<PAGE>   1

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------

                                    FORM 10-K

(MARK ONE)

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001

                                       OR

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

                FOR THE TRANSITION PERIOD FROM _______ TO _______

                          COMMISSION FILE NUMBER 0-8864

                                PACER TECHNOLOGY
           (Exact name of the registrant as specified in its charter)

          California                                    77-0080305
(State or other jurisdiction of             (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

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

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
                                                               par value

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

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

        The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 10, 2001 was $10,229,572 (computed by reference
to the average closing bid and asked prices of such stock on September 10, 2001,
as reported on the NASDAQ SmallCap Market).

        The number of shares outstanding of the Registrant's Common Stock, as of
September 10, 2001, was 3,090,505.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Part III of the Form 10-K is incorporated by reference from Registrant's
Definitive Proxy Statement for its Annual Meeting that is expected to be filed
on or before October 29, 2001.

================================================================================



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                           FORWARD LOOKING STATEMENTS

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

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

        Pacer Technology, Inc. is a leading manufacturer and supplier of high
performance glues, epoxies and other adhesives for household, office and other
consumer applications, and high performance adhesives, sealants and gaskets used
in manufacturing, repair and industrial applications (collectively, "Adhesives
Products"). We sell our high performance glue, adhesive and sealant products for
the consumer market under such well known brand names as SUPER GLUE*, ProSeal
and ZAP and those products are sold to consumers at over 77,000 retail store
locations in the United States, including Wal-Mart, K-Mart and Target stores,
Home Depot stores, Walgreens and Eckerd drug stores and grocery store chains
such as Albertsons, 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-Tech Industrial, 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, 2001, 2000 and 1999, our sales of Adhesives Products totaled
approximately $30.5 million, $31.7 million and $28.6 million, respectively.

        Additionally, as a result of the acquisition, in March 1998, of Cook
Bates, we have been a manufacturer and supplier of nail care products and
implements, including, pumice stones, emery boards, tweezers, and nail clippers,
for the professional beauty and self-nail care consumer markets. Those products
have been sold, under Company-owned brand names such as "Gem", "Kurlash" and
"Diamon Deb" and, also pursuant to license agreements, under the Oleg Cassini,
Brut and Elvira brand names, at more than 26,000 retail establishments in the
United States, including Wal-Mart, K-Mart, Walgreens and Eckerd. We 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,
2001, 2000 and 1999, our sales of nail care products totaled approximately $13.5
million, $16.0 million and $17.4 million, respectively.

        During the fiscal year ended June 30, 2001, approximately 14% of our
sales were made outside of the United States, primarily in Europe and, to a
lesser extent, in Canada and Latin America. Those sales consisted almost
entirely of our Adhesive Products.

RECENT DEVELOPMENTS AND OUTLOOK FOR FISCAL 2002

        Recent Developments

        Sale of Nail Care Products Business. During the latter part of fiscal
2001, we concluded that our nail care business was not likely to meet the future
performance goals that we had established for that business. In particular, nail
care product sales were beginning to decline and our efforts to significantly
improve the profitability of that business were being frustrated by, among other
things, increased competition and a resulting proliferation of products in the
market. We then considered a number of alternatives for improving future sales
and increasing the profitability of our nail care products business; but
concluded that this would require a considerable investment in capital and
management resources which could not be justified by the potential return that
could be realized from such an investment. As a result, we determined that the
best alternative would be to focus on our core glue, adhesives and sealant
businesses and to seek buyers for our nail care products business. That process,
which began early in the last quarter of fiscal 2001, led first to


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   * ZAP and ProSeal are registered trademarks owned by Pacer. Gem, Kurlash and
Diamon Deb are registered trademarks owned by Pacer and Oleg Cassini, Brut, and
Elvira are registered trademarks, respectively, of Oleg Cassini, Inc.,
Chesebrough-Ponds and Queen"B" Productions.
See "Trademarks, Patents and Licenses."



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the sale, in June 2001, of our California Chemical business, which consisted
primarily of the production and sale of bulk liquids and powders for the
sculptured acrylic finger nail processes. For that sale we received a total of
$500,000 in cash plus the transfer by the buyer to Pacer of 145,000 shares of
Pacer common stock owned by the buyer, which represented approximately 4.5% of
our outstanding shares at the time of the sale.

        Then, in the first quarter of the current fiscal year that will end on
June 30, 2002, we entered into a definitive agreement to sell our Cook Bates
nail care product line, to The W.E. Bassett Company, another manufacturer of
nail care products, for a cash purchase price of $5.5 million (which is subject
to adjustment based on Cook Bates product inventories at closing). In addition,
we expect to realize additional cash of between $3 million and $4 million, from
collections of Cook Bates receivables that Pacer will be retaining, net of Cook
Bates liabilities that are to be paid by Pacer. Consummation of the Cook Bates
sale, which is contingent on satisfaction of certain conditions, is expected to
take place at the end of September 2001.

        We believe that the sale of our nail care product businesses will enable
us to achieve greater operating efficiencies and to improve the profitability of
our core adhesive products business operations. We also expect that the sale of
the Cook Bates product line will strengthen our financial condition because,
among other things, that sale should result in an improvement in the quality of
our assets and will generate cash that we will be using to reduce, at least on
an interim basis, our outstanding bank borrowings.

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

        Fiscal 2001 Operating Results. We incurred a net loss of approximately
$1 million in the fiscal year ended June 30, 2001. That loss was primarily
attributable to (i) actions, taken to refocus Pacer's resources on growing its
core Adhesives Product business, which included the closure of our United
Kingdom distribution facility that resulted in approximately $500,000 of
expenses, and the sale of our California Chemical product line which required us
to take a one-time non-cash goodwill impairment charge of approximately $1.0
million, and a management reorganization and financial review which resulted in
charges of approximately $500,000; and (ii) to a lesser extent, a 7.8% decline
in our sales in fiscal 2001 as compared to fiscal 2000, which we believe was
primarily the result of the slowing of the United States economy. See "Item 6 --
Selected Financial Data" and "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II of this Report.

        Outlook for Fiscal 2002

        We currently expect improved profitability during the fiscal year ending
June 30, 2002, due primarily to the divesture of our nail care products
business, cost-cutting programs and new marketing and sales initiatives that are
designed to achieve increases in our market share in the consumer adhesive
products markets, and lower interest costs because we will be using the proceeds
from the sale of the Cook Bates product line to reduce, at least on an interim
basis, our outstanding bank borrowings. However, we expect our sales in fiscal
2002 will be significantly lower than in fiscal 2001 due to the sale of our nail
care products business, which accounted for approximately $13.5 million, or 31%,
of our total sales in fiscal 2001.

        Our operating results in fiscal 2002 are subject to certain risks and
uncertainties discussed below in the section entitled "Certain Factors That
Could Affect Our Future Performance" and, due to those and other factors or
circumstances, our actual results could differ, possibly significantly, from our
current expectations.

OUR CONSUMER PRODUCTS

        SuperGlue and Other Adhesive Products and Sealants

        Household and Office Products. We manufacture a broad range of glue and
adhesive products that we market and sell primarily under the Super Glue brand
name, for household and office uses. These products include a variety of
adhesive products that we package into easy-to-use tubes, bottles, syringes,
glue sticks, glue pens and fasteners, each designed for differing home and
office applications. We sell these products to mass merchandisers, such as
Wal-Mart, K-Mart and Target, drug store chains, such as Eckerd and Walgreens,
grocery store chains, such as Kroger, Albertsons,



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Safeway and Vons, office products and arts and crafts retailers such as Staples
and Michaels. As of June 30, 2001, our household and office adhesive products
could be purchased at more than 77,000 retail stores located primarily in the
United States, and also in Europe, Canada and Latin America.

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

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

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

        Nail Care Products

        During the past three years we have been a manufacturer of a wide range
of high quality nail care products that are sold in the professional beauty and
home nail care consumer markets, primarily to drug and grocery store chains,
mass merchandisers and specialty beauty supply businesses in the United States.
These products, which include pumice stones, tweezers, clippers, toiletries, and
emery boards, have been marketed under our Gem, Kurlash and Diamon Deb brand
names and also under the Brut, Oleg Cassini and Elvira brand names pursuant to
trademark licenses that we have obtained from the owners of those trademarks.

        As described above, we expect to complete the sale of our nail care
products business at the end of September 2001. Included in that sale will be
our inventories of nail care products and our trademarks and trademark licenses.

OUR INDUSTRIAL PRODUCTS

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

MARKETING

        Consumer Products

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

        Our automobile aftermarket products are marketed and sold by our own
sales personnel and also 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 model shops
through a network of independent master product distributors.



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        Industrial Products

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

        Foreign Sales

        Our foreign sales, which accounted for 14% of total revenues in the
fiscal year ended June 30, 2001 and 11% in fiscal 2000, are marketed and sold
primarily in Western Europe and, to a lesser extent, in Canada and Latin America
by our own sales personnel, independent sales representative organizations and
wholesale distributors. Adhesive Products account for almost all of our foreign
sales and, consequently, following the completion of the sale of the Cook Bates
product line, we expect that our foreign sales will represent approximately 18%
of total sales.

SOURCE AND AVAILABILITY OF RAW MATERIALS

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

        Approximately 32% of the materials and supplies we use in our business
are obtained from foreign suppliers. 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 operate a quality assurance department that conducts random batch
testing of the quality of the raw materials that we use in our adhesive and glue
products, which we warrant to have a shelf-life of one year. 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

        Our principal competitors in our adhesive products markets include
Henkel, which markets adhesive products under the Loctite/Manco brand names;
Devcon; 3-Bond; and Alteco. The principal competitive factors affecting our
sales are brand name recognition, pricing, breadth of product line and marketing
service and support. 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.

        Our principal competitors in our nail care products markets have
included Revlon, W. E. Bassett (which will be purchasing the Cook Bates product
line), Del Labs and 3-Bond.

CERTAIN FACTORS THAT COULD AFFECT OUR FUTURE PERFORMANCE

        Dependence on Certain Major Customers. Even though no single customer
accounted for as much as 10% of our total sales in any of the past three years,
our customers include several large national mass merchandisers and national and
regional food and drug store chains that purchase substantial volumes of
products from us. The loss of business from one or more of these larger
customers could result in unexpected reductions in our sales and could possibly
cause us to incur operating losses and reductions in cash flow that could
increase our dependence on borrowings to fund operations.



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

        Risks of Foreign Operations. Approximately 14% of our total sales in
fiscal 2001 and 11% in fiscal 2000 were made outside the United States,
primarily in Europe, Canada and Latin America and, following the completion of
our sale of our nail care products business, foreign sales will represent
approximately 18% of our total sales. Additionally, approximately 32% of our raw
material purchases are made from suppliers based outside the United States. As a
result, our operating results could decline as a result of foreign currency
fluctuations and changes in the value of the U.S. Dollar in relation to foreign
currencies in the countries where our products are sold and where we obtain some
of our raw materials. We do not attempt to hedge the risks of foreign currency
fluctuations by means of exchange agreements or other financial instruments.

        Uncertainties Relating to Repositioning Plan. During fiscal 2001, we
decided to focus our capital and management resources on improving and growing
our core Adhesives Products business and to divest ourselves of our Cook Bates
product line, the sale of which is expected to be completed by the end of
September 2001. Although we believe that this plan will result in improvements
in the profitability of our business, there are a number of factors that could
prevent us from achieving those improvements, including adverse changes in
prevailing economic conditions, increases in competition from other adhesive
products manufacturers and suppliers and changes in foreign exchange rates,
among others.

        Effects of a Slowing Economy. Sales of adhesive products, particularly
for consumer use is affected by the availability of disposable income, which is
affected by economic conditions in our markets. During the second half of fiscal
2001 our sales of adhesives products began to slow, we believe, due to the
slowing of the United States economy, which has continued into the current
fiscal year ending June 30, 2002. Unless economic conditions improve, our sales
may be adversely affected during the current fiscal year as well.

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

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 $318,000, $467,000, and $471,000 in the fiscal
years ended June 30, 2001, 2000 and 1999, respectively. The decrease in fiscal
2001 was the result of a reduction in product development expenditures relating
to the California Chemical product line and the Company's decision to suspend
research and development efforts associated with poultry adhesive/sealants and a
medical cyonoacrylate formulation.

GOVERNMENT AND ENVIRONMENTAL REGULATION

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



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TRADEMARKS, PATENTS AND LICENSES

        We have 25 registered trademarks, the most important of which are Pacer,
Pacer Technology, Zap, ProSeal, ProWeld, Pro-Lock and Pro-Seal Gasket,
Pacer-Tech, which are used in the marketing of our Adhesives Products. We also
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.

        We also have 4 registered trademarks, the most important of which are
Gem, Kurlash and Diamon Deb, that were used in marketing our nail care products.
We also market some of those products under the Oleg Cassini, Brut and Elvira
brand names, under license agreements with the owners of those trademarks. Those
agreements, expiring between November 2001 and March 2003, require the payment
of royalties on sales of products using those trademarks and require Pacer to
meet certain minimum sales and product quality requirements. Pacer is in
compliance with each of those agreements and in the past these agreements have
been renewed by the trademark owners. Those trademarks and trademark licenses
are being sold as part of the sale of our Cook Bates business.

EMPLOYEES

        At August 31, 2001, we employed 130 people on a regular full-time basis.
At various times during the year we also employ up to 95 additional personnel on
a temporary basis. We expect that the sale of our nail care products business
will result in a significant reduction in temporary employees and to a lesser
extent, the number of full-time employees. 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. We also occupy a 62,134 square foot distribution facility, also
located in Rancho Cucamonga, California. Both of these facilities are leased
under operating leases expiring on May 31, 2009. We are planning to relocate our
distribution operations to our headquarters building during fiscal 2002. When
that relocation is completed,we will seek to sublet or to obtain an early
termination of our existing lease for the distribution facility.

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

        A lawsuit was filed on September 27, 1999, in the Superior Court of
California by James T. Munn and Roberto J. Cavazos, Jr., who are former officers
of Pacer. The lawsuit alleged that Pacer and its Board of Directors breached
their fiduciary duties to shareholders and that the Board of Directors sought
special treatment in a proposed sale of Pacer in June 1998 and cited their
failure to publicly disclose the offer to shareholders. We filed a demurrer to
the complaint that led the court to dismiss the suit on grounds that it could
only be brought as a derivative action on behalf of Pacer. On March 15, 2000,
the plaintiffs re-filed their suit as a derivative action in the California
Superior Court in which they made the same allegations and in which they sought
unspecified damages against certain incumbent and former directors of the
Company, but not against the Company. The parties have entered into settlement
agreements which call for, among other things, a complete and final dismissal of
the derivative action as well the entry of a judgment in favor of the defendant
directors and officers.



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        As part of the settlement agreements, the plaintiffs preserved the right
to appeal the court's ruling, in sustaining the demurrer of their initial
action, that such action could only be brought as a derivative action. To our
knowledge, the plaintiffs have not as of yet filed such an appeal. In the event
no appeal is filed or if an appeal is filed but is unsuccessful for plaintiffs,
the settlement agreements call for the payment of $60,000 to plaintiffs' counsel
as partial compensation for attorneys fees. If an appeal is filed and plaintiffs
prevail, the parties have agreed that plaintiffs may reinstitute their original
action limited to the prosecution of their individual claims, but may not, in
any event, reinstitute the derivative action.

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

        None

EXECUTIVE OFFICERS OF REGISTRANT

<TABLE>
<CAPTION>
         NAME OF OFFICER         AGE                   OFFICE
         ---------------         ---                   ------
<S>                                   <C>   <C>
 Richard S. Kay.....................  59    Chairman of the Board of Directors,
                                            Chief Executive Officer and President
 Laurence R. Huff...................  41    Chief Financial Officer
</TABLE>

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

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

                                     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 bid
quotations for each of the quarters in the fiscal years ended June 30, 2001 and
2000 are listed below:

<TABLE>
<CAPTION>
                                                       HIGH(1)           LOW(1)
                                                       ------            ------
<S>                                                    <C>               <C>
        FISCAL YEAR ENDED JUNE 30, 2001:
          First Quarter ........................       $5.000            $3.750
          Second Quarter .......................        4.375             1.969
          Third Quarter ........................        3.250             2.313
          Fourth Quarter .......................        3.300             2.063
        FISCAL YEAR ENDED JUNE 30, 2000:
          First Quarter ........................       $5.315            $4.375
          Second Quarter .......................        6.250             4.845
          Third Quarter ........................        9.375             4.530
          Fourth Quarter .......................        5.155             3.830
</TABLE>

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



                                       8
<PAGE>   9

    Number of Record Shareholders

        The approximate number of record holders of our shares as of September
18, 2001 was 1,829.

    Dividends and Share Repurchases

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

        In fiscal 2000, we adopted an open market and private stock repurchase
program. Through June 30, 2001, we had made $628,000 of share purchases under
that program, that were funded with a combination of internally generated funds
and borrowings under our bank line of credit. We intend to make additional share
purchases during the current fiscal year ending June 30, 2002, when
opportunities arise to do so at favorable prices. However, such purchases may be
limited by certain bank loan covenants. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

ITEM 6. SELECTED FINANCIAL DATA

        The consolidated selected operating data set forth below for the fiscal
years ended June 30, 2001, 2000 and 1999, and the selected balance sheet data at
June 30, 2001 and 2000, are derived from the Company's audited financial
statements included elsewhere in this Report. The selected financial data for
the fiscal years ended June 30, 1998 and 1997 and at June 30, 1999, 1998 and
1997 are derived from audited financial statements which are not included in
this Report. The consolidated selected operating data for the fiscal year ended,
and the balance sheet data at, June 30, 1998 include the operations of Cook
Bates from March 4, 1998, when those operations were acquired by Pacer. The
following data should be read in conjunction with our consolidated financial
statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Report.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED JUNE 30,
                                                -----------------------------------------------------------------------
                                                          (ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                -----------------------------------------------------------------------
SELECTED OPERATING DATA:                          2001             2000            1999           1998           1997
                                                --------         --------         -------        -------        -------
<S>                                             <C>              <C>              <C>            <C>            <C>
   Net sales ...........................        $ 43,961         $ 47,685         $46,048        $31,939        $25,678
   Gross profit ........................          13,388           15,156          15,257         11,346          9,158
   Selling, general &
     administrative(1) .................          13,956           14,429          12,217          8,374          6,596
   Operating income (loss) .............            (568)             727           3,040          2,972          2,562
   Other expense, net ..................             841              863             803            309             76
   Income (loss) before income taxes ...          (1,409)            (136)          2,237          2,663          2,486
   Income tax expense (benefit) ........            (393)            (439)            951          1,122          1,269
   Net income (loss) ...................        $ (1,016)        $    303         $ 1,286        $ 1,541        $ 1,217
   Earnings (loss) per share(2):
     Basic .............................        $  (0.31)        $   0.09         $  0.40        $  0.49        $  0.39
     Diluted ...........................        $  (0.31)        $   0.09         $  0.38        $  0.44        $  0.37
</TABLE>

<TABLE>
<CAPTION>
                                                                 AS OF JUNE 30,
                                      -------------------------------------------------------------------
BALANCE SHEET DATA:                    2001           2000           1999           1998           1997
                                      -------        -------        -------        -------        -------
<S>                                   <C>            <C>            <C>            <C>            <C>
   Total assets ..............        $22,871        $29,618        $30,618        $27,799        $14,026
   Working capital ...........          8,244          8,267         18,825         14,504          5,778
   Borrowings(3) .............          7,856         12,252         12,703          9,869          1,276
   Shareholders' equity ......         11,074         12,699         12,641         10,632          8,762
</TABLE>

------------
(1)     Inclusive of goodwill impairment charge of $1,042,000 in 2001 incurred
        in connection with the sale of the California Chemical product line.

(2)     See Note 11 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 of outstanding shares
        approved by shareholders on November 21, 2000.

(3)     Includes current portion of long-term debt. For additional information
        regarding borrowings, see Note 5 to the Company's Consolidated Financial
        Statements.



                                       9
<PAGE>   10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

OVERVIEW

        We incurred a net loss of approximately $1.0 million in the fiscal year
ended June 30, 2001. The loss was primarily attributable to (i) actions, taken
to refocus Pacer's resources on growing its core Adhesives Product business,
that included the closure of our United Kingdom operations, the sale of our
California Chemical nail care acrylics business and a management reorganization
and financial review, which led to fourth quarter charges totaling approximately
$2.0 million, inclusive of a non-cash charge of approximately $1.0 million for
goodwill impairment resulting from the sale of the California Chemical product
line; and (ii) to a lesser extent, a 7.8% decline in our sales in fiscal 2001 as
compared to fiscal 2000, which we believe is primarily the result of the slowing
of the United States economy.

        Of our $44.0 million in total sales in fiscal 2001, approximately $13.5
million, or 31%, were attributable to sales of nail care products. Due to the
sale of our California Chemical product line which was consummated in June 2001
and the anticipated sale of the Cook Bates product line that is scheduled to
take place at the end of September 2001, we anticipate that after the first
quarter, our total sales for fiscal 2002 will consist almost entirely of
Adhesives Products and, as a result, total sales will be significantly lower
than in prior years. However, at the same time, we expect that the sale of our
nail care business will result in an improvement in our gross profit margin, and
reductions in our operating expenses and interest expense, in fiscal 2002 as
compared to fiscal 2001.

Results of Operations

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

<TABLE>
<CAPTION>
                                                  2001        2000        1999
                                                 ------      ------      ------
<S>                                              <C>         <C>         <C>
        Net sales ...........................    100.0%      100.0%      100.0%
        Cost of sales .......................     69.5%       68.2%       66.9%
        Gross profit ........................     30.5%       31.8%       33.1%
        Selling, general & administrative ...     31.8%       30.3%       26.5%
        Other expense, net ..................      1.9%        1.8%        1.7%
        Income (loss) before taxes ..........     (3.2)%      (0.3)%       4.9%
        Net income (loss) ...................     (2.3)%       0.6%        2.8%
</TABLE>

    Fiscal Years ended June 30, 2001 and 2000

        Net Sales. Net sales declined $3.7 million to $44.0 million or 7.8% from
the prior year. Sales in the United States, which represented 86% of our total
sales in fiscal 2001, decreased 10.4% from $42.4 million to $38.0 million. That
decline, we believe, was primarily attributable to a slowing of the United
States economy in fiscal 2001. International sales, which consist primarily of
Adhesives Products, increased to approximately $6.0 million, or 14% of total
sales, in fiscal 2001 as compared to $5.3 million, or 11% of total sales, in
fiscal 2000.

                In fiscal 2000 net sales increased by $1.6 million to $47.7
million or 3.6% from the prior year. Sales in the United States, which
represented 89% of total net sales in fiscal 2000, increased by 3.9% to $42.4
million. The domestic revenue growth was primarily attributable to increases in
unit sales of our Super Glue, nail care and Pro Seal products that were
attributable to new marketing programs that resulted in an increase in the
number of store locations at which those products are sold. International sales
remained relatively unchanged in fiscal 2000 as compared to the prior fiscal
year, totaling $5.3 million, or 11% of total net sales for fiscal year 2000, as
compared to $5.2 million and 11% of total net sales in fiscal 1999.

        Gross Profit. Our gross margin (gross profits stated as a percentage of
net sales) declined to 30.5% in fiscal 2001 from 31.8% in fiscal 2000, due
primarily to $500,000 of charges in the quarter ended June 30, 2001 as a result
of our closure of our United Kingdom operations. Excluding those charges, our
gross margin would have remained relatively unchanged at approximately 31.6% in
fiscal 2001.



                                       10
<PAGE>   11
                We currently anticipate improvements in efficiencies and,
therefore, in our gross margin during the fiscal year ending June 30, 2002 as a
result of the closure of our United Kingdom operations and the sale of our
California Chemical business in the fourth quarter of fiscal 2001 and the
consummation of our sale of Cook Bates, which is scheduled to take place at the
end of September 2001.

                In fiscal 2000, our gross margin declined to 31.8% from 33.1% in
fiscal 1999, due primarily to a $1.5 million inventory write-down in the quarter
ended March 31, 2000 in connection with a restructuring and cost reduction
program implemented during that quarter. Excluding the inventory write-down, our
gross margin would have increased to approximately 35.0% in fiscal 2000 as a
result of operating efficiencies achieved primarily in the fourth quarter of
fiscal 2000.

        Selling, General & Administrative Expenses. Selling, general and
administrative ("SG&A") expenses (inclusive of goodwill amortization
charges arising from prior acquisitions of businesses), decreased by $473,000 or
3.3% in fiscal 2001, as compared to fiscal 2000. However, due to a one-time
goodwill impairment charge of approximately $1.0 million recorded on the sale of
the California Chemical business, as a percentage of net sales, SG&A expenses
increased to 31.8% in fiscal 2001 from 30.3% in fiscal 2000. Excluding that
charge, SG&A expenses would have decreased by $1.5 million, and as a percentage
of net sales, would have declined to 29.3% of net sales, in fiscal 2001. During
fiscal 2001, goodwill amortization charges (exclusive of the goodwill impairment
charge that resulted from the sale of the California Chemical product line)
totaled approximately $332,000 as compared to $287,000 in fiscal 2000.

                In fiscal 2000, SG&A expenses increased both in absolute dollars
and as a percentage of net sales in fiscal 2000 as compared to fiscal 1999.
These increases were due to asset write-downs associated with promotional and
advertising expenses in the amount of $1.3 million, a restructuring charge of
$315,000, and expenses of $350,000 incurred to defend a proxy contest waged by a
group of dissident shareholders at the Annual Meeting held in November 2000.
Also contributing to the increase were higher marketing expenditures to support
the increase in sales volume. Goodwill amortization charges in fiscal 2000
totaled approximately $287,000 as compared to $282,000 in fiscal 1999.

        Other Expense, Net. Other expense, net, consists primarily of interest
charges on outstanding bank borrowings and foreign currency translation gains
and losses. Interest expense decreased by $150,000 as a result of reductions in
outstanding debt and interest rates. Those reductions were offset by foreign
currency translation losses associated with our United Kingdom operations. We
currently expect that interest expense will decline in fiscal 2002, because we
intend to use the proceeds we obtain from the sale of the Cook Bates product
line to reduce our outstanding bank indebtedness until such time as we are able
to employ such funds to grow our Adhesives Products business.

                Other expense, net, in fiscal 2000, which also consisted
primarily of interest charges on outstanding bank borrowings, was approximately
the same as in fiscal 1999.

        Income Tax Expense (Benefit). The income tax benefit of $393,000 in
fiscal 2001 was the result of the net operating loss for fiscal 2001. In fiscal
2000, the income tax benefit of $439,000 was primarily attributable to a
reduction in the provision required for state and local sales and use taxes.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash provided by all activities in fiscal 2001 was $20,000 versus
cash used of $83,000 in the prior year.

        Cash provided by operating activities during fiscal year 2001 was $4.7
million compared to $1.3 million in fiscal year 2000, despite the decrease in
net income of $1.3 million in fiscal year 2001 from fiscal year 2000. That
increase in cash flow from operations was due primarily to decreases in trade
accounts receivable and in inventories, which was partially offset by decreases
in accounts payable and deferred income taxes.

        Cash provided by investing activities was $22,000 compared to cash used
of $308,000 in the prior year, primarily as a result of the sale, in the fourth
quarter of fiscal 2001, of our California Chemical product business.

        Cash used in financing activities in fiscal 2001 was $4.7 million as
compared to cash used of $1.1 million in the prior year, because we were able to
reduce net borrowings under our bank credit facilities by $4.4 million during
fiscal 2001, due to improvements in internally generated cash flow primarily as
a result of decreases in trade receivables and inventories as compared to fiscal
2000.

                                       11
<PAGE>   12
        We fund our working capital requirements primarily with a combination of
internally generated funds and borrowings under a revolving bank credit line
pursuant to which we were entitled, during fiscal 2001, to borrow the lesser of
(i) $13 million or (ii) the sum of 80% of the face dollar amount of eligible
accounts receivable and approximately 40% of inventories (the "borrowing base").
During fiscal 2001 our credit line borrowings bore interest at the bank's prime
rate (6.75% at June 30, 2001), less 0.5%, or at the bank's LIBOR base rate, plus
2.00%. We are required to make monthly interest-only payments on the credit line
until its maturity date of December 31, 2002. Prepayments of the principal
balance are permitted without penalty. Borrowings under the credit line are
secured by substantially all of our assets. At June 30, 2001 and 2000,
outstanding borrowings totaled $7.6 million and $11.8 million, respectively.

        In order to reduce fees on the unused portion of the revolving credit
line, on May 2, 2001 a total of $2 million of Pacer's borrowings under the
revolving credit line were converted into a three year term loan by adding those
borrowings to an existing term note with a then outstanding principal balance of
$688,000. At the same time, the principal amount of available borrowings under
the revolving credit facility was reduced from $15 million to $13 million. The
term loan bears interest at either the bank's prime rate less 0.5% or at a fixed
LIBOR rate and is payable in monthly installments of principal, each in the
amount of $76,000, plus interest, to the maturity date of April 2004. As of June
30, 2001, the term loan balance is $2.6 million.

        As a result of the sale of our California Chemical product line, and the
sale of the Cook Bates product line that is scheduled to take place in late
September 2001, we believe that our requirements for external financing will be
greatly diminished, at least during the next 12 month. Accordingly, effective as
of September 17, 2001, we reduced the amount of our line of credit to the lesser
of (i) $7.0 million, or (ii) the sum of 70% of the face dollar amount of
eligible accounts receivable plus approximately 40% of the cost of our
inventories. At the same time, the LIBOR based interest rate on our credit line
borrowings was increased to LIBOR plus 2.50% per year and the prime rate based
interest rate was increased to 0.25% below the bank's prime rate.

        One of the conditions set by our bank lender, in granting its consent to
the Cook Bates sale, was that we use a portion of the proceeds from that sale to
retire the term loan and that, if we were to fail to do so, the bank would
require that the maturity date of our revolving credit line be shortened by one
year to January 1, 2002. Accordingly we plan to retire the term loan with
proceeds from the Cook Bates sale and we also intend to use some of the proceeds
to reduce outstanding borrowings under the credit line, at least until such time
as we need such our borrowings for our Adhesives Products business.

        In December 1999 the bank agreed to permit us to use a portion of the
borrowings under the credit line, in amounts not to exceed an aggregate of
$100,000 per fiscal quarter, to repurchase shares of our common stock in 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 is also limited by certain
Securities and Exchange Commission volume and price restrictions. Pursuant to
that plan we used borrowings and internally generated funds totaling $323,000 to
repurchase 87,290 of our shares in fiscal 2001 and bank borrowings of $305,000
to repurchase 54,900 of our shares in fiscal 2000.

        We believe that availability under the credit line, together with the
proceeds of the Cook Bates sales and internally generated funds will be
sufficient to enable us to meet our working capital and other cash requirements
over the next twelve months. However, we may take advantage of opportunities to
acquire other adhesives products businesses, should they arise, in which case we
may incur borrowings to do so. At the present time, however, we are not engaged
in any discussions that might lead to any such acquisition.

SEASONALITY AND QUARTERLY FINANCIAL DATA

        Historically, we have sold a greater volume of nail care products in the
third calendar quarter of the year (our first fiscal quarter), than in other
quarters, because merchants tend to begin stocking such products during the fall
in anticipation of increases in holiday sales during the last calendar quarter
of the year. Assuming that the Cook Bates sale is consummated, as scheduled, at
the end of September 2001, we expect that we will cease to encounter such
quarterly variation in our sales and operating results.

        The following table presents unaudited quarterly financial information
for each of the fiscal years ended June 30, 2001 and 2000. This information has
been prepared by us on a basis consistent with our audited 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.



                                       12
<PAGE>   13
<TABLE>
<CAPTION>

                                                       QUARTER ENDED
                                        --------------------------------------------
                                        SEPT. 30,    DEC. 31,   MAR. 31,    JUNE 30,
                                          2000         2000       2001         2001
                                        ---------    --------   --------    --------
<S>                                     <C>          <C>        <C>         <C>
Revenues ............................    $14,548      $9,435     $10,592     $ 9,386
Gross profit ........................      5,028       3,295       3,626       1,439
Net income (loss) ...................        869         158         389      (2,432)
Net income (loss) per share (1)
    Basic ...........................    $   .26      $  .05     $   .12     $  (.76)
    Diluted .........................    $   .26      $  .05     $   .12     $  (.76)
</TABLE>

<TABLE>
<CAPTION>
                                        SEPT. 30,     DEC. 31,   MAR. 31,    JUNE 30,
                                          1999          1999       2000        2000
                                        ---------     --------   --------    --------
<S>                                     <C>           <C>        <C>         <C>
Revenues ............................    $14,252      $10,385    $ 11,119    $11,929
Gross profit ........................      5,082        3,260       2,347      4,467
Net income (loss) ...................      1,044            5      (1,606)       860
Net income (loss) per share (1)
    Basic ...........................    $   .31      $    --    $   (.48)   $   .26
    Diluted .........................    $   .31      $    --    $   (.48)   $   .26
</TABLE>

----------
(1)     Per share data for periods prior to November 21, 2000 have been
        retroactively adjusted to give effect to a 1-for-5 reverse stock split
        of Pacer's outstanding shares that was approved by shareholders on
        November 21, 2000.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In June, 2001, the FASB issued Statements of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and
Other Intangible Assets." Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning July 1, 2002. We are currently assessing, and due to their recent
issuance we are not yet able to predict, the financial impact that SFAS No. 141
and No. 142 will have on our consolidated financial statements.

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.



                                       13
<PAGE>   14

                           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:

<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                   NO.
                                                                                  ----
<S>                                                                               <C>
  Report of Independent Auditors ...............................................   15

  Independent Auditors' Report .................................................   16

  Consolidated Balance Sheets--June 30, 2001 and 2000 ..........................   17

  Consolidated Statements of Income--Fiscal Years Ended June 30, 2001, 2000
    and 1999 ...................................................................   18

  Consolidated Statements of Shareholders' Equity--Fiscal Years Ended June 30,
    2001, 2000 and 1999 ........................................................   19

  Consolidated Statements of Cash Flows--Fiscal Years Ended June 30, 2001, 2000
    and 1999 ...................................................................   20

  Notes to Consolidated Financial Statements ...................................   21

  Report of Independent Auditors on Schedule II to Financial Statements ........   32

  Schedule II -- Valuation and Qualifying Accounts -- Fiscal years ended
   June 30, 2001, 2000 and 1999 ................................................   33
</TABLE>



                                       14
<PAGE>   15

                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Pacer Technology:

We have audited the accompanying consolidated balance sheets of Pacer Technology
and subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) as of June 30,
2001 and 2000 and for the years then ended. These financial statements and
schedule 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, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended June 30, 2001, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule as of June 30,
2001 and 2000 and for the years then ended, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.


ERNST & YOUNG LLP

  /s/ERNST & YOUNG LLP

Riverside, California
August 17, 2001
except for Note 5
as to which the date is
Sept 17, 2001



                                       15
<PAGE>   16

                          INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Directors
Pacer Technology

We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of Pacer Technology and subsidiaries for the
year ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Pacer Technology and subsidiaries for the year ended June 30, 1999 in conformity
with accounting principles generally accepted in the United States of America.


KPMG LLP

  /s/ KPMG LLP

Orange County, California
September 3, 1999



                                       16
<PAGE>   17

                        PACER TECHNOLOGY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                 JUNE 30,
                                                                                        ---------------------------
                                                                                         2001                2000
                                                                                        -------            --------
<S>                                                                                     <C>                <C>
                                  ASSETS
Current assets:
  Cash .....................................................................            $   471            $    451
  Trade receivables, less allowance for doubtful accounts of
       $343 in 2001 and $304 in 2000 .......................................              8,292               8,947
  Other receivables ........................................................                966                 973
  Notes receivable .........................................................                 --                 116
  Inventories, net .........................................................              7,950              11,991
  Prepaid expenses .........................................................                292                 451
  Deferred income taxes ....................................................              1,860               1,379
                                                                                        -------            --------
     Total current assets ..................................................             19,831              24,308
Equipment and leasehold improvements, net ..................................              1,634               1,724
Deferred income taxes ......................................................                 --                  16
Costs in excess of net assets of businesses acquired, net ..................              1,385               3,546
Other assets ...............................................................                 21                  24
                                                                                        -------            --------
                                                                                        $22,871            $ 29,618
                                                                                        =======            ========
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable .........................................................            $ 2,391            $  3,276
  Accrued expenses .........................................................              1,506               1,391
  Revolving bank line of credit ............................................              4,648              10,312
  Current installments of long-term debt ...................................              3,042               1,062
                                                                                        -------            --------
    Total current liabilities ..............................................             11,587              16,041


Deferred income tax liability ..............................................                 44                  --
Long-term debt, excluding current installments .............................                166                 878
                                                                                        -------            --------
      Total liabilities ....................................................             11,797              16,919
Commitments and contingencies
Shareholders' equity:
  Common stock, no par value. Authorized: 50,000,000 shares; issued and
     outstanding: 3,091,905 in 2001 and 3,324,195 in 2000(1) ...............              7,888               8,576
   Retained earnings .......................................................              3,186               4,202
   Accumulated other comprehensive loss ....................................                 --                 (79)
                                                                                        -------            --------
         Total shareholders' equity ........................................             11,074              12,699
                                                                                        -------            --------
                                                                                        $22,871            $ 29,618
                                                                                        =======            ========
</TABLE>

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


          See accompanying notes to consolidated financial statements.



                                       17
<PAGE>   18

                        PACER TECHNOLOGY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED
                                                                 --------------------------------------------------
                                                                 JUNE 30,             JUNE 30,             JUNE 30,
                                                                   2001                 2000                 1999
                                                                 --------             --------             --------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                              <C>                  <C>                  <C>
Net sales ...........................................            $ 43,961             $ 47,685             $ 46,048
Cost of sales .......................................              30,573               32,529               30,791
                                                                 --------             --------             --------
    Gross profit ....................................              13,388               15,156               15,257
Selling, general & administrative expenses ..........              12,914               14,429               12,217
Goodwill impairment on California Chemical sale .....               1,042                   --                   --
                                                                 --------             --------             --------
    Operating income (loss) .........................                (568)                 727                3,040
Other (income) expense:
  Interest income ...................................                  (2)                 (34)                 (37)
  Interest expense ..................................                 852                1,005                1,024
  Other, net ........................................                  (9)                (108)                (184)
                                                                 --------             --------             --------
                                                                      841                  863                  803
                                                                 --------             --------             --------
Income (loss) before income taxes ...................              (1,409)                (136)               2,237
Income tax expense (benefit) ........................                (393)                (439)                 951
                                                                 --------             --------             --------
         Net income (loss) ..........................            $ (1,016)            $    303             $  1,286
                                                                 ========             ========             ========

Weighted average shares--basic(1) ...................               3,260                3,345                3,234
                                                                 ========             ========             ========
    Basic earnings (loss) per share .................            $   (.31)            $    .09             $    .40
                                                                 ========             ========             ========
Weighted average shares--diluted(1) .................               3,260                3,374                3,385
                                                                 ========             ========             ========
    Diluted earnings (loss) ser share ...............            $   (.31)            $    .09             $    .38
                                                                 ========             ========             ========
</TABLE>

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


          See accompanying notes to consolidated financial statements.



                                       18
<PAGE>   19

                        PACER TECHNOLOGY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                      ACCUMULATED
                                      NUMBER OF ISSUED                                                   OTHER            TOTAL
                                      AND OUTSTANDING     COMMON     RETAINED     NOTES RECEIVABLE   COMPREHENSIVE     SHAREHOLDERS'
                                           SHARES         STOCK      EARNINGS      FROM DIRECTORS    INCOME (LOSS)        EQUITY
                                      ----------------   -------     --------     ----------------   -------------     -------------
<S>                                   <C>                <C>         <C>          <C>                <C>               <C>
Balances at June 30, 1998(1) ......       3,172,995      $ 8,271      $ 2,613           $(265)           $ 13            $ 10,632
  Net income ......................              --           --        1,286              --              --               1,286
  Foreign currency translation
    adjustment ....................              --           --           --              --             (26)                (26)
                                                                                                                         --------
  Comprehensive income ............              --           --           --              --              --               1,260
  Shares issued upon exercise of
    options(1) ....................         182,100          515           --              --              --                 515
  Shares issued to employees(1) ...           2,900           16           --              --              --                  16
  Promissory note payments from
    directors .....................              --           --           --             218              --                 218
                                         ----------      -------      -------           -----            ----            --------
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
                                         ==========      =======      =======           =====            ====            ========
</TABLE>

----------
(1)     The numbers of shares outstanding at June 30, 2000, 1999 and 1998 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.



                                       19
<PAGE>   20

                        PACER TECHNOLOGY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                  YEARS ENDED
                                                                               --------------------------------------------------
                                                                               JUNE 30,             JUNE 30,             JUNE 30,
                                                                                 2001                 2000                 1999
                                                                               --------             --------             --------
<S>                                                                            <C>                  <C>                  <C>
Net income (loss) ....................................................         $ (1,016)            $    303             $  1,286
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
  Depreciation .......................................................              515                  512                  664
  Amortization of other assets .......................................              330                  287                  282
  Allowance for doubtful accounts ....................................               39                 (600)                 380
  (Gain) loss on sale/disposition of property and equipment ..........               35                   (5)                  13
  Warrants issued to consultants .....................................               70                   --                   --
  Deferred income taxes ..............................................             (421)                (207)                  83
  Goodwill impairment on sale of California Chemical product line ....            1,042                   --                   --
  Changes in operating assets and liabilities, excluding effects of
   acquisitions:
   (Increase) decrease in trade receivables ..........................              616                  463                 (599)
   (Increase) decrease in other receivables ..........................               86                 (907)                  14
   (Increase) decrease in notes receivable ...........................              116                  157                  (85)
   (Increase) decrease in inventories ................................            3,913                1,715               (2,731)
   Decrease in prepaid expenses and other assets .....................              162                  170                  196
   Decrease in accounts payable ......................................             (885)                (343)                (517)
   (Decrease) increase in accrued expenses ...........................              115                 (264)              (1,506)
                                                                               --------             --------             --------
     Net cash provided by (used in) operating activities .............            4,717                1,281               (2,520)
                                                                               --------             --------             --------
Cash flows from investing activities:
  Proceeds from sale of California Chemical ..........................              500                   --                   --
  Proceeds from sale of property and equipment .......................               --                   33                   --
  Capital expenditures ...............................................             (478)                (341)                (806)
                                                                               --------             --------             --------
     Net cash provided by (used in) investing activities .............               22                 (308)                (806)
Cash flows from financing activities:
  Principal payments on debt .........................................          (19,073)             (17,466)             (27,289)
  Borrowings on debt .................................................           13,594               17,504               30,983
  Principal payments on term-loan ....................................             (917)                (915)                (861)
  Borrowings on term-loan ............................................            2,000                   --                   --
  Notes receivable payments from directors ...........................               --                   47                  218
  Issuance (repurchase) of common stock, net .........................             (323)                (226)                 532
                                                                               --------             --------             --------
     Net cash provided by (used in) financing activities .............           (4,719)              (1,056)               3,583
                                                                               --------             --------             --------
Net increase (decrease) in cash ......................................               20                  (83)                 257
Cash at beginning of year ............................................              451                  534                  277
                                                                               --------             --------             --------
Cash at end of year ..................................................         $    471             $    451             $    534
                                                                               ========             ========             ========
Supplemental disclosures of cash flow information:
  Cash paid during the year for interest .............................         $    890             $    981             $    913
                                                                               ========             ========             ========
  Cash paid during the year for income tax ...........................         $    320             $    750             $  1,141
                                                                               ========             ========             ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       20
<PAGE>   21

                        PACER TECHNOLOGY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999

(1)     THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Nature of Business

        Pacer Technology ("Pacer") 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 also produces plastic containers for other customers. Pacer also
manufactures and markets manicure implements for the retail consumer markets.
These products are sold primarily in the United States and also Internationally
through its UK subsidiary, Pacer Tech Limited.

        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, Pacer Tech Limited ("Pacer Tech"). Pacer Tech was formed in 1986
to conduct business operations as a distributor of adhesives in the United
Kingdom. In June 2001, Pacer Tech was converted into a 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 generally
accepted accounting principles 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 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).



                                       21
<PAGE>   22

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


        Equipment and Leasehold Improvements

        Equipment and leasehold improvements are stated at cost less accumulated
depreciation or 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 in excess of net assets of businesses acquired are amortized on
the straight-line method over an 8-year to 20-year life. Pacer assesses the
recoverability of this intangible asset by determining whether the amortization
of the asset balance over its remaining useful life can be recovered through
undiscounted future operating cash flows of the acquired operations. The
accumulated amortization on the assets of businesses acquired was $1.4 million
and $1.5 million as of June 30, 2001 and 2000, respectively.

        Revenue Recognition

        The Company generally recognizes net revenues at the time of shipment
with provisions for certain sales of the Company that are made subject to
agreements with customers that allow for the right of return on merchandise that
is unsold. All distribution costs are included in cost of goods sold in the
accompanying consolidated financial statements.

        Advertising

        Cooperative advertising obligations are accrued and the costs are
immediately expensed when incurred. Advertising expense was $1,300,000,
$1,400,000 and $500,000, for 2001, 2000 and 1999, respectively.

        Restructuring Charges

        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 (E.P.S.) 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.

        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.



                                       22
<PAGE>   23

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999

        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, 2001, 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 $318,000, $467,000 and
$471,000 in 2001, 2000 and 1999, respectively.

        Product Warranties

        Pacer provides warranties for some products for periods generally
ranging from 6 to 12 months. Estimated warranty costs are recognized at the time
of the sale.

        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 Option Plans

        Pacer 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.

        Impact of Recently Issued Accounting Pronouncements

        In June, 2001, the FASB issued Statements of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and
Other Intangible Assets." Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning July 1, 2002. We are currently assessing the financial impact SFAS No.
141 and No. 142 will have on our Consolidated Financial Statements.

(2)     NOTES RECEIVABLE

        Some customers have converted trade receivable balances to term notes.
The notes are payable in monthly installments of principal and interest at a
rate higher than the rate of interest charged to Pacer for its borrowing of
funds from its predominant bank. All notes receivable were paid in 2001.



                                       23
<PAGE>   24

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


(3)     INVENTORIES

        Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                               JUNE 30,
                                     ----------------------------
                                      2001                 2000
                                     -------             --------
                                            (IN THOUSANDS)
<S>                                  <C>                 <C>
Raw materials ...........            $ 4,378             $  6,620
Work-in-process .........                508                  320
Finished goods ..........              3,341                5,689
Less:  reserves .........               (277)                (638)
                                     -------             --------
Inventories, net ........            $ 7,950             $ 11,991
                                     =======             ========
</TABLE>

(4)     EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

<TABLE>
<CAPTION>
                                                                                       JUNE 30,
                                                          ESTIMATED           --------------------------
                                                         USEFUL LIVES          2001                2000
                                                         ------------         -------             ------
                                                                                     (IN THOUSANDS)
<S>                                                      <C>                  <C>                 <C>
Shop equipment ...............................               5-10             $ 6,017             $5,195
Leasehold improvements .......................                 10               1,062              1,053
Office furniture and equipment ...............                5-7                 279                752
Transportation equipment .....................                  3                 106                106
Construction in progress .....................                 --                  34                 72
                                                                              -------             ------
                                                                                7,498              7,178
Less accumulated depreciation and amortization                                 (5,864)            (5,454)
                                                                              -------             ------
                                                                              $ 1,634             $1,724
                                                                              =======             ======
</TABLE>

(5)     BORROWINGS

        Pacer has a revolving bank credit line that permitted it to borrow up to
the lesser of (i) $13.0 million, or (ii) the sum of 80% of the face dollar
amount of eligible accounts receivable plus approximately 40% of the cost of its
inventories, primarily to fund working capital requirements. Borrowings under
the credit line bore interest at the bank's prime rate (6.75% as of June 30,
2001) less 0.5%, or at a LIBOR base rate plus 2.00%. Pacer is required to make
monthly interest only payments on outstanding borrowings until the maturity date
of the credit line, which is January 1, 2003. Pacer also is permitted to use
borrowings under the credit line to make purchases of up to $800,000 of its
outstanding shares of common stock per year. As of June 30, 2001, $4.7 million
of borrowings were outstanding under the line of credit. Of this amount, $2
million bore interest at a LIBOR base rate of 5.375% plus 2.00%. An additional
$1 million bore interest at a LIBOR base rate of 4.125% plus 2.00%. The
remaining balance outstanding of $1.7 million at June 30, 2001 bore interest at
prime less 0.5%. At June 30, 2001, the Company had approximately $2.0 million of
additional borrowings available based on eligible collateral.

        As a result of the sale of our California Chemical product line and the
pending sale of our Cook-Bates product line, which is scheduled to take place in
late September 2001, we amended our line of credit facility effective September
17, 2001 to reduce permitted borrowings under the line of credit to the lesser
of (i) $7.0 million, or (ii) the sum of 70% of the face dollar amount of
eligible accounts receivable plus approximately 40% of the cost of its
inventories. At the same time, the LIBOR based interest rate was increased to
LIBOR plus 2.50% per year and the prime rate based interest rate was increased
to 0.25% below the bank's prime rate.

        In connection with this credit line, the Company maintains a Commercial
Letter of Credit, Standby Letter of Credit, and Banker's Acceptance, not to
exceed $1.5 million in the aggregate. Any amount outstanding on this additional
credit facility reduces the borrowing base on the line of credit and expires on
January 1, 2003. As of June 30, 2001, outstanding letters of credit obtained
under this facility totaled $237,000.



                                       24
<PAGE>   25

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


        Pacer has obtained the following additional credit facilities from the
same bank:

        (1) A $2.7 million term loan that bears interest at the bank's prime
rate (6.75% at June 30, 2001) less 0.5%, or at a LIBOR base rate of 6.75% plus
1.625% per annum and is payable in monthly installments of principal, each in
the amount of $76,000, plus interest which has a maturity date of April 2, 2004.
As of June 30, 2001, the outstanding principal balance of this term loan was
approximately $2.6 million.

        (2) A term loan commitment of $750,000, which is available to Pacer to
fund capital expenditures. Any borrowings under this commitment will bear
interest at the bank's prime rate, less 0.5%, per annum and will mature on
January 1, 2002. This non-revolving term loan permits draws up to the full
commitment amount during the first year. At the first anniversary, any amount
outstanding is repayable with principal payments due over the next 48 months. At
June 30, 2001, the outstanding balance was $331,000.

    The agreements with the bank require Pacer to maintain certain financial
ratios and to comply with certain restrictive covenants. As of June 30, 2001,
Pacer was in compliance with or had received waivers with respect to all of
these covenants. All borrowings from the bank are secured by a first priority
security interest in all of the Company's assets.

        It is the Company's intention to pay off substantially all debt during
fiscal year ending June 30, 2002 with proceeds from the sale of the Cook Bates
product line that is scheduled to take place at the end of September 2001.
Therefore, all of the above noted debt has been classified as current in the
accompanying consolidated financial statements for the year ended June 30, 2001.

        In granting its consent to the Cook Bates sale, our bank lender
conditioned that consent on our commitment to use a portion of the proceeds from
that sale to retire the term loan. Additionally, the bank lender advised us that
if we were to fail to do so, it would require that the maturity date of our
revolving credit line be shortened by one year to January 1, 2002.

        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, 2001, the outstanding balance was $266,000.

        Long-term debt, excluding the revolving line of credit at June 30, 2001
and 2000, consisted of the following:

<TABLE>
<CAPTION>
                                                     2001                2000
                                                    -------             -------
                                                           IN THOUSANDS
<S>                                                 <C>                 <C>
        Term loan ......................            $ 2,611             $ 1,529
        Capital expenditure loan .......                331                  --
        Pro-Tel Bondini ................                266                 411
        Less:  current installments ....             (3,042)             (1,062)
                                                    -------             -------
        Total Long-Term Debt ...........            $   166             $   878
                                                    =======             =======
</TABLE>

        Future payments of debt are as follows (in thousands):

<TABLE>
<CAPTION>
       YEAR ENDING JUNE 30,                   PAYMENTS
       -------------------                    --------
<S>                                           <C>
             2002 .................            $7,690
             2003 .................               100
             2004 .................                66
                                               ------
             Total Payments .......            $7,856
                                               ======
</TABLE>



                                       25
<PAGE>   26

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


(6)     ACCRUED EXPENSES

        Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                               2001              2000
                                                              ------            ------
                                                                   (IN THOUSANDS)
<S>                                                           <C>               <C>
        Sales and marketing expenses .............            $  111            $  154
        Legal and accounting expenses ............                90                71
        Warranty .................................               214               232
        Income and other taxes ...................                 3                48
        Relocation and closure costs .............                --               271
        Accrued payroll and related expenses .....               602               359
        Deferred rent ............................               218               138
        Other ....................................               268               118
                                                              ------            ------
          Total Accrued Liabilities ..............            $1,506            $1,391
                                                              ======            ======
</TABLE>

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

(7)     LEASE OBLIGATIONS

        Pacer leases three manufacturing facilities under operating leases
expiring in May 2009, 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 July 2001 and May 2003.
Future minimum lease payments under non-cancelable operating leases as of June
30, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
       YEAR ENDING JUNE 30,                         OPERATING LEASES
       --------------------                         ----------------
<S>                                                 <C>
             2002 ...........................            $  707
             2003 ...........................               698
             2004 ...........................               568
             2005 ...........................               540
             2006 ...........................               543
        Thereafter ..........................             1,640
                                                         ------
        Minimum future lease payments .......            $4,696
                                                         ======
</TABLE>

        Rent expense was $723,000, $766,000 and $861,000 in 2001, 2000 and 1999,
respectively.

(8)     MAJOR CUSTOMERS AND EXPORT SALES

        Pacer has no customer that accounts for more than 10% of its net sales
and export sales represent approximately 14% of net sales in 2001, 11% of net
sales in 2000 and 11% of net sales in 1999.

(9)     INCOME TAXES

        Income tax expense (benefit) from continuing operations for the years
ended June 30, 2001, 2000 and 1999 consist of:

<TABLE>
<CAPTION>
                                                            2001              2000             1999
                                                           -----             -----             ----
                                                                        (IN THOUSANDS)
<S>                                                        <C>               <C>               <C>
        Federal:
          Current .............................            $  --             $  --             $682
          Deferred ............................             (416)             (394)              74
                                                           -----             -----             ----
                                                            (416)             (394)             756
                                                           -----             -----             ----
        State:
          Current .............................               --                --              152
          Deferred ............................               (5)              (81)               9
                                                           -----             -----             ----
                                                              (5)              (81)             161
                                                           -----             -----             ----
        Foreign:
          Current .............................               28                36               34
          Deferred ............................               --                --               --
                                                           -----             -----             ----
                                                              28                36               34
                                                           -----             -----             ----
        Total income tax expense (benefit) ....            $(393)            $(439)            $951
                                                           =====             =====             ====
</TABLE>


                                       26
<PAGE>   27

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


        The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at June 30, 2001 and 2000 are presented
below:

        Current deferred tax assets (liabilities):

<TABLE>
<CAPTION>
                                                              2001        2000
                                                            -------      -------
                                                               (IN THOUSANDS)
<S>                                                         <C>          <C>
    Allowance for doubtful accounts .....................   $   147      $   130
    Inventory ...........................................       159          358
    Prepaid expenses ....................................       (29)         (49)
    Vacation accruals ...................................        86           91
    Warranty accruals ...................................        91           99
    Advertising accruals ................................       120          304
    Amortization ........................................       179          124
    Net operating loss ..................................       890          250
    Other ...............................................       217           72
                                                            -------      -------
    Net current deferred tax assets .....................   $ 1,860      $ 1,379
                                                            =======      =======
    n-current deferred tax assets (liabilities):
    Depreciation ........................................   $   202      $   216
    Other ...............................................      (246)        (200)
                                                            -------      -------
    Net non-current deferred tax assets (liabilities) ...   $   (44)     $    16
                                                            =======      =======
</TABLE>

        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 (computed by applying the U.S. Federal corporate income tax rate of 34%)
for 2001, 2000 and 1999 as follows:

<TABLE>
<CAPTION>
                                                                2001     2000    1999
                                                               -----    -----    -----
                                                                   (IN THOUSANDS)
<S>                                                            <C>      <C>      <C>
    Expected income tax provision ...........................  $(479)   $ (46)   $ 761
    Non-deductible expenses .................................     43       49       53
    State income tax, net of Federal income tax benefit .....    (82)     (23)     106
    Effect of foreign operations ............................     28      (54)      34
    Benefit from tax planning ...............................     --     (365)      --
    Other ...................................................     97       --       (3)
                                                               -----    -----    -----
       Total Income Tax Expense (Benefit) ...................  $(393)   $(439)   $ 951
                                                               =====    =====    =====
</TABLE>

        Loss carryforwards for federal and state tax purposes, at June 30, 2001,
were approximately $2,400,000 and $961,000, respectively, and expire at various
dates through 2021 and 2011, respectively.

(10)    SHAREHOLDERS' EQUITY

        Nonqualified Stock Option and Incentive Stock Option Plans

        All shares and per share amounts below have been retroactively restated
to reflect the one-for-five reverse stock split approved by shareholders on
November 21, 2000.

        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.



                                       27
<PAGE>   28

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


        There were no stock options granted under the nonqualified Stock Option
Plan during fiscal year 1999. 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 an expected life of 10 years. There were no stock
options granted under the nonqualified Stock Option Plan during fiscal year
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. 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 1999, under this Plan, Pacer granted two options to
employees to purchase a total of 15,000 shares of Pacer's common stock at $5.235
per share. The market value of the stock was $5.235 per share on the date of
grant. The fair value of the stock options granted during fiscal 1999 was
$61,000 on the date of grant using the Black Scholes option-pricing model with
the following assumptions: volatility rate of 66.54%, risk-free interest rate of
5.93%, and an expected life of 10 years.

        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 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
shares 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.

        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.

        Pacer applies APB Opinion No. 25 in accounting for its 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 (which are stated in thousands, except for per share amounts):

<TABLE>
<CAPTION>
                                                                          2001                  2000                 1999
                                                                        ---------             ---------            ---------
<S>                                                                     <C>                   <C>                  <C>
        Net income (loss) as reported ......................            $  (1,016)            $     303            $   1,286
        Pro forma net income (loss) ........................            $  (1,071)            $     263            $   1,256
        As reported - basic earnings (loss) per share ......            $    (.31)            $    0.09            $    0.40
        Pro forma - basic earnings (loss) per share ........            $    (.33)            $    0.08            $    0.39
        As reported - diluted earnings (loss) per share ....            $    (.31)            $    0.09            $    0.38
        Pro forma - diluted earnings (loss) per share ......            $    (.33)            $    0.08            $    0.37
</TABLE>



                                       28
<PAGE>   29

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


        A summary of transactions under the stock option plans is as follows:

                                 1994 SOP & ISOP

<TABLE>
<CAPTION>
                                                                                        OUTSTANDING OPTIONS
                                                 OPTIONS              --------------------------------------------------------
                                                AVAILABLE              NUMBER                EXERCISE               AGGREGATE
                                                FOR GRANT             OF SHARES               PRICES                  VALUE
                                                ---------             --------             ------------            -----------
<S>                                             <C>                   <C>                  <C>                     <C>
        Balances at June 30, 1998 ...              50,000              750,000              $3.60-$7.05            $ 3,533,813
          Options granted ...........             (15,000)              15,000                    $5.25                 78,525
          Options exercised .........                  --              (54,000)             $3.60-$5.00               (195,120)
          Options expired ...........             200,000             (200,000)             $3.60-$5.00             (1,000,000)
          Options cancelled .........               5,000               (5,000)             $3.60-$5.00                (18,000)
          Options authorized ........              40,000                   --                       --                     --
                                                 --------             --------             ------------            -----------
        Balances at June 30, 1999 ...             280,000              506,000              $3.60-$7.05            $ 2,399,218
          Options granted ...........             (27,000)              27,000              $4.90-$4.95                132,750
          Options exercised .........                  --              (18,000)                   $3.60                (64,080)
                                                 --------             --------             ------------            -----------
        Balances at June 30, 2000 ...             253,000              515,000              $3.60-$7.05            $ 2,467,888
          Options granted ...........            (100,000)             100,000                    $2.63                262,500
          Options cancelled .........              10,000              (10,000)                   $7.03                (70,300)
                                                 --------             --------             ------------            -----------
        Balances at June 30, 2001 ...             163,000              605,000              $3.60-$7.05            $ 2,660,088
                                                 ========             ========             ============            ===========
</TABLE>

        At June 30, 2001 and 2000, the options exercisable were 520,000 and
508,000, respectively, and the remaining average life of those options at June
30, 2001, was 2.48 years.

                          1982 OTHER STOCK OPTION PLAN

<TABLE>
<CAPTION>
                                                                      OUTSTANDING OPTIONS
                                                   ---------------------------------------------------------
                                                     NUMBER                EXERCISE               AGGREGATE
                                                   OF SHARES                PRICES                  VALUE
                                                   ---------             ------------            -----------
<S>                                                <C>                   <C>                     <C>
        Balances at June 30, 1998 ......             220,000              $5.00-$5.40            $ 1,113,800
          Options expired ..............             (80,000)             $5.00-$5.40               (407,800)
                                                    --------             ------------            -----------
        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
                                                    ========             ============            ===========
</TABLE>

        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 and
expires on January 28, 2004. The Company valued the warrant at $70,000 using the
Black-Scholes option pricing model.



                                       29
<PAGE>   30

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999


(11)    EARNINGS (LOSS) PER SHARE

        Earnings (loss) per share were computed as follows:

<TABLE>
<CAPTION>
                                                                      2001               2000              1999
                                                                    -------             ------            ------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                                 <C>                 <C>               <C>
NUMERATOR:
Numerator for basic and diluted
     earnings (loss) per share .........................            $(1,016)            $  303            $1,286
                                                                    =======             ======            ======
DENOMINATOR:
     Denominator for basic earnings (loss) per share
     -- weighted average number of common shares
     outstanding during the period .....................              3,260              3,345             3,234
     Incremental common shares attributable
     to exercise of outstanding options ................                 --                 29               150
                                                                    -------             ------            ------
Denominator for diluted earnings (loss) per share ......              3,260              3,374             3,385
                                                                    =======             ======            ======
Basic earnings (loss) per share ........................            $  (.31)            $  .09            $  .40
                                                                    =======             ======            ======
Diluted earnings (loss) per share ......................            $  (.31)            $  .09            $  .38
                                                                    =======             ======            ======
</TABLE>


(12)    401(k) 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, and participants become fully vested in Pacer contributions after six
years of service.

        Plan expenses for the years ended June 30, 2001, 2000 and 1999 were
$67,000, $62,000 and $74,000, respectively.

(13)    QUARTERLY FINANCIAL DATA (UNAUDITED)

        The following table presents unaudited quarterly financial information
for each of the fiscal years ended June 30, 2001 and 2000. 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.

<TABLE>
<CAPTION>
                                                                         QUARTER ENDED
                                              -----------------------------------------------------------------
                                              SEPT. 30,          DEC. 31,           MAR. 31,           JUNE 30,
                                                2000               2000              2001               2001
                                              ---------          --------           --------           --------
<S>                                           <C>                <C>                <C>                <C>
Revenues ..........................            $14,548            $9,435            $10,592            $ 9,386
Gross profit ......................              5,028             3,295              3,626              1,439
Net income (loss) .................                869               158                389             (2,432)
Net income (loss) per share:
     Basic ........................            $   .26            $  .05            $   .12            $  (.76)
     Diluted ......................            $   .26            $  .05            $   .12            $  (.76)
</TABLE>



                                       30
<PAGE>   31

                        PACER TECHNOLOGY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                         QUARTER ENDED
                                              -------------------------------------------------------------------
                                              SEPT. 30,          DEC. 31,            MAR. 31,            JUNE 30,
                                                1999               1999                2000                2000
                                              ---------          --------            --------            --------
<S>                                           <C>                <C>                 <C>                 <C>
Revenues ..........................            $14,252            $10,385            $ 11,119             $11,929
Gross Profit ......................              5,082              3,260               2,347               4,467
Net income (loss) .................              1,044                  5              (1,606)                860
Net income (loss) per share:
     Basic ........................            $   .31            $    --            $   (.48)            $   .26
     Diluted ......................            $   .31            $    --            $   (.48)            $   .26
</TABLE>

(14)    ACQUISITIONS & DISPOSITIONS

        On June 1, 2000, Pacer entered into an intellectual property license
agreement where 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 agreement
calls for monthly royalty payments over a five-year period which are subject to
minimum and maximum amount constraints. The 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.

        On June 11, 2001, the Company sold all of the assets, properties and
goodwill of its California Chemical product line, which consists of primarily
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, 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.

(15)    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
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.

(16)    COMMITMENTS AND CONTINGENCIES

        Pacer has entered into sales agreements with many of its customers which
contain pricing terms, including the amounts of promotional allowances and Co-op
advertising, renewability clauses, and provisions which convey trademark rights.
Each of these agreements is unique and may include one or more of these features
as part of its terms.

        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.

(17)    RELATED PARTY TRANSACTIONS

        During the years ended June 30, 2001, 2000 and 1999, Pacer incurred
legal expenses of $83,000, $151,000 and $107,000 respectively, to a law firm,
one of the partners of which is a director and shareholder.

(18)    SUBSEQUENT EVENT

        On August 21, 2001, the Company entered into an agreement to sell
substantially all of the assets of its Cook Bates product line, which consists
of personal care manicure implements, seasonal gift sets and Halloween
merchandise, to The W.E. Bassett Company in exchange for approximately $5.2
million cash. The agreement provides for Pacer's retention of the outstanding
accounts receivable. The Company expects that it will recognize a gain on this
sale in the first quarter of fiscal year end 2002; however the amount of that
gain is not yet determinable.



                                       31
<PAGE>   32

                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Board of Directors and Shareholders
Pacer Technology:

        The audit referred to in our report dated September 3, 1999 included the
related financial statement schedule as of June 30, 1999, and for the year ended
June 30, 1999, included in the annual report on Form 10-K of Pacer Technology.
This financial statement schedule is the responsibility of Pacer Technology's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

                                            KPMG LLP

                                            /s/  KPMG LLP
                                            ---------------------------

Orange County, California
September 3, 1999



                                       32
<PAGE>   33

                          SCHEDULE II--PACER TECHNOLOGY

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                            BALANCE AT
                                           BEGINNING OF                                      BALANCE AT
 DESCRIPTION                                  PERIOD         ADDITIONS      DEDUCTIONS(1)   END OF PERIOD
 -----------                               ------------      ---------      -------------   -------------
<S>                                        <C>               <C>            <C>             <C>
Allowance for doubtful accounts:
Year Ended June 30, 1999 ...........            $525            $390            $ (11)            $904
Year Ended June 30, 2000 ...........            $904            $119            $(719)            $304
Year Ended June 30, 2001 ...........            $304            $499            $(460)            $343
</TABLE>

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

<TABLE>
<CAPTION>
                                                               BALANCE AT                                            BALANCE
                                                                BEGINNING                                            AT END
 DESCRIPTION                                                    OF PERIOD         ADDITIONS     DEDUCTIONS(1)       OF PERIOD
 -----------                                                   ----------         ---------     -------------       ---------
<S>                                                            <C>                <C>           <C>                 <C>
 Allowance for obsolete or slow-moving inventory:
 Year Ended June 30, 1999 ............................            $1,107            $226            $(522)            $811
 Year Ended June 30, 2000 ............................            $  811            $426            $(599)            $638
 Year Ended June 30, 2001 ............................            $  638            $ 84            $(445)            $277
</TABLE>

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



                                       33
<PAGE>   34

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

        Ernst & Young, LLP ("Ernst & Young") have been the Company's independent
public accountants for the fiscal years ended June 30, 2001 and 2000.

        KPMG, LLP ("KPMG") were the Company's independent public accountants and
audited the Company's financial statements as of and for the year ended June 30,
1999. Effective October 12, 1999, the Board of Directors approved the selection
of Ernst & Young, and dismissed KPMG, as the registrant's independent
accountant. As confirmed by KPMG in a letter dated October 15, 1999 that was
filed with the Securities Exchange Commission, there had never been (i) any
disagreements between the Company and KPMG on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures or (ii) any "reportable events" (as defined in Paragraph (a)(v) of
Item 304 of Regulation S-K as promulgated by the Securities and Exchange
Commission).

        At no time during the two fiscal years or any subsequent interim period
preceding the engagement of Ernst & Young as the Company's independent certified
public accountants did the Company consult with Ernst & Young regarding the
application of accounting principles to any transaction, the type of audit
opinion that might be rendered on the financial statements of the Company, or
any disagreement or reportable event.


                                    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 expected
to be filed with the Commission on or before October 29, 2001 for the Company's
annual shareholders' meeting.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement expected to be filed with the
Commission on or before October 29, 2001 for the Company's annual shareholders'
meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        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 October 29, 2001 for the Company's annual shareholders'
meeting.

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 expected to be filed with the
Commission on or before October 29, 2001 for the Company's annual shareholders'
meeting.

ITEM 14. 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

                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 is not
applicable.


                                       34
<PAGE>   35

(a)(3) EXHIBITS

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

<TABLE>
<S>            <C>
Exhibit 3.1    Articles of Incorporation (1)

Exhibit 3.2    By-laws (1)

Exhibit 4.1    Stock Purchase Warrant for 66,667 shares of Common Stock issued to
               the Prince Henry Group

Exhibit 10.7   Agreement to Extend Term of lease agreement dated March 1, 1988 for
               facilities in Rancho Cucamonga. (2)

Exhibit 21     Subsidiaries of Registrant

Exhibit 23.1   Consent of Independent Auditors

Exhibit 23.2   Consent of Independent Auditors
</TABLE>

--------------
(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, 1999.

(b)     REPORTS ON FORM 8-K

        None


                                       35
<PAGE>   36

                                   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, 2001                    PACER TECHNOLOGY, INC.

                                            By: /s/      RICHARD S. KAY
                                                --------------------------------
                                                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, Larry K. Reynolds, and Laurence R. Huff, or any of them,
individually, to act severally as attorneys-in-fact and agents, 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-in-fact may deem necessary or appropriate.

<TABLE>
<CAPTION>
          SIGNATURE                            TITLE                          DATE
          ---------                            -----                          ----
<S>                            <C>                                    <C>
/s/    RICHARD S. KAY          Chairman of the Board of Directors,    September 25, 2001
---------------------------    Chief Executive Officer, President
       Richard S. Kay          and Director


/s/   LAURENCE R. HUFF         Chief Financial Officer (Principal     September 25, 2001
---------------------------    Financial and Principal Accounting
      Laurence R. Huff         Officer)


/s/     E. T. GRAVETTE         Director                               September 25, 2001
---------------------------
        E. T. Gravette


/s/   JOHN G. HOCKIN, II       Director                               September 25, 2001
---------------------------
      John G. Hockin, II


/s/      CARL HATHAWAY         Director                               September 25, 2001
---------------------------
        Carl Hathaway


/s/    LARRY K. REYNOLDS       Director                               September 25, 2001
---------------------------
      Larry K. Reynolds
</TABLE>



                                       S-1
<PAGE>   37

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
   NUMBER                DESCRIPTION
   ------                -----------
<S>             <C>
Exhibit 3.1     Articles of Incorporation (1)

Exhibit 3.2     By-laws (1)

Exhibit 4.1     Stock Purchase Warrant for 66,667 shares of Common Stock issued to
                the Prince Henry Group

Exhibit 10.7    Agreement To Extend Term of lease agreement dated March 1, 1988
                for facilities in Rancho Cucamonga (2)

Exhibit 21      Subsidiaries of Registrant

Exhibit 23.1    Consent of Independent Auditors

Exhibit 23.2    Consent of Independent Auditors
</TABLE>

------------
(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, 1999.



                                      E-1