Portola Packaging, Inc. 10-Q/A 11-30-03

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

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

890 Faulstich Court
San Jose, California 95112
(Address of principal executive offices, including zip code)

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X .

11,905,193 shares of Registrant’s $.001 par value Common Stock, consisting of 2,134,992 shares of nonvoting Class A Common Stock and 9,770,201 shares in the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were outstanding at November 30, 2003.

This Amendment on Form 10-Q/A is being filed to restate certain amounts (see “Restatement” within Note 1 for discussion of significant changes) of the Company’s Consolidated Financial Statements for the quarterly period ended November 30, 2002, identified during the fourth quarter of fiscal year 2003. This filing should be read in conjunction with the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2002.

In addition, the Company updated its “Results of Operations” within Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect changes as discussed below.

This amendment only reflects the changes discussed above. All other information is unchanged and reflects the disclosures made at the time of the original filing on January 13, 2003.


		Page

Part I — Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of November 30, 2002 (unaudited), as restated, and August 31, 2002		4
	Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended November 30, 2002 and November 30, 2001, as restated		5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended November 30, 2002 and November 30, 2001		6
	Notes to Condensed Consolidated Financial Statements, as restated		7
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4.	Controls and Procedures		33
Part II — Other Information
Item 6.	Exhibits and Reports on Form 8-K		35
Signatures			36
Certifications			38

Portola Packaging, Inc. is not required to file, and is not filing, this Form 10-Q/A pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. Portola Packaging, Inc. is filing this Form 10-Q/A solely to fulfill its obligations under the Indenture, dated as of October 2, 1995, by and between Portola Packaging, Inc. and American Bank National Association.

Trademark acknowledgments:
Cap Snap^®, Snap Cap^®, Cap Snap Seal^®, Portola Packaging^®, Nepco^®, Non-Spill^®, TWIST & SPOUT^®, Cap Profile Logo^®, Cap Seal^®, Plasto-Lok^®, Product Integrity^®, the Consumer Cap logo and the Portola logo are registered trademarks of Portola Packaging, Inc. and its subsidiaries (collectively the “Company”). All other product names of the Company are trademarks of the Company.


					November 30,
					2002			August 31,
					(unaudited)			2002

					(restated)

ASSETS
Current assets:
	Cash and cash equivalents				$	3,764		$	4,566
	Accounts receivable, net					24,219			25,810
	Inventories					12,607			13,272
	Other current assets					3,006			2,533
	Deferred income taxes					651			643

		Total current assets				44,247			46,824
Property, plant and equipment, net						69,932			71,455
Goodwill, net						10,316			10,342
Patents, net						2,984			3,127
Debt financing costs, net						2,099			2,280
Other assets, net						2,390			2,561

			Total assets		$	131,968		$	136,589

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Current portion of long-term debt				$	429		$	426
	Accounts payable					12,393			13,828
	Accrued liabilities					6,188			6,746
	Accrued compensation					4,507			2,749
	Accrued interest					1,972			4,928

		Total current liabilities				25,489			28,677
Long-term debt, less current portion						119,799			120,126
Redeemable warrants to purchase Class A Common Stock						10,378			10,359
Deferred income taxes						1,574			1,601
Other long-term obligations						593			681

		Total liabilities				157,833			161,444

Minority interest						35			58

Commitments and contingencies (Note 7)
Shareholders’ equity (deficit):
	Class A convertible Common Stock of $.001 par value:
		Authorized: 5,203 shares; Issued and outstanding: 2,135 shares in both periods				2			2
	Class B, Series 1, Common Stock of $.001 par value:
		Authorized: 17,715 shares; Issued and outstanding: 8,597 shares in both periods				8			8
	Class B, Series 2, convertible Common Stock of $.001 par value:
		Authorized: 2,571 shares; Issued and outstanding: 1,170 shares in both periods				1			1
Additional paid-in capital						6,570			6,570
Notes receivable from shareholders						(158	)		(158	)
Accumulated other comprehensive loss						(1,993	)		(2,318	)
Accumulated deficit						(30,330	)		(29,018	)

			Total shareholders’ equity (deficit)			(25,900	)		(24,913	)

				Total liabilities, minority interest and shareholders’ equity (deficit)	$	131,968		$	136,589

The accompanying notes are an integral part of the condensed consolidated financial statements.


		For the Three Months
		Ended November 30,

		2002			2001

		(restated)

Sales		$	51,954		$	54,247
Cost of sales			40,682			41,962

	Gross profit		11,272			12,285

Selling, general and administrative			8,142			8,404
Research and development			1,182			789
Amortization of intangibles			204			453

			9,528			9,646

	Income from operations		1,744			2,639

Other (income) expense:
	Interest income		(17	)		(17	)
	Interest expense		3,186			3,399
	Amortization of debt financing costs		180			191
	Loss (gain) from sale of property, plant and equipment		49			(9	)
	Other (income) expense, net		437			453

			3,835			4,017

	Loss before income taxes		(2,091	)		(1,378	)

Income tax benefit			(779	)		(504	)

Net loss		$	(1,312	)	$	(874	)

The accompanying notes are an integral part of the condensed consolidated financial statements.


			For the Three Months
			Ended November 30,

			2002			2001

			(unaudited)

Cash flows provided by operating activities:			$	2,326		$	4,089

Cash flows from investing activities:
	Additions to property, plant and equipment			(2,831	)		(2,779	)
	Proceeds from sale of property, plant and equipment			9			335
	Decrease (increase) in other assets, net			99			(49	)

		Net cash used in investing activities		(2,723	)		(2,493	)

Cash flows from financing activities:
	(Repayments) borrowings under revolver, net			(327	)		41
	Borrowings (repayments) under long-term debt obligations, net			3			(109	)
	Payments on other long-term obligations			(15	)		(21	)
	Distributions to minority owners			(47	)		(16	)

		Net cash used in financing activities		(386	)		(105	)

Effect of exchange rate changes on cash				(19	)		(34	)

	(Decrease) increase in cash and cash equivalents			(802	)		1,457
Cash and cash equivalents at beginning of period				4,566			3,315

Cash and cash equivalents at end of period			$	3,764		$	4,772

Supplemental disclosure of non-cash information:
	Forgiveness on note receivable from shareholder		$	—		$	29

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Portola Packaging, Inc. and its subsidiaries (the “Company”) without audit and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K previously filed with the Securities and Exchange Commission. The August 31, 2002 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Interim results are subject to seasonal variations and the results of operations for the three months ended November 30, 2002 are not necessarily indicative of the results to be expected for the full fiscal year ending August 31, 2003.

During the fourth quarter of fiscal year 2003, the Company identified certain adjustments that have led us to restate our consolidated financial statements for the quarters ended November 30, 2002 and 2001, February 28, 2003 and 2002 and May 31, 2003 and 2002.

The restatement relates to recording foreign currency gains and losses and certain inventory valuation adjustments in the prior quarters to which they relate rather than in the fourth quarter of each respective fiscal year. These adjustments, which aggregated $515,000 and $137,000 on a pre-tax basis and $309,000 and $82,000 on an after-tax basis for fiscal years ended August 31, 2003 and 2002, respectively, were presented in the historical periods to which they related. These restatements had no effect on the Company’s consolidated financial statements for the fiscal years ended August 31, 2003 and 2002.

The impact on the consolidated balance sheets and consolidated statements of operations, as a result of the above adjustments, is as follows (in thousands). The amounts previously reported are derived from the original Form 10-Q for the quarter ended November 30, 2002 filed on January 13, 2003. The above adjustments had no impact on the previously reported consolidated statements of cash flows for the quarters ended November 30, 2002 and 2001.

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)


		As Previously			As
		Reported			Restated

At November 30, 2002:
	Inventories	$	12,535		$	12,607
	Accrued liabilities		6,343			6,188
	Accumulated other comprehensive loss		(2,452	)		(1,993	)
	Accumulated deficit	$	(30,098	)	$	(30,330	)
For the three months ended November 30, 2002
	Cost of sales	$	40,754		$	40,682
	Gross profit		11,200			11,272
	Income from operations		1,672			1,744
	Other (income) expense, net		(22	)		437
	Loss before income taxes		(1,704	)		(2,091	)
	Income tax benefit		(624	)		(779	)
	Net loss	$	(1,080	)	$	(1,312	)
For the three months ended November 30, 2001
	Cost of sales	$	41,932		$	41,962
	Gross profit		12,315			12,285
	Income from operations		2,669			2,639
	Other (income) expense, net		74			453
	Loss before income taxes		(969	)		(1,378	)
	Income tax benefit		(340	)		(504	)
	Net loss	$	(629	)	$	(874	)

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets”. These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 apply to all business combinations after June 30, 2001. Effective September 1, 2001, the Company adopted SFAS No. 142 for existing goodwill and other identifiable assets and, at August 31, 2002, the Company used the discounted cash flows methodology to measure its goodwill by operating unit and reviewed for impairment. Based on this review, the Company did not record an impairment loss during the fiscal year ended August 31, 2002. An event did not transpire that would require management to review for goodwill impairment as of November 30, 2002.

Effective September 1, 2002, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. The impact of adopting SFAS No. 143 was not material to the Company’s financial statements for the first quarter of fiscal year 2003.

Effective September 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes or amends existing accounting literature related to the impairment and disposal of long-lived assets. SFAS 144 requires long-lived assets to be tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable from future cash flows of the particular asset group or there is an expectation that it is more likely than not that a long-lived group will be sold or otherwise disposed of before the end of its previously estimated useful life. The impact of adopting SFAS No. 144 was not material to the Company’s financial statements for the first quarter of fiscal year 2003.

Effective September 1, 2002, the Company adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement updates, clarifies and simplifies existing accounting pronouncements. While the technical corrections to existing pronouncements are not substantive in nature, in some instances they may change accounting practice. The provisions of this standard related to SFAS No. 13, Accounting for Leases, are effective for transactions occurring after May 15, 2002. Prospectively, as a result of the adoption of SFAS No. 145, debt extinguishment costs will no longer be treated as extraordinary items. The impact of adopting SFAS No. 145 was not material to the Company’s financial statements for the first quarter of fiscal year 2003.

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Effective September 1, 2002, the Company adopted SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The scope of SFAS No. 146 includes (1) costs to terminate contracts that are not capital leases; (2) costs to consolidate facilities or relocate employees; and (3) termination benefits provided to employees who are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The impact of adopting SFAS No. 146 was not material to the Company’s financial statements for the first quarter of fiscal year 2003.

Effective December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. SFAS No. 148 will be adopted in fiscal year 2004 and is not expected to have a material impact on the Company’s results of operations or financial condition.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others” (“FIN45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees that are issued or modified after December 31, 2002. The provisions of FIN 45 were not effective at November 30, 2002 and therefore had no impact on the Company’s results of operations or financial condition for the first quarter of fiscal 2003.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – and interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. On October 8, 2003, the FASB issued FASB Staff Position No. 46-e, which allows public entities, who meet certain criteria, to defer the effective date for applying the provisions of FIN 46 to interests held by the public entity in certain variable interest entities or potential variable interest entities until the end of the first interim or annual period ending after December 15, 2003. FIN 46 was not effective at November 30, 2002 and therefore had no impact on the Company’s results of operations or financial condition for the first quarter of fiscal 2003.

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Effective April 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends Statement 133 for certain decisions made by the Board as part of the Derivatives Implementation Group (DIG) process and further clarifies the accounting and reporting standards for derivative instruments including derivatives embedded in other contracts and for hedging activities. The provisions of this statement are to be prospectively applied effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement is not expected to have a material impact on the Company’s results of operations or financial condition for the third quarter of 2003.

Effective May 1, 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement is not expected to have a material impact on the Company’s results of operations or financial condition for the third quarter of fiscal 2004.

Certain prior year balances have been reclassified to conform with the current quarter financial statement presentation.

Other comprehensive loss consisted of cumulative foreign currency translation adjustments of $253,000 and $75,000 for the three-month periods ended November 30, 2002 and 2001, respectively.

As of November 30, 2002 and August 31, 2002, inventories consisted of the following (in thousands):

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

As of November 30, 2002 and August 31, 2002, goodwill and accumulated amortization by segment category (see Note 8) consisted of the following (in thousands):


			November 30, 2002					August 31, 2002

			Gross Carrying		Accumulated			Gross Carrying		Accumulated
			Amount		Amortization			Amount		Amortization

			(unaudited)

Goodwill:
	United States		$	12,585	$	(6,667	)	$	12,585	$	(6,667	)
	Canada			3,939		(1,100	)		3,975		(1,110	)
	Mexico			3,801		(2,534	)		3,801		(2,534	)
	China			392		(185	)		392		(185	)
	Other			449		(364	)		449		(364	)

		Total consolidated	$	21,166	$	(10,850	)	$	21,202	$	(10,860	)

The change in the gross carrying amounts and accumulated amortization for Canada from August 31, 2002 to November 30, 2002 was due to foreign currency translation. The Company has not recognized any impairment losses for the three month period ended November 30, 2002.

In connection with the adoption of SFAS No. 142, the Company reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The remaining lives of these assets range from one to thirteen years. The components of its intangible assets are as follows:


			November 30, 2002					August 31, 2002

			Gross Carrying		Accumulated			Gross Carrying		Accumulated
			Amount		Amortization			Amount		Amortization

			(in thousands)					(in thousands)

Intangible assets:
	Patents		$	9,623	$	(6,639	)	$	9,621	$	(6,494	)
	Debt financing costs			5,963		(3,864	)		5,966		(3,686	)
	Covenants not-to-compete			555		(274	)		555		(252	)
	Trademarks			360		(230	)		360		(200	)
	Other			125		(52	)		374		(297	)

		Total consolidated	$	16,626	$	(11,059	)	$	16,876	$	(10,929	)

Gross carrying amounts and accumulated amortization may fluctuate between periods due to foreign currency translation. In addition, amortization expense for the net carrying amount of intangible assets, including debt financing costs, for the three month period ended November 30, 2002 was $384,000 and is estimated to be $1,541,000 for the full fiscal year 2003, $1,811,000 in fiscal 2004, $1,156,000 in fiscal 2005, $300,000 in fiscal 2006, $126,000 in fiscal 2007, $120,000 in fiscal 2008 and $897,000 thereafter.

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The Company is subject to various legal proceedings and claims arising out of the normal course of business. Based on the facts currently available, management believes that the ultimate amount of liability beyond reserves provided, if any, for any pending actions will not have a material adverse effect on the Company’s financial position. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material impact on the results of operations or liquidity of the Company in a particular period.

The Company has issued a letter of credit that guarantees $280,637 of a loan related to the purchase of machinery for Capsnap Europe Packaging Gmb.H’s (“CSE”) 50% owned Turkish joint venture, Watertek. CSE is an unconsolidated, 50% owned Austrian joint venture that sells five-gallon water bottles and closures that are produced primarily by the Company’s United Kingdom subsidiary. The Company has also issued a letter of credit that guarantees a loan of $348,037 for the purchase of machinery by CSE, presently being used at the Company’s United Kingdom facility. These guarantee agreements are in Eurodollars and were valued using a conversion rate as of November 30, 2002.

In November 2000, the Company’s Mexican consolidated subsidiary entered into a ten- year lease for a building in Guadalajara, Mexico commencing in May 2001. The Company’s Mexican operations relocated to the new building during May 2001. The Company guarantees approximately $595,000 in future lease payments relating to the lease as of November 30, 2002.

The Company’s reportable operating businesses are organized primarily by geographic region. The United Kingdom, Canada and Mexico produce both closure and bottle product lines and the United States and China produce closure product lines. The Company evaluates the performance of its segments and allocates resources to them based on earnings before interest, taxes, depreciation, amortization and other non-operating gains and losses. Certain Company businesses and activities, including the equipment division, Portola Allied Tool, and general corporate costs, do not meet the definition of a reportable operating segment and have been aggregated into “Other.” Certain corporate expenses related to the domestic closure operations, including human resources, finance, quality assurance, selling and information technology costs, have been allocated to the United States segment for purposes of determining Adjusted EBITDA. Adjusted EBITDA represents income (loss) before income taxes, depreciation of property, plant and equipment, net interest expense (including warrant interest (income) expense and amortization of debt issuance costs), amortization of intangible assets, gains and losses on both foreign exchange and sale of assets. Adjusted EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, net income (loss), cash flow or other measures of performance in accordance with generally accepted accounting principles. The accounting policies of the segments are consistent with those policies used by the Company as a whole.

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The table below presents information about reported segments for the three month periods ended November 30 (in thousands):


			November 30,			November 30,
			2002			2001

Revenues
	United States		$	29,329		$	31,239
	Canada			6,900			6,465
	United Kingdom			8,486			8,776
	Mexico			3,626			3,628
	China			604			577
	Other			3,009			3,562

		Total Consolidated	$	51,954		$	54,247

Adjusted EBITDA
	United States		$	5,616		$	7,133
	Canada			844			618
	United Kingdom			1,860			1,850
	Mexico			625			667
	China			40			72
	Other			(2,822	)		(2,855	)

		Total Consolidated	$	6,163		$	7,485

Intersegment revenues totaling $2,594,000 and $2,664,000 have been eliminated from the segment totals presented above for the three month periods ended November 30, 2002 and 2001, respectively.

One United States customer accounted for approximately 10% of sales for the three-month period ended November 30, 2002 and owed the Company $1,354,000 as of November 30, 2002.

The table below presents a reconciliation of total segment Adjusted EBITDA to total consolidated loss before income taxes for the three month periods ended November 30, 2002 and 2001, respectively as restated (in thousands):


		2002			2001

Total Adjusted EBITDA – for reportable segments		$	6,163		$	7,485
Depreciation and amortization			(4,402	)		(4,811	)
Amortization of debt issuance costs			(180	)		(191	)
Interest expense, net			(3,169	)		(3,382	)
(Loss) gain from sale of property, plant and equipment			(49	)		9
Other, as restated			(454	)		(484	)

	Consolidated loss before income taxes, as restated	$	(2,091	)	$	(1,374	)

Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

In addition to historical information, this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q/A, including, without limitation, statements related to the impact of the final disposition of legal matters in the “Commitments and Contingencies” footnote to the condensed consolidated financial statements, anticipated cash flow sources and uses under “Liquidity and Capital Resources” and other statements contained in the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” regarding the Company’s critical accounting policies and estimates, financing alternatives, financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Certain statements, including, without limitation, statements containing the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” and words of similar import, constitute forward-looking statements. Readers are referred to sections of this Report entitled “Risk Factors,” “Critical Accounting Policies and Estimates,” and “Quantitative and Qualitative Disclosures of Market Risk.” Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including, but not limited to, competition in its markets and reliance on key customers, all of which may be beyond the control of the Company. Any one or more of these factors could cause actual results to differ materially from those expressed in any forward-looking statement. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this paragraph, elsewhere in this Report and in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the fiscal year 2002 and Quarterly Reports on Form 10-Q to be filed by the Company during fiscal year 2003.

The Company is a major designer, manufacturer and marketer of tamper evident plastic closures, plastic bottles and related equipment used for packaging applications in dairy, fruit juice, bottled water, sports drinks, institutional foods and other non-carbonated beverage products. The Company was acquired in 1986 through a leveraged acquisition led by Jack L. Watts, the Company’s current Chairman of the Board and Chief Executive Officer.

General. The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgement based on various assumptions and other factors such as historical experience, current and expected economic conditions, and in some cases, actuarial techniques. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. The Company believes that the following accounting policies are critical due to the degree of estimation required.

Allowance for Doubtful Accounts. The Company provides credit to its customers in the normal course of business, performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The allowance for doubtful accounts related to trade receivables is determined based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, an evaluation of specific accounts is conducted when information is available indicating a customer may not be able to meet its financial obligations. Judgements are made in these specific cases based on available facts and circumstances, and a specific reserve for that customer may be recorded to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on historical collection and write-off experience. The collectibility of trade receivables could be significantly reduced if default rates are greater than expected or if an unexpected material adverse change occurs in a major customer’s ability to meet its financial obligations. The allowance for doubtful accounts totaled $1.2 million as of both November 30, 2002 and August 31, 2002.

Revenue Recognition. The Company follows Staff Accounting Bulletin 101, “Revenue Recognition in Financial Statements” in recognizing revenues within the Company’s financial statements. This bulletin requires, among other things, that revenue only be recognized when title has transferred and risk of loss has passed to a customer with the capability to pay, and that there are no significant remaining obligations related to the sale on the part of the Company.

Inventory Valuation. Cap and bottle related inventories are stated at the lower of cost (first-in, first-out method) or market and equipment related inventories are stated at the lower of cost (average cost method) or market. The Company records reserves against the value of inventory based upon ongoing changes in technology and customer needs. These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from the Company’s expectations.

Impairment of Assets. The Company periodically evaluates its property, plant and equipment, goodwill and other intangible assets for potential impairment. Management’s judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business. Future events could cause management to conclude that impairment indicators exist and that property, plant and equipment, goodwill and other intangible assets may be impaired. Any resulting impairment loss could have a material adverse impact on the results of operations and financial condition. No impairment loss was recognized during the three-month period ended November 30, 2002.

Income Taxes. The Company estimates its income taxes in each of the jurisdictions in which it operates. This process involves estimating its current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company then assesses the likelihood that the deferred tax assets will be recovered from future taxable income, and, to the extent recovery is not likely, a valuation allowance is established. When an increase in this allowance within a period is recorded, the Company includes an expense in the tax provision in the consolidated statements of operations. Management’s judgment is required in determining the provision (benefit) for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the deferred tax assets will be realized through the recognition of future taxable income, except for certain foreign jurisdictions for which a full valuation has been provided. Although the deferred tax assets for which full valuation allowances have not been provided are considered realizable, actual amounts could be reduced if future taxable income is not achieved. The Company has provided valuation allowances against net deferred tax assets of $1.1 million as of both November 30, 2002 and August 31, 2002.

Impact of Equity Issuances. The Company has two outstanding warrants, which are redeemable at the option of the holder upon 60 days written notice to the Company based upon a price equal to the higher of the current fair value per share of the Company’s Common Stock or an amount computed under a formula(s) in the warrant agreements, through June 30, 2004 and June 30, 2008, respectively. The obligation of the Company to redeem the warrants is suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At November 30, 2002, the Company’s credit facilities did not permit redemption of the warrants. At November 30, 2002, the carrying value of the warrants totaled $10.4 million, which represents the fair value of the instruments as determined by the Company’s management. In accordance with EITF Issue 00-19, the change in the fair value of the warrants of $19,000 was recognized as interest expense during the three-month period ended November 30, 2002.

The Company has updated its “Results of Operations” within Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect restated amounts, as further described in Note 1 to the condensed consolidated financial statements.

Three Months Ended November 30, 2002 Compared to the Three Months Ended November 30, 2001

Sales. Sales decreased $2.3 million, or 4.2%, from $54.2 million for the three months ended November 30, 2001 to $51.9 million for the three months ended November 30, 2002. This decrease was primarily due to decreased sales of $2.0 million by the U.S. closure division largely due to the consolidation of a few large domestic customers which resulted in lower selling prices as well as a less favorable product mix. Equipment sales decreased $0.5 million mainly due to delays in placing of customer orders. Sales decreased $0.3 million in the United Kingdom due to decreased volume driven by market demand. Offsetting these decreases were increased sales of $0.4 million in Canada due to increased sales produced by its Toronto facility and $0.1 million in tooling due to timing of customer orders.

Gross Profit. Gross profit decreased $1.0 million to $11.3 million for the first quarter of fiscal 2003 compared to $12.3 million for the first quarter of fiscal 2002. As a percentage of sales, gross profit decreased from 22.6% for the first quarter of fiscal 2002 to 21.7% for the same quarter in fiscal 2003. The margin decrease was primarily due to an increase in resin costs in the fourth quarter of 2002 that were not reflected in prices to contract customers during the first quarter of fiscal year 2003 and also increased utility costs.

First quarter of fiscal 2003 direct materials, labor and overhead costs represented 38.4%, 16.5% and 27.2% of sales, respectively, compared to the first quarter of fiscal 2002 percentages of 37.1%, 15.6% and 28.5%, respectively.

Selling, General and Administrative Expense. Selling, general and administrative expenses decreased $0.3 million, or 3.1%, to $8.1 million for the three months ended November 30, 2002, as compared to $8.4 million for the same period in fiscal year 2002, and increased as a percentage of sales from 15.5% for the three months ended November 30, 2001 to 15.7% for the three months ended November 30, 2002. The decrease in selling, general and administrative expenses was due to decreased expenses incurred for legal fees and bad debt expense.

Research and Development Expenses. Research and development expense increased $0.4 million, or 49.8%, to $1.2 million for the three months ended November 30, 2002, as compared to $0.8 million for the three months ended November 30, 2001, and increased as a percentage of sales from 1.5% in the three months ended November 30, 2001 to 2.3% in the three months ended November 30, 2002. The increase in research and development expense was primarily due to an increase in prototype expenses related to new products.

Amortization of Intangibles. Amortization of intangibles (consisting primarily of amortization of patents and technology licenses, tradename, covenants not-to-compete and customer lists) decreased $249,000, or 55.0%, to $204,000 for the three months ended November 30, 2002, as compared to $453,000 for the three months ended November 30, 2001. The decrease was primarily due to certain intangibles related to the acquisition of Portola Allied Tool which were fully amortized during the three-month period ended November 30, 2002.

Income from Operations. Reflecting the effect of the factors summarized above, income from operations decreased $0.9 million, or 33.9%, to $1.7 million for first quarter of fiscal year 2003 as compared to $2.6 million for the first quarter of fiscal year 2002 and decreased as a percentage of sales to 3.4% in the first quarter of fiscal year 2003 as compared to 4.9% in the same period of fiscal year 2002.

Other (Income) Expense. Interest income remained relatively consistent at $17,000 for both of the three-month periods ended November 30, 2002 and 2001. The Company recognized a net loss of $49,000 on the sale of property, plant and equipment during the first quarter of fiscal year 2003, compared to a gain of $9,000 recognized during the first quarter of fiscal year 2002.

Interest Expense. Interest expense decreased $0.2 million to $3.2 million for the three months ended November 30, 2002, as compared to $3.4 million for the three months ended November 30, 2001. This decrease was primarily due to the decrease in borrowings on the revolving credit facility and the effect of a decrease in the LIBOR rate during the first quarter of fiscal 2003 compared to the same period in fiscal 2002.

Amortization of Debt Financing Costs. Amortization of debt financing costs decreased $11,000 for the three months ended November 30, 2002 to $180,000 from $191,000 for the three months ended November 30, 2001.

Income Tax Benefit. The Company recorded a benefit from income taxes of $779,000 for the three months ended November 30, 2002 based on its pre-tax loss using an effective tax rate of 37.3%. The Company recorded a benefit from income taxes of $504,000 for the three months ended November 30, 2001 based on its pre-tax loss using an effective tax rate of 36.6%.

Net Loss. Net loss was $1.3 million in the first quarter of fiscal year 2003 as compared to a net loss of $0.9 million in the first quarter of fiscal year 2002.

The Company has relied primarily upon cash from operations, borrowings from financial institutions and, to a lesser extent, sales of its common stock to finance its operations, repay long-term indebtedness and fund capital expenditures and acquisitions. At November 30, 2002, the Company had cash and cash equivalents of $3.8 million, a decrease of $0.8 million from August 31, 2002.

Operating Activities. Cash provided by operations totaled $2.3 million for the three months ended November 30, 2002, which represented a $1.8 million decrease from the $4.1 million provided by operations for the three months ended November 30, 2001. Net cash provided by operations for both quarters was the result of a net loss offset primarily by non-cash charges for depreciation and amortization. Working capital (current assets less current liabilities) increased $0.4 million as of November 30, 2002 to $18.5 million, as compared to $18.1 million as of August 31, 2002.

Investing Activities. Cash used in investing activities was $2.7 million for the three months ended November 30, 2002, as compared to using $2.5 million for the three months ended November 30, 2001. In both periods, the use of cash consisted primarily of additions to property, plant and equipment.

Financing Activities. Cash used in financing activities was $0.4 million for the first quarter of fiscal year 2003 as compared to cash used in financing activities of $0.1 million for the first quarter of fiscal year 2002. In the first quarter of fiscal years 2003 and 2002, there was no significant new financing activity.

Cash and Cash Equivalents. At November 30, 2002, the Company had $3.8 million in cash and cash equivalents as well as borrowing capacity of approximately $30.9 million under the revolving credit line, less a minimum availability requirement of $3.0 million. Management believes that these resources together with anticipated cash flows from operations, will be adequate to fund the Company’s operations, debt service requirements and capital expenditures throughout fiscal year 2003. The Company may require additional funds to support other purposes and may seek to raise these additional funds through debt financing or through other sources. There can be no assurances that additional funding will be available at all, or that if available, such financing will be obtainable on terms favorable to the Company. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors presented in Item 2 of this document entitled “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Risk Factors.”

On January 22, 2002, the Securities and Exchange Commission issued an interpretive release on disclosures related to liquidity and capital resources, including off-balance sheet arrangements. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Contractual Obligations” and Note 7 of the Notes to Condensed Consolidated Financial Statements (unaudited) for off-balance sheet arrangements.

The following additional information is provided to assist financial statement users.


		Payments Due by Period

		Total		Less than 1 Year		1 – 3 Years		4 – 5 Years		After 5 Years

Contractual Obligations:		(dollars in thousands)

Long-Term Debt, including current portion:
	Senior Notes (1)	$	110,000		—	$	110,000		—		—
	Revolver (2)	$	9,454		—	$	9,454		—		—
	Capital Lease Obligations (3)	$	774	$	429	$	345		—		—
Redeemable Warrants (4)		$	10,378		—	$	10,378		—		—
Operating Lease Obligations (5)		$	21,446	$	2,303	$	6,746	$	2,759	$	9,638
Guarantees (6)		$	1,224		—	$	348		—	$	876

(2)

Concurrently with the offering of senior notes, in October 1995, the Company entered into a five-year senior revolving credit facility of up to $35.0 million. On September 29, 2000, the Company entered into a new four year amended and restated senior secured credit facility of $50.0 million for operating purposes subject to a borrowing base of eligible receivables and inventory, plus property, plant and equipment, net, which serve as collateral for the line. The credit facility, which expires on August 31, 2004, contains covenants and provisions that restrict, among other things, the Company’s ability to: (i) incur additional indebtedness, (ii) incur liens on its property, (iii) make investments, (iv) enter into guarantees and other contingent obligations, (v) merge or consolidate with or acquire another person or engage in other fundamental changes, or in certain sales of assets, (vi) engage in certain transactions with affiliates, (vii) make restricted junior payments, and (viii) declare or pay dividends. An unused fee is payable on the facility based on the total commitment amount less the balance outstanding at the rate of 0.375% per annum. In addition, interest payable is based on either the Bank Prime Loan rate plus 1.00% or the LIBOR Loan rate plus 2.25% determined by a pricing table based on total indebtedness to EBITDA. At November 30, 2002, the Bank Prime Loan rate and the LIBOR Loan rate were 4.25% and 1.75%, respectively.

(3)

The Company acquired certain machinery and office equipment under non-cancelable capital leases.

(4)

As of November 30, 2002, the Company had two outstanding warrants, which are redeemable at the option of the holder upon 60 days written notice to the Company based upon a price equal to the higher of the current fair value per share of the Company’s Common Stock or an amount computed under a formula(s) in the warrant agreements through June 30, 2004 and June 30, 2008, respectively. The obligation of the Company to redeem the warrants is suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At November 30, 2002, the Company’s credit facilities did not permit redemption of the warrants. At November 30, 2002, the carrying value of the warrants totaled $10.4 million, which represents the fair value of the instruments as determined by the Company’s management. The fair value of the warrants was estimated at November 30, 2002 using the Black-Scholes pricing model with the following assumptions: Risk-free interest rate of 2.07% and 4.00%; expected redemption period of June 30, 2004 and June 30, 2008; and volatility of 20% for each warrant, respectively.

(5)

The Company leases certain office, production and warehouse facilities under operating lease agreements expiring on various dates through 2021. Under the terms of the facilities’ leases, the Company is responsible for common area maintenance expenses, which include taxes, insurance, repairs and other operating costs. Base rent expense for fiscal 2003 is estimated to be $2.7 million.

(6)

The Company has issued a letter of credit that guarantees $280,637 of a loan related to the purchase of machinery for CSE’s 50% owned Turkish joint venture, Watertek. CSE is an unconsolidated, 50% owned Austrian joint venture that sells five-gallon water bottles and closures that are produced primarily by the Company’s United Kingdom subsidiary. The Company has issued a letter of credit that also guarantees a loan of $348,037 for the purchase of machinery by CSE, presently being used at the Company’s United Kingdom facility. These guarantee agreements are in Eurodollars and were valued using a conversion rate as of November 30, 2002.

In November 2000, the Company’s Mexican consolidated subsidiary entered into a ten-year lease for a building in Guadalajara, Mexico commencing in May 2001. The Company’s Mexican operations relocated to the new building during May 2001. The Company guarantees approximately $595,000 in future lease payments relating to the lease at November 30, 2002.

The Company incurs certain related party transactions throughout the course of its business. There have been no significant additional related party transactions from those disclosed in “Item 13. – Certain Relationships and Related Transactions” and Note 14 of Notes to Consolidated Financial Statements of the Company’s most recent annual report on Form 10-K.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others” (“FIN45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees that are issued or modified after December 31, 2002. The provisions of FIN 45 were not effective at November 30, 2003 and therefore had no impact on the Company’s results of operations or financial condition for the first quarter of fiscal 2003.

The following risk factors, in addition to the risks described elsewhere in the description of the Company’s business in this report, including, without limitation, those described under the caption “Quantitative and Qualitative Disclosures About Market Risk” may cause actual results to differ materially from those in any forward-looking statements contained in such business description or elsewhere in this report or made in the future by the Company or its representatives:

At November 30, 2002, the Company had indebtedness outstanding of approximately $130.6 million. $110.0 million of this amount represented the principal amount of the senior notes issued by the Company on October 1, 1995, which is due in 2005; $9.5 million of the balance represented funds drawn under the Company’s $50.0 million revolving line of credit; and $0.7 million of the indebtedness was principally comprised of capital lease obligations. The Company’s total indebtedness at November 30, 2002 included redeemable warrants with a carrying value of $10.4 million. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Contractual Obligations” for additional information on the redeemable warrants.

The degree to which the Company is leveraged could have important consequences, including the following: (i) the Company’s ability to obtain financing for future working capital needs or for acquisitions or other purposes is limited and may be limited from time to time in the future; (ii) a substantial portion of the Company’s cash flow from operations will be dedicated to debt service, thereby reducing funds available for operations; (iii) certain of the Company’s borrowings, including borrowings under the Company’s credit facility, will be at variable rates of interest, which could cause the Company to be vulnerable to increases in interest rates; and (iv) the substantial indebtedness and the restrictive covenants to which the Company is subject under the terms of its indebtedness may make the Company more vulnerable to economic downturns, may reduce its flexibility to respond to changing business conditions and opportunities, and may limit its ability to withstand competitive pressures. The Company’s ability to make scheduled payments of the principal of and interest on, or to refinance, its indebtedness will depend upon its future operating performance and cash flows which are subject to prevailing economic conditions, market conditions in the packaging industry, prevailing interest rates and financial, competitive, business and other factors, many of which may be beyond the Company’s control.

The Company’s credit facilities contain numerous restrictive covenants that may limit the Company’s operational and financing flexibility. A failure to comply with the obligations contained in the credit facilities or any agreements with respect to future indebtedness could result in an event of default under such agreements that could permit acceleration of the related debt and acceleration of debt under other agreements that may contain cross-acceleration or cross-default provisions. Other indebtedness of the Company that may be incurred in the future may contain financial or other covenants more restrictive than those applicable to the Company’s senior notes or credit facilities. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Contractual Obligations” for additional information regarding the Company’s senior notes and credit facilities.

The Company’s senior notes are not secured by any of the Company’s assets. The indenture governing the senior notes issued by the Company in October 1995 permits the Company to incur certain secured indebtedness, including indebtedness under the Company’s credit facilities. If the Company becomes insolvent or is liquidated, or if payment under the credit facilities or other secured indebtedness is accelerated, the lenders under the credit facilities and the holders of any other secured indebtedness would be entitled to exercise the remedies available to them as secured creditors under applicable laws and pursuant to instruments governing such indebtedness. Accordingly, such secured indebtedness would have a prior claim on the collateral and would effectively be senior to the senior notes to the extent that the value of such collateral is sufficient to satisfy the indebtedness secured thereby. To the extent that the value of such collateral is not sufficient to satisfy the secured indebtedness, amounts remaining outstanding on such indebtedness would be entitled to share with holders of senior notes and other claims on the Company with respect to any other assets of the Company. In either event, because the senior notes are not secured by any of the Company’s assets, it is possible that there will be insufficient assets remaining from which claims of the holders of the senior notes could be satisfied. In addition, the senior notes are obligations of the Company and not of any subsidiary, although the indenture does require that any restricted subsidiary of the Company having assets with an aggregate fair market value in excess of $100,000 execute a guarantee in respect of the senior notes. There can be no assurance that such guarantees, or any guarantee delivered by a restricted subsidiary formed in the future, would not be subject to avoidance by another creditor as a fraudulent transfer or for other reasons. The Company’s unrestricted subsidiaries do not guarantee the Company’s obligations under the senior notes. Upon liquidation of any unrestricted subsidiary, such obligations would be effectively subordinated to claims of such subsidiary’s creditors upon its assets. It is likely that this will also be the case for other unrestricted subsidiaries that the Company may form in the future.

Upon a change of control of the Company (as defined is the Company’s senior notes), each holder of senior notes will have certain rights to require the Company to repurchase all or a portion of such holder’s senior notes. If a change of control were to occur, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for all senior notes tendered by the holders thereof. In addition, a change of control would constitute a default under the Company’s credit facilities and, since indebtedness under the credit facilities will effectively rank senior in priority to indebtedness under the senior notes, the Company would be obligated to repay indebtedness under the credit facilities in advance of indebtedness under the senior notes. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition — Risk Factors, Effective Subordination of Notes in Certain Circumstances.” The Company’s repurchase of senior notes as a result of the occurrence of a change of control may be prohibited or limited by, or create an event of default under, the terms of other agreements relating to borrowings which the Company may enter into from time to time, including agreements relating to secured indebtedness. Failure by the Company to make or consummate a change of control offer would constitute an immediate event of default under the indenture governing the senior notes, thereby entitling the trustee or holders of at least 25% in principal amount of the then outstanding senior notes to declare all of the senior notes to be due and payable immediately; provided that so long as any indebtedness permitted to be incurred pursuant to the credit facilities is outstanding, such acceleration shall not be effective until the earlier of (i) an acceleration of any such indebtedness under the credit facilities or (ii) five business days after receipt by the Company of written notice of such acceleration. In the event all of the senior notes are declared due and payable, the Company’s ability to repay the senior notes would be subject to the limitations referred to above.

The Company believes that the domestic markets for its traditional products have become relatively mature and that, in order to grow, the Company has continued to develop new products in the markets it currently serves and in new products in different markets, to make acquisitions and to expand in its international markets. Developing new products, expanding into new markets and acquisitions will require a substantial investment and involve additional risks such as acquiring other companies. There can be no assurance that the Company’s efforts to achieve such development and expansion will be successful. Expansion poses risks and potential adverse effects on the Company’s operating results, such as the diversion of management’s attention, the loss of key personnel and the risks of unanticipated problems and liabilities. Moreover, as described above, the Company’s debt instruments impose significant restrictions under certain circumstances on the ability of the Company to make investments in or acquire other companies.

The Company’s international operations are subject to certain risks associated with doing business in foreign countries, including the possibility of adverse governmental regulation, additional taxation and exchange rate fluctuations. There can be no assurance that the Company’s foreign operations will continue to be successful. Also, these operations may require additional funding, which the Company may or may not be able to provide.

While no single competitor offers products that compete with all of the Company’s product lines, the Company faces direct competition in each of those lines from a number of companies, many of which have financial and other resources that are substantially greater than those of the Company. The Company can expect to meet significant competition from existing and new competitors with entrenched positions in respect of its existing product lines as well as in respect of new products the Company might introduce. The Company has experienced a negative impact due to competitor pricing. Further, numerous well-capitalized competitors might expand their product offerings, either through internal product development or acquisitions of the Company’s direct competitors. Such competitors could introduce products or establish prices for their products in a manner that could adversely affect the Company’s ability to compete. A significant increase in competition through technological innovations or offerings of lower prices products or what the Company has begun to note as a continuing proliferation of new packaging applications that the Company can not serve because sufficient technology or financial and marketing resources might not be available to it, could have a significant adverse effect on the Company’s financial condition and results of operations. Additionally, the Company from time to time also faces direct competition from bottling companies and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources.

The dairy, water and juice industries continue a pattern of consolidation through mergers and acquisitions. As a result, the Company’s top ten customers may continue to be a growing segment of the Company’s business. Loss of one of these customers or changes in the procurement practices in the form of pricing pressures of one or more major customers could have a significant adverse effect on the Company’s financial condition. Dairy and water consolidations have had a negative impact on the Company during the first quarter of fiscal year 2003. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Results of Operations.”

Many of the Company’s products are used to cap food and beverage products. The Company has been an industry leader in designing closures that are tamper-proof and highly resistant to contamination of the product sold to the end-consumer. From time to time in the past, the Company and other producers of similar products have received complaints from an insignificant number of customers and end-consumers’ claiming that such products might cause or almost caused injury to the end-consumer. In some instances such claims have alleged defects in manufacture or faulty design of the Company’s closures. In the event an end-consumer might suffer a harmful accident, the Company could incur substantial costs in responding to complaints or litigation. Further, if any of the Company’s products were found to be defective, the Company could incur significant costs in correcting any defects and suffer a loss of revenues derived from such products. A substantial portion of such costs might not be covered by insurance. To date, however, no such claims have been adjudicated adversely to the Company, and the Company has had to pay only insignificant amounts in settlement of such claims. To counter the possibility of adverse events of the type discussed, the Company is continuing its efforts in the areas of materials research, quality control and testing during and after the manufacturing process to produce products that are safe for their intended uses.

The Company’s products are subject to governmental regulation, including regulation by the Federal Food and Drug Administration and other agencies to the extent that such agencies that might have jurisdiction over effectiveness of tamper-resistant devices and other closures for dairy and other food and beverage products. A change in government regulation could adversely affect the Company. There can be no assurance that federal, state or foreign authorities will not issue regulations in the future that could materially increase the Company’s costs of manufacturing certain of its products.

While the Company does not believe that its employees, facilities, or products are a target for terrorists, there is a remote risk that terrorist activities could result in contamination or adulteration of its products. The Company’s products are tamper resistant, but not tamper proof. Although the Company has systems and procedures in place that are designed to prevent contamination and adulteration of raw materials used in the manufacture of its products and in its finished products, there is no assurance that a disgruntled employee or third party could not introduce an infectious substance, into packages of our finished products, either at our manufacturing plants or during shipment of our products. The Company has asked all of its employees to maintain a heightened awareness of suspicious circumstances and to be prepared to respond should the need arise. The Company has also asked its customers to inspect incoming shipments of products transported by common carrier to assure that shipments of its products have arrived intact and show no signs of external tampering. Were its products to be tampered with in a manner not readily capable of detection, the Company could experience a material adverse effect in our business, operations and financial condition.

The Company’s products are molded from various plastic materials, primarily low density polyethylene (“LDPE”) resin. LDPE resin accounts for a significant portion of the Company’s cost of sales for closures. Plastic resins, including LDPE, are subject to substantial price fluctuations, resulting from shortages in supply, changes in the prices of natural gas, crude oil and other petrochemical products from which resins are produced and other factors. Significant increases in resin prices, coupled with an inability to pass such increases on to customers promptly, would have a material adverse effect on the Company’s financial condition and results of operations. Moreover, even if the full amount of such price increases were to be passed on to customers, the increases would have the effect of reducing gross margin percentages. Similarly, if resin prices decrease, customers would typically expect rapid pass-through of the decrease, and there can be no assurance that the Company would be able to maintain its margin percentages. Resin price increases had a negative impact on the Company during the first quarter of fiscal year 2003. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Resin Price Sensitivity.”

The Company has approximately 115 patents covering various aspects of the design and manufacture of its products. There can be no assurance that the Company will be successful in protecting its proprietary technology from third party infringement or that the Company’s products will not be found to infringe upon the proprietary technology of others. Furthermore, patents do not ensure that competitors will not develop competing products.

The Company now sells its products internationally. The protection offered by the patent laws of foreign countries may be less than the protection offered by the United States patent laws. The Company also relies on trade secrets, proprietary information and adapted industry-wide technology to maintain its competitive position. While the Company enters into confidentiality agreements with employees, consultants, customers and potential acquisition candidates that gain access to its trade secrets and proprietary information, there can be no assurance that these measures will prevent the unauthorized disclosure or use of such.

The Company believes that its future success is dependent upon factors such as the knowledge, ability and experience of its personnel, new product development, product enhancements and ongoing customer service. The loss of key personnel responsible for managing the Company or for advancing its product development could adversely affect the Company’s business and financial condition.

There is no public market for the Company’s Common Stock, and it is not expected that one will develop. In addition, as there are substantial restrictions on the ability of a holder of the Company’s Common Stock to transfer shares of such stock. and as the Company’s ability to repurchase its Common Stock is limited by its credit facility agreement, it is difficult for a stockholder of the Company to divest itself of its investment in the Company. Furthermore, the Company historically has not paid dividends to its stockholders.

Most of the Company’s closures and bottles are priced based in part on the cost of the plastic resins from which they are produced. The Company generally has been able to eventually pass on increases in resin prices directly to its customers.

The following discussion about the Company’s market risk exposure involves forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements. The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates, credit risk and resin prices. The Company does not use derivative financial instruments for speculative or trading purposes.

The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company manages such risk through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. There have been no material changes in market risk related to changes in interest rates from that which was disclosed in the Company’s most recent annual report on Form 10-K.

The Company’s foreign subsidiaries use the local currency as their functional currency. Assets and liabilities are translated at month-end exchange rates. Items of income and expense are translated at average exchange rates. Translation gains and losses are not included in determining net income (loss) but are accumulated as a separate component of shareholders’ equity (deficit). Gains (losses) arising from foreign currency transactions are included in determining net income (loss). During the three-month period ended November 30, 2002, the Company incurred $497,000 in losses arising from foreign currency transactions. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and trade receivables. The Company’s cash and cash equivalents are concentrated primarily in several United States banks. At times, such deposits may be in excess of insured limits. Management believes that the financial institutions which hold the Company’s financial instruments are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments.

The Company’s products are principally sold to entities in the beverage and food industries in the United States, Canada, the United Kingdom, Mexico, China and elsewhere in Europe. Ongoing credit evaluations of customers’ financial condition are performed and collateral is generally not required. The Company maintains reserves for potential credit losses which, on a historical basis, have not been significant. One United States customer accounted for approximately 10% of sales for the three-month period ended November 30, 2002 and owed the Company $1.4 million as of November 30, 2002.

The majority of the Company’s products are molded from various plastic resins which comprise a significant portion of the Company’s cost of sales. These resins are subject to substantial price fluctuations, resulting from shortages in supply, changes in prices in petrochemical products and other factors. During the fourth quarter of fiscal 2002, the Company incurred increases in resin prices. The Company passes the majority of these increases on to its customers depending upon the competitive environment and contractual terms for customers with contracts. Significant increases in resin prices coupled with an inability to promptly pass such increases on to customers could have a material adverse impact on the Company. Resin price increases had a negative impact on the Company during the first quarter of fiscal year 2003. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Results of Operations.”

Quarterly evaluation of the Company’s Disclosure Controls and Internal Controls. Within the 90 days prior to the date of this Quarterly Report on Form 10-Q/A, the Company’s management, including its principal executive and accounting officers, evaluated the effectiveness of the Company’s “disclosure controls and procedures” (the “Disclosure Controls”), and its “internal controls and procedures” (the “Internal Controls”) for financial reporting (the “Controls Evaluation”). The Company’s Internal Controls were also evaluated by personnel in the Company’s finance department.

Disclosure Controls and Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the principal executive and accounting officers, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) the Company’s transactions are properly authorized; (2) the Company’s assets are safeguarded against unauthorized or improper use; and (3) the Company’s transactions are properly recorded and reported, all to permit the preparation of the Company’s financial statements in conformity with generally accepted accounting principles.

Limitations on the Effectiveness of Controls. The Company’s management, including its principal executive and accounting officers, does not expect that the Company’s Disclosure Controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls. In accord with SEC requirements, the principal executive and accounting officers note that, since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Conclusions. Based upon the Controls Evaluation, the Company’s principal executive and accounting officers have concluded that, subject to the limitations noted above, the Company’s Disclosure Controls are effective to ensure that material information relating to the Company and its consolidated subsidiaries is made known to management, including the principal executive

and accounting officers, particularly during the period when the Company’s periodic reports are being prepared, and that the Company’s Internal Controls are effective to provide reasonable assurance that the Company’s financial statements are fairly presented in conformity with generally accepted accounting principles.


31.01		Certification of Jack L. Watts, Principal Executive Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification of James A. Taylor, Principal Executive Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.03		Certification of Dennis L. Berg, Chief Financial Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certification of Jack L. Watts, Chief Executive Officer of Portola Packaging, Inc. and Dennis L. Berg, Chief Financial Officer of Portola Packaging, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

On November 27, 2002, the Company filed a report on Form 8-K which reported under Item 9 the filing of the certifications required by section 1350 of chapter 63 of title 18 of the United States Code as created by section 906 of the Sarbanes-Oxley Act of 2002, which were filed as exhibits thereto.

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


Exhibit
Number		Exhibit Title

31.04		Certification of Jack L. Watts, Principal Executive Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.05		Certification of James A. Taylor, Principal Executive Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.06		Certification of Dennis L. Berg, Chief Financial Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certification of Jack L. Watts, Chief Executive Officer of Portola Packaging, Inc. and Dennis L. Berg, Chief Financial Officer of Portola Packaging, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002


Delaware		94-1582719
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Condensed Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EX-31.1
EX-31.2
EX-31.3
EX-32.1


	November 30,
	2002		August 31,
	(unaudited)		2002

	(restated)

Raw materials	$	6,070	$	6,644
Work in process		1,360		1,047
Finished goods		5,177		5,581

	$	12,607	$	13,272


		PORTOLA PACKAGING, INC. (Registrant)

Date: December 4, 2003		/s/ Dennis L. Berg

		Dennis L. Berg Vice President, Finance and Chief Financial Officer (Principal Accounting Officer and Duly Authorized Officer)

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