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 November 30, 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 January 18, 2008.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)


	November 30,			August 31,
	2007			2007
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $100	$	3,628		$	3,297
Accounts receivable, net of allowance for doubtful accounts of $1,194 and $1,074 respectively		34,450			33,559
Inventories, net (Note 7)		29,094			26,671
Other current assets		6,783			5,520

Total current assets		73,955			69,047

Property, plant and equipment, net (Note 8)		72,844			71,723
Goodwill (Note 9)		10,517			10,215
Debt issuance costs, net (Note 9)		4,997			5,415
Patents, net (Note 9)		1,019			1,052
Covenants not-to-compete and other intangible assets, net (Note 9)		1,374			1,477
Other assets, net		2,600			2,541

Total assets	$	167,306		$	161,470


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	21,619		$	21,188
Accrued liabilities		10,362			9,930
Accrued compensation		2,794			3,224
Accrued interest		4,950			1,238

Total current liabilities		39,725			35,580

Long-term debt (Note 10)		222,763			219,590
Deferred income taxes		1,490			1,533
Other long-term obligations		1,711			1,442

Total liabilities		265,689			258,145


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: 8,709 shares		9			9
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		6,643			6,632
Accumulated other comprehensive income		1,658			784
Accumulated deficit		(106,696	)		(104,103	)

Total shareholders’ deficit		(98,383	)		(96,675	)

Total liabilities and shareholders’ deficit	$	167,306		$	161,470

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 Three Months Ended
	November 30,			November 30,
	2007			2006

Cash flows provided by operating activities:	$	907		$	2,937


Cash flows from investing activities:
Additions to property, plant and equipment		(3,982	)		(3,173	)
Proceeds from sale of property, plant and equipment		22			5
Other investing activities		1			(178	)

Net cash used in investing activities		(3,959	)		(3,346	)


Cash flows from financing activities:
Borrowings under revolver		5,673			6,030
Repayments under revolver		(2,500	)		(5,500	)
Repayments on other long-term obligations		—			(9	)
Payments of debt issuance costs		—			(125	)
Other financing activities		12			281

Net cash provided by financing activities		3,185			677


Effect of exchange rate changes on cash		198			21


Increase in cash and cash equivalents		331			289

Cash and cash equivalents at beginning of period		3,197			2,549

Cash and cash equivalents at end of period	$	3,528		$	2,838


Supplemental disclosure of cash flow information:
Cash paid for interest	$	921		$	558

Cash paid for income taxes	$	576		$	1,385

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)

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, 2007 previously filed with the Securities and Exchange Commission (“SEC”) on November 27, 2007 (the “Form 10-K”). The August 31, 2007 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 (“GAAP”). Interim results are subject to seasonal variations, and the results of operations for the three months ended November 30, 2007 are not necessarily indicative of the results to be expected for the full fiscal year ending August 31, 2008.

Recent accounting pronouncements:

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was adopted by the Company in the first quarter of fiscal 2008.

We have reviewed the impact of FIN 48 on our condensed consolidated financial statements and have determined we do not have material uncertain tax positions or unrecognized tax benefits and there is no material impact on our financial position, results of operations or cash flows. The Company’s FIN 48 evaluation was performed for the tax years 2003 through 2006, which are the years that remain subject to federal and state examinations as of September 1, 2007.

In September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, and establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. SFAS No. 157 is effective for the Company for financial statements issued subsequent to November 15, 2007. On November 16, 2007 the FASB partially delayed the implementation of SFAS No. 157. The delay pertains to non-financial assets and liabilities being disclosed at fair value, measuring of fair values of liabilities at exit prices and the applicability of disclosure requirements to retirement plan assets. The effective date of these items will be for financial statements issued subsequent to November 15, 2008. The Company is currently evaluating the requirements of SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 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

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

subsequent reporting period. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business combinations” (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 141R.

In December 2007, FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of earnings; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. This statement is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 160.

Other comprehensive income (loss):

Other comprehensive income (loss) consisted of cumulative foreign currency translation adjustments of $874 and $(95) for the three months ended November 30, 2007 and 2006, respectively.

Reclassifications:

Certain reclassifications have been made to prior year’s business segment information to conform with the 2008 presentation.

Segments:

The Company’s reportable operating businesses are organized primarily by geographic region and, in one case, by function. The Company’s United Kingdom, Mexico and Canada operations 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. 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

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

of a reportable operating segment and have been aggregated into “Other.” Revenue generating activities within “Other” include 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.

The table below presents information about reported segments for the three-month period ended November 30, 2007 and 2006, respectively:


	For the Three
	Months Ended
	November 30,		November 30,
	2007		2006
Revenues:
United States — Closures & Corporate	$	29,417	$	27,409
United States — CFT		6,829		6,415
Canada		13,078		11,885
United Kingdom		9,761		9,555
Mexico		5,027		5,291
China		4,999		2,838
Other		3,487		4,011

Total consolidated	$	72,598	$	67,404

Inter-segment revenues totaling $4,046 and $3,437 have been eliminated from the segment totals presented above for the three months ended November 30, 2007 and 2006, respectively.

One Canadian customer, Saputo, accounted for approximately 11% and 10% of sales for the three months ended November 30, 2007 and 2006, respectively. It also accounted for 7% and 6% of accounts receivable as of November 30, 2007 and August 31, 2007, 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 months ended November 30, 2007 and 2006, respectively:


	United States		United
	—Closures &		States —					United
EBITDA	Corporate		CFT			Canada		Kingdom		Mexico		China		Other			Total

For the three months ended November 30, 2007	$	2,933	$	(26	)	$	2,428	$	1,209	$	367	$	780	$	(49	)	$	7,642

For the three months ended November 30, 2006	$	3,861	$	(150	)	$	1,669	$	749	$	463	$	477	$	156		$	7,225

The following table presents a reconciliation of EBITDA to net cash provided by operating activities for the three months ended November 30, 2007 and 2006:


	For the Three
	Months Ended
	November 30,			November 30,
	2007			2006
EBITDA	$	7,642		$	7,225

Interest expense		(4,633	)		(4,441	)
Tax expense		(1,299	)		(699	)
Deferred income taxes		178			(122	)
Provision (benefit) provision for doubtful accounts		66			(6	)
Provision for restructuring		10			89
Loss (gain) on sale of property, plant and equipment		48			(2	)
Other		(3	)		(73	)
Changes in working capital items		(1,102	)		966


Net cash provided by operating activities	$	907		$	2,937

Restructuring:

The Company incurred restructuring costs of $10 for the three months ended November 30, 2007, related primarily to its CFT operations.

The Company incurred restructuring costs of $89 for the three months ended November 30, 2006. During the first three months of fiscal 2007, the Company incurred restructuring charges of $67 due to the elimination of certain positions in its US Closure plants. The remaining $22 is due to the Company’s United States — CFT segment primarily related to employee severance costs.

At November 30, 2007 and August 31, 2007, accrued restructuring costs related to employee severance and other amounted to $13 and $89, respectively. As of November 30, 2007, approximately $86 has been paid from the restructuring reserve for the employee severance

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

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 nine months ended November 30, 2007:


	August 31,								November 30,
	2007		Provision			Cost Paid			2007
United States — Closures & Corporate	$	35	$	(2	)	$	(26	)	$	7
United States — CFT		54		12			(60	)		6

Total	$	89	$	10		$	(86	)	$	13

Inventories:

As of November 30, 2007 and August 31, 2007, inventories consisted of the following:


	November 30,			August 31,
	2007			2007

Raw materials	$	17,057		$	14,484
Work in process		1,921			2,131
Finished goods		11,310			11,653

Total inventory		30,288			28,268
Less: inventory reserves		(1,194	)		(1,597	)

Inventory — net	$	29,094		$	26,671

Property, plant and equipment:

The Company had proceeds of $22 on the sale of property and equipment that resulted in a loss of $48 for the three months ended November 30, 2007. The Company had proceeds of $5 on the sale of other assets that resulted in a gain of $2 for the three months ended November 30, 2006.

Capital lease obligations:

The Company acquired certain machinery and office equipment under non-cancelable capital leases. Property, plant and equipment include the following items held under capital lease obligations:


	November 30,			August 31,
	2007			2007
Equipment	$	1,152		$	1,152
Less accumulated depreciation		(807	)		(779	)

	$	345		$	373

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

Goodwill and intangible assets:

The following table represents the activity in goodwill by segment for the three months ended November 30, 2007:


					Foreign
	August 31,				Currency		November 30,
	2007		Impairment		Translation		2007

United States — Closures	$	5,918	$	—	$	—	$	5,918
Canada		4,212		—		302		4,514
Other		85		—		—		85

Total Consolidated	$	10,215	$	—	$	302	$	10,517

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, Canada and Other. 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 three months of fiscal 2008 that would have required management to review goodwill for impairment as of November 30, 2007.

The change in the gross carrying amounts and accumulated amortization for Canada from August 31, 2007 to November 30, 2007 was due to the effects of foreign currency translation.

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


	November 30, 2007					August 31, 2007
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortizable intangible assets:
Patents	$	9,688	$	(8,669	)	$	9,688	$	(8,636	)
Debt issuance costs		12,137		(7,140	)		12,100		(6,685	)
Customer relationships		2,600		(2,600	)		2,600		(2,600	)
Covenants not-to-compete		817		(577	)		817		(522	)
Technology		400		(400	)		400		(400	)
Other		1,999		(865	)		1,995		(813	)

Total amortizable intangible assets		27,641		(20,251	)		27,600		(19,656	)


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


Total intangible assets	$	32,641	$	(25,251	)	$	32,600	$	(24,656	)

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

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 three months ended November 30, 2007 and 2006 was $555 and $587, respectively. Amortization expense is estimated to be $1,633 for the remaining nine months of fiscal 2008, $1,661 in fiscal 2009, $1,403 in fiscal 2010, $1,403 in fiscal 2011, $671 in fiscal 2012 and $619 in the remaining years thereafter.

10.

Debt:

Long term debt consists of the following:


	November 30,		August 31,
	2007		2007
Senior notes	$	180,000	$	180,000
Senior revolving credit facility		42,763		39,590

	$	222,763	$	219,590

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

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

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 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 2008 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 November 30, 2007, the Bank Prime Loan rate and the LIBOR Loan rate were 7.50% and 4.53%, respectively. At November 30, 2007, the Company had approximately $15,402 available for borrowing under the credit facility under the borrowing base formula described above.

Aggregate maturities of long-term debt:

The aggregate maturities of long-term debt for the remaining nine months of fiscal 2008 and the next four years and thereafter based on amounts outstanding at November 30, 2007 were as follows:


Nine months ended August 31, 2008	$	—
Year ended August 31, 2009		42,763
Year ended August 31, 2010		—
Year ended August 31, 2011		—
Year ended August 31, 2012		180,000
Thereafter		—

	$	222,763

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

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

was expensed on the settlement date. The Company has made these payments through December 31, 2007 and has adequate cash flow from operations and availability under its 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, 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 November 30, 2007 and 2006 was $1,441 and $1,370 respectively.

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


Nine months ending August 31, 2008	$	4,052
Fiscal year ending August 31, 2009		4,968
Fiscal year ending August 31, 2010		4,737
Fiscal year ending August 31, 2011		4,219
Fiscal year ending August 31, 2012		3,766
Thereafter		15,015

	$	36,757

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 November 30, 2007 and August 31, 2007 and for the three months ended November 30, 2007 and 2006.

Supplemental Condensed Consolidated Balance Sheet
November 30, 2007


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

ASSETS
Current assets:
Cash and cash equivalents	$	781		$	1,135		$	1,712		$	—		$	3,628
Accounts receivable, net		12,139			18,385			9,001			(5,075	)		34,450
Inventories, net		11,539			14,451			3,104			—			29,094
Other current assets		2,452			1,446			2,885			—			6,783

Total current assets		26,911			35,417			16,702			(5,075	)		73,955
Property, plant and equipment, net		39,547			28,174			5,139			(16	)		72,844
Goodwill		5,917			4,600			—			—			10,517
Debt issuance costs, net		4,997			—			—			—			4,997
Investment in subsidiaries		11,351			13,314			897			26			25,588
Common stock of subsidiaries		(14,444	)		(18,988	)		(4,318	)		13,177			(24,573	)
Other assets		3,835			51			92			—			3,978

Total assets	$	78,114		$	62,568		$	18,512		$	8,112		$	167,306


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	8,708		$	12,806		$	5,180		$	(5,075	)	$	21,619
Inter-company (receivable) payable		(73,502	)		65,301			8,169			32			—
Other current liabilities		14,759			841			2,105			401			18,106

Total current liabilities		(50,035	)		78,948			15,454			(4,642	)		39,725
Long-term debt, less current portion		222,763			—			—			—			222,763
Other long-term obligations		3,769			358			(926	)		—			3,201

Total liabilities		176,497			79,306			14,528			(4,642	)		265,689

Other equity (deficit)		8,313			2,740			(1,163	)		(1,577	)		8,313
Accumulated equity (deficit)		(106,696	)		(19,478	)		5,147			14,331			(106,696	)

Total shareholders’ equity (deficit)		(98,383	)		(16,738	)		3,984			12,754			(98,383	)

Total liabilities and shareholders’ equity (deficit)	$	78,114		$	62,568		$	18,512		$	8,112		$	167,306

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, 2007


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


ASSETS
Current assets:
Cash and cash equivalents	$	987		$	1,796		$	514		$	—		$	3,297
Accounts receivable, net		12,605			17,603			10,185			(6,834	)		33,559
Inventories, net		10,041			14,107			2,523			—			26,671
Other current assets		1,721			1,087			2,712			—			5,520

Total current assets		25,354			34,593			15,934			(6,834	)		69,047
Property, plant and equipment, net		39,426			27,780			4,533			(16	)		71,723
Goodwill		5,917			4,298			—			—			10,215
Debt issuance costs, net		5,415			—			—			—			5,415
Investment in subsidiaries		11,351			13,317			897			26			25,591
Common stock of subsidiaries		(16,554	)		(18,988	)		(4,318	)		15,287			(24,573	)
Other assets		3,928			49			75			—			4,052

Total assets	$	74,837		$	61,049		$	17,121		$	8,463		$	161,470


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	9,040		$	13,512		$	5,470		$	(6,834	)	$	21,188
Inter-company (receivable) payable		(71,487	)		63,600			7,854			33			—
Other current liabilities		10,808			1,442			1,746			396			14,392

Total current liabilities		(51,639	)		78,554			15,070			(6,405	)		35,580
Long-term debt, less current portion		219,590			—			—			—			219,590
Other long-term obligations		3,561			319			(905	)		—			2,975

Total liabilities		171,512			78,873			14,165			(6,405	)		258,145

Other equity (deficit)		7,428			1,594			(893	)		(701	)		7,428
Accumulated equity (deficit)		(104,103	)		(19,418	)		3,849			15,569			(104,103	)

Total shareholders’ equity (deficit)		(96,675	)		(17,824	)		2,956			14,868			(96,675	)

Total liabilities and shareholders’ equity (deficit)	$	74,837		$	61,049		$	17,121		$	8,463		$	161,470

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
November 30, 2007


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


Sales	$	32,941		$	35,062		$	8,641		$	(4,046	)	$	72,598
Cost of sales		27,881			32,095			7,353			(3,951	)		63,378

Gross profit		5,060			2,967			1,288			(95	)		9,220

Selling, general and administrative		3,924			1,443			707			(95	)		5,979
Research and development		765			311			—			—			1,076
Loss on sale of property, plant and equipment		—			48			—			—			48
Amortization of intangibles		136			1			—			—			137
Restructuring costs		(2	)		12			—			—			10

Income from operations		237			1,152			581			—			1,970

Interest income		—			(11	)		(3	)		—			(14	)
Interest expense		4,587			46			—			—			4,633
Amortization of debt financing costs		418			—			—			—			418
Foreign currency transaction gain		(495	)		(1,267	)		(6	)		—			(1,768	)
Inter-company interest (income) expense		(1,351	)		1,136			212			3			—
Other (income) expense, including (income) expense from equity investments, net		(412	)		5			—			402			(5	)


(Loss) income before income taxes		(2,510	)		1,243			378			(405	)		(1,294	)

Income tax expense		83			1,110			106			—			1,299


Net (loss) income	$	(2,593	)	$	133		$	272		$	(405	)	$	(2,593	)

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
November 30, 2006


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


Sales	$	30,348		$	33,507		$	6,986		$	(3,437	)	$	67,404
Cost of sales		24,705			30,475			5,197			(3,248	)		57,129

Gross profit		5,643			3,032			1,789			(189	)		10,275

Selling, general and administrative		3,691			1,582			635			(189	)		5,719
Research and development		689			338			—			—			1,027
Gain on sale of property, plant and equipment		—			(2	)		—			—			(2	)
Amortization of intangibles		173			1			—			—			174
Restructuring costs		67			22			—			—			89

Income from operations		1,023			1,091			1,154			—			3,268

Interest income		(21	)		(11	)		(1	)		—			(33	)
Interest expense		4,399			42			—			—			4,441
Amortization of debt financing costs		413			—			—			—			413
Foreign currency transaction (gain) loss		(269	)		194			(29	)		—			(104	)
Inter-company interest (income) expense		(1,307	)		1,174			133			—			—
Other (income) expense, including (income) expense from equity investments, net		(207	)		(70	)		—			198			(79	)


(Loss) income before income taxes		(1,985	)		(238	)		1,051			(198	)		(1,370	)

Income tax expense		84			524			91			—			699


Net (loss) income	$	(2,069	)	$	(762	)	$	960		$	(198	)	$	(2,069	)

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 Three Months Ended
November 30, 2007


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


Cash flow (used in) provided by operations	$	(1,282	)	$	628		$	1,561		$	—	$	907


Additions to property, plant and equipment		(2,111	)		(1,362	)		(509	)		—		(3,982	)
Proceeds from the sale of property, plant and equipment		—			22			—			—		22
Increase (decrease) in other assets, net		2			—			(1	)		—		1

Net cash used in investing activities		(2,109	)		(1,340	)		(510	)		—		(3,959	)


Borrowings under revolver		5,673			—			—			—		5,673
Repayments under revolver		(2,500	)		—			—			—		(2,500	)
Other		12			—			—			—		12

Net cash provided by financing activities		3,185			—			—			—		3,185


Effect of exchange rate changes on cash		—			51			147			—		198

(Decrease) increase in cash		(206	)		(661	)		1,198			—		331

Cash and cash equivalents at beginning of period		887			1,796			514			—		3,197

Cash and cash equivalents at end of period	$	681		$	1,135		$	1,712		$	—	$	3,528

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 Three Months Ended
November 30, 2006


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


Cash flow provided by operations	$	1,261		$	991		$	685		$	—	$	2,937


Additions to property, plant and equipment		(1,420	)		(1,403	)		(350	)		—		(3,173	)
Proceeds from the sale of property, plant and equipment		—			5			—			—		5
(Increase) decrease in other assets, net		(233	)		126			(71	)		—		(178	)

Net cash used in investing activities		(1,653	)		(1,272	)		(421	)		—		(3,346	)


Borrowings under revolver		6,030			—			—			—		6,030
Repayments under revolver		(5,500	)		—			—			—		(5,500	)
Repayments on other long-term obligations		(1	)		—			(8	)		—		(9	)
Payment on debt issuance costs		(125	)		—			—			—		(125	)
Other		—			281			—			—		281

Net cash provided by (used in) financing activities		404			281			(8	)		—		677


Effect of exchange rate changes on cash		—			6			15			—		21


Increase in cash		12			6			271			—		289

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

Cash and cash equivalents at end of period	$	739		$	1,276		$	823		$	—	$	2,838

13. Income taxes:

Income tax expense for the three months ended November 30, 2007 and 2006 consisted of the following:


	For the Three
	Months Ended
	November 30,		November 30,
	2007		2006

Current:
Federal	$	—	$	—
State		—		—
Foreign		1,120		588

		1,120		588

Deferred		179		111

	$	1,299	$	699

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

Income tax expense reported in the accompanying Condensed Consolidated Statements of Operations is primarily the result of taxable earnings generated in the Company’s Canada and China operations. The effective tax rate differs from the statutory tax rate primarily as a result of the benefit of taxable losses being offset by increases in the valuation allowance. The Company has provided valuation allowances of $30,109 and $29,446 against deferred tax assets as of November 30, 2007 and August 31, 2007, respectively, to reduce net 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.

As the Company was implementing FIN 48 for the first quarter of fiscal 2008 ended November 30, 2007, the Company’s management evaluated a potential income tax matter arising under its senior secured credit facility that had been entered into by the Company and its subsidiaries. The Company evaluated whether under Section 956 of the Internal Revenue Code, pledging assets of its foreign subsidiaries for the Company’s domestic borrowings from August 31, 2000 through August 31, 2007 could result in U.S. taxable income. As a result of this review, management of the Company determined that U.S. taxable income from August 31, 2000 through August 31, 2007 was understated by $37,352. The Company plans to make the necessary corrections when filing their August 31, 2007 U.S. tax return. Such corrections will not result in any additional tax due because each affected year had available other losses to reduce the aggregate taxable income to below zero. In footnote 12 of the Company’s financial statements included in its 2007 10-K filed with the SEC, the Company had disclosed that it had approximately $83,432 in net operating loss carry forwards and a full valuation allowance. As a result of the Section 956 taxable income, the Company’s revised net operating loss carry forward at August 31, 2007 is approximately $46,080 and at November 30, 2007 is approximately $48,770. However, these reductions were fully offset by reduction in the recorded valuation allowance and, as such, no resulting income statement or balance sheet adjustments are required. The Company will amend its historical disclosure of net operation loss carry forwards and valuation allowance in its future filings. The valuation allowance disclosures in the previous paragraph have been resolved for this matter.

14.

Related party transactions:

The Company engages in certain related party transactions throughout the course of its business. Related party sales of $1,437 and $1,096 for the three months ended November 30, 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 14 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended August 31, 2007.

15.

Subsequent Events:

On December 19, 2007 the Company sold its 50% ownership of Capsnap Europe Packaging GmbH for 445 Euros. The Company also entered into a continuing distribution and licensing agreements.

On December 28, 2007 the Company purchased 1,875 Class A Units of Leonard S. Slaughter and Associates, LLC, a distributor for the Company, for $250.

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 $1.2 million and $1.1 million as of November 30, 2007 and August 31, 2007, 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 $1.2 million and $1.6 million as of November 30, 2007 and August 31, 2007, 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. Based on the Company’s review of impairment for fiscal 2007, the management of the company determined that the fixed assets of PTI were impaired as a result of deteriorating operating performance. For fiscal 2007 the Company recorded an impairment loss of $1.6 million. No significant impairment loss was recognized during the three months ended November 30, 2007 and 2006, respectively.

Impairment of goodwill and non amortizing assets. At August 31, 2007, we measured goodwill by operating unit and reviewed for impairment by utilizing the EBITDA multiplier methodology for United States — Closures and Corporate, Canada, Mexico and the United Kingdom. Based on our reviews, we did not record an impairment loss for fiscal 2007. 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 $30.1 million and $29.4 million against net deferred tax assets as of November 30, 2007 and August 31, 2007, respectively. For additional information regarding the change in the valuation allowance, see Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements.

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 November 30, 2007 compared to the three months ended November 30, 2006

Sales. Sales increased $5.2 million to $72.6 million for the first quarter of fiscal 2008 compared to $67.4 million for the first quarter of fiscal 2007. Sales at our China operations increased $2.2 million primarily due to increased sales volume of cosmetics products and push pull closures. Sales at our Canada operations increased $1.2 million primarily due to higher bottle and closure volume and foreign exchange rate. Sales at PTI increased $0.4 million due to a favorable change in product mix and higher jar volume. Sales in US Closures increased $2.0 million due primarily to higher 38mm, 5 gallon and fitment closure volume. United Kingdom sales increased $0.2 million due to a favorable change in product mix. Offsetting these increases were decreased sales at our Mexico operations of $0.3 million due to an unfavorable change in product mix due to the decrease in sales volume of 5 gallon closures. Czech sales decreased $0.7 million due to a decrease in cosmetic closure sales resulting from a reduction in volume from one of our largest customers. US Closure and Canada also experienced higher sales dollars due to increased resin related average selling price.

Gross profit. Gross profit decreased $1.1 million to $9.2 million for the first quarter of fiscal 2008 compared to $10.3 million for the first quarter of fiscal 2007. The decrease in gross profit was due primarily to the lower gross profits at US Closures of $0.7 million resulting from higher resin costs and increased freight, utilities and repair and maintenance costs. Also contributing to lower gross margins was increased resin costs in Mexico coupled with higher labor and utility costs. Czech gross margin was lower by $0.3 million due to a decrease in cosmetic closure sales volume. The increase in resin at our United Kingdom facility lowered gross margin slightly for that segment. Partially offsetting these lower margins were increased margins in China due to higher sales volume. Canada gross margin also increased quarter over quarter mainly due to increased sales volume. As a percentage of sales, gross profit decreased to 12.7% for the first quarter of fiscal 2008 from 15.2% for the same quarter of fiscal 2007.

For the three months ended November 30, 2007, direct materials, labor and overhead costs represented 50.1%, 15.5% and 21.6% of sales, respectively, compared to 48.9%, 15.1% and 20.7%, respectively, for the three months ended November 30, 2006.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.3 million to $6.0 million for the first quarter of fiscal 2008 compared to $5.7 million for the first quarter of fiscal 2007. Selling costs remained consistent quarter over quarter. General and administrative costs increased $0.3 million due to higher inflationary salary expense and increased bonus and consulting expense. Selling, general and administrative expenses remained relatively stable as a percentage of sales at 8.2% for the first quarter of fiscal 2008 as compared to 8.5% for the same quarter of fiscal 2007.

Research and development expenses. Research and development expenses increased $0.1 million to $1.1 million for the first quarter of fiscal 2008 compared to $1.0 million for the first quarter of fiscal 2007. The increase is due primarily to additional resources relating to new product development initiatives.

(Loss)/gain from sale of property, plant and equipment. For the first quarter ended November 30, 2007, there was a loss on sale of equipment of $48,000. For the first quarter ended November 30, 2006 there was minimal activity resulting in a small gain.

Amortization of intangibles. Amortization of intangibles (consisting primarily of amortization of patents, technology, licenses, tradenames, covenants not-to-compete and customer relationships) decreased to $0.1 million for the first quarter of fiscal 2008 compared to $0.2 million reported for the first quarter of fiscal 2007.

Restructuring costs. Restructuring charges decreased to $10,000 for the first quarter of fiscal 2008 compared to $0.1 million for the first quarter of fiscal 2007. Fiscal year 2007 restructuring charges for the first quarter relate primarily to the Company’s PTI divisions. These restructuring charges related to the elimination of certain personnel in the PTI US plants and relate primarily to employee severance.

Income from operations. Reflecting the effect of the factors summarized above, income from operations decreased $1.3 million to $2.0 million for the first quarter of fiscal 2008 compared to income from operations of $3.3 million for the first quarter of fiscal 2007. Income from operations decreased as a percentage of sales to 2.6% in the first quarter of fiscal 2008 compared to 4.8% in the same period of fiscal 2007.

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 $0.2 million to $4.6 million for the first quarter of fiscal 2008 compared to $4.4 million for the first quarter of fiscal 2007. The increase is due to a higher outstanding balance on our senior secured credit facility.

Amortization of debt issuance costs remained constant at $0.4 million for the three months ended November 30, 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 gain of $1.8 million on foreign exchange transactions for the first quarter of fiscal 2008 compared to a gain of $0.1 million for the first quarter of fiscal 2007. The gain on foreign exchange transactions for the three months ended November 30, 2007 was due primarily to the Canadian dollar performing stronger against the U.S. dollar. In general the gain is due to

the weak performance of the US dollar. The gain in foreign exchange transactions for the three months ended November 30, 2006 was 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 first quarter of fiscal 2008 was $1.3 million on loss before income taxes of $1.3 million, compared to $0.7 million on loss before income taxes of $1.4 million for the first quarter of fiscal 2007. The income tax expense for first quarter is a result of income generated primarily in Canada, UK and China. 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 $2.6 million for the first quarter of fiscal 2008 compared to a net loss of $2.1 million for the first quarter of fiscal 2007. This increase was due primarily to the decrease in gross margins for the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007.

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 November 30, 2007, we had cash and cash equivalents, including restricted cash, of $3.6 million, an increase of $0.3 million from August 31, 2007.

Operating activities. Cash provided by operations totaled $0.9 million for the three months ended November 30, 2007, which represented a $2.0 million decrease from the $2.9 million provided by operations for the three months ended November 30, 2006. The decrease in cash provided by operations is due to a reduction in cash provided by accounts receivables and an increase in inventory. Partially offsetting these reductions was a decrease in cash used for payables. Working capital (current assets less current liabilities) increased by $0.8 million to $34.2 million as of November 30, 2007, compared to $33.4 million as of August 31, 2007.

Investing activities. Cash used in investing activities consist primarily of additions to property, plant and equipment, which totaled $4.0 million for the three months, ended November 30, 2007, this represented a $0.7 million increase from the $3.3 million cash from investing activities for the three months ended November 30, 2006. We are projecting to spend approximately $16.5 million for additions to property, plant and equipment for the fiscal year ended August 31, 2008.

Financing activities. At November 30, 2007, we had total indebtedness of $222.8 million, $180.0 million of which was attributable to the Senior Notes. The remaining indebtedness of $42.8 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 November 30, 2007, the Bank Prime Loan rate and LIBOR Loan rate were 7.50% and 4.53%, respectively. At November 30, 2007, we had $15.4 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 November 30, 2007 and believe that we will remain in compliance with the covenants throughout fiscal 2008. 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. Our senior secured credit agreement is due on January 23, 2009. 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 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 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 2008 or beyond.

Contractual obligations

The following sets forth our contractual obligations as of November 30, 2007:


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

Long-term debt, including current portion:

Senior Notes (1)	$	243,113	$	14,850	$	29,700	$	198,563	$	—

Revolver (2)	$	47,327	$	3,221	$	44,106	$	—	$	—

Operating Lease Obligations (3)	$	36,757	$	4,052	$	9,705	$	7,985	$	15,015

Blackhawk Settlement	$	750	$	750	$	—	$	—	$	—


(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 1st and August 1st 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. On October 19, 2006 the Company amended its senior revolving credit facility, this 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. The Company’s future compliance with the amended covenants is dependent upon the Company achieving its projected operating results in fiscal 2007 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 2008 are estimated to be $5.5 million.

Related party transactions

We engage in certain related party transactions throughout the course of our business. Related party sales of $1.4 million and $1.1 million for the three months ended November 30, 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 14 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended August 31, 2007.

Recent accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value Measurements” (“SFAS No. 157”). 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. On November 16, 2007 the FASB partially delayed the implementation of SFAS No. 157. The delay pertains to non-financial assets and liabilities being disclosed at fair value, measuring of fair values of liabilities at exit prices and the applicability of disclosure requirements to retirement plan assets. The effective date of these items will be for financial statements issued subsequent to November 15, 2008. The Company is currently evaluating the requirements of SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) SFAS No. 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 No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business combinations” (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R establishes

principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 141R.

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, 2007.

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 months ended November 30, 2007, we incurred a gain of $1.8 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 Canadian customer, Saputo, accounted for approximately 11% and 10% of sales for the three months ended November 30, 2007 and 2006 respectively, and 7% of accounts receivable as of November 30, 2007.

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 November 30, 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 November 30, 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. However, as the Company was implementing FIN 48 for the first quarter of fiscal 2008 ended November 30, 2007, the Company’s management evaluated a potential income tax matter arising under its senior secured credit facility that had been entered into by the Company and its subsidiaries. The Company evaluated whether under Section 956 of the Internal Revenue Code, pledging assets of its foreign subsidiaries for the Company’s domestic borrowings from August 31, 2000 through August 31, 2007 could result in U.S. taxable income. As a result of this review, management of the Company determined that U.S. taxable income from August 31, 2000 through August 31, 2007 was understated by $37,352. The Company plans to make the necessary corrections when filing their August 31, 2007 U.S. tax return. Such corrections will not result in any additional tax due because each affected year had available other losses to reduce the aggregate taxable income to below zero. In footnote 12 of the Company’s financial statements included in its 2007 10-K filed with the SEC, the Company had disclosed that it had approximately $83,432 in net operating loss carry forwards and a full valuation allowance. As a result of the Section 956 taxable income, the Company’s revised net operating loss carry forward at August 31, 2007 is approximately $46,080 and at November 30, 2007 is approximately $48,770. However, these reductions were fully offset by reduction in the recorded valuation allowance and, as such, no resulting income statement or balance sheet adjustments are required. The Company will amend its historical disclosure of net operation loss carry forwards and valuation allowance in its future filings. The valuation allowance disclosures in the previous paragraph have been resolved for this matter.

Management considered this tax error in its assessment of internal control over financial reporting relating to our accounting for income taxes and determined that the error indicates a significant deficiency in its internal control over financial reporting related to the accounting for income taxes. A significant deficiency is a deficiency, or combination of deficiencies, in internal controls over financial reporting that is important enough to merit attention by management. Specifically, the Company did not have sufficient knowledge of international tax laws applicable in the Company’s circumstances, to properly account for U.S. income tax ramifications related to foreign operations. The Company is taking steps to remediate this control deficiency for future reporting periods including having additional discussions with its third party tax consultant that assists the Company in accounting for complex issues relating international tax laws. The Company expects to have this control deficiency remediated by the end of fiscal 2008.

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 errors 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 adequate cash flow from operations and availability under its 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 November 30, 2007, our total indebtedness was approximately $222.8 million, $180.0 million of this amount represented the 8¹/4 Senior Notes due 2012, $42.8 million represented funds drawn down under our senior secured credit facility. Our senior secured credit agreement is due on January 23, 2009. Moreover, as of November 30, 2007 we have a total shareholders’ deficit of $98.4 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, 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;

	•		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 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 hereunder. 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 16 of our Notes to Consolidated Financial Statements of our Annual Report Form 10-K for the fiscal year ended August 31, 2007 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 8 ¹/4% 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 have not realized the anticipated benefits of this acquisition.

The integration of PTI with our other operations has been completed. Nonetheless, we have not realized the expected operating efficiencies, growth opportunities and other benefits of the transaction. 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.

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 2007 our top ten customers accounted for approximately 43% 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, fiscal 2006 and fiscal 2007 have materially and adversely affected our gross margins and operating results for those periods. During fiscal year 2008 resin prices have significantly affected our gross margin and operating results in an unfavorable manner. 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 November 30, 2007, we had cash and cash equivalents, including restricted cash, of $3.6 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 $0.75 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 54% of our sales for fiscal 2007 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 adequate cash flow from operations and availability under its lines of credit to make the remaining 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 8 ¹/4% Senior Notes) own a majority of our common stock. Robert Egan, a member of our Board of Directors, is a affiliate of 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, may not in all cases be aligned with the interests of our other security holders. We currently have three independent directors (as defined under the rules of the NASDAQ Stock Market) on our Board of Directors. Our Board of Directors and Compensation Committee have not met, including at such times when they have considered issues of importance to us, the standard “independence” requirements that would be applicable if our equity securities were traded on NASDAQ or the New York Stock Exchange (“NYSE”); however, the Audit Committee does meet such independence requirements, but only has two members rather than the three that would be required by NASDAQ and the NYSE.. 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 14 of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended August 31, 2007.


		Page
Part I — Financial Information

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of November 30, 2007 and August 31, 2007	3

	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended November 30, 2007 and 2006	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended November 30, 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	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	33

Part II — Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 6.	Exhibits	43

Signatures		44

	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: January 18, 2008	/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

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


	Date: January 18, 2008
	/s/ Brian J. Bauerbach
	Brian J. Bauerbach
	President and Chief Executive Officer

1.		I have reviewed this Quarterly Report on Form 10-Q of Portola Packaging, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	(i)		the Quarterly Report on Form 10-Q of the Company for the period ended November 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

	(ii)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.