Portola Packaging, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended February 28, 2007


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

For the Transition Period from to

Commission File No. 33-95318

PORTOLA PACKAGING, INC.

(Exact name of Registrant as specified in its charter)


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

951 Douglas Road
Batavia, Illinois 60510
(Address of principal executive offices, including zip code)

(630) 406-8440
(Registrant’s telephone number, including area 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 þ NO o.

Indicate by check mark whether the Registrant is large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ.

12,014,770 shares of Registrant’s $.001 par value common stock, consisting of 2,134,992 shares of non–voting Class A Common Stock and 9,879,778 shares in the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were outstanding at April 11, 2007.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	February 28,			August 31,
	2007			2006
ASSETS

Current assets:
Cash and cash equivalents, including restricted cash of $100	$	3,297		$	2,649
Accounts receivable, net of allowance for doubtful accounts of $1,102 and $1,409, respectively		30,593			33,976
Inventories, net (Note 7)		22,199			21,527
Other current assets		4,690			4,222

Total current assets		60,779			62,374

Property, plant and equipment, net (Note 8)		72,438			72,123
Goodwill (Note 9)		9,851			10,035
Debt issuance costs, net (Note 9)		6,251			6,907
Patents, net (Note 9)		1,119			1,274
Covenants not-to-compete and other intangible assets, net (Note 9)		1,682			1,065
Other assets, net		2,370			2,963


Total assets	$	154,490		$	156,741


LIABILITIES AND SHAREHOLDERS’ DEFICIT

Current liabilities:
Current portion of long-term debt (Note 10)	$	—		$	30
Accounts payable		19,411			20,075
Accrued liabilities		10,884			13,011
Accrued interest		1,238			1,238

Total current liabilities		31,533			34,354

Long-term debt, less current portion (Note 10)		211,306			204,958
Deferred income taxes		1,465			1,272
Other long-term obligations		1,560			2,018

Total liabilities		245,864			242,602


Commitments and contingencies (Note 11)
Shareholders’ deficit:
Class A convertible Common Stock of $.001 par value:
Authorized: 5,203 shares; Issued and outstanding: 2,135 shares		2			2
Class B, Series 1, Common Stock of $.001 par value:
Authorized: 17,715 shares; Issued and outstanding: 8,626 shares		8			8
Class B, Series 2, convertible Common Stock of $.001 par value:
Authorized: 2,571 shares; Issued and outstanding: 1,170 shares		1			1
Additional paid-in capital		6,514			6,514
Accumulated other comprehensive loss		(412	)		(298	)
Accumulated deficit		(97,487	)		(92,088	)

Total shareholders’ deficit		(91,374	)		(85,861	)



Total liabilities and shareholders’ deficit	$	154,490		$	156,741

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

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)


	For the Three Months						For the Six Months
	Ended						Ended
	February 28,			February 28,			February 28,			February 28,
	2007			2006			2007			2006
Sales	$	63,659		$	63,402		$	131,063		$	129,324
Cost of sales		54,270			54,082			111,399			109,622

Gross profit		9,389			9,320			19,664			19,702


Selling, general and administrative		5,885			5,882			11,604			12,753
Research and development		869			1,082			1,896			1,958
Litigation settlement		—			1,500			—			1,500
Gain from sale of property, plant and equipment		(21	)		(632	)		(23	)		(886	)
Amortization of intangibles		156			208			329			435
Restructuring costs		113			109			201			654

		7,002			8,149			14,007			16,414

Income from operations		2,387			1,171			5,657			3,288


Other (income) expense:
Interest income		(11	)		(24	)		(44	)		(27	)
Interest expense		4,430			4,269			8,871			8,496
Amortization of debt financing costs		418			403			831			807
Foreign currency transaction loss (gain), net		283			(692	)		179			(457	)
Other expense, net		569			107			492			7

		5,689			4,063			10,329			8,826

Loss before income taxes		(3,302	)		(2,892	)		(4,672	)		(5,538	)
Income tax expense		24			964			723			1,646


Net loss		(3,326	)		(3,856	)		(5,395	)		(7,184	)
Other comprehensive (loss) income		(19	)		153			(114	)		246

Comprehensive loss	$	(3,345	)	$	(3,703	)	$	(5,509	)	$	(6,938	)

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

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Six Months Ended
	February 28,			February 28,
	2007			2006
Cash flows provided by operating activities:	$	2,753		$	3,663

Cash flows from investing activities:
Additions to property, plant and equipment		(7,975	)		(4,276	)
Proceeds from sale of property, plant and equipment		26			4,286
Other investing activities		(355	)		—

Net cash (used in) provided by investing activities		(8,304	)		10


Cash flows from financing activities:
Borrowings under revolver		15,406			13,928
Repayments under revolver		(9,000	)		(14,876	)
Repayments on other long-term obligations		(88	)		(12	)
Other financing activities		(147	)		(153	)

Net cash provided by (used in) financing activities		6,171			(1,113	)


Effect of exchange rate changes on cash		28			(2	)


Increase in cash and cash equivalents		648			2,558

Cash and cash equivalents at beginning of period		2,549			1,863

Cash and cash equivalents at end of period	$	3,197		$	4,421


Supplemental disclosure of cash flow information:
Cash paid for interest	$	8,871		$	8,496

Cash paid for income taxes	$	1,408		$	2,446

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

Portola Packaging, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share data and percentages)

1. Basis of presentation and accounting policies:

The accompanying unaudited condensed consolidated financial statements have been prepared by Portola Packaging, Inc. and its subsidiaries (the “Company” or “PPI”) without audit and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006 previously filed with the Securities and Exchange Commission (“SEC”) on November 21, 2006 (the “Form 10-K”). The August 31, 2006 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 and six months ended February 28, 2007 are not necessarily indicative of the results to be expected for the full fiscal year ending August 31, 2007.

2. Recent accounting pronouncements:

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will be required to adopt this interpretation in the first quarter of fiscal year 2008. The Company is currently evaluating the requirements of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value Measurements.” SFAS No. 157 defines fair value, and establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. SFAS No. 157 is effective for the Company for financial statements issued subsequent to November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 157.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company is currently evaluating the requirements of SAB No. 108.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits the measurement of certain financial instruments at

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

fair value. Entities may choose to measure eligible items at fair value at specified election dates, reporting unrealized gains and losses on such items at each subsequent reporting period. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 159.

3. Other comprehensive (loss) income:

Other comprehensive (loss) income consisted of cumulative foreign currency translation adjustments of $(19) and $153 for the three months ended February 28, 2007 and 2006, respectively, and $(114) and $246 for the six months ended February 28, 2007 and 2006, respectively.

4. Reclassifications:

Certain reclassifications have been made to prior year’s business segment information to conform with the 2007 presentation.

5. Segments:

The Company’s reportable operating businesses are organized primarily by geographic region and, in one case, by function. The Company’s United Kingdom and Mexico operations, as well as its Blow Mold Technology Division, produce both closure and bottle product lines. The Company’s United States and China operations produce closure products for plastic beverage containers and cosmetics, fragrance and toiletries (“CFT”) jars and closures. During the first and second quarter of fiscal 2006, Portola Allied Tool operations were moved from Michigan to Pennsylvania. As a result of this move Portola Allied Tool is no longer included in the Blow Mold Technologies segment; it is now a part of the Other segment data. The Blow Mold Technologies segment includes only the Canadian division. In the following tables all periods have been restated for this presentation. The Company’s China operations also manufacture plastic parts for the high-tech industry. The Company has one operating measure. Management evaluates the performance of, and allocates resources to, regions based on earnings before interest, taxes, depreciation and amortization expenses (“EBITDA”). The Company does not allocate interest expense, taxes, depreciation and amortization to its subsidiaries. Certain Company businesses and activities, including the equipment division, do not meet the definition of a reportable operating segment and have been aggregated into “Other.” Revenue generating activities within “Other” includes equipment sales and geographical regions which meet neither the quantitative nor qualitative thresholds of the Company’s reportable segments. 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 Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

The table below presents information about reported segments for the three- and six-month periods ended February 28, 2007 and 2006, respectively:


	For the Three				For the Six
	Months Ended				Months Ended
	February 28,		February 28,		February 28,		February 28,
	2007		2006		2007		2006
Revenues:
United States – Closures & Corporate	$	25,947	$	26,279	$	53,356	$	53,759
United States – CFT		6,310		5,556		12,725		11,600
Blow Mold Technology		10,980		12,206		22,865		23,339
United Kingdom		8,899		9,126		18,454		19,805
Mexico		4,440		4,810		9,731		9,975
China		3,204		2,697		6,042		5,186
Other		3,879		2,728		7,890		5,660

Total consolidated	$	63,659	$	63,402	$	131,063	$	129,324

Inter-segment revenues totaling $3,603 and $2,548 have been eliminated from the segment totals presented above for the three months ended February 28, 2007 and 2006, respectively and $7,040 and $5,153 for the six months ended February 28, 2007 and 2006, respectively.

One Blow Mold Technology customer, Saputo, accounted for approximately 10% and 11% of sales for the three months ended February 28, 2007 and 2006, respectively and 10% of sales for each of the six months ended February 28, 2007 and 2006. It also accounted for 5% and 6% of accounts receivable as of February 28, 2007 and August 31, 2006, respectively.

The Company’s bonds are registered with the SEC and are publicly traded, but its stock is not registered or publicly traded. The Company has presented EBITDA as a measure of liquidity due to the fact that certain covenants governing our senior secured credit facility are tied to ratios and other calculations based on this measure. EBITDA does not represent, and should not be considered, an alternative to net income or cash flow from operations, as determined by GAAP, and our calculation may not be comparable to a similarly entitled measure reported by other companies. Based on our industry and debt financing experience, we believe EBITDA is customarily used to provide useful information regarding a company’s ability to service and/or incur indebtedness. In addition, EBITDA is defined in our senior secured credit facility under which we are required to satisfy specified financial ratios and tests, including a borrowing base calculation, which take into account the product of trailing 12 month restricted EBITDA. We have to maintain EBITDA for any 12 month period ending the last fiscal day of each month of at least $17,500. Therefore, creditors, investors and analysts focus on EBITDA as the primary measure of the Company’s liquidity.

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

The tables below present the detail of EBITDA by segment for the three and six months ended February 28, 2007 and 2006, respectively:


	United States		United
	– Closures &		States -			Blow Mold		United
EBITDA	Corporate		CFT			Technology		Kingdom			Mexico			China		Other			Total

For the three months ended February 28, 2007	$	3,967	$	(138	)	$	1,513	$	(649	)	$	(20	)	$	775	$	55		$	5,503

For the three months ended February 28, 2006	$	1,720	$	1,064		$	1,725	$	729		$	287		$	491	$	(288	)	$	5,728


	United States		United
	– Closures &		States -			Blow Mold		United
EBITDA	Corporate		CFT			Technology		Kingdom		Mexico		China		Other			Total

For the six months ended February 28, 2007	$	8,039	$	(288	)	$	3,034	$	100	$	379	$	1,253	$	211		$	12,728

For the six months ended February 28, 2006	$	4,186	$	993		$	3,454	$	1,909	$	709	$	936	$	(437	)	$	11,750

The following table presents a reconciliation of EBITDA to net cash provided by operating activities for the six months ended February 28, 2007 and 2006:


	For the Six
	Months Ended
	February 28,			February 28,
	2007			2006
EBITDA	$	12,728		$	11,750
Interest expense		(8,871	)		(8,496	)
Tax expense		(723	)		(1,646	)
Impairment of intangible assets		(211	)		—
Deferred income taxes		313			434
Provision for doubtful accounts		(67	)		62
Provision for restructuring		201			654
Gain on property and equipment dispositions		(23	)		(886	)
Other		273			128
Changes in working capital items		(867	)		1,663


Net cash provided by operating activities	$	2,753		$	3,663

5. Restructuring:

The Company incurred restructuring costs of $113 and $201 for the three and six months ended February 28, 2007. During the first six months of fiscal 2007, the Company incurred restructuring charges of $82 relating to employee severance costs due to the elimination of certain positions in its US Closure plants. The remaining $119 is due to employee severance costs in the Company’s United States – CFT segment.

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

During the first six months of fiscal 2006, the Company incurred restructuring charges of $654 related to the relocation of its Allied Tool division from Michigan to Pennsylvania, its Blow Mold Technology segment and the elimination of certain of its corporate selling, general and administrative areas primarily related to employee severance costs.

At February 28, 2007 and August 31, 2006, accrued restructuring costs related to employee severance and other amounted to $62 and $15, respectively. As of February 28, 2007, approximately $154 has been paid from the restructuring reserve for the employee severance costs. Management anticipates that the accrual balance will be paid within the next twelve months.

The following table represents the activity in the restructuring reserve by segment for the six months ended February 28, 2007:


	August 31,							February 28,
	2006		Provision		Cost Paid			2007
United States - Closures & Corporate	$	15	$	82	$	(79	)	$	18
United States — CFT		—		119		(75	)		44

Total	$	15	$	201	$	(154	)	$	62

7. Inventories:

As of February 28, 2007 and August 31, 2006, inventories consisted of the following:


	February 28,			August 31,
	2007			2006
Raw materials	$	11,832		$	12,546
Work in process		1,814			1,154
Finished goods		10,259			9,236

Total inventory		23,905			22,936
Less: inventory reserves		(1,706	)		(1,409	)

Inventory — net	$	22,199		$	21,527

8. Property, plant and equipment:

The Company had proceeds of $26 on the sale of property and equipment that resulted in a gain of $23 for the six months ended February 28, 2007. During fiscal year 2006, the Company had the following transactions that resulted in a gain on the sale of assets. On November 9, 2005 the Company sold the remaining building and land at its San Jose, California location for proceeds of $2,139 which resulted in a gain on sale of $366. Also, during the first quarter ended November 30, 2005, the Company disposed of equipment in its closed Sumter, South Carolina facility resulting in a loss of $148. On December 28, 2005, the Company sold its facility in Sumter, South Carolina for $904 which resulted in a gain on sale of $54. On January 13, 2006, the Company sold its facility located at 84 Fairmont Avenue, Woonsocket, Rhode Island for $1,084 which resulted in a gain on sale of $560. The Company had proceeds of $159

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

on the sale of other property and equipment that resulted in a gain of $54 for the six months ended February 28, 2006.

9. Goodwill and intangible assets:

The following table represents the activity in goodwill by segment for the six months ended February 28, 2007:


					Foreign
	August				Currency			February 28,
	31, 2006		Impairment		Translation			2007

United States – Closures	$	5,918	$	—	$	—		$	5,918
Blow Mold Technology		4,032		—		(184	)		3,848
Other		85		—		—			85

Total Consolidated	$	10,035	$	—	$	(184	)	$	9,851

Effective September 1, 2001, the Company adopted SFAS No. 142 for existing goodwill and other identifiable assets and performs its annual test at August 31^st each year. The Company uses a two step approach when testing for impairment based on the EBITDA methodology. The Company will perform the calculation by using actual EBITDA and the plan EBITDA for the next fiscal year. Based on these two calculations the Company will review to determine if the assets are impaired. The Company measures goodwill by operating unit and reviews for impairment by utilizing the EBITDA multiplier methodology for United States – Closures, Blow Mold Technology and Other, and used the discounted cash flows methodology for United States – CFT. SFAS No. 142 allows the use of multiple methods to determine the fair value and the Company has been consistent in applying those methods to the segments. In management’s judgment, no events transpired during the first six months of fiscal 2007 that would have required management to review goodwill for impairment as of February 28, 2007.

The change in the gross carrying amounts and accumulated amortization for Blow Mold Technology from August 31, 2006 to February 28, 2007 was due to the effects of foreign currency translation.

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

The components of the Company’s intangible assets are as follows:


	February 28, 2007					August 31, 2006
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortizable intangible assets:
Patents	$	9,687	$	(8,568	)	$	9,688	$	(8,414	)
Debt issuance costs		12,055		(5,804	)		11,903		(4,996	)
Customer relationships		2,600		(2,600	)		2,600		(2,600	)
Covenants not-to-compete		1,272		(866	)		829		(829	)
Technology		400		(400	)		400		(400	)
Other		2,065		(789	)		1,718		(653	)

Total amortizable intangible assets		28,079		(19,027	)		27,138		(17,892	)


Non-amortizable intangible assets:
Trademarks		5,000		(5,000	)		5,000		(5,000	)


Total intangible assets	$	33,079	$	(24,027	)	$	32,138	$	(22,892	)

Gross carrying amounts and accumulated amortization may fluctuate between periods due to the effects of foreign currency translation. In addition, amortization expense for the net carrying amount of intangible assets, including debt issuance costs, for the six months ended February 28, 2007 and 2006 was $1,160 and $1,242, respectively. Amortization expense is estimated to be $1,111 for the remaining six months of fiscal 2007, $2,188 in fiscal 2008, $1,660 in fiscal 2009, $1,403 in fiscal 2010, $1,402 in fiscal 2011 and $1,288 in the remaining years thereafter.

10. Debt:

Long term debt consists of the following:


	February 28,		August 31,
	2007		2006
Senior notes	$	180,000	$	180,000
Senior revolving credit facility		31,306		24,901
Other		—		87

		211,306		204,988
Less: Current portion long-term debt		—		(30	)

	$	211,306	$	204,958

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Senior notes:

On January 23, 2004, the Company completed an offering of $180,000 in aggregate principal amount of Senior Notes that mature on February 1, 2012 and bear interest at 8¹/4% per annum (the “Senior Notes”). Interest payments of $7,425 are due semi-annually on February 1 and August 1 of each year. Interest began accruing January 23, 2004 and the first interest payment was made on August 1, 2004. The Senior Notes indenture contains covenants and provisions that restrict, among other things, the Company’s ability to: (i) incur additional indebtedness or issue preferred stock, (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, (vi) engage in certain sales of assets and subsidiary stock, (vii) engage in certain transactions with affiliates, (viii) engage in sale/leaseback transactions, (ix) engage in any business other than a related business, (x) make restricted payments, and (xi) declare or pay dividends.

Senior revolving credit facility:

Concurrently with the offering of the Senior Notes on January 23, 2004, the Company entered into an amended and restated five-year senior revolving credit facility of up to $50,000, maturing on January 23, 2009. The Company entered into an amendment to this senior secured credit facility on May 21, 2004, a limited waiver and second amendment to this senior secured credit facility on November 24, 2004 (the “November 24 Amendment”), a fifth amendment to the senior secured credit facility on April 4, 2005 (the “April 4 Amendment”), a sixth amendment to the senior secured credit facility on May 2, 2005 (the “May 2 Amendment”), a seventh amendment to the senior secured credit facility on June 21, 2005 (the “June 21 Amendment”), an eighth amendment to the senior secured credit facility on June 29, 2006 (the “June 29 Amendment”) and a ninth amendment to the senior secured credit facility on October 19, 2006 (the “October 19 Amendment”). The amended and restated credit facility contains covenants and provisions that restrict, among other things, the Company’s ability to: (i) redeem warrants and repurchase stock, except during the first year, (ii) incur additional indebtedness, (iii) incur liens on its property, (iv) make investments, (v) enter into guarantees and other contingent obligations, (vi) merge or consolidate with or acquire another person or engage in other fundamental changes, or in certain sales of assets, (vii) engage in certain transactions with affiliates, (viii) make restricted junior payments, and (ix) declare or pay dividends. The June 21 Amendment, which superseded the April 4 Amendment and the May 2 Amendment and their covenants, revised the credit agreement as follows: (a) the borrowing base calculation is based on the product of trailing 12 month restricted EBITDA and a leverage multiple of 2.5 less any outstanding senior indebtedness, which excludes senior indebtedness evidenced by the Senior Notes and any guaranties thereof and excluding any fees, liabilities or other obligations payable with respect to such senior indebtedness; (b) the Company is required to maintain EBITDA for any 12-month period ending on the last day of each fiscal month, commencing with the fiscal month ending May 31, 2005, of at least $17,500; (c) the Company no longer is required to maintain a borrowing availability amount; and (d) the amount the Company can invest in certain specified subsidiaries was increased from $6,700 to $8,500. The June 21 Amendment also eliminated the fixed charge coverage and senior leverage ratios. The Company’s future compliance with the amended covenants is dependent upon the Company achieving its projected operating results in fiscal 2007 and beyond. The June 29 Amendment allows a maximum of $7,000 to be added back to EBITDA for the Blackhawk Molding Company Inc. litigation settlement. The October 19 Amendment increased the maximum loan limit under the credit facility from $50,000 to $60,000 with the amount in excess of $50,000 being based on the Company’s working capital/fixed asset

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

borrowing base calculation. It also increased the amount of capital expenditures the Company is able to make each fiscal year from $13,500 to $16,500. The Company believes that it will attain its projected results and that it will be in compliance with the covenants throughout fiscal 2007 and beyond. An unused fee is payable on the facility based on the total commitment amount less the average daily aggregate amount of outstanding liability, at the rate of 0.50% per annum. In addition, interest payable is based on, at the Company’s election, either the Bank Prime Loan rate plus 1.50% or the LIBOR Loan rate plus 3.00% determined by a pricing table based on the outstanding credit facility balance. At February 28, 2007, the Bank Prime Loan rate and the LIBOR Loan rate were 8.25% and 5.33%, respectively. At February 28, 2007, the Company had approximately $25,729 available for borrowing under the credit facility under the borrowing base formula described above.

Capital lease obligations:

The Company acquired certain machinery and office equipment under noncancelable capital leases. Amounts owed under these leases were paid off during fiscal 2007. Property, plant and equipment include the following items held under capital lease obligations:


	February 28,			August 31,
	2007			2006
Equipment	$	1,152		$	1,152
Less accumulated depreciation		(723	)		(663	)

	$	429		$	489

Aggregate maturities of long-term debt:

The aggregate maturities of long-term debt for the remaining six months of fiscal 2007 and the next four years and thereafter based on amounts outstanding at February 28, 2007 were as follows:


Six months ended August 31, 2007	$	—
Year ended August 31, 2008		—
Year ended August 31, 2009		31,306
Year ended August 31, 2010		—
Year ended August 31, 2011		—
Thereafter		180,000

	$	211,306

11. Commitments and contingencies:

Legal:

On May 31, 2006, the Company and Blackhawk Molding Co., Inc. (“Blackhawk”) settled a patent infringement claim by the Company agreeing to pay Blackhawk $4,000 on June 30, 2006, $500 per quarter for four quarters thereafter and $250 for the following four quarters. Of the settlement amount, $1,500 was expensed in the period ending February 28, 2006 and the remainder was expensed on the settlement date. The Company has made the required payments to date and has ample cash flow from operations and lines of credit to make the remaining payments.

In the normal course of business, except for the Blackhawk litigation mentioned above, the Company is subject to various legal proceedings and claims. Based on the facts currently available,

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Management believes that the ultimate amount of liability from these pending actions will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Commitments and Contingencies:

The Company leases certain office, production and warehouse facilities under operating lease agreements expiring on various dates through 2021 and with various terms. Most of these agreements require the Company to pay an initial base rent for a certain period of time, with escalation based on a fixed amount or a percentage tied to an economic index. The Company calculates its lease obligation, including the escalation, and recognizes the rent expense on a straight-line basis over the lease term. 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. Rent expense for the three month periods ended February 28, 2007 and 2006 was $1,351 and $1,432, respectively, and $2,721 and $2,698 for the six months ended February 28, 2007 and 2006, respectively.

The future minimum rental commitments under agreements with terms in excess of twelve months were as follows:


Six months ending August 31, 2007	$	2,555
Fiscal year ending August 31, 2008		4,596
Fiscal year ending August 31, 2009		4,410
Fiscal year ending August 31, 2010		4,234
Fiscal year ending August 31, 2011		3,826
Thereafter		19,029

	$	38,650

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

12. Supplemental condensed consolidated financial statements:

On January 23, 2004, the Company completed the offering of $180,000 in aggregate principal amount of 8¹/4% Senior Notes due 2012. The majority of the net proceeds of such offering were used to redeem all of the previously outstanding $110,000 in aggregate principal amount of 10³/4% Senior Notes. In the fourth quarter of fiscal 2004, the Company exchanged the outstanding Senior Notes for registered exchange notes having substantially the same terms. The exchange notes have the following guarantors, all of which are 100% owned subsidiaries of the Company and have provided guarantees that are full and unconditional and for which they are jointly and severally liable: Allied Tool; Portola Limited; Portola Packaging, Inc. Mexico, S.A. de C.V.; Portola Packaging Canada Ltd.; Portola Packaging Limited; and Portola Tech International (“PTI”). The tables below set forth financial information of the guarantors and non-guarantors at February 28, 2007 and August 31, 2006 and for the three- and six-months ended February 28, 2007 and 2006.

Supplemental Condensed Consolidated Balance Sheet

February 28, 2007


							Combined
				Combined			Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	714		$	1,621		$	962		$	—		$	3,297
Accounts receivable, net		11,149			16,070			8,290			(4,916	)		30,593
Inventories, net		8,652			10,889			2,658			—			22,199
Other current assets		1,324			1,344			2,022			—			4,690

Total current assets		21,839			29,924			13,932			(4,916	)		60,779
Property, plant and equipment, net		38,967			29,016			4,471			(16	)		72,438
Goodwill		5,917			3,934			—			—			9,851
Debt issuance costs, net		6,251			—			—			—			6,251
Investment in subsidiaries		11,351			13,233			897			26			25,507
Common stock of subsidiaries		(16,861	)		(18,988	)		(4,318	)		15,594			(24,573	)
Other assets		4,102			62			73			—			4,237

Total assets	$	71,566		$	57,181		$	15,055		$	10,688		$	154,490


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	9,222		$	10,937		$	4,168		$	(4,916	)	$	19,411
Intercompany (receivable) payable		(69,725	)		59,851			9,842			32			—
Other current liabilities		8,135			1,736			1,845			406			12,122

Total current liabilities		(52,368	)		72,524			15,855			(4,478	)		31,533
Long-term debt, less current portion		211,306			—			—			—			211,306
Other long-term obligations		4,002			(102	)		(875	)		—			3,025

Total liabilities		162,940			72,422			14,980			(4,478	)		245,864

Other equity (deficit)		6,113			380			(879	)		499			6,113
Accumulated equity (deficit)		(97,487	)		(15,621	)		954			14,667			(97,487	)

Total shareholders’ equity (deficit)		(91,374	)		(15,241	)		75			15,166			(91,374	)

Total liabilities and shareholders’ equity (deficit)	$	71,566		$	57,181		$	15,055		$	10,688		$	154,490

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Supplemental Condensed Consolidated Balance Sheet
August 31, 2006


				Combined			Combined
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	827		$	1,270		$	552		$	—		$	2,649
Accounts receivable, net		10,530			19,873			5,266			(1,693	)		33,976
Inventories, net		7,921			11,583			2,023			—			21,527
Other current assets		1,059			1,449			1,714			—			4,222

Total current assets		20,337			34,175			9,555			(1,693	)		62,374
Property, plant and equipment, net		37,042			30,847			4,250			(16	)		72,123
Goodwill		5,917			4,118			—			—			10,035
Debt issuance costs, net		6,907			—			—			—			6,907
Investment in subsidiaries		(2,115	)		25,667			897			1,597			26,046
Common stock of subsidiaries		(1,267	)		(18,988	)		(4,357	)		—			(24,612	)
Other assets		3,715			82			71			—			3,868

Total assets	$	70,536		$	75,901		$	10,416		$	(112	)	$	156,741


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	8,609		$	11,587		$	1,572		$	(1,693	)	$	20,075
Intercompany (receivable) payable		(71,898	)		61,138			10,804			(44	)		—
Other current liabilities		10,518			2,530			726			505			14,279

Total current liabilities		(52,771	)		75,255			13,102			(1,232	)		34,354
Long-term debt, less current portion		204,900			—			58			—			204,958
Other long-term obligations		4,268			(127	)		(851	)		—			3,290

Total liabilities		156,397			75,128			12,309			(1,232	)		242,602

Other equity (deficit)		6,227			517			(999	)		482			6,227
Accumulated equity (deficit)		(92,088	)		256			(894	)		638			(92,088	)

Total shareholders’ equity (deficit)		(85,861	)		773			(1,893	)		1,120			(85,861	)

Total liabilities and shareholders’ equity (deficit)	$	70,536		$	75,901		$	10,416		$	(112	)	$	156,741

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Supplemental Condensed Consolidated Statements of Operations
For the Three-Months Ended
February 28, 2007


				Combined			Combined
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Sales	$	29,486		$	30,903		$	6,873		$	(3,603	)	$	63,659
Cost of sales		23,332			29,085			5,321			(3,468	)		54,270

Gross profit		6,154			1,818			1,552			(135	)		9,389

Selling, general and administrative		3,774			1,551			695			(135	)		5,885
Research and development		557			312			—			—			869
Gain on sale of property, plant and equipment		(9	)		(6	)		(6	)		—			(21	)
Amortization of intangibles		155			1			—			—			156
Restructuring costs		16			97			—			—			113

Income (loss) from operations		1,661			(137	)		863			—			2,387

Interest income		(1	)		(9	)		(1	)		—			(11	)
Interest expense		4,387			43			—			—			4,430
Amortization of debt financing costs		418			—			—			—			418
Foreign currency transaction (gain) loss		(20	)		343			(40	)		—			283
Intercompany interest (income) expense		(1,279	)		1,142			137			—			—
Other (income) expense, including (income) expense from equity investments, net		1,399			650			11			(1,491	)		569


(Loss) income before income taxes		(3,243	)		(2,306	)		756			1,491			(3,302	)

Income tax expense (benefit)		83			(127	)		68			—			24


Net (loss) income	$	(3,326	)	$	(2,179	)	$	688		$	1,491		$	(3,326	)

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Supplemental Condensed Consolidated Statements of Operations
For the Three-Months Ended
February 28, 2006


							Combined
				Combined			Non
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Sales	$	28,568		$	32,589		$	4,793		$	(2,548	)	$	63,402
Cost of sales		23,461			29,281			3,784			(2,444	)		54,082

Gross profit		5,107			3,308			1,009			(104	)		9,320

Selling, general and administrative		3,674			1,582			730			(104	)		5,882
Research and development		762			320			—			—			1,082
Litigation settlement		1,500			—			—			—			1,500
Gain on sale of property, plant and equipment		(53	)		(579	)		—			—			(632	)
Amortization of intangibles		136			72			—			—			208
Restructuring costs		51			58			—			—			109

(Loss) income from operations		(963	)		1,855			279			—			1,171

Interest income		—			(22	)		(2	)		—			(24	)
Interest expense		4,247			22			—			—			4,269
Amortization of debt financing costs		403			—			—			—			403
Foreign currency transaction gain		(372	)		(320	)		—			—			(692	)
Intercompany interest (income) expense		(1,245	)		1,121			124			—			—
Other (income) expense, including (income) expense from equity investments, net		(1,413	)		180			—			1,340			107

(Loss) income before income taxes		(2,583	)		874			157			(1,340	)		(2,892	)

Income tax expense (benefit)		1,273			(309	)		—			—			964


Net (loss) income	$	(3,856	)	$	1,183		$	157		$	(1,340	)	$	(3,856	)

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share and per share data and percentages)

Supplemental Condensed Consolidated Statements of Operations
For the Six-Months Ended
February 28, 2007


				Combined			Combined
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Sales	$	59,834		$	64,410		$	13,859		$	(7,040	)	$	131,063
Cost of sales		48,036			59,561			10,518			(6,716	)		111,399

Gross profit		11,798			4,849			3,341			(324	)		19,664
Selling, general and administrative		7,466			3,133			1,329			(324	)		11,604
Research and development		1,246			650			—			—			1,896
Gain on sale of property, plant and equipment		(9	)		(8	)		(6	)		—			(23	)
Amortization of intangibles		327			2			—			—			329
Restructuring costs		82			119			—			—			201

Income from operations		2,686			953			2,018			—			5,657

Interest income		(22	)		(20	)		(2	)		—			(44	)
Interest expense		8,785			85			1			—			8,871
Amortization of debt financing costs		831			—			—			—			831
Foreign currency transaction (gain) loss		(289	)		537			(69	)		—			179
Intercompany interest (income) expense		(2,585	)		2,315			270			—			—
Other (income) expense, including (income) expense from equity investments, net		1,194			675			23			(1,400	)		492

(Loss) income before income taxes		(5,228	)		(2,639	)		1,795			1,400			(4,672	)

Income tax expense		167			398			158			—			723


Net (loss) income	$	(5,395	)	$	(3,037	)	$	1,637		$	1,400		$	(5,395	)

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share and per share data and percentages)

Supplemental Condensed Consolidated Statements of Operations
For the Six-Months Ended
February 28, 2006


				Combined			Combined
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Sales	$	57,830		$	66,867		$	9,780		$	(5,153	)	$	129,324
Cost of sales		46,590			59,976			7,741			(4,685	)		109,622

Gross profit		11,240			6,891			2,039			(468	)		19,702

Selling, general and administrative		8,137			3,502			1,582			(468	)		12,753
Research and development		1,300			658			—			—			1,958
Litigation settlement		1,500			—			—			—			1,500
Gain on sale of property, plant and equipment		(271	)		(615	)		—			—			(886	)
Amortization of intangibles		291			144			—			—			435
Restructuring costs		226			428			—			—			654

Income from operations		57			2,774			457			—			3,288

Interest income		—			(25	)		(2	)		—			(27	)
Interest expense		8,451			44			1			—			8,496
Amortization of debt financing costs		807			—			—			—			807
Foreign currency transaction (gain) loss		(1	)		(475	)		19			—			(457	)
Intercompany interest (income) expense		(2,457	)		2,211			246			—			—
Other (income) expense, including (income) expense from equity investments, net		(673	)		158			—			522			7

(Loss) income before income taxes		(6,070	)		861			193			(522	)		(5,538	)

Income tax expense		1,114			532			—			—			1,646


Net (loss) income	$	(7,184	)	$	329		$	193		$	(522	)	$	(7,184	)

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Supplemental Condensed Consolidated Statements of Cash Flows
For the Six-Months Ended
February 28, 2007


							Combined
				Combined			Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations		Consolidated

Cash flow (used in) provided by operations	$	(367	)	$	2,217		$	903		$	—	$	2,753


Additions to property, plant and equipment		(5,440	)		(1,952	)		(583	)		—		(7,975	)
Proceeds from the sale of property, plant and equipment		10			10			6			—		26
(Increase) decrease in other assets, net		(445	)		129			(39	)		—		(355	)

Net cash used in investing activities		(5,875	)		(1,813	)		(616	)		—		(8,304	)


Borrowings under revolver		15,406			—			—			—		15,406
Repayments under revolver		(9,000	)		—			—			—		(9,000	)
Repayments on other long-term obligations		(1	)		—			(87	)		—		(88	)
Payment of debt issuance costs		(175	)		—			—			—		(175	)
Other		(101	)		(64	)		193			—		28

Net cash provided by (used in) financing activities		6,129			(64	)		106			—		6,171


Effect of exchange rate changes on cash		—			11			17			—		28


(Decrease) increase in cash		(113	)		351			410			—		648

Cash and cash equivalents at beginning of period		727			1,270			552			—		2,549


Cash and cash equivalents at end of period	$	614		$	1,621		$	962		$	—	$	3,197

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

Supplemental Condensed Consolidated Statements of Cash Flows
For the Six-Months Ended
February 28, 2006


							Combined
				Combined			Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Cash flow provided by operations	$	89		$	3,148		$	426		$	—		$	3,663
	—

Additions to property, plant and equipment		(1,636	)		(2,762	)		(248	)		370			(4,276	)
Proceeds from the sale of property, plant and equipment		3,147			1,139			—			—			4,286
Other		12			167			191			(370	)		—

Net cash provided by (used in) investing activities		1,523			(1,456	)		(57	)		—			10


Borrowings under revolver		13,928			—			—			—			13,928
Repayments under revolver		(14,876	)		—			—			—			(14,876	)
Other		(158	)		10			(17	)		—			(165	)

Net cash (used in) provided by financing activities		(1,106	)		10			(17	)		—			(1,113	)


Effect of exchange rate changes on cash		—			(2	)		—			—			(2	)


Increase in cash		506			1,700			352			—			2,558

Cash and cash equivalents at beginning of period		288			857			718			—			1,863

Cash and cash equivalents at end of period	$	794		$	2,557		$	1,070		$	—		$	4,421

13. Income taxes:

Income tax expense for the three and six months ended February 28, 2007 and 2006 consisted of the following:


	For the Three					For the Six
	Months Ended					Months Ended
	February 28,			February 28,		February 28,		February 28,
	2007			2006		2007		2006

Current:
Federal	$	—		$	—	$	—	$	—
State		—			—		—		—
Foreign		(72	)		556		516		1,231

		(72	)		556		516		1,231

Deferred		96			408		207		415

	$	24		$	964	$	723	$	1,646

Income tax expense reported in the accompanying Condensed Consolidated Statements of Operations is primarily the result of taxable earnings generated in the Company’s Blow Mold Technology and China operations. The effective tax rate differs from the statutory tax rate primarily as a result of a valuation allowance. The Company has provided valuation allowances of $38,294 and $36,138 against deferred tax assets as of February 28, 2007 and August 31, 2006, respectively, to reduce deferred tax assets to the amounts expected to be realized. The increase in the valuation allowances is primarily related to increases in net operating losses in certain of the Company’s taxable jurisdictions.

Portola Packaging, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except share data and percentages)

14. Related party transactions:

The Company engages in certain related party transactions throughout the course of its business. Related party sales of $1,274 and $1,294 for the three months ended February 28, 2007 and 2006, respectively, and $2,370 and $2,945 for the six months ended February 28, 2007 and 2006, respectively, consisted primarily of closures produced by the Company’s U.K. operations that were sold to the Company’s joint venture, CSE. There have been no other significant additional related party transactions from those disclosed in “Item 13. – Certain Relationships and Related Transactions” and Note 15 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended August 31, 2006.

15. Management’s deferred compensation plan:

On December 5, 2005, the Company approved the termination of the Portola Packaging, Inc. Management Deferred Compensation Plan (the “MDC Plan”).

In connection with the preparation of its financial statements for the quarter ended November 30, 2005, the Company determined that its MDC Plan, which it terminated in December 2005 in accordance with the December 31, 2005 transition period under Internal Revenue Code section 409A, had not been accounted for by the Company. In connection with terminating the MDC Plan, it was determined that the liability for plan benefits of $917 exceeded plan assets of $648 by $269. The amount of plan liability in excess of $269 has been charged to expense in the three months ended November 30, 2005. Had the Company been properly recording the MDC Plan since inception, $244 of this amount would have been charged in years prior to fiscal 2006. However, the Company believes that the impact of not previously recording the MDC Plan was not material to the Company’s consolidated financial statements for any prior year or quarter.

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

In addition to historical information, this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Form 10-Q, including, without limitation, statements related to the impact of the final disposition of legal matters in the “Commitments and Contingencies” footnote to the unaudited 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 Financial Condition and Results of Operations” section regarding our critical accounting policies and estimates, financial position, business strategy, plans and objectives of our management for future operations, and industry conditions, are forward-looking statements. In addition, 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 About Market Risk.” Although we believe that the expectations reflected in any such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Any forward-looking statements herein are subject to certain risks and uncertainties in our business, including, but not limited to, competition in our markets and reliance on key customers, all of which may be beyond our control. Any one or more of these factors could cause actual results to differ materially from those expressed in any forward-looking statement. We undertake 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 we file from time to time with the Securities and Exchange Commission.

Overview

We are a leading designer, manufacturer and marketer of plastic closures and bottles and related equipment used for packaging applications in the non-carbonated beverage and institutional foods market. We also design, manufacture and sell closures and containers for the cosmetics, fragrance and toiletries (“CFT”) market. Our products provide our customers with a number of value-added benefits, such as the ability to increase the security and safety of their products by making them tamper evident and substantially leak-proof.

Critical accounting policies and estimates

General. The unaudited condensed consolidated financial statements and notes to the unaudited condensed consolidated financial statements contain information that is pertinent to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, current and expected economic conditions and, in some cases, actuarial techniques. We constantly re–evaluate these

factors and make adjustments where facts and circumstances dictate. We believe that the following accounting policies are critical due to the degree of estimation required.

Allowance for doubtful accounts. We provide credit to our customers in the normal course of business, perform ongoing credit evaluations of our customers and maintain reserves 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 that a customer may not be able to meet its financial obligations. Judgments 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 approximately $1.1 million and $1.4 million as of February 28, 2007 and August 31, 2006, respectively.

Revenue recognition. The Company recognizes revenue upon shipment of our products when persuasive evidence of an arrangement exists with fixed pricing and collectibility is reasonably assured. Our general conditions of sale explicitly state that the delivery of our products is F.O.B. shipping point and that title and all risks of loss and damages pass to the buyer upon delivery of the sold products to the common carrier. The Company has one CFT customer who receives shipments of goods under a consignment arrangement. Revenue for the customer is recognized upon consumption by the customer. All shipping and handling fees billed to customers are classified as revenue and the corresponding costs are recognized in cost of goods sold.

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. We record 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 our expectations. The inventory reserve accounts totaled approximately $1.7 million and $1.4 million as of February 28, 2007 and August 31, 2006, respectively.

Impairment of assets. We periodically evaluate our property, plant and equipment, and other intangible assets for potential impairment. Management’s judgment 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 and other intangible assets may be impaired. Any resulting impairment loss could have a material adverse impact on our results of operations and financial condition. No significant impairment loss was recognized during the three and six months ended February 28, 2007 and 2006, respectively.

Impairment of goodwill and non amortizing assets. At August 31, 2006, we measured goodwill by operating unit and reviewed for impairment by utilizing the EBITDA multiplier methodology for United States – Closures and Corporate, Blow Mold Technology and Mexico and used the discounted cash flows methodology for United States – CFT. Based on our reviews, we recorded an impairment loss of $16.7 million for United States – CFT and $1.2 million for Mexico during fiscal 2006. The impairment test for the non-amortizable intangible assets other than goodwill consisted of a comparison of the estimated fair value with carrying amounts. The value of

the trademark and tradename was measured using the relief-from-royalty method. The Company tests these assets annually as of August 31 or more frequently if events or changes in circumstances indicate that the assets might be impaired.

Income taxes. We estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our 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 in the unaudited condensed consolidated balance sheets. We then assess 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, we include an expense in the tax provision in the unaudited condensed consolidated statement 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 the deferred tax assets will be realized before expiration through the recognition of future taxable income, except where a valuation allowance has been provided. While the deferred tax assets for which valuation allowances have not been provided are considered realizable, actual amounts could be reduced if future taxable income is not achieved. We have provided valuation allowances of $38.3 million and $36.1 million against net deferred tax assets as of February 28, 2007 and August 31, 2006, respectively.

Foreign currency translation. Our foreign subsidiaries use the local currency as their functional currency. Assets and liabilities are translated at quarter-end exchange rates. Income and expense items are translated at average exchange rates for the relevant period. 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 and the revaluation of certain intercompany debt are included in determining net income (loss).

Results of operations

Three months ended February 28, 2007 compared to the three months ended February 28, 2006

Sales. Sales increased $0.3 million to $63.7 million for the second quarter of fiscal 2007 compared to $63.4 million for the second quarter of fiscal 2006. Sales at our China operations increased $0.5 million primarily due to increased cutlery sales and cosmetic product sales. Sales at PTI increased $0.7 million due to increased cosmetic closure volume related to the general strengthening in the cosmetic market. Sales at our Czech operations increased $0.8 million due to increased sales related to cosmetic products. Sales at our Equipment and Tooling division increased $0.6 million due to increased volume. Offsetting these increases were decreased sales at our Blow Mold Technology operations of $1.2 million primarily due to passing lower resin cost to customers and decreased pricing. Sales at our Mexico operations decreased $0.4 million due to a decrease in sales volume mainly in the 38mm and 5 gallon closures. United Kingdom sales decreased $0.2 million due to a decrease in closure sales resulting from a reduction in volume from one of our largest customers and lower pricing. Sales in US Closures decreased $0.3 million due primarily to passing lower resin costs to customers.

Gross profit. Gross profit increased $0.1 million to $9.4 million for the second quarter of fiscal 2007 compared to $9.3 million for the second quarter of fiscal 2006. US Closures gross profit increased $0.7 million primarily due to a decrease in resin costs, improved operating efficiencies and lower medical insurance claims compared to the second quarter of fiscal 2006. Gross profit in our Equipment and Tooling division increased as a result of the increase in sales. The increase in gross profit at our China and Czech facilities was primarily due to increased cosmetic volumes. These increases were partially offset by decreased profits as a result of lower

sales and price erosion in United Kingdom and lower closure volume in Mexico. Gross profits at PTI decreased due mainly to the product mix sold in the second quarter of fiscal 2007 as compared to the second quarter of 2006. As a percentage of sales, gross profit remained constant at 14.7% for the second quarter of fiscal 2007 as compared to fiscal 2006.

For the three months ended February 28, 2007, direct materials, labor and overhead costs represented 47.7%, 15.8% and 21.8% of sales, respectively, compared to 48.3%, 15.9% and 21.0%, respectively, for the three months ended February 28, 2006. Direct material costs decreased by $0.3 million for the three months ended February 28, 2007 compared to the three months ended February 28, 2006 due primarily to a decrease in resin costs.

Selling, general and administrative expenses. Selling, general and administrative expenses remained constant at $5.9 million for the second quarter of fiscal 2007 and fiscal 2006. Selling costs increased $0.1 million. Increases of $0.3 million in costs associated with converting new customer filling lines to be compatible with our closures were partially offset by lower commission expense. General and administrative costs decreased by $0.1 million due mainly to lower legal expenses. Selling, general and administrative expenses decreased as a percentage of sales to 9.2% for the second quarter of fiscal 2007 from 9.3% for the same quarter of fiscal 2006.

Research and development expenses. Research and development expenses decreased $0.2 million to $0.9 million for the second quarter of fiscal 2007 compared to $1.1 million for the second quarter of fiscal 2006. The decrease is due primarily to lower patent consulting fees.

Litigation settlement. In fiscal 2006, the Company accrued $1.5 million relating to the Blackhawk litigation matter. This matter was settled in May 2006.

Gain from sale of property, plant and equipment. For the second quarter ended February 28, 2007 there was minimal activity resulting in a small gain for the second quarter compared to a gain of $0.6 in the second quarter of fiscal 2006.

Amortization of intangibles. Amortization of intangibles (consisting primarily of amortization of patents, technology, licenses, tradenames, covenants not-to-compete and customer relationships) remained constant at approximately $0.2 million for the second quarter of fiscal 2007 compared to $0.2 million for the second quarter of fiscal 2006.

Restructuring costs. Restructuring charges remained constant at $0.1 million for the second quarter of fiscal 2007 compared to $0.1 million for the second quarter of fiscal 2006. Fiscal year 2007 restructuring charges for the second quarter relate primarily to the Company’s US Closures and PTI divisions. These restructuring charges related to the elimination of certain personnel in the US Closure and PTI US plants and these costs relate primarily to employee severance. Fiscal 2006 restructuring charges were for severance costs relating primarily to the Company’s relocation of its Allied Tool division from Michigan to Pennsylvania and its Blow Mold Technology division.

Income from operations. Reflecting the effect of the factors summarized above, income from operations increased $1.2 million to $2.4 million for the second quarter of fiscal 2007 compared to income from operations of $1.2 million for the second quarter of fiscal 2006, primarily due to a decrease in research and development and administration costs and the Blackhawk matter of $1.5 million, which occurred in fiscal 2006. The decrease in costs was offset partially by a decrease in the gain on the sale of property and equipment. Income from operations increased as a percentage of sales to 3.7% in the second quarter of fiscal 2007 compared to 1.8% in the same period of fiscal 2006.

Other (income) expense. Other (income) expense includes interest income, interest expense, amortization of debt financing costs, foreign currency transactions, minority interest expense, equity (income) loss of unconsolidated affiliates and other expense, net.

Interest expense increased $0.1 million to $4.4 million for the second quarter of fiscal 2007 compared to $4.3 million for the second quarter of fiscal 2006. The increase is due to an increase in the senior secured credit facility and higher interest rates.

Amortization of debt issuance costs remained constant at $0.4 million for the three months ended February 28, 2007 and 2006. The amortization of debt issuance cost is consistent between periods due to the Company incurring minimal additional cost related to issuance cost.

We recognized a loss of $0.3 million on foreign exchange transactions for the second quarter of fiscal 2007 compared to a gain of $0.7 million for the second quarter of fiscal 2006. The loss on foreign exchange transactions for the three months ended February 28, 2007 was due primarily to the U.S. dollar performing stronger against the Canadian dollar. The gain in foreign exchange transactions for the three months ended February 28, 2006 is due primarily to the United Kingdom pound sterling and the Canadian dollar performing stronger against the U.S. dollar.

Income tax expense. The income tax expense for the second quarter of fiscal 2007 was $24,000 on loss before income taxes of $3.3 million, compared to $1.0 million on loss before income taxes of $2.9 million for the second quarter of fiscal 2006. The income tax expense for second quarter is a result of the tax expense generated in Canada and China being nearly offset by the benefit generated on the loss in the UK. Our effective tax rate differs from the U.S. statutory rate principally due to providing a valuation allowance against net deferred tax assets in our domestic jurisdictions as well as our China, Mexico and Czech operations.

Net loss. Net loss was $3.3 million for the second quarter of fiscal 2007 compared to a net loss of $3.9 million for the second quarter of fiscal 2006. The improvement in net loss was due primarily to decreased income tax expense and no litigation expense in fiscal 2007. These income improvements were partially offset by a decrease in property and equipment sales resulting in lower gains on sale of property and equipment for the second quarter of 2007 compared to the same quarter of 2006 and higher customer conversion costs of $0.3 million in fiscal 2007, which will generate future sales.

Six months ended February 28, 2007 compared to the six months ended February 28, 2006

Sales. Sales increased $1.8 million to $131.1 million for the six months ended February 28, 2007 compared to $129.3 million for the six months ended February 28, 2006. Sales at our China operations increased $0.9 million primarily due to increased cutlery sales and cosmetic product sales. Sales at PTI increased $1.1 million due to increased cosmetic closure volume related to the general strengthening in the cosmetic market. Sales at our Czech operations increased $1.9 million due primarily to increased cosmetic jar and closure sales. Sales at our Equipment and Tooling division increased $0.4 million due to increased volume. Offsetting these increases were decreased sales at our Blow Mold Technology operations of $0.5 million primarily due to an unfavorable product mix, decreased average selling prices resulting from lower resin costs and a price concession given to two of our largest customers. Sales at our Mexico operations decreased $0.2 million due to decreased sales volume of 38mm closures. United Kingdom sales decreased $1.4 million due to a decrease in volume from one of our largest customers and pricing concessions. US Closures sales decreased by $0.4 million primarily as a result of passing lower resin costs to customers as part of contractual agreements.

Gross profit. Gross profit remained constant at $19.7 million for the six months ended February 28, 2007 compared to $19.7 million for the six months ended February 28, 2006. Gross

profit remained constant due to lower overhead costs resulting from cost reduction activities across the Company as well as other productivity enhancements from our continuous improvement programs. China increased gross profit by $0.4 million due to increased sales in cutlery and cosmetic products. Czech increased gross profit by $0.4 million due to higher sales volumes and improved operating efficiencies. Offsetting these improvements were decreased sales volumes and lower pricing in the UK and lower pricing and an unfavorable product mix in our Blow Mold Technology operations. In addition, material costs increased in the US Closures division as a result of increased corrugated costs and increased costs on products sold that are manufactured at a third party. As a percentage of sales, gross profit decreased slightly to 15.0% for the six months ended February 28, 2007 from 15.2% for the same period of fiscal 2006.

For the six months ended February 28, 2007, direct materials, labor and overhead costs represented 48.3%, 15.4% and 21.2% of sales, respectively, compared to 46.7%, 16.1% and 22.0%, respectively, for the six months ended February 28, 2006. Direct material costs increased by $3.0 million for the six months ended February 28, 2007 compared to the six months ended February 28, 2006 due primarily to increased sales in cosmetic products and costs on products sold that are manufactured by a third party.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $1.1 million to $11.6 million for the six months ended February 28, 2007 compared to $12.7 million for the six months ended February 28, 2006. United States Closures and Corporate decreased by $0.9 million due to a reduction in employee and overhead expenses and a decrease due to the dissolution of our MDC Plan in fiscal 2006. Partially offsetting these decreases was an increase of $0.7 million due to costs associated with converting new customers filling lines to be compatible with our closures. The reduction in these expenses has been a result of decreased legal expenses, a decrease in medical insurance claims and various cost improvement programs that have been implemented by the Company. Selling, general and administrative expenses decreased as a percentage of sales to 8.9% for the six months ended February 28, 2007 from 9.9% for the same period of fiscal 2006.

Research and development expenses. Research and development expenses decreased $0.1 million to $1.9 million for the six months ended February 28, 2007 compared to $2.0 million for the six months ended February 28, 2006. The decrease in expenses was primarily due to lower patent consulting fees and receiving reimbursement from customers for certain product development work done on their behalf.

Litigation settlement. In fiscal 2006, the Company accrued $1.5 million for the Blackhawk litigation matter. This matter was settled in May 2006.

Gain from sale of property, plant and equipment. For the six months ended February 28, 2007 there was minimal activity resulting in a small gain compared to a gain of $0.9 million for the six months ended February 28, 2006.

Amortization of intangibles. Amortization of intangibles (consisting primarily of amortization of patents, technology, licenses, tradenames, covenants not-to-compete and customer relationships) remained relatively constant at approximately $0.3 million for the six months ended February 28, 2007 compared to $0.4 million for the six months ended February 28, 2006.

Restructuring costs. Restructuring charges decreased $0.5 million to $0.2 million for the six months ended February 28, 2007 compared to $0.7 million for the six months ended February 28, 2006. Fiscal 2007 restructuring charges related primarily to the Company’s US Closures and PTI divisions. Fiscal 2006 restructuring charges related primarily to the relocation of the Company’s Allied Tool division from Michigan to Pennsylvania. The Company also incurred restructuring

charges related to the Company’s corporate selling, general and administrative activities and the Blow Mold Technology division.

Income from operations. Reflecting the effect of the factors summarized above, income from operations increased $2.4 million to $5.7 million for the six months ended February 28, 2007 compared to $3.3 million for the six months ended February 28, 2006. Income from operations increased as a percentage of sales to 4.3% in the six months ended February 28, 2007 compared to 2.5% in the same period of fiscal 2006.

Interest expense increased $0.4 million to $8.9 million for the six months ended February 28, 2007 compared to $8.5 million for the six months ended February 28, 2006. The increase is due to an increase in the amount outstanding on the senior secured credit facility as compared to February 28, 2006 and a slight increase in interest rates.

Amortization of debt issuance costs remained constant at $0.8 million for the six months ended February 28, 2007 and 2006. The amortization of debt issuance cost remained constant due to the Company not incurring any additional costs and the current costs being amortized on the straight line method over the life of the loan.

We recognized a loss of $0.2 million on foreign exchange transactions for the six months ended February 28, 2007 compared to a gain of $0.5 million for the six months ended February 28, 2006. The loss on foreign exchange transactions for the six months ended February 28, 2007 was due primarily to the U.S. dollar performing stronger against the Canadian dollar. The gain on foreign exchange transactions for the six months ended February 28, 2006 was due primarily to the Canadian dollar performing stronger against the U.S. dollar.

Income tax expense. The income tax expense for the six months ended February 28, 2007 was $0.7 million on loss before income taxes of $4.7 million, compared to $1.6 million on loss before income taxes of $5.5 million for the six months ended February 28, 2006. Tax expense for the six months ended February 28, 2007 is due primarily to our Canada and China operations, which had net income for the six months ended February 28, 2007. Our effective tax rate differs from the U.S. statutory rate principally due to providing a valuation allowance against net deferred tax assets in our domestic jurisdictions as well as our China, Mexico and Czech operations.

Net loss. Net loss was $5.4 million for the six months ended February 28, 2007 compared to a net loss of $7.2 million for the six months ended February 28, 2006. The improvement in net loss was due primarily to a reduction of labor and overhead expenses and decreased selling general and administrative expenses and the elimination of litigation expense relating to the Blackhawk matter, partially offset by an unfavorable foreign exchange effect for the six months ended February 28, 2007 compared to the same period of 2006 and higher customer conversion costs of $0.7 million in fiscal 2007, which will generate future sales.

Liquidity and capital resources

In recent years, we have relied primarily upon cash from operations and borrowings to finance our operations and fund capital expenditures and acquisitions. At February 28, 2007, we

had cash and cash equivalents, including restricted cash, of $3.3 million, an increase of $0.7 million from August 31, 2006.

Operating activities. Cash provided by operations totaled $2.8 million for the six months ended February 28, 2007, which represented a $0.9 million decrease from the $3.7 million provided by operations for the six months ended February 28, 2006. The decrease in cash provided by operations is due to a reduction in legal and general accruals and a decrease in cash provided by accounts receivable as compared to the previous period. Offsetting these reductions was slower growth in inventory compared to the prior period and improved financial performance related to employee cost reductions programs, productivity enhancements and other cost reduction activities. Working capital (current assets less current liabilities) increased by $1.2 million to $29.2 million as of February 28, 2007, compared to $28.0 million as of August 31, 2006.

Investing activities. Cash used in investing activities totaled $8.3 million for the six months ended February 28, 2007 compared to cash from investing activities which netted close to zero for the six months ended February 28, 2006. For the six months ended February 28, 2007, cash used in investing activities was primarily due to additions to property, plant and equipment. For the six months ended February 28, 2006, net cash provided by investing activities primarily related to the proceeds from the sale of our office building in San Jose, California, the warehouse in Woonsocket, Rhode Island and our facility in Sumter, South Carolina, which was offset by additions to property, plant and equipment. We are projecting to spend approximately $16.0 million for additions to property, plant and equipment for the fiscal year ended August 31, 2007.

Financing activities. At February 28, 2007, we had total indebtedness of $211.3 million, $180.0 million of which was attributable to the Senior Notes. The remaining indebtedness of $31.3 million was attributable to our senior secured credit facility.

On January 23, 2004, we completed an offering of $180.0 million in aggregate principal amount of Senior Notes. Interest payments of approximately $7.4 million are due semi-annually on February 1 and August 1 of each year. Interest began accruing January 23, 2004, and the first interest payment was made on August 1, 2004. The indenture under which the senior notes were issued contains covenants and provisions that restrict, among other things, our ability to: (i) incur additional indebtedness or issue preferred stock, (ii) incur liens on our 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, (vi) engage in certain sales of assets and subsidiary stock, (vii) engage in certain transactions with affiliates, (viii) engage in sale/leaseback transactions, (ix) engage in any business other than a related business, (x) make restricted payments, and (xi) declare or pay dividends.

Concurrently with the offering of the Senior Notes, we amended our credit agreement by entering into an amended and restated five-year senior revolving credit agreement that provided a secured credit facility of up to $50.0 million, maturing on January 23, 2009. We entered into an amendment to this agreement on May 21, 2004, a limited waiver and second amendment to this credit agreement on November 24, 2004 (the “November 24 Amendment”), a fifth amendment to the senior secured credit facility on April 4, 2005 (the “April 4 Amendment”), a sixth amendment to the senior secured credit facility on May 2, 2005 (the “May 2 Amendment”), a seventh amendment to the senior secured credit facility on June 21, 2005 (the “June 21 Amendment”), an eighth amendment to the senior secured credit facility on June 29, 2006 (the “June 29 Amendment”) and a ninth amendment to the senior secured credit facility on October 19, 2006 (the “October 19 Amendment”). The amended and restated credit agreement contains covenants and provisions that restrict, among other things, our ability to: (i) redeem warrants and repurchase stock, except during the first year, (ii) incur additional indebtedness, (iii) incur liens on our property, (iv) make investments, (v) enter into guarantees and other contingent obligations, (vi)

merge or consolidate with or acquire another person or engage in other fundamental changes, or in certain sales of assets, (vii) engage in certain transactions with affiliates, (viii) make restricted junior payments, and (ix) declare or pay dividends. The June 21 Amendment, which superseded the April 4 Amendment and the May 2 Amendment and their covenants, revised the credit agreement as follows: (a) the borrowing base calculation is based on the product of trailing 12 month restricted EBITDA and a leverage multiple of 2.5 less any outstanding senior indebtedness, which excludes senior indebtedness evidenced by the Senior Notes and any guaranties thereof and excluding any fees, liabilities or other obligations payable with respect to such senior indebtedness; (b) we are required to maintain EBITDA for any 12-month period ending on the last day of each fiscal month, commencing with the fiscal month ending May 31, 2005, of at least $17.5 million; (c) we no longer are required to maintain a borrowing availability amount; and (d) the amount we can invest in certain specified subsidiaries was increased from $6.7 million to $8.5 million. The June 21 Amendment also eliminated the fixed charge coverage and senior leverage ratios. The June 29 Amendment allows a maximum of $7.0 million to be added back to EBITDA for the Blackhawk Molding Company Inc. litigation settlement. The October 19 Amendment increased the maximum loan limit under the credit facility from $50.0 million to $60.0 million with the amount in excess of $50.0 million being based on the Company’s working capital/fixed asset borrowing base calculation. It also increased the amount of capital expenditures the Company is able to make each fiscal year from $13.5 million to $16.5 million. An unused fee is payable under the facility based on the total commitment amount less the average daily aggregate amount of outstanding liability, at the rate of 0.50% per annum. In addition, interest payable is based on, at our election, the Bank Prime Loan rate plus 1.50% or the LIBOR Loan rate plus 3.00% determined by a pricing table based on the outstanding credit facility balance. At February 28, 2007, the Bank Prime Loan rate and LIBOR Loan rate were 8.25% and 5.33%, respectively. At February 28, 2007, we had $25.7 million available for borrowings under our credit facility under the borrowing base formula described above.

Our senior secured credit agreement, as amended, and the indenture governing our Senior Notes contain a number of significant restrictions and covenants as discussed above. We were in compliance with these covenants at February 28, 2007, and believe that we will attain the projected results to ensure compliance with the covenants throughout fiscal 2007 and beyond. However, adverse changes in our operating results or other negative developments, such as significant increases in interest rates or in resin prices, severe shortages of resin supply or decreases in sales of our products could result in non-compliance with financial covenants in our senior secured credit agreement. If we violate these covenants and are unable to obtain waivers from our lenders, we would be in default under the indenture and our secured credit agreement, and our lenders could accelerate our obligations thereunder. If our indebtedness is accelerated, we may not be able to repay these debts or borrow sufficient funds to refinance them. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. If our expectations of future operating results are not achieved, or our debt is in default for any reason, our business, liquidity, financial condition and results of operations would be materially and adversely affected. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies who are not subject to such restrictions.

We believe that our existing financial resources, together with our current and anticipated results of operations, will be adequate for the foreseeable future to service our secured and long-term debt, to meet our applicable debt covenants and to fund our other liquidity needs, but, for the reasons stated above, we cannot assure you that this will be the case. In this respect, we note that competitive pressures and costs of raw materials have not been favorable. We believe that historical negative trends have stabilized, and we expect favorable results from our continuing efforts at reducing costs and implementing manufacturing and organizational efficiencies, we cannot assure you that substantial improvements will occur through the remainder of fiscal 2007 or beyond.

Contractual obligations

The following sets forth our contractual obligations as of February 28, 2007:


	Payments Due by Period
			Less than				3 – 5		More than
	Total		1 Year		1 – 3 Years		Years		5 Years
Contractual obligations:			(dollars in thousands)

Long-term debt, including current portion:

Senior Notes (1)	$	254,250	$	14,850	$	29,700	$	209,700	$	—

Revolver (2)	$	36,306	$	2,609	$	33,697	$	—	$	—

Operating lease obligations (3)	$	38,650	$	2,555	$	9,006	$	8,060	$	19,029


(1)		On January 23, 2004, we completed an offering of $180.0 million in aggregate principal amount of Senior Notes that mature on February 1, 2012 and bear interest at 8¹/4% per annum. Interest payments of approximately $7.4 million are due semi-annually on February 1 and August 1 of each year. Interest began accruing January 23, 2004 and the first interest payment was made August 1, 2004. The indenture governing the Senior Notes contains certain restrictive covenants and provisions. The table above includes an estimate of interest to be paid over the life of the loan.

(2)		Concurrently with the offering of $180.0 million in aggregate principal amount of our 8¹/4% Senior Notes due 2012 on January 23, 2004, we entered into an amended and restated five-year senior revolving credit facility of up to $50.0 million. The Company’s future compliance with the amended covenants is dependent upon the Company achieving its projected operating results in fiscal 2006 and beyond. If the Company does not achieve these projected results and all outstanding borrowings become immediately due and payable, the Company’s liquidity would be negatively affected. The table above includes an estimate of interest to be paid over the life of the loan.

(3)		We lease certain office, production and warehouse facilities under operating lease agreements expiring on various dates through 2021. Under the terms of the facilities’ leases, we are responsible for common area maintenance expenses, which include taxes, insurance, repairs and other operating costs. Base rent expense for fiscal 2007 is estimated to be $5.4 million.

Related party transactions

We engage in certain related party transactions throughout the course of our business. Related party sales of $1.3 million for each of the three months ended February 28, 2007 and 2006 and $2.4 million and $2.9 million for the six months ended February 28, 2007 and 2006,

respectively, consisted primarily of closures produced by our U.K. operations that were sold to our joint venture, CSE. There have been no other significant additional related party transactions from those disclosed in “Item 13. – Certain Relationships and Related Transactions” and Note 15 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended August 31, 2006.

Recent accounting pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement of Financial Accounting Standards (‘SFAS”) No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will be required to adopt this interpretation in the first quarter of fiscal year 2008. The Company is currently evaluating the requirements of FIN 48.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company is currently evaluating the requirements of SAB No. 108.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits the measurement of certain financial instruments at fair value. Entities may choose to measure eligible items at fair value at specified election dates, reporting unrealized gains and losses on such items at each subsequent reporting period. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 159.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates, foreign currency exchange rate, credit risk and resin prices. We do not use derivative financial instruments for speculative or trading purposes. There have been no material changes in market risk related to changes in interest rates from that which were disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2006.

Interest rate sensitivity

We are exposed to market risk from changes in interest rates on long–term debt obligations. We manage such risk through the use of a combination of fixed and variable rate debt. Currently, we do not use derivative financial instruments to manage our interest rate risk.

Exchange rate sensitivity

Our foreign subsidiaries use the local currency as their functional currency. Assets and liabilities are translated at month–end exchange rates. Income and expense items are translated at average exchange rates for the relevant periods. 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 and six months ended February 28, 2007, we incurred a loss of $0.3 million and $0.2 million arising from foreign currency transactions. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates.

Credit risk sensitivity

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Our cash and cash equivalents are concentrated primarily in several United States banks as well as banks in Canada, Mexico, China, Czech Republic and the United Kingdom. At times, such deposits may be in excess of insured limits. Management believes that the financial institutions which hold our financial instruments are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments.

Our products are principally sold to entities in the beverage, food and CFT industries in the United States, Canada, the United Kingdom, Mexico, China, Australia, New Zealand and throughout Europe. Ongoing credit evaluations of customers’ financial condition are performed, and collateral is generally not required. We maintain reserves for potential credit losses which, on a historical basis, have not been significant. One Blow Mold Technology customer, Saputo, accounted for approximately 10% and 11% of sales for the three months ended February 28, 2007 and 2006 respectively, and 10% of sales for each of the six months ended February 28, 2007 and 2006 and 5% of accounts receivable as of February 28, 2007.

Resin price sensitivity

The majority of our products are molded from various plastic resins that comprise a significant portion of our 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 fiscal 2005 and fiscal 2006, we experienced unprecedented significant increases in resin prices. In the past, we generally have been able to pass on increases in resin prices directly to our customers after delays required in many cases because of governing contractual provisions. Significant increases in resin prices coupled with an inability to promptly pass such increases on to customers could have a

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a–15e of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of February 28, 2007, the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information relating to Portola (including its consolidated subsidiaries) required to be included in our Exchange Act filings and to ensure that information required to be disclosed by the Company in the report it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes in internal control over financial reporting

During the quarter ended February 28, 2007, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on effectiveness of controls and procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our 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 Portola have been detected. These inherent limitations include, but are not limited to, 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 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, a 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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, except for the Blackhawk litigation mentioned below, the Company is subject to various legal proceedings and claims. Based on the facts currently available Management believes that the ultimate amount of liability from these pending actions will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

On May 31, 2006, the Company and Blackhawk Molding Co., Inc. (“Blackhawk”) settled a patent infringement claim by the Company agreeing to pay Blackhawk $4.0 million on June 30, 2006, $0.5 million per quarter for four quarters thereafter and $0.25 million for the following four quarters. The Company has made all required payments under the settlement agreement to date and has ample cash flow from operations and lines of credit to make the remaining payments.

ITEM 1A. RISK FACTORS

The following risk factors 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 us or our representatives:

Risks related to our outstanding indebtedness

Our level of indebtedness could limit cash flow available for our operations and could adversely affect our ability to obtain additional financing.

As of February 28, 2007, our total indebtedness was approximately $211.3 million, $180.0 million of this amount represented the 8¹/4 Senior Notes due 2012, $31.3 million represented funds drawn down under our senior secured credit facility. Moreover, as of February 28, 2007 we have a total shareholders’ deficit of $91.4 million. Our level of indebtedness could restrict our operations and make it more difficult for us to fulfill our obligations under our 8¹/4 Senior Notes. Among other things, our level of indebtedness may:

	•		limit our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions and general corporate purposes;

	•		require us to dedicate all or a substantial portion of our cash flow to service our debt, which will reduce funds available for other business purposes, such as capital expenditures or acquisitions;

	•		limit our flexibility in planning for or reacting to changes in the markets in which we compete;

	•		place us at a competitive disadvantage relative to our competitors with less indebtedness;

	•		render us more vulnerable to general adverse economic and industry conditions; and

	•		make it more difficult for us to satisfy our financial obligations.

Nonetheless, we and our subsidiaries may still be able to incur substantially more debt. The terms of our senior secured credit facility and the indenture governing our 8¹/4 Senior Notes permit additional borrowings and such borrowings may be secured debt.

Our ability to service our debt and meet our cash requirements depends on many factors, some of which are beyond our control.

Our ability to satisfy our obligations will depend on our future operating performance and financial results, which will be subject, in part, to factors beyond our control, such as interest rates and general economic, financial and business conditions. If we are unable to generate sufficient cash flow to service our debt, we may be required to:

	•		refinance all or a portion of our debt;

	•		obtain additional financing;

	•		sell certain of our assets or operations;

	•		reduce or delay capital expenditures; or

	•		revise or delay our strategic plans.

If we are required to take any of these actions, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various credit agreements, including the indenture governing our 8¹/4 Senior Notes.

The covenants in our senior secured credit facility and the indenture governing our 8¹/4 Senior Notes impose restrictions that may limit our operating and financial flexibility.

Our senior secured credit facility and the indenture governing our 8¹/4 Senior Notes contain a number of significant restrictions and covenants that limit our ability and our subsidiaries’ ability to:

	•		incur liens and debt or provide guarantees in respect of obligations of any other person;

	•		issue redeemable preferred stock and subsidiary preferred stock;

	•		make redemptions and repurchases of capital stock;

	•		make loans, investments and capital expenditures;

	•		prepay, redeem or repurchase debt;

	•		engage in mergers, consolidations and asset dispositions;

	•		engage in sale/leaseback transactions and affiliate transactions;

	•		change our business, amend certain debt and other material agreements, and issue and sell capital stock of subsidiaries; and

	•		make distributions to shareholders.

Future adverse changes in our operating results or other negative developments, such as increases in interest rates or in resin prices, shortages of resin supply or decreases in sales of our products, could result in our being unable to comply with the fixed charge covenant ratio and other financial covenants in our senior secured credit facility. If we fail to comply with any of our loan covenants in the future and are unable to obtain waivers from our lenders, we could be declared in default under these agreements, and our lenders could accelerate our obligations thereunder. If our indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable

terms or terms that are acceptable to us. If our expectations of future operating results are not achieved, or our debt is in default for any reason, our business, financial condition, results of operations and cash flows would be materially and adversely affected. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies who are not subject to such restrictions.

Our 8¹/4 Senior Notes are effectively subordinated to all of our secured debt, and if a default occurs, we may not have sufficient funds to fulfill our obligations under the Senior Notes.

Our 8¹/4 Senior Notes are not secured by any of our assets. The indenture governing the Senior Notes permits us to incur certain secured indebtedness, including indebtedness under our senior secured credit facility. If we become insolvent or are liquidated, or if payment under the credit facility or other secured indebtedness is accelerated, the lenders under the credit facility 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 us with respect to any of our other assets. In either event, because the Senior Notes are not secured by any of our 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, we cannot assure you that the guarantees from our subsidiary guarantors, 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. Our unrestricted subsidiaries do not guarantee our 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 we may form in the future. See Note 17 of our Notes to Consolidated Financial Statements of our Annual Report Form 10-K for the fiscal year ended August 31, 2006 for additional information regarding our restricted and unrestricted subsidiaries.

We may be unable to purchase our 8¹/4 Senior Notes upon a change of control.

Upon a change of control of Portola (as defined in the indenture governing our Senior Notes), each holder of Senior Notes will have certain rights to require us to repurchase all or a portion of such holder’s Senior Notes. If a change of control were to occur, we cannot assure you that we 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 our senior secured credit facility and, since indebtedness under the credit facility effectively ranks senior in priority to indebtedness under the Senior Notes, we would be obligated to repay indebtedness under the credit facility in advance of indebtedness under our Senior Notes. Our 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 that we may enter into from time to time, including agreements relating to secured indebtedness. Failure by us 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 senior secured credit facility is outstanding, such acceleration shall not be effective until the earlier of (i) an acceleration of any such indebtedness under the credit facility or (ii) five business days after receipt by us of written notice of such acceleration. In the event all of the Senior Notes are declared due and payable, our ability to repay the Senior Notes would be subject to the limitations referred to above.

Risks related to our business

We have completed the integration of PTI with the beverage product elements of our Company, and we may not realize the anticipated benefits of this acquisition on a timely basis or at all.

The integration of PTI with our other operations has been completed. Nonetheless, we may not realize the expected operating efficiencies, growth opportunities and other benefits of the transaction that we anticipated at the time of the acquisition or may realize them later than planned. Our management was not initially experienced in the sales and marketing of CFT products and we depend significantly on the sales and marketing capabilities of inherited PTI management. Although most of PTI’s management has continued in the roles they performed prior to the acquisition, we cannot assure you that they will continue to do so in the future.

We may be subject to pricing pressures and credit risks due to consolidation in our customers’ industries, and we do not have long–term contracts with most of our customers.

The dairy, bottled water and fruit juice industries, which constitute our largest customer base from a revenue perspective, have experienced consolidations through mergers and acquisitions in recent years, and this trend may continue. We could experience additional customer concentration, and our results of operations would be increasingly sensitive to changes in the business of customers that represent an increasingly large portion of our sales or any deterioration of their financial condition. During fiscal 2006 our top ten customers accounted for approximately 40% of our sales. Consolidation has resulted in pricing pressures, as larger customers often have been able to make greater pricing and other demands over us.

We do not have firm long–term contracts covering a majority of our sales. Although customers that are not under firm contracts provide indications of their product needs and purchases on a periodic basis, they generally purchase our products on an order–by–order basis, and the relationship, as well as particular orders, can be terminated at any time. The loss or significant decrease in business or a change in the procurement practices of any of our major customers may produce pricing pressures that could have a material adverse effect on our business, results of operations and financial condition.

We are subject to competition in our markets.

We face direct competition in each of our product lines from a number of companies, many of which have financial and other resources that are substantially greater than ours. We are experiencing significant competition from existing competitors with entrenched positions, and we may encounter new competitors with respect to our existing product lines as well as with respect to new products we might introduce. We have experienced a negative impact due to competitor pricing, and this impact has accelerated during the past and current fiscal years. Further, numerous well–capitalized competitors might expand their product offerings, either through internal product development or acquisitions of our direct competitors. Such competitors could introduce products or establish prices for their products in a manner that could adversely affect our ability to compete. Additionally, from time to time, we also face direct competition from bottling companies, carton manufacturers and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources.

We are subject to the risk of changes in resin prices.

Our products are molded from various plastic materials, primarily low density polyethylene (“LDPE”) resin. LDPE resin, which is a broadly traded commodity, accounts for a significant portion of our cost of sales for closures. Plastic resins, including LDPE, are subject to substantial price fluctuations resulting from increasingly chronic shortages in supply and frequent increases in

the prices of natural gas, crude oil and other petrochemical products from which resins are produced, as well as other factors. These factors will likely continue to materially adversely affect the price and timely availability of these raw materials. We have contracts with our three principal resin suppliers that provide for the adjustment of prices payable by us depending on periodic increases or decreases in published indices of national resin bulk pricing. The effects of resin price increases on us to a certain extent lag the market. Unprecedented significant resin price increases experienced during fiscal 2005 and fiscal 2006 have materially and adversely affected our gross margins and operating results for those periods. In the event that significant increases in resin prices continue in the future, we may not be able to pass such increases on to customers promptly in whole or in part. Such inability to pass on such increases, or delays in passing them on, would continue to have a material adverse effect on our sales and margins on a current or delayed basis. Most of our sales are either made to customers on a purchase order basis, which provide us with no assurance that we can pass on price increases to these customers, or pursuant to contracts that generally allow only quarterly price adjustments, which could delay our ability to pass on price increases to these customers, if at all. Moreover, even if the full amount of such price increases were passed on to customers, the increases would have the effect of reducing our gross margins. On the other hand, if resin prices decrease, customers typically would expect rapid pass–through of the decrease, and we cannot assure you that we would be able to maintain our gross margins.

We may not be able to arrange for sources of resin from our regular vendors or alternative sources in the event of an industry–wide general shortage of resins used by us, or a shortage or discontinuation of certain types of grades of resin purchased from one or more of our suppliers.

We are capital constrained, which has reduced our ability to make capital expenditures and has limited our flexibility in operating our business.

At February 28, 2007, we had cash and cash equivalents, including restricted cash, of $3.3 million. A significant portion of our cash and cash equivalents and cash from operations must be used to service our significant debt obligations, which includes $7.4 million in semi-annual interest payments with respect to our Senior Notes and the remaining $2.0 million payments for the Blackhawk Molding Company Inc. litigation settlement. In addition, our senior secured credit facility and the indenture governing our Senior Notes contain a number of significant restrictions and covenants that limit our ability and our subsidiaries’ ability to incur further indebtedness or make capital expenditures. We would also likely encounter difficulties in raising capital through an equity offering, particularly as a company whose stock is not publicly traded. As a result of our current financial position, we may be limited in our ability to allocate equipment and other resources to meet emerging market and customer needs and from time to time are unable to take advantage of sales opportunities for new products. Similarly, we are sometimes unable to implement cost-reduction measures that might be possible if we were able to bring on line more efficient plant and equipment. These limitations in operating our business could adversely affect our operating results and growth prospects.

The integration of future acquisitions may result in substantial costs, delays and other problems.

We may not be able to successfully integrate future acquisitions, if any, without substantial costs, delays or other problems. Future acquisitions would require us to expend substantial managerial, operating, financial and other resources to integrate any new businesses. The costs of such integration could have a material adverse effect on our operating results and financial condition. Such costs would likely include non–recurring acquisition costs, investment banking fees, recognition of transaction–related obligations, plant closing and similar costs and various other acquisition–related costs. In addition, each transaction inherently carries an unavoidable level of risk regarding the actual condition of the acquired business, regardless of the investigation we may conduct beforehand. Until we assume operating control of such businesses, we may not be able to

ascertain the actual value or understand the potential liabilities of the acquired entities. If and when we acquire a business, we would likely be subject to risks including:

	•		the possibility that it would be difficult to integrate the operations into our existing operations;

	•		the possibility that we had acquired substantial undisclosed liabilities;

	•		the risks of entering markets, producing products or offering services for which we had no prior experience;

	•		the potential loss of customers of the acquired business; and

	•		the possibility we might be unable to recruit managers with the necessary skills to supplement or replace the incumbent management of the acquired business.

We may not be successful in overcoming these risks.

We depend on new business development, international expansion and acquisition.

We believe that growth has slowed in the domestic markets for our traditional beverage products. In order to increase our sales, we have intensified and streamlined domestic sales channels but we cannot assure you that these changes will cause improvements in sales. We believe we must also continue to develop new products in the markets we currently serve and new products in different markets and to expand in our international markets. Developing new products and expanding into new markets will require a substantial investment and involve additional risks. We cannot assure you that our efforts to achieve such development and expansion will be successful. Expansion poses risks and potential adverse effects on our operating results, such as the diversion of management’s attention, the loss of key personnel and the risks of unanticipated problems and liabilities. We do not anticipate making acquisitions in the near future because of capital constraints and because, our senior credit facility imposes significant restrictions on our ability to make investments in or to acquire other companies.

Difficulties presented by non–U.S. economic, political, legal, accounting and business factors could negatively affect our interests and business efforts.

Approximately 53% of our sales for fiscal 2006 were derived from shipments to destinations outside of the United States or from our operations outside the United States. We intend to expand such exports and our international operations and customer base. Our sales outside of the United States generally involve longer payment cycles from customers than our sales inside the United States. Our operations outside the United States require us to comply with the legal requirements of foreign jurisdictions and expose us to the political consequences of operating in foreign jurisdictions. Our operations outside the United States are also subject to the following potential risks:

	•		difficulty in managing and operating such operations because of distance, and, in some cases, language and cultural differences;

	•		fluctuations in the value of the U.S. dollar that could increase or decrease the effective price of our products sold in U.S. dollars and might have a material adverse effect on sales or costs, require us to raise or lower our prices or affect our reported sales or margins in respect of sales conducted in foreign currencies;

	•		difficulty entering new international markets due to greater regulatory barriers than those of the United States and differing political systems;

	•		increased costs due to domestic and foreign customs and tariffs, adverse tax legislation,

imposition or increases of withholding and other taxes on remittances and other payments by subsidiaries;

	•		credit risk or financial condition of local customers and distributors;

	•		potential difficulties in staffing and labor disputes;

	•		risk of nationalization of private enterprises;

	•		government embargoes or foreign trade restrictions such as anti–dumping duties;

	•		increased costs of transportation or shipping;

	•		ability to obtain supplies from foreign vendors and ship products internationally during times of crisis or otherwise;

	•		difficulties in protecting intellectual property;

	•		increased worldwide hostilities;

	•		potential imposition of restrictions on investments; and

	•		local political, economic and social conditions such as hyper–inflationary conditions and political instability.

Any further expansion of our international operations would increase these and other risks. As we enter new geographic markets, we may encounter competition from the primary participants in those markets that may have significantly greater market knowledge and that may have substantially greater resources than we do. In addition, we conduct some of our international operations through joint venture arrangements in which our operational and financial control of the business are limited.

Adverse weather conditions could adversely impact our financial results.

Weather conditions around the world can have a significant impact on our sales. Unusually cool temperatures during a hot weather season in one or more of our markets have adversely affected, and could again adversely affect, sales of our products in those markets.

We are subject to risks that our intellectual property may not be adequately protected, and we may be adversely affected by the intellectual property rights of others.

We rely on a combination of patents and trademarks, licensing agreements and unpatented proprietary know–how and trade secrets to establish and protect our intellectual property rights. We enter into confidentiality agreements with customers, vendors, employees, consultants and potential acquisition candidates to protect our know–how, trade secrets and other proprietary information. However, these measures and our patents and trademarks may not afford complete protection of our intellectual property, and it is possible that third parties may copy or otherwise obtain and use our proprietary information and technology without authorization or otherwise infringe on our intellectual property rights. We cannot assure you that our competitors will not independently develop equivalent or superior know–how, trade secrets or production methods.

We are involved in litigation from time to time in the course of our business to protect and enforce our intellectual property rights, and third parties from time to time initiate litigation against us asserting that our business infringes or violates their intellectual property rights. We cannot assure you that our intellectual property rights have the value that we believe them to have or that

our products will not be found to infringe upon the intellectual rights of others. Further, we cannot assure you that we will prevail in any such litigation, or that the results or costs of any such litigation will not have a material adverse effect on our business. For example, on May 31, 2006, the Company and Blackhawk Molding Co., Inc. (“Blackhawk”) settled a patent infringement claim by the Company agreeing to pay Blackhawk $4.0 million on June 30, 2006, $0.5 million per quarter for four quarters thereafter and $0.25 million for the following four quarters. The Company has ample cash flow from operations and lines of credit to make these payments. Any litigation concerning intellectual property could be protracted and costly and is inherently unpredictable and could have a material adverse effect on our business and results of operations regardless of its outcome.

A number of our patents relating to one of our closure product lines have expired in recent years. We believe that such expirations have, to varying effect, adversely affected our margins as competitors who have become free to imitate our designs have begun to compete aggressively against us in the pricing of certain products. These adverse effects will only be partially ameliorated to the extent that we continue to obtain new patents.

The laws of certain countries in which our products or technology are or may be licensed may not protect our intellectual property rights to the same extent as the laws of the United States. The protection offered by the patent laws of foreign countries may be less protective than the United States patent laws.

Defects in our products could result in litigation and harm our reputation.

Many of our products are used to cap beverage and food products. From time to time in the past, we and other producers of similar products have received complaints from customers and end–consumers claiming that such products might cause or have almost caused injury to the end–consumer. In some instances, such claims have alleged defects in manufacture or faulty design of our closures. In the event an end–consumer suffers a harmful accident, we could incur substantial costs in responding to complaints or litigation. Further, if any of our products were found to be defective, we could incur damages and significant costs in correcting any defects, lose sales and suffer damage to our reputation.

Our customers’ products could be contaminated through tampering, which could harm our reputation and business.

Terrorist activities could result in contamination or adulteration of our customers’ products, as our products are tamper resistant but not tamper proof. We cannot assure you 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. Were our products or our customers’ products to be tampered with in a manner not readily capable of detection, we could experience a material adverse effect to our reputation, business, operations and financial condition.

Changes to government regulations affecting our products could harm our business.

Our products are subject to governmental regulation, including regulation by the Federal Food and Drug Administration and other agencies in the United States and elsewhere. A change in government regulation could adversely affect our business. We cannot assure you that federal, state or foreign authorities will not issue regulations in the future that could materially increase our costs of manufacturing certain of our products. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls, or seizures as well as potential criminal sanctions, which could have a material adverse effect on us.

Our business may be adversely affected by compliance obligations or liabilities under environmental, health and safety laws and regulations.

We are subject to federal, state, local and foreign environmental and health and safety laws and regulations that could result in liability, affect ongoing operations and increase capital costs and operating expenses in order to maintain compliance with such requirements. Some of these laws and regulations provide for strict and joint and several liability regarding contaminated sites. Such sites may include properties currently or formerly owned or operated by us and properties to which we disposed of, or arranged to dispose of, wastes or hazardous substances. Based on the information presently known to us, we do not expect environmental costs or contingencies to have a material adverse effect on us. We may, however, be affected by hazards or other conditions presently unknown to us. In addition, we may become subject to new requirements pursuant to evolving environmental, and health and safety, laws and regulations. Accordingly, we cannot assure you that we will not incur material environmental costs or liabilities in the future.

We depend upon key personnel.

We believe that our future success depends upon the knowledge, ability and experience of our personnel. The loss of key personnel responsible for managing Portola or for advancing our product development could adversely affect our business and financial condition.

We are controlled by Jack L. Watts, a Director and major shareholder, and J.P. Morgan Partners 23A SBIC, LLC, an affiliate of J.P. Morgan Securities Inc., and their interests may conflict with those of our other security holders.

Jack L. Watts (a member of our Board of Directors), and J.P. Morgan Partners 23A SBIC, LLC (an affiliate of J.P. Morgan Securities Inc., one of the initial purchasers of our Senior Notes) own a majority of our common stock. Robert Egan, a member of our Board of Directors, is a Senior Advisor to J.P. Morgan Partners, LLC and a Partner of J.P. Morgan Entertainment Partners, LLC, each of which is an affiliate of J.P. Morgan Partners 23A SBIC, LLC. The interests of Mr. Watts, Mr. Egan and J.P. Morgan Partners 23A SBIC, LLC may not in all cases be aligned with the interests of our security holders. We currently have two independent directors on our Board of Directors. Our Board of Directors and Compensation Committee have not met the standard “independence” requirements that would be applicable if our equity securities were traded on NASDAQ or the New York Stock Exchange, but the Audit Committee does. We have engaged in a number of related party transactions. For example, from 1999 through 2002, we engaged in several transactions with Sand Hill Systems, Inc., an entity in which Mr. Watts and other of our officers and directors had a financial interest. See “Item 13—Certain Relationships and Related Transactions” and Note 15 of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended August 31, 2006.


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Part I — Financial Information

Item 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of February 28, 2007 and August 31, 2006		3

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended February 28, 2007 and 2006		4

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended February 28, 2007 and 2006		5

Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		36

Item 4. Controls and Procedures		38

Part II — Other Information

Item 1. Legal Proceedings		39

Item 1A. Risk Factors		39

Item 6. Exhibits		48

Signatures		49
EX-10.35
EX-10.36
EX-31.01
EX-31.02
EX-32.01

	10.35		First Amendment of Portola Packaging, Inc. 2002 Stock Option Plan

	10.36		Employment Agreement with Michael T. Morefield

	31.01		Certification of Brian J. Bauerbach, Chief Executive Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.02		Certification of Michael T. Morefield, Chief Financial Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.01		Certification of Brian J. Bauerbach, Chief Executive Officer of Portola Packaging, Inc., and Michael T. Morefield, 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


		PORTOLA PACKAGING, INC.
		(Registrant)

Date: April 12, 2007		/s/ Michael T. Morefield

		Michael T. Morefield
		Senior Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer
		and Duly Authorized Officer)


Exhibit
Number		Exhibit Title
10.35		First Amendment of Portola Packaging, Inc. 2002 Stock Option Plan

10.36		Employment Agreement with Michael T. Morefield

31.01		Certification of Brian J. Bauerbach, Chief Executive Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification of Michael T. Morefield, Chief Financial Officer of Portola Packaging, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certification of Brian J. Bauerbach, Chief Executive Officer of Portola Packaging, Inc., and Michael T. Morefield, 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