ~~may~~facility ~~incur~~expires ~~borrowings~~on toOctober do1, so2003. AtAs ~~the~~of ~~present~~June ~~time~~30, we2003, ~~are introducing~~there ~~our~~were ~~new~~no ~~Anchor-TiteTM~~amounts ~~and~~outstanding Gounder ~~Spot~~this ~~Go®~~credit ~~products~~facility.

Pacer believes that internally generated funds, together with available borrowings under the credit line, will be sufficient to enable it to meet its working capital and other cash requirements through the October 1, 2003 maturity date of the credit line. Pacer plans to seek, and it currently expects to be able to obtain, an extension of its existing bank line of credit. In addition, Pacer may seek to take advantage of opportunities to acquire other businesses, should such opportunities arise, or to invest in new product introductions, in which case it may incur borrowings to do so.

Seasonality and Quarterly Financial Data

Historically, wePacer ~~have~~has sold a greater volume of nail care products in the third calendar quarter of the year (~~our~~its 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~~Pacer expects that weit will cease to encounter such sizable quarterly variations in ~~our~~ its sales and operating results.

The following table presents unaudited quarterly financial information for each of the fiscal years ended June 30, ~~2002~~2003 and ~~2001~~ 2002. This information has been prepared by usPacer on a basis consistent with ~~our~~its 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.

			Quarter Ended
		Quarters Ended
			Sept. 30,				Dec. 31,			Mar. 31,			June 30,
FY 2003		Sept. 30,2002			Dec. 31,2002			Mar. 31,2003		June 30,2003
FY2002			2001				2001			2002			2002
		(In thousands, except per share amounts)
Net sales		$	$6,523	~~10,359~~	$	5,784	$	~~6,886~~$	6,566	$	65,~~567~~529		$	~~7,008~~
Gross profit			2,074	~~2,938~~		1,790		~~1,864~~	2,154		1,~~993~~765			~~1,952~~
Net income (loss)			385	~~904~~		241		~~(70~~	)395		~~353~~(172	)		56
Net income (loss) per share
Net income (loss) per share:
Basic	~~Basic~~	$	$.13	~~.29~~	$	.08	$	~~(.02~~$	).14	$	(.1206	)	$	~~.02~~
Diluted	~~Diluted~~	$	$.13	~~.29~~	$	.08	$	~~(.02~~$	).13	$	(.1106	)	$	~~.02~~

			Sept. 30,				Dec. 31,				Mar. 31,			June 30,
		Quarters Ended
FY 2001			2000				2000				2001			2001
FY 2002		Sept. 30,2001(1)			Dec. 31,2001				Mar. 31,2002			June 30,2002
Net sales			$	13,987			$	8,877			$	10,141		$	8,653
		(In thousands, except per share amounts)
Gross profit				4,066				2,397				2,862			417
Net sales		$	10,359		$	6,886			$	6,567		$	7,008
Net income (loss)				869				158				389			(2,432	)
Gross profit			2,938			1,864				1,993			1,952
Net income (loss) per share (1)
Net income (loss)			904			(70	)			353			56
	Basic		$	.26			$	.05			$	.12		$	(.76	)
Net income (loss) per share:
	Diluted		$	.26			$	.05			$	.12		$	(.76	)
Basic		$	.29		$	(.02	)		$	.12		$	.02
Diluted		$	.29		$	(.02	)		$	.11		$	.02

(1) ~~Per~~Operating ~~share~~results ~~data~~in ~~for~~the ~~periods~~fiscal ~~prior~~quarter toended ~~November~~September 2130, ~~2000~~2001 ~~have~~include ~~been~~the ~~retroactively~~operations ~~adjusted~~of toCook ~~give~~Bates ~~effect~~from toJuly a 1~~-for-5~~, ~~reverse~~2001 ~~stock~~until ~~split~~its ofproduct ~~Pacer’s~~line ~~outstanding~~and ~~shares~~related ~~that~~assets ~~was~~were ~~approved~~sold byon ~~shareholders~~September on29, ~~November~~2001. 21During that quarter, ~~2000~~Cook Bates net sales totaled $4,490,000.

Impact of Recently Issued Accounting Pronouncements

In ~~June~~January ~~2001~~2003, the ~~Financial~~FASB ~~Accounting~~issued ~~Standards~~Interpretation ~~Board~~No. ~~(FASB) issued Statement~~46, Consolidation of ~~Financial~~Variable Interest Entities, an Interpretation of Accounting ~~Standards~~Research Bulletin (~~SFAS~~ARB) No. ~~142~~ 51, ~~“Goodwill~~Consolidated ~~and~~Financial ~~Other Intangible~~Statements ~~Assets~~(Interpretation 46).” ~~Under~~The ~~the~~Interpretation ~~new~~significantly ~~rules,~~changes ~~goodwill~~previous ~~and~~consolidation ~~indefinite~~guidance ~~lived intangible~~pertaining ~~assets~~to ~~will~~SPEs. noThe ~~longer~~Interpretation beclarifies ~~amortized~~the ~~but~~application ~~will~~of beARB ~~reviewed~~No. ~~annually for~~51 ~~impairment.~~to ~~Separable~~certain ~~intangible~~entities ~~assets~~in ~~that~~which ~~are~~equity investors do not ~~deemed~~have tothe characteristics of a controlling financial interest or do not have ~~an indefinite~~sufficient ~~life~~equity ~~will~~at ~~continue~~risk for the entity to befinance ~~amortized~~its ~~over~~activities ~~their~~without ~~useful~~additional ~~lives.~~subordinated ~~The~~financial support. ~~non-amortization~~These ~~provisions~~entities ofare ~~SFAS~~defined Noas variable interest entities or VIEs. ~~142~~ ~~apply~~Most toSPEs ~~goodwill~~will ~~and~~be ~~intangible assets~~evaluated ~~acquired~~for ~~after~~consolidation ~~June 30,~~under ~~2001~~the Interpretation as VIEs. ~~With~~All ~~respect~~enterprises towith ~~goodwill~~variable ~~and~~interests ~~intangible assets~~in ~~acquired~~VIEs ~~prior~~created toafter ~~July 1~~January 31, ~~2001~~2003, ~~the~~are ~~Company~~required ~~will~~to apply the ~~new accounting~~provisions ~~rules~~of ~~beginning~~the ~~July 1,~~Interpretation ~~2002~~immediately. ~~The~~A ~~Company~~public ~~will~~entity bewith a variable interest in a VIE created before February 1, 2003, is required to ~~reassess~~ apply the ~~useful~~consolidation ~~lives~~provisions of ~~other~~the ~~intangible~~Interpretation ~~assets~~to ~~within~~that ~~its~~entity in the first fiscal year or ~~quarter~~interim ~~after~~period ~~adoption~~beginning ofafter ~~SFAS~~June No15, 2003. ~~142.~~ WeThe ~~are~~Interpretation ~~currently~~also ~~assessing~~requires ~~what~~ certain disclosures in all financial ~~impact~~statements initially issued after January 31, 2003, regardless of the date on which the VIE was created if ~~any,~~it ~~SFAS~~is ~~No. 142~~reasonably possible that an enterprise will consolidate or disclose information about a VIE when the Interpretation becomes effective. We do not expect the provision of this statement to have a significant impact on our ~~consolidated~~results ~~financial statements~~of ~~and~~operations ~~operating~~or ~~results~~financial position.

17In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (“FAS 149”) which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. We do not expect the provision of this statement to have a significant impact on our results of operations or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“FAS 150”). This statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FAS 150 requires that those instruments be classified as liabilities in the balance sheet. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect the provisions of this statement to have a significant impact on our results of operations or financial position.

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, Pacer is exposed to market risk from foreign currency fluctuations associated with the purchases of raw materials and sales of products outside of the United States. Pacer does not use financial instruments for trading or other speculative purposes and is not party to any derivative financial instruments.

In seeking to minimize the risks from interest rate fluctuations, Pacer manages exposure through the regular operating and financing activities. Although there are currently no borrowings under its revolving bank credit facility or term note, when Pacer does borrow under the credit facility or term note, the fair value of borrowings under the revolving bank credit facility and term note approximate the carrying value of such obligations.

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

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.

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.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements are included herein:

	Page
	Page No.
	No.
Report of Independent Auditors	17
Report of Independent Auditors		21
Consolidated Balance Sheets—June 30, 2003 and 2002	18
Consolidated Balance Sheets — June 30, 2002 and 2001		22
Consolidated Statements of Operations—Fiscal Years Ended June 30, 2003, 2002 and 2001	19
Consolidated Statements of Operations — Fiscal Years Ended June 30, 2002, 2001 and 2000		23
Consolidated Statements of Shareholders’ Equity—Fiscal Years Ended June 30, 2003, 2002 and 2001	20
Consolidated Statements of Shareholders’ Equity — Fiscal Years Ended June 30, 2002, 2001 and 2000		24
Consolidated Statements of Cash Flows—Fiscal Years Ended June 30, 2003, 2002 and 2001	21
Consolidated Statements of Cash Flows — Fiscal Years Ended June 30, 2002, 2001 and 2000		25
Notes to Consolidated Financial Statements	22
Notes to Consolidated Financial Statements		26
Schedule II—Valuation and Qualifying Accounts—Fiscal years ended June 30, 2003, 2002 and 2001	36
Schedule II — Valuation and Qualifying Accounts — Fiscal years ended June 30, 2002, 2001 and 2000		39

20 16

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 have audited the accompanying consolidated balance sheets of Pacer Technology as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a). 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~~2003 and ~~2001~~2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, ~~2002~~2003, 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.

As discussed in Note 1 to the consolidated financial statements, in 2003 the Company changed its method of accounting for costs in excess of net assets of businesses acquired.

/s/ ERNST & YOUNG LLP

Orange County, California ~~August 14,~~ ~~2002~~

21 August 11, 2003

PACER TECHNOLOGY

CONSOLIDATED BALANCE SHEETS ~~(In~~ ~~thousands, except share amounts)~~

		June 30,				~~June 30,~~
						2002		2001
		2003			2002
Assets
		(In thousands, exceptshare amounts)
Current assets:
ASSETS
	Cash					$	1,199	$	471
Current assets:
	Trade receivables, less allowance for doubtful accounts of $518 in 2002 and $343 in 2001						5,186		8,292
Cash		$	3,272		$	1,199
	Other receivables						442		966
Trade receivables, less allowance for doubtful accounts of $753 in 2003 and $518 in 2002			3,770			5,186
	Inventories, net						3,387		7,950
Other receivables			447			442
	Prepaid expenses						709		292
Inventories, net			4,176			3,387
	Deferred income taxes						347		1,860
Prepaid expenses			550			709
			Total current assets				11,270		19,831
Deferred income taxes			422			347
Equipment and leasehold improvements, net							1,262		1,634
Total current assets			12,637			11,270
Deferred income taxes							238		—
Equipment and leasehold improvements, net			1,672			1,262
Intangible assets, net							1,163		1,406
Deferred income taxes			18			238
						$	13,933	$	22,871
Intangible assets, net			1,163			1,163
Liabilities and Shareholders’ Equity
		$	15,490		$	13,933
Current liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
	Accounts payable					$	1,160	$	2,391
Current liabilities:
	Accrued expenses						1,020		1,506
Accounts payable		$	1,152		$	1,160
	Revolving bank line of credit						—		4,648
Accrued expenses			1,134			1,020
	Current installments of long-term debt						100		3,042
Current installments of capital lease obligation			101			—
			Total current liabilities				2,280		11,587
Current installments of long-term debt			80			100
Deferred income taxes							—		44
Total current liabilities			2,467			2,280
Long-term debt, excluding current installments							67		166
Long-term capital leases obligation, excluding current installments			489			—
				Total liabilities			2,347		11,797
Long-term debt, excluding current installments			42			67
Commitments and contingencies
Total liabilities			2,998			2,347
Shareholders’ equity:
Commitments and contingencies
	Common stock, no par value. Authorized: 50,000,000 shares; issued and outstanding: 2,928,401 in 2002 and 3,091,905 in 2001						7,157		7,888
Shareholders’ equity:
	Retained earnings						4,429		3,186
Common stock, no par value. Authorized: 50,000,000 shares; issued and outstanding: 2,939,851 in 2003 and 2,928,401 in 2002			7,214			7,157
				Total shareholders’ equity			11,586		11,074
Retained earnings			5,278			4,429
						$	13,933	$	22,871
Total shareholders’ equity			12,492			11,586
		$	15,490		$	13,933

See accompanying notes to consolidated financial statements.

22 18

PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF OPERATIONS

					Years Ended
		Years Ended June 30,
					June 30,				June 30,				June 30,
		2003				2002				2001
					2002				2001				2000
		(In thousands, except per share amounts)
					(In thousands, except per share amounts)
Net sales		$	24,402			$	30,820			$	41,658
Net sales					$	30,820			$	41,658			$	43,792
Cost of sales			16,619				22,073				31,916
Cost of sales						22,073				31,916				32,891
Gross profit			7,783				8,747				9,742
		Gross profit				8,747				9,742				10,901
Selling, general and administrative expenses			6,407				7,245				9,268
Selling, general & administrative expenses						7,245				9,268				9,859
Restructuring charges			—				516				—
Restructuring charges						516				—				315
Gain on sale of Cook Bates product line			—				(1,211	)			—
Gain on sale of Cook Bates						(1,211	)			—				—
Loss on sale of California Chemical product line			—				—				1,042
Loss on sale of California Chemical						—				1,042				—
Operating income (loss)			1,376				2,197				(568	)
		Operating income (loss)				2,197				(568	)			727
Other (income) expense:
Other (income) expense:
Interest income			(3	)			(4	)			(2	)
	Interest income					(4	)			(2	)			(34	)
Interest expense			3				144				852
	Interest expense					144				852				1,005
Other, net			(5	)			(28	)			(9	)
	Other, net					(28	)			(9	)			(108	)
			(5	)			112				841
						112				841				863
Income (loss) before income taxes			1,381				2,085				(1,409	)
Income (loss) before income taxes						2,085				(1,409	)			(136	)
Income tax expense (benefit)			532				842				(393	)
Income tax expense (benefit)						842				(393	)			(439	)
Net income (loss)		$	849			$	1,243			$	(1,016	)
			Net income (loss)		$	1,243			$	(1,016	)		$	303
Weighted average shares—basic(1)			2,921				3,022				3,260
Weighted average shares — basic(1)						3,022				3,260				3,345
Basic earnings (loss) per share		$	.29			$	.41			$	(.31	)
		Basic earnings (loss) per share			$	.41			$	(.31	)		$	.09
Weighted average shares—diluted(1)			3,027				3,092				3,260
Weighted average shares — diluted(1)						3,092				3,260				3,374
Diluted earnings (loss) per share		$	.28			$	.40			$	(.31	)
		Diluted earnings (loss) per share			$	.40			$	(.31	)		$	.09

(1) The numbers of shares outstanding at June 30, 2000 have been retroactively adjusted to give effect to a 1-for-5 reverse stock split of outstanding shares approved by the shareholders on November 21, 2000.

See accompanying notes to consolidated financial statements.

23 19

PACER TECHNOLOGY

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

		Number of												Accumulated
		Issued									Notes			Other
		and									Receivable			Comprehensive			Total
		Outstanding			Common			Retained			From			Income			Shareholders'
		Shares			Stock			Earnings			Directors			(Loss)			Equity
Balances at June 30, 1999(1)			3,357,995		$	8,802		$	3,899		$	(47	)	$	(13	)	$	12,641
	Net income		—			—			303			—			—			303
	Foreign currency translation adjustment		—			—			—			—			(66	)		(66	)
	Comprehensive income		—			—			—			—			—			237
	Shares issued upon exercise of options(1)		17,800			64			—			—			—			64
	Shares issued to employees(1)		3,300			15			—			—			—			15
	Shares repurchased(1)		(54,900	)		(305	)		—			—			—			(305	)
	Promissory note payments from directors		—			—			—			47			—			47
Balances at June 30, 2000(1)			3,324,195			8,576			4,202			—			(79	)		12,699
	Net loss		—			—			(1,016	)		—			—			(1,016	)
	Foreign currency translation adjustment		—			—			—			—			79			79
	Comprehensive loss		—			—			—			—			—			(937	)
	Shares retired related to sale of California Chemical		(145,000	)		(435	)		—			—			—			(435	)
	Shares repurchased		(87,290	)		(323	)		—			—			—			(323	)
	Warrants issued to consultants		—			70			—			—			—			70
Balances at June 30, 2001			3,091,905			7,888			3,186			—			—			11,074
	Net income and comprehensive income		—			—			1,243			—			—			1,243
	Shares repurchased		(163,504	)		(731	)		—			—			—			(731	)
Balances at June 30, 2002			2,928,401		$	7,157		$	4,429		$	—		$	—		$	11,586

Years Ended June 30, 2003, 2002 and 2001

(1)In ~~The numbers of shares outstanding at June 30~~thousands, ~~2000~~except ~~and~~share ~~1999~~amounts) ~~have been retroactively adjusted to give effect to a 1-for-5 reverse stock split of outstanding shares approved by the shareholders on November 21, 2000.~~

	Number of Issued and Outstanding Shares		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balances at June 30, 2000(1)	3,324,195		$	8,576		$	4,202		$	(79	)	$	12,699
Net loss	—			—			(1,016	)		—			(1,016	)
Foreign currency translation adjustment	—			—			—			79			79

Comprehensive loss	—			—			—			—			(937	)
Shares retired related to sale of California Chemical product line	(145,000	)		(435	)		—			—			(435	)
Shares repurchased	(87,290	)		(323	)		—			—			(323	)
Warrants issued to consultants	—			70			—			—			70

Balances at June 30, 2001	3,091,905			7,888			3,186			—			11,074
Net income and comprehensive income	—			—			1,243			—			1,243
Shares repurchased	(163,504	)		(731	)		—			—			(731	)

Balances at June 30, 2002	2,928,401			7,157			4,429			—			11,586
Net income and comprehensive income	—			—			849			—			849
Shares issued upon exercise of options	20,000			99			—			—			99
Shares repurchased	(8,550	)		(42	)		—			—			(42	)

Balances at June 30, 2003	2,939,851		$	7,214		$	5,278		$	—		$	12,492

(1)

The numbers of shares outstanding at June 30, 2000 have been retroactively adjusted to give effect to a 1-for-5 reverse stock split of outstanding shares approved by the shareholders on November 21, 2000.

See accompanying notes to consolidated financial statements.

24 20

PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(In~~ ~~thousands)~~

					Years Ended
		Years Ended June 30,
					June 30,				June 30,				June 30,
		2003				2002				2001
					2002				2001				2000
		(In thousands)
Net income (loss)		$	849		$	~~1,243~~$	1,243		$	~~(1,016~~$	)(1,016	)	$	~~303~~
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	~~Depreciation~~		415			~~525~~	525			~~515~~	515			~~512~~
Amortization of other assets	~~Amortization of other assets~~		—			~~222~~	222			~~330~~	330			~~287~~
Write-off of property and equipment	~~Write-off of property and equipment~~		—			~~144~~	144			—	—			—
Allowance for doubtful accounts	~~Allowance for doubtful accounts~~		235			~~175~~	175			39	39			~~(600~~	)
Deferred income taxes	~~Deferred income taxes~~		145			~~1,231~~	1,231			~~(421~~	)(421	)		~~(207~~	)
Restructuring charges	~~Restructuring charges~~		—			~~516~~	516			—	—			~~315~~
Gain on sale of Cook Bates product line	~~Gain on sale of Cook Bates product line~~		—			~~(1,211~~	)(1,211	)		—	—			—
Cash received on sale of Cook Bates product line	~~Cash received on sale of Cook Bates product line~~		—			~~5,341~~	5,341			—	—			—
	(Gain) loss on sale of property and equipment					86				35				(5	)
Loss on sale of property and equipment			1				86				35
Warrants issued to consultants	~~Warrants issued to consultants~~		—			—	—			70	70			—
Goodwill impairment on sale of California Chemical product line	~~Goodwill impairment on sale of California Chemical product line~~		—			—	—			~~1,042~~	1,042			—
Changes in operating assets and liabilities, excluding effects of dispositions:	~~Changes in operating assets and liabilities, excluding effects of dispositions:~~
Decrease in trade receivables			~~Decrease in trade receivables~~1,181			~~2,931~~	2,931			~~616~~	616			~~463~~
(Increase) decrease in other receivables			(~~Increase) decrease in other receivables~~5	)		~~524~~	524			86	86			~~(907~~	)
Decrease in notes receivable			~~Decrease in notes receivable~~—			—	—			~~116~~	116			~~157~~
			Decrease in inventories			681				3,913				1,715
(Increase) decrease in inventories			(789	)			681				3,913
(Increase) decrease in prepaid expenses and other assets			~~(Increase) decrease in prepaid expenses and other assets~~159			~~(417~~	)(417	)		~~162~~	162			~~170~~
Decrease in accounts payable			~~Decrease in accounts payable~~(8	)		~~(1,231~~	)(1,231	)		~~(885~~	)(885	)		~~(343~~	)
Increase (decrease) in accrued expenses			~~Increase (decrease) in accrued expenses~~114			~~(1,145~~	)(1,145	)		~~115~~	115			~~(579~~	)
Net cash provided by operating activities		~~Net cash provided by operating activities~~	2,297			~~9,615~~	9,615			~~4,717~~	4,717			~~1,281~~
Cash flows from investing activities:
	Proceeds from sale of California Chemical					—				500				—
Proceeds from sale of California Chemical product line			—				—				500
	Proceeds from sale of property and equipment					—				—				33
Proceeds from sale of equipment			9				—				—
Capital expenditures	~~Capital expenditures~~		(245	)		~~(467~~	)(467	)		~~(478~~	)(478	)		~~(341~~	)
Net cash provided by (used in) investing activities		~~Net cash provided by (used in) investing activities~~	(236	)		~~(467~~	)(467	)		22	22			~~(308~~	)
Cash flows from financing activities:
Principal payments on debt and line of credit	~~Principal payments on debt and line of credit~~		(104	)		~~(12,809~~	)(12,809	)		~~(19,073~~	)(19,073	)		~~(17,466~~	)
Borrowings on debt and line of credit	~~Borrowings on debt and line of credit~~		59			~~7,731~~	7,731			~~13,594~~	13,594			~~17,504~~
Principal payments on term-loan	~~Principal payments on term-loan~~		—			~~(2,611~~	)(2,611	)		~~(917~~	)(917	)		~~(915~~	)
Borrowings on term-loan	~~Borrowings on term-loan~~		—			—	—			~~2,000~~	2,000			—
	Notes receivable payments from directors					—				—				47
Exercise of stock options			99				—				—
	Repurchase of common stock, net					(731	)			(323	)			(226	)
Repurchase of common stock			(42	)			(731	)			(323	)
		Net cash used in financing activities				(8,420	)			(4,719	)			(1,056	)
Net cash provided by (used in) financing activities			12				(8,420	)			(4,719	)
Net increase (decrease) in cash						728				20				(83	)
Net increase in cash			2,073				728				20
Cash at beginning of year			1,199			~~471~~	471			~~451~~	451			~~534~~
Cash at end of year		$	3,272		$	~~1,199~~$	1,199		$	~~471~~$	471		$	~~451~~
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	~~Cash paid during the year for interest~~	$	3		$	~~138~~$	138		$	~~890~~$	890		$	~~981~~
Cash paid during the year for income taxes	~~Cash paid during the year for income taxes~~	$	619		$	~~280~~$	280		$	~~320~~$	320		$	~~750~~
Non-cash borrowings on capital lease		$	590			$	—			$	—

See accompanying notes to consolidated financial statements.

25 21

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001

(1) The Company and Summary of Significant Accounting Policies

Nature of Business

Pacer Technology (“Pacer” or “Company”) is a vertically integrated manufacturing formulator and packager of adhesives, sealants and other related products used in hobby, cosmetic, industrial, automotive aftermarket, consumer and private label applications. Pacer produces the plastic containers used to package their adhesives and produces plastic containers for other customers. These products are sold primarily in the United States and internationally through its UK subsidiary, Pacer Tech Limited (“Pacer Tech”).

The significant accounting policies followed by the Company in preparing the accompanying financial statements are as follows:

Principles of Consolidation

The consolidated financial statements include the accounts of Pacer and its ~~subsidiary~~subsidiaries, RECAP, Ltd. and Pacer Tech, which was formed in 1986 to conduct business operations as a distributor of adhesives primarily in the United Kingdom. In June 2001, the scope of Pacer Tech’s operations were reduced and it is now operated as an international sales office. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reverse Stock Split

Effective November 21, 2000, the Company shareholders’ approved a 1-for-5 reverse stock split of its outstanding shares of common stock. All share and per share amounts in these financial statements have been retroactively restated to reflect such reverse split.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investment instruments with original maturities of three months or less.

Concentration of Credit Risk

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and accounts receivable. Credit is extended ~~for~~to all customers based upon an evaluation of the customer’s financial condition and credit history and generally the Company does not require collateral. Credit losses are provided for in the consolidated financial statements by management based upon a detailed evaluation of the collectibility of accounts receivable.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value).

26 22

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.

Costs in Excess of Net Assets of Businesses Acquired

~~Costs~~As inof ~~excess~~July of1, ~~net~~2002, ~~assets~~the Company ofadopted ~~businesses~~Statement ~~acquired~~of ~~are~~Financial ~~amortized~~Accounting onStandards ~~the straight-line~~No. ~~method~~142 ~~over~~(“SFAS an142”), ~~8-year~~“Goodwill toand ~~20-year~~Other ~~life~~Intangible Assets.” ~~Pacer~~In ~~assesses~~accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business ~~recoverability~~combinations effective as of ~~this~~July ~~intangible~~1, ~~asset~~2002 byand ~~determining~~instead ~~whether~~will ~~the~~test at least annually for impairment. As a result, there is no charge for goodwill amortization of ~~the~~expense ~~asset~~contained ~~balance~~in ~~over~~the ~~its~~Company’s ~~remaining~~statement ~~useful~~of ~~life~~operations ~~can~~for bethe ~~recovered~~year ~~through~~ended June 30, ~~undiscounted~~2003, ~~future~~whereas ~~operating~~the ~~cash~~Company’s ~~flows~~statements of operations for the ~~acquired~~years ~~operations~~ended June 30, 2002 and 2001 do contain charges for goodwill amortization expense. The accumulated amortization on the assets of businesses acquired was $1.6 ~~million and~~ ~~$1.4~~ million as of June 30, ~~2002~~2003 and ~~2001, respectively~~2002.

Revenue Recognition and Shipping Costs

The Company provides its customers with limited rights to ~~return~~ return products. The Company recognizes revenue ~~from~~upon ~~the~~concluding ~~sale~~that all of athe ~~product~~fundamental ~~upon~~criteria ~~its~~for ~~shipment~~revenue torecognition have been met. The criteria are usually met at the ~~customer and~~time of product shipment. The Company establishes an allowance based on historical experience with returns of like products. Shipping costs are included as a component of cost of sales.

Advertising and Promotional Expenses

Cooperative advertising and other promotional obligations are accrued and the costs are immediately recorded as a charge against sales when incurred. ~~Advertising~~ Advertising and promotional expense ~~was~~were approximately $~~600~~647,000, $1,~~300~~139,000 and $12,~~400~~303,000, for ~~2002~~2003, ~~2001~~ 2002 and ~~2000~~2001, respectively.

Restructuring Charges

During the fiscal year ended June 30, 2002, the Company recorded $516,000 of restructuring charges mainly as a result of lease termination charges and employee termination costs. The Company has also acquired certain equipment and made certain leasehold improvements to accommodate the relocated operations at its retained facilities at a cost of approximately $200,000, which was capitalized and will be depreciated over the useful lives of the acquired assets.

Restructuring charges for employee severance, and lease termination associated with relocation and closure of facilities amounted to $315,000 in the fiscal year ended June 30, 2000.

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) are based on the weighted average number of shares outstanding during the periods reported and exclude any dilutive effects of options.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

27 23

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001

Foreign Currency Translation

Assets and liabilities denominated in a functional currency other than U.S. dollars are translated into U.S. dollars at the current rate of exchange existing at year-end, and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included as a separate component of shareholders’ equity. Transaction gains and losses included in net income (loss) are immaterial.

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, ~~2002~~2003, the fair value of all financial instruments approximated carrying value.

Research and Development

Research and development costs are charged to selling, general and administrative expenses as incurred and amounted to $~~302~~254,000, $~~318~~302,000 and $~~467~~318,000 in ~~2002~~2003, ~~2001~~2002 and ~~2000~~2001, respectively.

Product Warranties

Pacer provides limited warranties for some products for periods generally ranging from 6 to 12 months. Estimated warranty costs have historically been consistent and do not vary significantly from month to month and therefore are recognized as incurred.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

Pacer reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Stock-Based ~~Option~~Compensation ~~Plans~~

~~Pacer~~In ~~applies~~December 2002, the ~~intrinsic~~Financial ~~value-based~~Accounting ~~method~~Standards Board (“FASB”) issued Statement of ~~accounting~~Financial ~~prescribed~~Accounting by Standards No. 148, “Accounting ~~Principles~~for ~~Board~~Stock-Based Compensation—Transition and Disclosure” (“~~APB~~FAS 148”), ~~Opinion~~which amends Statement of Financial Accounting Standards No. 25 123, “Accounting for Stock-Based ~~Issued~~ Compensation” (“FAS 123”). FAS 148 provides alternative methods of transition for a voluntary change to ~~Employees~~the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and ~~related~~more ~~interpretations,~~frequent disclosures in ~~accounting~~financial ~~for~~statements ~~its~~of the effects of stock-based ~~options~~compensation. The transition guidance Asand ~~such~~annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, ~~compensation~~2002. ~~expense~~The ~~would~~Company beadopted ~~recorded~~FAS on148 as of January 1, 2003 but continued its application of the ~~date~~intrinsic value method of ~~grant~~accounting ~~only~~under ifAPB 25. Financial statement disclosures of the ~~current~~effect ~~market~~on ~~price~~net income (loss) and earnings (loss) per share if fair value provisions of ~~the~~FAS ~~underlying~~148 ~~stock~~had ~~exceeded~~been ~~the~~applied ~~exercise~~are ~~price~~set forth below.

Pacer has stock-based employee compensation plans and applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, in accounting for its stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the Company had applied the fair value recognition provisions of FAS 123.

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001

	Years Ended June 30,
	2003			2002			2001
	(In thousands)
Net income (loss), as reported	$	849		$	1,243		$	(1,016	)
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects		(79	)		(212	)		(56	)

Pro forma net income (loss)	$	770		$	1,031		$	(1,072	)

Earnings (loss) per share:
Basic—as reported	$	0.29		$	0.41		$	(0.31	)
Weighted Average Shares—Basic		2,921			3,022			3,260
Diluted—as reported	$	0.28		$	0.40		$	(0.31	)
Weighted Average Shares—Diluted		3,027			3,092			3,260
Basic—pro forma	$	0.26		$	0.34		$	(0.33	)
Weighted Average Shares—Basic		2,921			3,022			3,260
Diluted—pro forma	$	0.25		$	0.32		$	(0.33	)
Weighted Average Shares—Diluted		3,082			3,181			3,260

Impact of Recently Issued Accounting Pronouncements

In ~~June~~January ~~2001~~2003, the FASB ~~Financial~~issued ~~Accounting~~Interpretation ~~Standards~~No. ~~Board~~46, ~~(FASB) issued Statement~~Consolidation of ~~Financial~~Variable Interest Entities, an Interpretation of Accounting ~~Standards~~Research Bulletin (~~SFAS~~ARB) No. ~~142~~ 51, ~~“Goodwill~~Consolidated ~~and~~Financial ~~Other Intangible~~Statements ~~Assets~~(Interpretation 46).” ~~Under~~The ~~the~~Interpretation ~~new~~significantly ~~rules,~~changes ~~goodwill~~previous consolidation ~~and~~guidance ~~indefinite~~pertaining ~~lived intangible~~to ~~assets~~Special ~~will~~Purpose noEntities ~~longer~~(“SPEs”). beThe ~~amortized~~Interpretation ~~but~~clarifies ~~will~~the beapplication ~~reviewed~~of ~~annually~~ARB ~~for impairment~~No. ~~Separable~~51 ~~intangible~~to ~~assets~~certain ~~that~~entities ~~are~~in ~~not~~which ~~deemed~~equity toinvestors do not have anthe characteristics of a controlling financial ~~indefinite~~interest ~~life~~or ~~will~~do ~~continue~~not have sufficient equity at risk for the entity to befinance ~~amortized~~its ~~over~~activities ~~their~~without ~~useful~~additional ~~lives~~subordinated financial support. ~~The non-amortization~~These ~~provisions~~entities ofare ~~SFAS~~defined Noas variable interest entities or VIEs. ~~142~~ ~~apply~~Most toSPEs ~~goodwill~~will ~~and~~be ~~intangible~~evaluated for ~~assets~~consolidation ~~acquired~~under ~~after~~the ~~June 30,~~Interpretation ~~2001~~as VIEs. ~~With~~All ~~respect~~enterprises towith ~~goodwill~~variable ~~and~~interests ~~intangible assets~~in ~~acquired~~VIEs ~~prior~~created toafter ~~July 1~~January 31, ~~2001~~2003, ~~the~~are ~~Company~~required ~~will~~to apply the ~~new accounting~~provisions ~~rules~~of ~~beginning~~the ~~July 1,~~Interpretation ~~2002~~immediately. ~~The~~A ~~Company~~public ~~will~~entity bewith a variable interest in a VIE created before February 1, 2003, is required to ~~determine~~ ifapply ~~any~~the ~~other~~consolidation ~~identifiable~~provisions ~~intangible~~of ~~assets~~the ~~exist~~Interpretation ~~within~~to ~~its~~that entity in the first fiscal ~~quarter~~year ~~after~~or ~~adoption~~interim ofperiod ~~SFAS~~beginning Noafter June 15, 2003. ~~142.~~ The ~~Company~~Interpretation isalso ~~currently assessing~~requires ~~what~~certain disclosures in all financial ~~impact~~statements initially issued after January 31, 2003, regardless of the date on which the VIE was created if ~~any,~~it ~~SFAS~~is ~~No. 142~~reasonably possible that an enterprise will ~~have~~consolidate onor ~~its~~disclose information about a VIE when the Interpretation ~~consolidated~~becomes ~~financial~~effective. ~~statements~~The ~~and~~Company ~~operating~~does not expect the provision of this statement to have a significant impact on the Company’s results of operations or financial position.

28In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (“FAS 149”) amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The Company does not expect the provision of this statement to have a significant impact on the Company’s results of operations or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“FAS 150”). This statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FAS 150 requires that those instruments be classified as liabilities in the balance sheet. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the provisions of this statement to have a significant impact on the Company’s results of operations or financial position.

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~In June~~NOTES ~~2001,~~TO ~~the~~CONSOLIDATED ~~FASB~~FINANCIAL ~~issued~~STATEMENTS 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.

InYears ~~October~~Ended ~~2001,~~June ~~the FASB issued SFAS No. 144~~30, ~~“Accounting for the Impairment or Disposal of Long-Lived Assets”~~2003, ~~which~~2002 isand ~~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). The Company is currently assessing what financial impact, if any, SFAS No. 144 will have on its consolidated financial statements and operating results.

Impact of Recent EITF Guidance

Reclassifications

Certain reclassifications have been made to the 2001 and 2000 consolidated financial statements to conform with the 2002 consolidated financial statement presentation.

(2) Inventories

Inventories are summarized as follows:

	June 30,
	2002			2001
	2003			2002
	(In thousands)
Raw materials	$	1,~~579~~991		$	41,~~378~~579
Work-in-process		323			~~508~~323
Finished goods		1,~~505~~887			31,~~341~~505
Less: reserves		(2025	)		(~~277~~20	)
Inventories, net	$	34,~~387~~176		$	73,~~950~~387

PACER TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000

(3) Equipment and Leasehold Improvements

Equipment and leasehold improvements and the useful lives used for computing depreciation and amortization are summarized as follows:

					June 30,
	Estimated Useful Lives		June 30,
	Estimated
			2003				2002
	Useful Lives				2002				2001
	(In thousands)
					(In thousands)
Shop equipment	5-10		$	5,622			$	4,845
Shop equipment		5-10			$	4,845			$	6,017
Leasehold improvements	10			1,092				1,082
Leasehold improvements		10				1,082				1,062
Office furniture and equipment	5-7			232				227
Office furniture and equipment		5-7				227				279
Transportation equipment	3			53				53
Transportation equipment		3				53				106
Construction in progress				14				6
Construction in progress						6				34
				7,013				6,213
						6,213				7,498
Less accumulated depreciation and amortization				(5,341	)			(4,951	)
Less accumulated depreciation and amortization						(4,951	)			(5,864	)
			$	1,672			$	1,262
					$	1,262			$	1,634

(4) Borrowings

Pacer has a revolving bank credit line that permits it to borrow up to the lesser of (i) $7.0 million, or (ii) the sum of 70% of the amount of eligible accounts receivable plus 46% of the cost of its finished goods inventories and 35% of its raw material inventories. Credit line borrowings are used primarily to fund working capital requirements. Borrowings under the credit line bear interest at the bank’s prime rate (4.7500% as of June 30, ~~2002~~2003) less 0.25%, or at a LIBOR base rate plus 2.50%. The agreement provides for a reduction in the LIBOR rate of 0.25% on any outstanding borrowings if the Company reached EBITDA targets of $1.0 million for the six-month period January through June 2002 and $500,000 in any subsequent quarter. Pacer is required to make monthly interest only payments on outstanding borrowings until the maturity date of the credit line, which is October 1, 2003. As of June 30, ~~2002~~2003, no borrowings were outstanding under the credit line. At June 30, ~~2002~~2003, the Company had approximately $4.9 2 million of borrowings available based on eligible collateral.

In connection with this credit line, the Company ~~maintains~~has available Commercial Letters of Credit, Standby Letters of Credit, and Banker’s Acceptances, not to exceed $1.5 million in the aggregate. Any amount outstanding on this additional credit facility reduces the borrowing base on the revolving bank credit line. This credit facility expires on October 1, 2003. As of June 30, ~~2002~~ 2003, there were no letters of credit, standby letters of credit or banker’s acceptances outstanding under this facility.

The agreement with the bank requires Pacer to maintain certain ~~financial~~ financial ratios and to comply with certain restrictive covenants. As of June 30, ~~2002~~2003, Pacer was in compliance with or had received waivers for all of these covenants. All borrowings from the bank are secured by a first priority security interest in all of the Company’s assets.

In26 June of 2000, Pacer incurred additional long-term debt of $426,000 related to its acquisition of the intellectual property rights for the Pro-Tel Bondini product line. The current portion of this debt is based on certain minimum royalty payments in accordance with the agreement. The payments commenced on June 1, 2000 and will be made over a term of five years. As of June 30, 2002, the outstanding balance was $167,000.

Long-term debt, excluding the revolving line of credit at June 30, 2002 and 2001, consisted of the following:

	2002			2001
	(In thousands)
Term loan	$	—		$	2,611
Capital expenditure loan		—			331
Pro-Tel Bondini		167			266
Less: current installments		(100	)		(3,042	)
Total Long-Term Debt	$	67		$	166

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001

In November 2002, the Company obtained a sixty-month capital expenditure loan totaling $59,000 from the same bank. This loan bears interest as a rate of 6.77% per annum and is payable in monthly installments of principal and interest of $1,155. As of June 30, 2003, the outstanding balance was $53,000 and the current portion was approximately $11,000.

In June of 2000, Pacer incurred additional long-term debt of $426,000 related to its acquisition of the intellectual property rights for the Pro-Tel Bondini product line. The current portion of this debt is based on certain minimum royalty payments in accordance with the agreement. The payments commenced on June 1, 2000 and will be made over a term of five years. As of June 30, 2003, the outstanding balance was $69,000, all of which is classified as current.

Future payments of debt are as follows:

Year Ending June 30,	Payments
Years Ending June 30,	Payments
	(In thousands)
2003	$	100
2004	$	80
2004		67
2005		11
Total Payments	$	167
2006		12
2007		13
2008		6
Total Payments	$	122

(5) ~~Accrued~~ ~~Expenses~~Capital Lease Obligation

During the current year, the Company leased certain equipment under a capital lease. The lease is for a term of five years and bears interest at a rate of 7.5%, payable in monthly installments of approximately $12,000.

Future minimum lease payments under this lease are as follows:

Years Ending June 30,	Payments
	(In thousands)
2004	$	142
2005		142
2006		142
2007		142
2008		141

Total minimum lease payments		709
Less: amounts representing interest		(119	)

Present value of future minimum lease payments		590
Less: current portion		(101	)

Long-term portion	$	489

(6) Costs in Excess of Assets Acquired

As of July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as of July 1, 2002. As a result, there is no charge for goodwill amortization expense contained in the Company’s statement of operations for the year ended June 30, 2003, whereas the Company’s statements of operations for the years ended June 30, 2002 and 2001 do contain charges for goodwill amortization expense.

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001

Had amortization of goodwill been discontinued at July 1, 2001, rather than at July 1, 2002, the reported net income (loss) and earnings (loss) per share for the years ended June 30, 2003, 2002 and 2001, respectively, would have been as follows:

	Years Ended June 30,
	2003		2002		2001
	(In thousands)
Net income (loss)
Reported net income (loss)	$	849	$	1,243	$	(1,016	)
Add back: amortization, net of tax		—		134		204

Adjusted net income (loss)	$	849	$	1,377	$	(812	)

Earnings (loss) per share—basic
Reported net income (loss)	$	0.29	$	0.41	$	(0.31	)
Add back: amortization, net of tax		—		0.04		0.06

Adjusted net income (loss)	$	0.29	$	0.45	$	(0.25	)

Earnings (loss) per share—diluted
Reported net income (loss)	$	0.28	$	0.40	$	(0.31	)
Add back: amortization, net of tax		—		0.04		0.06

Adjusted net income (loss)	$	0.28	$	0.44	$	(0.25	)

SFAS 142 also requires that goodwill be tested for impairment annually, or more frequently if circumstances indicate potential impairment, by comparing the fair value of the asset to its carrying amount. Such testing requires, as an initial step, that each of the Company’s reporting units, as defined in SFAS 142, be identified and that the Company’s assets and liabilities, including the existing goodwill and intangible assets, be assigned to those reporting units. The Company has determined that it has a single reporting unit.

The Company has completed the transitional goodwill impairment tests, which involved an assessment of the fair value of the Company and a comparison of that value to the Company’s carrying value. In determining fair value, the Company considered the guidance in SFAS 142, including the Company’s market capitalization, discounted cash flows and other indicators of fair value. Based on this analysis, the Company determined that the fair value of the net assets of the Company exceeded their carrying value and, therefore, that no goodwill impairment had occurred and no impairment charge was required to be taken.

(7) Accrued Expenses

Accrued expenses consist of the following:

			2002				2001
		2003			2002
		(In thousands)	~~(In thousands)~~
Sales and marketing expenses			$	57			$	111
Accrued payroll and related expenses		$	316		$	311
Legal and accounting expenses			229	24		24		90
Warranty				—				214
Employee incentive plan			220			280
Income and other taxes				—				3
Deferred rent			113			122
Employee incentive plan				280				—
Sales and marketing expenses			42			57
Accrued payroll and related expenses				311				602
Other			214			226
Deferred rent				122				218
Total accrued expenses		$	1,134		$	1,020
Other				226				268
	Total accrued expenses		$	1,020			$	1,506

~~Accrued~~28 ~~payroll and related expenses for 2001 include approximately $216,000 for employee severance.~~

(6) Lease Obligations

Pacer leases two manufacturing facilities under operating leases expiring in October 2004 and May 2009. Pacer also leases two distribution facilities and office equipment under operating lease agreements. Leases for the two distribution facilities expire in May 2003 and November 2003. Future minimum lease payments under non-cancelable operating leases as of June 30, 2002 are as follows:

		Operating Leases
Year Ending June 30,
		(In thousands)
	2003	$	569
	2004		344
	2005		261
	2006		245
	2007		237
Thereafter			487
Minimum future lease payments		$	2,143

Rent expense was $619,000, $723,000 and $766,000 in 2002, 2001 and 2000, respectively.

(7) Major Customers and Export Sales

Pacer has one customer that accounted for approximately 12% in fiscal 2002 of its net sales and export sales represent approximately 16%, 14% and 12% of net sales in 2002, 2001 and 2000 respectively. There was no customer that accounted for more than 10% of its net sales in 2001.

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~(8) Income~~NOTES ~~Taxes~~ TO CONSOLIDATED FINANCIAL STATEMENTS

~~Income~~Years ~~tax~~Ended ~~expense (benefit) from continuing operations for the years ended~~ June 30, ~~2002~~2003, ~~2001~~2002 and ~~2000 consist of:~~2001

		2002			2001			2000
		(In thousands)
Federal:
	Current	$	(323	)	$	—		$	—
	Deferred		1,168			(416	)		(394	)
			845			(416	)		(394	)
State:
	Current		(150	)		—			—
	Deferred		63			(5	)		(81	)
			(87	)		(5	)		(81	)
Foreign:
	Current		84			28			36
	Deferred		—			—			—
			84			28			36
Total income tax expense (benefit)		$	842		$	(393	)	$	(439	)

(8) Operating Lease Obligations

~~The~~Pacer ~~tax~~leases ~~effects~~two ofmanufacturing ~~temporary~~facilities ~~differences~~under ~~that~~operating ~~give~~leases ~~rise~~expiring toin ~~significant~~October 2004 and May 2009. Pacer also leases a ~~portions~~distribution offacility and office equipment under operating lease agreements. The lease for the ~~deferred~~distribution ~~tax~~facility ~~assets~~expires atin October 2004. Future minimum lease payments under non-cancelable operating leases as of June 30, ~~2002~~2003 ~~and 2001~~ are ~~presented below~~as follows:

			2002			2001
Years Ending June 30,		OperatingLeases
		(In thousands)	~~(In thousands)~~
Current deferred tax assets (liabilities):
2004		$	444
	Allowance for doubtful accounts		$	222		$	147
2005			321
	Inventories			33			159
2006			248
	Prepaid expenses			(133	)		(29	)
2007			237
	Vacation accruals			83			86
2008			254
	Warranty accruals			—			91
Thereafter			233
	Advertising accruals			56			120
Total minimum lease payments		$	1,737
	Amortization			—			179
	Net operating loss			—			890
	Other			86			217
	Net current deferred tax assets		$	347		$	1,860
Non-current deferred tax assets (liabilities):
	Depreciation		$	126		$	202
	Amortization			165			—
	Net operating loss			36			—
	Other			(89	)		(246	)
	Net non-current deferred tax assets (liabilities)		$	238		$	(44	)

~~Pacer~~Rent ~~believes~~expense ~~that it is more likely than not that the net deferred tax~~was ~~assets~~$524,000, ~~will~~$619,000 beand ~~realized.~~$723,000 ~~This~~in ~~belief~~2003, is2002 ~~based on past~~ and ~~anticipated~~2001, ~~future earnings~~respectively.

32(9) Major Customers, Suppliers and Export Sales

Pacer has two customers that each accounted for approximately 14% and 11%, respectively, in fiscal 2003, of net sales and one customer accounted for more than approximately 12% of net sales in fiscal 2002. Pacer has one supplier that accounted for 20%, 18% and 11% of Pacer’s total material purchases during the fiscal years ended June 30, 2003, 2002 and 2001, respectively. Export sales represent approximately 18%, 16% and 14% of net sales in 2003, 2002 and 2001, respectively.

(10) Income Taxes

Income tax expense (benefit) from continuing operations for the fiscal years ended June 30, 2003, 2002 and 2001 consist of:

	2003		2002			2001
	(In thousands)
Federal:
Current	$	299	$	(323	)	$	—
Deferred		103		1,168			(416	)

		402		845			(416	)

State:
Current		39		(150	)		—
Deferred		42		63			(5	)

		81		(87	)		(5	)

Foreign:
Current		49		84			28
Deferred		—		—			—

		49		84			28

Total income tax expense (benefit)	$	532	$	842		$	(393	)

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~The~~NOTES ~~total~~TO ~~income~~CONSOLIDATED ~~tax~~FINANCIAL ~~expense~~STATEMENTS ~~(benefit) differs from the “expected” tax expense (benefit) (computed by applying the U.S. Federal corporate income tax rate of 34%) for 2002, 2001 and 2000 as follows:~~

		2002			2001			2000
		(In thousands)
Expected income tax provision		$	567		$	(479	)	$	(46	)
Non-deductible expenses			25			43			49
State income tax, net of Federal income tax benefit			87			(82	)		(23	)
Effect of foreign operations			167			28			(54	)
Benefit from tax planning			—			—			(365	)
Other			(4	)		97			—
	Total Income Tax Expense (Benefit)	$	842		$	(393	)	$	(439	)

Years Ended June 30, 2003, 2002 and 2001

~~Loss~~The ~~carry~~tax ~~forwards~~effects ~~for~~of ~~federal~~temporary ~~tax~~differences ~~purposes,~~that atgive ~~June 30,~~rise ~~2002,~~to ~~were~~significant portions of the deferred tax ~~approximately~~assets ~~$106~~at June 30,~~000,~~ 2003 and ~~expire~~2002 atare ~~various~~presented ~~dates~~below: ~~through 2021.~~

(9) Shareholders’ Equity

	2003			2002
	(In thousands)
Current deferred tax assets (liabilities):
Allowance for doubtful accounts	$	323		$	222
Inventories		11			33
Prepaid expenses		(121	)		(133	)
Vacation accruals		63			83
Advertising accruals		34			56
Other		112			86

Net current deferred tax assets	$	422		$	347

Non-current deferred tax assets (liabilities):
Depreciation	$	60		$	126
Amortization		46			165
Net operating loss		—			36
Other		(88	)		(89	)

Net non-current deferred tax assets (liabilities)	$	18		$	238

Pacer believes that it is more likely than not that the net deferred tax assets will be realized. This belief is based on past and anticipated future earnings.

The total income tax expense (benefit) differs from the “expected” tax expense (benefit) (computed by applying the U.S. Federal corporate income tax rate of 34%) for 2003, 2002 and 2001 as follows:

	2003			2002			2001
	(In thousands)
Expected income tax provision	$	469		$	567		$	(479	)
Non-deductible expenses		49			25			43
State income tax, net of Federal income tax benefit		53			87			(82	)
Effect of foreign operations		(39	)		167			28
Other		—			(4	)		97

Total income tax expense (benefit)	$	532		$	842		$	(393	)

(11) Shareholders’ Equity

Nonqualified Stock Option and Incentive Stock Option Plans

~~All~~Effective November 21, 2000, the Company’s shareholders’ approved a 1-for-5 reverse stock split of its outstanding shares of common stock. All share and per share amounts ~~below~~in these financial statements have been retroactively restated to reflect ~~the~~such ~~one-for-five~~ reverse ~~stock~~ split ~~approved by shareholders on November 21, 2000~~.

During the year ended June 30, 2002, Pacer adopted the 2001 Stock Incentive Plan that qualifies as “incentive stock options” under Section 442 of the Internal Revenue Code.

Under the 2001 Stock Incentive Plan, options to purchase up to an aggregate of 300,000 shares of Pacer common stock can be granted. The purchase ~~price~~ price shall be no less than the fair market value of the common stock on the grant date. In the event such option is granted to an employee who, at the time the option is granted, owns common stock possessing more than 10% of the total combined voting power of all classes of stock of Pacer, the exercise price of the option shall be no less than 110% of the fair market value. The exercise period for the options shall not exceed ten years, except that it shall not be greater than five years in the case of any options granted to an employee who owns common stock possessing more than 10% of the total combined voting power of all classes of stock of Pacer. The option agreement may provide (a) that the right to exercise the option shall accrue over time in accordance with a vesting schedule, which shall provide that options will become exercisable at least in annual ~~installments of 20% per year over the first five years of the term of the option; or (b) that such accrual shall be accelerated upon the occurrence of certain specified event(s).~~

~~There~~30 ~~were no stock options granted under this Plan during fiscal year 2002.~~

During the year ended June 30, 1995, Pacer adopted the 1994 Stock Option Plan to provide key employees and directors an opportunity to purchase common stock of Pacer pursuant to “non-qualified stock options” at the discretion of the Board of Directors.

Under the 1994 Stock Option Plan, options to purchase up to 440,000 shares of Pacer common stock are authorized to be granted. The purchase price shall be no less than fair market value on the grant date. The exercise period shall not exceed ten years from grant date and options vest immediately.

In fiscal year 2000, under this Plan, Pacer granted an option to a Director to purchase 20,000 shares of Pacer’s common stock at $4.925 per share. The market value of the stock was $4.925 per share, on the date of grant. The fair value of the stock option granted during fiscal 2000 was $79,000 on the date of grant using the Black Scholes option-pricing model with the following assumptions: volatility rate of 67.85%, risk-free interest rate of 6.68%, and

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

anNOTES ~~expected~~TO ~~life~~CONSOLIDATED ofFINANCIAL ~~10 years.~~STATEMENTS ~~There were no stock options granted under the nonqualified Stock Option Plan during fiscal years 2002 or 2001.~~

Years Ended June 30, 2003, 2002 and 2001

installments of 20% per year over the first five years of the term of the option; or (b) that such accrual shall be accelerated upon the occurrence of certain specified event(s).

There were no stock options granted under this Plan during fiscal year 2003 or 2002.

In fiscal year 2003, under this Plan, Pacer granted an option to a Director to purchase 20,000 shares of Pacer’s common stock at $4.95 per share. The market value of the stock was $4.95 per share, on the date of grant. The fair value of the stock option granted during fiscal 2003 was $63,000 on the date of grant using the Black Scholes option-pricing model with the following assumptions: volatility rate of 48.29%, risk-free interest rate of 3.58%, and an expected life of 10 years. There were no stock options granted under the nonqualified Stock Option Plan during fiscal years 2002 or 2001.

During the year ended June 30, 1995, Pacer adopted the 1994 Incentive Stock Option Plan that qualifies as “incentive stock options” under Section 422 of the Internal Revenue Service Code.

Under the 1994 Incentive Stock Option Plan, options to purchase up to an aggregate of 400,000 shares of Pacer common stock can be granted. The purchase price shall be no less than the fair market value of the common stock on the grant date. In the event such option is granted to an employee who, at the time the option is granted, owns common stock possessing more than 10% of the total combined voting power of all classes of stock of Pacer, the exercise price of the option shall be no less than 110% of the fair market value. The exercise period for the options shall not exceed ten years, except that it shall not be greater than five years in the case of any options granted to an employee who owns common stock possessing more than 10% of the total combined voting power of all classes of stock of Pacer. The option agreement may provide (a) that the right to exercise the option in whole or in part shall not accrue until a certain date or the occurrence of an event; (b) that the right to exercise the option shall accrue over time in accordance with a vesting schedule; or (c) that such accrual shall be accelerated upon the occurrence of certain specified event(s).

In fiscal year 2000, under this Plan, Pacer granted options to an employee to purchase a total of 7,000 shares of Pacer’s common stock at $4.90 per share. The market value of the stock was $4.90 per share on the date of grant. The fair value of the stock options granted during fiscal 2000 was $27,000 on the date of grant using the Black Scholes option-pricing model with the following assumptions: volatility rate of 67.85%, risk-free interest rate of 5.92%, and an expected life of 10 years.

In fiscal year 2001, under this Plan, the Company granted options to an employee to purchase a total of 100,000 shares of Pacer’s common stock at $2.625 per share. The market value was $2.625 per share on the date of grant. The fair value of the stock options granted during fiscal year 2001 was $172,000 on the date of grant using the Black Scholes option-pricing model with the following assumptions: volatility rate of 47.57%, risk free interest rate of 5.06% and an expected life of 10 years.

In fiscal year 2002, under this Plan, the Company granted options to various employees to purchase a total of 163,000 shares of Pacer’s common stock at prices ranging from $3.02 to $4.50 per share, which equaled the market price of the Company’s common stock at date of grant. The fair value of the stock options granted during fiscal year 2002 was $312,000 on the dates of grant using the Black Scholes option-pricing model with the following assumptions: volatility rate of 47.8%, risk free interest rate of 4.08% and an expected life of 10 years.

~~Under~~In ~~the~~fiscal ~~1982~~year ~~Stock~~2003, ~~Option~~under this Plan, the Company granted options to ~~purchase~~various upemployees to anpurchase ~~aggregate~~ a total of ~~360~~45,000 shares of ~~common~~Pacer’s common stock ~~could~~at beprices ~~granted~~ranging tofrom ~~both~~$3.90 ~~directors~~to ~~and key employees~~$4.31 ~~The~~per ~~purchase~~share, ~~price~~which ~~was~~equaled ~~not normally less than~~ the ~~fair~~ market ~~value~~ price of the ~~shares~~Company’s oncommon ~~the~~stock at date ~~the~~of ~~option~~grant. ~~was~~The ~~granted,~~fair ~~and~~value inof ~~no event was~~ the ~~purchase~~ ~~price~~stock ~~less~~options ~~than~~granted ~~85%~~during offiscal ~~the~~year ~~fair~~2003 ~~market~~was ~~value~~$121,000 ofon the ~~shares~~dates onof ~~the~~grant ~~date~~using the ~~option~~Black ~~was~~Scholes ~~granted.~~option-pricing ~~The~~model ~~exercise~~with ~~period~~the ~~for~~following anassumptions: ~~option~~volatility ~~could~~rate ~~not~~of ~~exceed~~48.29% ~~ten years~~to 48.48%, ~~and~~risk ~~options~~free ~~granted~~interest ~~vested~~rate ~~immediately~~of 3.58% ~~This~~to ~~plan~~4.31% ~~expired in 1992~~ and ~~no options~~an ~~were~~expected ~~granted~~life ~~under~~of ~~this~~10 ~~plan thereafter~~years.

34 31

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~Pacer~~NOTES ~~applies~~TO ~~APB~~CONSOLIDATED ~~Opinion~~FINANCIAL ~~No. 25~~STATEMENTS in accounting for its stock option plans and, accordingly, no compensation expense has been recognized for its stock options in the financial statements. Had Pacer determined compensation expense based on the fair value at the grant date for its stock options under SFAS No. 123, Pacer’s net income would have been reduced to the pro forma amounts indicated below:

	2002		2001			2000
		(In thousands, except per share amounts)
Net income (loss) as reported	$	1,243	$	(1,016	)	$	303
Pro forma net income (loss)	$	888	$	(1,071	)	$	263
As reported — basic earnings (loss) per share	$	.41	$	(.31	)	$	.09
Pro forma — basic earnings (loss) per share	$	.29	$	(.33	)	$	.08
As reported — diluted earnings (loss) per share	$	.40	$	(.31	)	$	.09
Pro forma — diluted earnings (loss) per share	$	.29	$	(.33	)	$	.08

Years Ended June 30, 2003, 2002 and 2001

Under the 1982 Stock Option Plan, options to purchase up to an aggregate of 360,000 shares of common stock could be granted to both directors and key employees. The purchase price was not normally less than the fair market value of the shares on the date the option was granted, and in no event was the purchase price less than 85% of the fair market value of the shares on the date the option was granted. The exercise period for an option could not exceed ten years, and options granted vested immediately. This plan expired in 1992 and no options were granted under this plan thereafter.

In 1993, the Company granted an option to purchase 60,000 shares of common stock at a price equal to fair market value of the shares on the date the option was granted. The exercise period for the option was ten years and options granted vested immediately. This grant was not associated with any stock option plan.

Summary of changes in stock options outstanding are as follows:

1994 SOP & ISOP

										Weighted		Weighted Average
		Options Available For Grant			Number Outstanding			WeightedAverageExercise Prices		WeightedAverage FairValue Per Share of OptionsGranted
			Options							Average		Fair Value
Balances at June 30, 2000		253,000			515,000			$	4.76
			Available				Number			Exercise		Per Share of
Options granted		(100,000	)		100,000				2.63	$	1.72
			For Grant				Outstanding			Prices		Options Granted
Options cancelled		10,000			(10,000	)			5.23
Balances at June 30, 1999				280,000				506,000		$	4.71
Balances at June 30, 2001		163,000			605,000			$	5.10
Options granted	~~Options granted~~	(163,000	)	~~(27,000~~	)163,000			~~27,000~~	3.28	$	2.0110	$	~~3.94~~
	Options exercised			—				(18,000	)		3.60
Options cancelled		85,000			(85,000	)			3.89
Balances at June 30, 2000				253,000				515,000		$	4.76
Balances at June 30, 2002		85,000			683,000			$	3.41
Options granted	~~Options granted~~	(65,000	)	~~(100,000~~	)65,000			~~100,000~~	4.48	$	2.6387	$	~~1.72~~
	Options cancelled			10,000				(10,000	)		5.23
Options exercised		—			(20,000	)			4.95
Balances at June 30, 2001				163,000				605,000		$	5.10
Options cancelled		10,000			(10,000	)			3.02
	Options granted			(163,000	)			163,000			3.28	$	2.10
Balances at June 30, 2003		30,000			718,000			$	4.21
	Options cancelled			85,000				(85,000	)		3.89
Balances at June 30, 2002				85,000				683,000		$	3.41

The following table summarizes information about the 1994 SOP & ISOP stock options at June 30, ~~2002~~2003:

								Weighted Average				Weighted Average
Exercise Price	SharesOutstanding at 6/30/03		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Shares Exercisable at 6/30/03	Weighted AverageExercise Price ofExercisableOptions
		Shares Outstanding			Weighted Average			Remaining		Shares Exercisable		Exercise Price of
$2.63	100,000		$	2.63	7.6 years		60,000	$	2.63
Exercise Price		at 6/30/02			Exercise Price			Contractual Life		at 6/30/02		Exercisable Options
$ 3.02—$3.90	144,000		$	3.14	7.3 years		134,000	$	3.10
$2.63			100,000		$	2.63		8.6 years			40,000	$	2.63
$ 4.31—$4.95	114,000		$	4.48	7.2 years		79,000	$	4.56
$3.02-$3.60			149,000		$	3.11		8.6 years			141,000	$	3.08
$5.00	360,000		$	5.00	1.7 years		360,000	$	5.00
$4.32-$4.92			74,000		$	4.58		7.2 years			67,000	$	4.58
	718,000						633,000	$	4.32
$5.00			360,000		$	5.00		2.7 years			360,000	$	5.00
			683,000								608,000	$	4.35

35 32

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~1982~~NOTES ~~Other~~TO ~~Stock~~CONSOLIDATED ~~Option~~FINANCIAL ~~Plan~~ STATEMENTS

		Outstanding Options
		Number			Exercise		Aggregate
		of Shares			Prices		Value
Balances at June 30, 1999			140,000		$	5.00-$5.40	$	706,000
Balances at June 30, 2000			140,000		$	5.00-$5.40	$	706,000
	Options expired		(60,000	)	$	5.00-$5.40		(306,000	)
Balances at June 30, 2001			80,000		$	5.00	$	400,000
	Options expired		(20,000	)	$	5.00		(100,000	)
Balances at June 30, 2002			60,000		$	5.00	$	300,000

Years Ended June 30, 2003, 2002 and 2001

1982 Stock Option Plan and Other Shares Granted

	Outstanding Options
	Number of Shares		Exercise Prices		Aggregate Value
Balances at June 30, 2000	140,000		$	5.00-$5.40	$	706,000
Options expired	(60,000	)	$	5.00-$5.40		(306,000	)

Balances at June 30, 2001	80,000		$	5.00	$	400,000
Options expired	(20,000	)	$	5.00		(100,000	)

Balances at June 30, 2002 and 2003	60,000		$	5.00	$	300,000

Warrant to Purchase Common Stock

At June 30, 2000, there were no warrants outstanding to purchase shares of the Company’s common stock.

During the year ended June 30, 2001, the Company issued a warrant to purchase 66,667 shares of common stock at a price of $2.9375 per share that expires on January 28, 2004. The Company valued the warrant at $70,000 using the Black-Scholes option-pricing model.

The Company did not issue any new warrants during the ~~current~~years ~~year~~ended June 30, 2003 or 2002. At June 30, ~~2002~~2003, there is a warrant outstanding to purchase 66,667 shares of common stock.

(1012) Earnings (Loss) Per Share

Earnings (loss) per share were computed as follows:

			2002				2001				2000
		2003			2002			2001
		(In thousands, except per share amounts)	~~(In thousands, except per share amounts)~~
Numerator:
Numerator for basic and diluted earnings (loss) per share		$	$849	~~1,243~~	$	1,243	$	~~(1,016~~$	)(1,016	)	$	~~303~~
Denominator:
	Denominator for basic earnings (loss) per share — weighted average number of common shares outstanding during the period			3,022				3,260				3,345
Denominator for basic earnings (loss) per share—weighted average number of common shares outstanding during the period			2,921			3,022			3,260
Incremental common shares attributable to exercise of outstanding options	~~Incremental common shares attributable to exercise of outstanding options~~		106	70		70		—	—			29
Denominator for diluted earnings (loss) per share			3,027	~~3,092~~		3,092		~~3,260~~	3,260			~~3,374~~
Basic earnings (loss) per share		$	$.29	~~.41~~	$	.41	$	~~(.31~~$	)(.31	)	$	~~.09~~
Diluted earnings (loss) per share		$	$.28	~~.40~~	$	.40	$	~~(.31~~$	)(.31	)	$	~~.09~~

(1113) 401(k) ~~PLAN~~ Plan

Pacer’s 401(k) plan is available to all full-time employees who have completed a minimum service of 90 days at January 1, April 1, July 1 or October 1 of each year.

Employees who elect to participate in the plan may make contributions to the plan on a pre-tax basis from 2% to 16% of their annual compensation. Pacer contributions, when made, will match 50% of employee contributions up to 4% of salaries paid. Pacer contributions are accrued as participant contributions are withheld. Participants become fully vested in Pacer contributions after six years of service.

Plan expenses, net of forfeitures for the years ended June 30, ~~2002~~2003, ~~2001~~2002 and ~~2000~~2001 were $5938,000, $6759,000 and $6267,000, respectively.

36 33

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~(12) Quarterly~~NOTES ~~Financial~~TO ~~Data~~CONSOLIDATED ~~(Unaudited)~~ FINANCIAL STATEMENTS

~~The~~Years ~~following~~Ended ~~table presents unaudited quarterly financial information for each of the fiscal years ended~~ June 30, 2003, 2002 and 2001~~. This information has~~ been prepared by Pacer on a basis consistent with its audited consolidated financial statements for those years. 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 Pacer’s audited consolidated financial statements and notes thereto. These quarterly operating results are not necessarily indicative of results that may be expected in future periods.

		Quarter Ended
		Sept. 30,		Dec. 31,			Mar. 31,		June 30,
FY 2002		2001		2001			2002		2002
Net sales		$	10,359	$	6,886		$	6,567	$	7,008
Gross profit			2,938		1,864			1,993		1,952
Net income (loss)			904		(70	)		353		56
Net income (loss) per share:
	Basic	$	.29	$	(.02	)	$	.12	$	.02
	Diluted	$	.29	$	(.02	)	$	.11	$	.02

(14) Quarterly Financial Data (Unaudited)

		Quarter Ended
		Sept. 30,		Dec. 31,		Mar. 31,		June 30,
FY 2001		2000		2000		2001		2001
Net sales		$	13,987	$	8,877	$	10,141	$	8,653
Gross profit			4,066		2,397		2,862		417
Net income (loss)			869		158		389		(2,432	)
Net income (loss) per share:
	Basic	$	.26	$	.05	$	.12	$	(.76	)
	Diluted	$	.26	$	.05	$	.12	$	(.76	)

The following table presents unaudited quarterly financial information for each of the fiscal years ended June 30, 2003 and 2002. This information has been prepared by Pacer on a basis consistent with its audited consolidated financial statements for those years. 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 Pacer’s audited consolidated financial statements and notes thereto. These quarterly operating results are not necessarily indicative of results that may be expected in future periods.

(13) Acquisitions & Dispositions

	Quarters Ended
FY 2003	Sept. 30, 2002		Dec. 31, 2002		Mar. 31, 2003		June 30, 2003
Net sales	$	6,523	$	5,784	$	6,566	$	5,529
Gross profit		2,074		1,790		2,154		1,765
Net income (loss)		385		241		395		(172	)
Net income (loss) per share:
Basic	$	.13	$	.08	$	.14	$	(.06	)
Diluted	$	.13	$	.08	$	.13	$	(.06	)

On June 1, 2000, Pacer entered into an intellectual property license agreement pursuant to which Pacer obtained exclusive marketing and distribution rights from Pro-Tel, Inc., to the Bondini product line. The Bondini product line includes various Adhesive Products marketed under the Bondini brand name. The license agreement calls for monthly royalty payments over a five-year period, which are subject to minimum and maximum amount constraints. The license agreement also allows for Pacer to purchase all intellectual properties associated with the Pro-Tel and Bondini product line at the conclusion of the five-year term for a nominal purchase price.

	Quarters Ended
FY 2002	Sept. 30, 2001		Dec. 31, 2001			Mar. 31, 2002		June 30, 2002
Net sales	$	10,359	$	6,886		$	6,567	$	7,008
Gross profit		2,938		1,864			1,993		1,952
Net income (loss)		904		(70	)		353		56
Net income (loss) per share:
Basic	$	.29	$	(.02	)	$	.12	$	.02
Diluted	$	.29	$	(.02	)	$	.11	$	.02

(15) Acquisitions & Dispositions

On June 11, 2001, the Company sold all of the assets, properties and goodwill of its California Chemical product line, which consists primarily of bulk liquids and powders for 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, the Company wrote off the remaining goodwill that arose from the acquisition in 1997. The goodwill impairment, a one-time, non-cash charge, of $1,042,000 is included in the accompanying 2001 consolidated statement of operations.

On September 28, 2001, the Company 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, Pacer 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.

37 (16) United Kingdom Distribution Facility Closure

During the fourth quarter ended June 30, 2001, the board of directors instituted a repositioning plan to focus the Company’s resources on its core adhesive and sealant business. In connection with this repositioning plan, the Company decided to close its United Kingdom operations and distribution facility. As a result of this closure, the Company did not renew the facility lease, which expired in July 2001. The Company will, however, continue to

PACER TECHNOLOGY ~~NOTES~~ ~~TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000~~

~~(14) United~~NOTES ~~Kingdom~~TO ~~Distribution~~CONSOLIDATED ~~Facility~~FINANCIAL ~~Closure~~ STATEMENTS

~~During~~Years ~~the~~Ended ~~fourth quarter ended~~ June 30, ~~2001~~2003, ~~the~~2002 ~~Board of Directors instituted a repositioning plan to focus the Company’s resources on its core adhesive~~ and sealant business. In connection with this repositioning plan, the Company decided to close its United Kingdom operations and distribution facility. As a result of this closure, the Company did not renew the facility lease, which expired in July 2001~~. The Company will, however, continue to~~ ~~maintain a small sales office. Included in cost of sales in the accompanying 2001 consolidated statement of operations is a write off of $500,000 associated with the cost of closure.~~

~~(15) Commitments~~ maintain ~~and~~a ~~Contingencies~~small sales office. Included in cost of sales in the accompanying 2001 consolidated statement of operations is a write-off of $500,000 associated with the cost of closure.

(17) Commitments and Contingencies

In June of 2000, the Company entered into an intellectual property license agreement pursuant to which Pacer obtained exclusive marketing and distribution rights from Pro-Tel, Inc., to the Bondini product line. As part of this agreement, the Company has the obligation to make a monthly royalty payment to Pro-Tel equal to 10% of net sales through the fiscal year ended June 30, 2005.

The Company has entered into sales agreements with many of its customers that contain pricing terms, including the amounts of promotional and cooperative advertising allowances that Pacer will provide to those customers. Each of these agreements is unique and may include one or more of these features as part of its terms. In the case of agreements that provide for promotional and cooperative allowances, those allowances are established at fixed dollar amounts, rather than varying with the volume of the customer’s purchases of products from Pacer and, therefore, those allowances represent commitments on the part of Pacer to such customers.

Pacer has severance compensation agreements with certain of its officers. Those agreements provide for, in the event of termination ondue to a change of control or termination without cause, a lump-sum payment equal to 2.99 times the sum of the officers highest base salary within the twelve-month period prior to the termination and an amount equal to any bonuses that would have be paid.

Pacer is involved in certain legal actions and claims arising in the ordinary course of business. It is the opinion of management that such litigation will be resolved without material effect on Pacer’s financial position or results of operations.

(1618) Related Party Transactions

During the years ended June 30, ~~2002~~2003, ~~2001~~2002 and ~~2000~~2001, Pacer incurred legal expenses of $627,000, $8362,000 and $~~151~~83,000, respectively, to a law firm, one of the partners of which is a shareholder and, until August 2002, was a member of Pacer’s ~~Board~~board of ~~Directors~~directors.

38 (19) Subsequent Event

On July 30, 2003, Pacer Technology and Cyan Investments, LLC announced that they have signed a definitive merger agreement providing for Cyan Holding Co., a subsidiary of Cyan Investments, LLC (“Cyan”), to acquire, for $6.95 per share in cash, the approximately 70% of Pacer’s outstanding common stock that Cyan does not already own. In addition, all of Pacer’s outstanding stock options will be converted into a right to receive cash in an amount equal to the difference between $6.95 per share and the respective exercise prices of those options. The per share consideration, together with the cash that will be paid for the options, places the aggregate value of Pacer’s shares (inclusive of options) at approximately $22.6 million.

SCHEDULE II — PACER TECHNOLOGY

VALUATION AND QUALIFYING ACCOUNTS ~~(In~~ ~~thousands)~~

	Balance At							Balance
	Beginning							At End
Description	of Period		Additions		Deductions(1)			of Period
Allowance for doubtful accounts:
Year Ended June 30, 2000	$	904	$	119	$	(719	)	$	304
Year Ended June 30, 2001	$	304	$	499	$	(460	)	$	343
Year Ended June 30, 2002	$	343	$	703	$	(528	)	$	518

(In thousands)

Description	Balance At Beginning of Period		Additions		Deductions(1)			Balance At End of Period
	(In thousands)
Allowance for doubtful accounts:
Year Ended June 30, 2001	$	304	$	499	$	(460	)	$	343
Year Ended June 30, 2002	$	343	$	703	$	(528	)	$	518
Year Ended June 30, 2003	$	518	$	472	$	(237	)	$	753

(1)

Write-off of doubtful accounts against the allowance and recoveries.

	Balance At											Balance
Description	Balance At Beginning of Period		Additions			Deductions(1)				Balance At End of Period
	Beginning											At End
Allowance for obsolete or slow-moving inventory:
Description	of Period			Additions				Deductions(1)				of Period
Year Ended June 30, 2001	$	638	$	84		$	(445	)		$	277
Allowance for obsolete or slow-moving inventory:
Year Ended June 30, 2002	$	277	$	258		$	(515	)		$	20
Year Ended June 30, 2000	$	811		$	426			$	(599	)		$	638
Year Ended June 30, 2003	$	20	$	63		$	(58	)		$	25
Year Ended June 30, 2001	$	638		$	84			$	(445	)		$	277
Year Ended June 30, 2002	$	277		$	258			$	(515	)		$	20

(1)

Write-off of slow-moving or obsolete inventory or sale of inventory at reduced margin.

39 36

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

Item 9A. CONTROLS AND PROCEDURES

Pacer’s management, under the supervision and with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) in effect as of June 30, 2003. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2003, Pacer’s disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within these entities.

There were no significant changes in Pacer’s internal controls or in other factors that could significantly affect these controls subsequent to June 30, 2003. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except for information concerning the Company’s executive officers which is included in Part I of this Report, the information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement for its Annual Meeting of Shareholders that is expected to be filed with the Commission on or before October 28, ~~2002 for the Company’s annual shareholders’ meeting~~2003.

Item 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference from the Company’s definitive proxy statement which is expected to be filed with the Commission on or before October 28, ~~2002~~2003 for the Company’s annual shareholders’ meeting.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

~~The~~Except for the information below regarding our equity compensation plans, the information required by Item 12 is incorporated herein by reference from the Company’s definitive proxy statement expected to be filed with the Commission on or before on or before October 28, ~~2002~~2003 for the Company’s annual ~~shareholders~~stockholders’ meeting.

The following table provides information relating to our equity compensation plans as of June 30, 2003. Amounts in this table have been retroactively adjusted for a 1-for-5 reverse stock split effectuated in November 2000:

	Column A	Column B		Column C
	Number of Securities to be Issued upon Exercise of Outstanding Options and Warrants	Weighted-Average Exercise Price of Outstanding Options and Warrants		Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column A)
Equity compensation plans approved by shareholders	718,000	$	4.21	330,000
Equity compensation not approved by shareholders (1)	126,667		3.91	—

Total	844,667	$	4.17	330,000

(1)

Issuable under a stock purchase warrant that was granted to a consultant for services rendered to Pacer in fiscal 2001.

Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The information required by Item 13 is incorporated herein by reference from the Company’s definitive proxy statement that is expected to be filed with the Commission on or before October 28, ~~2002~~2003 for the Company’s annual shareholders’ meeting.

Item 14. ~~CONTROLS~~PRINCIPAL ACCOUNTANT FEES AND ~~PROCEDURES~~ SERVICE

Not Applicable .

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)		(1) Financial Statements
		See Financial Statement Index included in Item 8 of Part II of this Form 10-K.
(a)		(2) Financial Statement Schedule

(a)(1) Financial Statements

See Financial Statement Index included in Item 8 of Part II of this Form 10-K.

(a)(2) Financial Statement Schedule

Schedule II. Valuation and Qualifying Accounts

All other schedules have been omitted as the required information is reported or incorporated by reference elsewhere in this Annual Report or isare not applicable.

40 38

(a) (3) Exhibits

The following is a list of the exhibits filed with this Annual Report on Form 10-K.

Exhibit 3.1		Articles of Incorporation (1)
Number		Description
Exhibit 3.2		By-laws (1)
Exhibit 2.1		Agreement and Plan of Merger, dated July 29, 2003, by and among Pacer Technology, Cyan Holding Co. and PT Acquisition Corp. (1)
Exhibit 4.1		Stock Purchase Warrant for 66,667 shares of Common Stock issued to the Prince Henry Group (2)
Exhibit 3.1		Articles of Incorporation(2)
Exhibit 4.2		2001 Stock Incentive Plan approved by shareholders on November 13, 2001
Exhibit 3.2		By-laws(2)
Exhibit 10.7		Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in Rancho Cucamonga (3)
Exhibit 4.1		Stock Purchase Warrant for 66,667 shares of Common Stock (3)
Exhibit 10.8		Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001
Exhibit 4.2		2001 Stock Incentive Plan approved by shareholders on November 13, 2001(5)
Exhibit 10.9		New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002
Exhibit 10.7		Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in Rancho Cucamonga (4)
Exhibit 10.10		Severance Compensation Agreement with Richard S. Kay dated January 30, 2002
Exhibit 10.8		Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001(4)
Exhibit 10.11		Severance Compensation Agreement with Ronald T. Gravette dated January 30, 2002
Exhibit 10.9		New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002 (5)
Exhibit 10.12		Credit Agreement with Wells Fargo Bank dated May 1, 2002
Exhibit 10.10		Severance Compensation Agreement with Richard S. Kay dated January 30, 2002 (5)
Exhibit 10.11		Severance Compensation Agreements with Ronald T. Gravette dated January 30, 2002 (5)
Exhibit 10.12		Credit Agreement with Wells Fargo Bank dated May 1, 2002 (5)
Exhibit 21		Subsidiaries of Registrant
Exhibit 23.1		Consent of Independent Auditors
Exhibit 99.1		CEO Certifications under Section 906 of the Sarbanes-Oxley Act
Exhibit 31.1		CEO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2		CFO Certifications under Section 906 of the Sarbanes-Oxley Act
Exhibit 31.2		CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		CEO Certifications under Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2		CFO Certifications under Section 906 of the Sarbanes-Oxley Act

(1)		Incorporated by reference to exhibits to Form 10-K for fiscal year ended June 30, 1986.
(2)		Incorporated by reference to exhibits to Form 10-K for fiscal year ended June 30, 2001.
(3)		Incorporated by reference to exhibits to Form 10-K for fiscal year ended June 30, 1999.

(1)

Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated July 29, 2003

(2)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1986.

(3)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2001.

(4)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1999.

(5)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2002.

(b)

Reports on Form 8-K

~~None~~Pacer filed a Current Report on Form 8-K dated July 29, 2003 to report, under Item 5—“Other Events” the signing of the Agreement and Plan of Merger dated as of July 29, 2003 among Pacer, Cyan Holding Co., and its wholly owned subsidiary, PT Acquisition corp. A copy of that Agreement was appended as Exhibit 2.1 to that Current Report.

41Pacer filed a Current Report Form 8-K dated August 26, 2003 to report, under Item 12—“Results of Operations and Financial Condition,” the issuance by Pacer of a press release announcing its earnings for the quarter and fiscal year ended June 30, 2003.

SIGNATURES

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

Date: September 25, 2002		PACER TECHNOLOGY
Date: September 25, 2003	PACER TECHNOLOGY
	By:	~~By:~~	/s/ RICHARD S. KAY
			Richard S. Kay, Chairman of the Board of Directors, Chief Executive Officer and President
			Richard S. Kay,
			Chairman of the Board of Directors,
			Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Each person whose signature to this Report appears below hereby appoints Richard S. Kay ~~and Laurence R. Huff, or any of them, individually,~~ to act severally as ~~attorneys~~attorney-in-fact and ~~agents~~agent, with power of substitution and resubstitution, ~~for each of them,~~ to sign on his behalf, ~~individually~~ and in the capacities stated below, and to file any and all amendments to this Annual Report, which amendment or amendments may make changes and additions as such ~~attorneys~~ attorney-in-fact may deem necessary or appropriate.

Signature	Title	Date
/s/ RICHARD S. KAY Richard S. Kay	Chairman of the Board of Directors, Chief Executive Officer, President and Director	September 25, ~~2002~~2003
/s/ LAURENCE R. HUFF Laurence R. Huff	Chief Financial Officer (Principal Financial and Principal Accounting Officer)	September 25, 2002
/s/ RICHARD S. KAY Richard S. Kay	Acting Chief Financial Officer (Principal Financial and Principal Accounting Officer)	September 25, 2003
/s/ E. T. GRAVETTE E. T. Gravette	Director	September 25, 2002
/s/ JOHN G. HOCKIN, II	Director	September 25, 2003
/s/ JOHN G. HOCKIN, II John G. Hockin, II	Director	September 25, 2002
John G. Hockin, II
/s/ CARL HATHAWAY Carl Hathaway	Director	September 25, 2002
/s/ CARL HATHAWAY	Director	September 25, 2003
/s/ D. STEPHEN ANTION D. Stephen Antion	Director	September 25, 2002
Carl Hathaway

S-1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Richard S. Kay, Chairman, Chief Executive Officer and President of Pacer Technology, certify that:

1. I have reviewed this annual report on Form 10-K of Pacer Technology; 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 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.

Date: September 25, 2002

/s/ RICHARD S. KAY Richard S. Kay Chairman, Chief Executive Officer and President

S-2

CERTIFICATIONS OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Laurence R. Huff, Chief Financial Officer of Pacer Technology, certify that:

Date: September 25, 2002

/s/ LAURENCE R. HUFF Laurence R. Huff Chief Financial Officer

S-3

INDEX TO EXHIBITS

Number		Description
Exhibit 3.1		Articles of Incorporation(1)
Exhibit 2.1		Agreement and Plan of Merger, dated July 29, 2003, by and among Pacer Technology, Cyan Holding Co. and PT Acquisition Corp. (1)
Exhibit 3.2		By-laws(1)
Exhibit 3.1		Articles of Incorporation(2)
Exhibit 4.1		Stock Purchase Warrant for 66,667 shares of Common Stock issued to the Prince Henry Group(2)
Exhibit 3.2		By-laws(2)
Exhibit 4.2		2001 Stock Incentive Plan approved by shareholders on November 13, 2001
Exhibit 4.1		Stock Purchase Warrant for 66,667 shares of Common Stock (3)
Exhibit 10.7		Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in Rancho Cucamonga(3)
Exhibit 4.2		2001 Stock Incentive Plan approved by shareholders on November 13, 2001(5)
Exhibit 10.8		Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001
Exhibit 10.7		Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in Rancho Cucamonga (4)
Exhibit 10.9		New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002
Exhibit 10.8		Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001(4)
Exhibit 10.10		Severance Compensation Agreement with Richard S. Kay dated January 30, 2002
Exhibit 10.9		New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002 (5)
Exhibit 10.11		Severance Compensation Agreements with Ronald T. Gravette dated January 30, 2002
Exhibit 10.10		Severance Compensation Agreement with Richard S. Kay dated January 30, 2002 (5)
Exhibit 10.12		Credit Agreement with Wells Fargo Bank dated May 1, 2002
Exhibit 10.11		Severance Compensation Agreements with Ronald T. Gravette dated January 30, 2002 (5)
Exhibit 21		Subsidiaries of Registrant
Exhibit 10.12		Credit Agreement with Wells Fargo Bank dated May 1, 2002 (5)
Exhibit 23.1		Consent of Independent Auditors
Exhibit 21		Subsidiaries of Registrant
Exhibit 99.1		CEO Certifications under Section 906 of the Sarbanes-Oxley Act
Exhibit 23.1		Consent of Independent Auditors
Exhibit 99.2		CFO Certifications under Section 906 of the Sarbanes-Oxley Act
Exhibit 31.1		CEO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		CEO Certifications under Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2		CFO Certifications under Section 906 of the Sarbanes-Oxley Act

(1)		Incorporated by reference to exhibits to Form 10-K for fiscal year ended June 30, 1986
(2)		Incorporated by reference to exhibits to Form 10-K for fiscal year ended June 30, 2001
(3)		Incorporated by reference to exhibits to Form 10-K for fiscal year ended June 30, 1999

(1)

Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated July 29, 2003

(2)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1986.

(3)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2001.

(4)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1999.

(5)

Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2002.

E-1

Name of officer

Richard S. Kay

Chairman of the Board of Directors,

Chief Executive Officer and President

Ronald T. Gravette

Vice President, Sales

Laurence R. Huff

Chief Financial Officer

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