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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended May 31, 2003

OR

For the Transition Period from       to

Commission File No. 33-95318

PORTOLA PACKAGING, INC.

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

(408) 453-8840
(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 [X]     NO [  ].

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

11,902,360 shares of Registrant’s $.001 par value Common Stock, consisting of 2,134,992 shares of nonvoting Class A Common Stock and 9,767,368 shares in the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were outstanding at June 30, 2003.

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PORTOLA PACKAGING, INC. AND SUBSIDIARIES

INDEX

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

Trademark acknowledgments:

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

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

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

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PORTOLA PACKAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

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

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PORTOLA PACKAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

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Portola Packaging, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     Basis of Presentation:

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

2.     Recent Accounting Pronouncements:

     Effective September 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” for existing goodwill and other identifiable assets and, at August 31, 2002, the Company used the discounted cash flows methodology to measure its goodwill by operating unit and review for impairment. Based on this review, the Company did not record an impairment loss during the fiscal year ended August 31, 2002. No event transpired that would require management to review goodwill for impairment as of May 31, 2003.

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

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

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

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

     Effective September 1, 2002, the Company adopted SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The scope of SFAS No. 146 includes (1) costs to terminate contracts that are not capital leases; (2) costs to consolidate facilities or relocate employees; and (3) termination benefits provided to employees who are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. During the second quarter of fiscal year 2003, the Company incurred restructuring charges of $405,000, which were determined in accordance with the provisions of SFAS No. 146 (see Notes 7 and 11).

     Effective December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure an amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies footnote in the financial statements of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has elected to continue to follow the disclosure-only provisions of SFAS No. 123. The Company has evaluated the impact of SFAS No. 148 and has adopted the required disclosure provisions (see Note 4).

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

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

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective January 31, 2003 and did not have a material impact on the Company’s results of operations or financial condition.

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

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

3.     Reclassifications:

     Certain first quarter of fiscal year 2003 balances have been reclassified to conform with the current quarter financial statement presentation.

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

4.     Stock-Based Compensation:

     As of May 31, 2003, the Company has three stock option plans, which are described in Note 10 of the Company’s most recent Form 10-K. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, no compensation expense has been recognized for the Company’s stock plans. Had compensation expense for the stock plans been determined based on the fair value at the grant date for options granted for the periods ended May 31, 2003 and 2002 consistent with the provisions of SFAS No. 123, the pro forma net (loss) income would have been reported as follows (in thousands):

     These results are not likely to be representative of the effects on reported net (loss) income for future years.

5.     Other Comprehensive Income (Loss):

     Other comprehensive income (loss) consisted of cumulative foreign currency translation adjustments of $1,681,000 and $384,000 for the three month periods ended May 31, 2003 and 2002, respectively, and $1,697,000 and ($164,000) for the nine month periods ended May 31, 2003 and 2002, respectively.

6.     Segment Information:

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

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

     The table below presents information about reported segments for the three and nine month periods ended May 31, 2003 and 2002, respectively (in thousands):

     Intersegment revenues totaling $2,573,000 and $2,912,000 have been eliminated from the segment totals presented above for the three month periods ended May 31, 2003 and 2002, respectively, and $7,264,000 and $7,973,000 for the nine month periods ended May 31, 2003 and 2002, respectively.

     The table below presents a reconciliation of total segment Adjusted EBITDA to total consolidated loss before income taxes for the three and nine month periods ended May 31, 2003 and 2002 (in thousands):

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

7.     Restructuring:

     During the second quarter of fiscal year 2003, the Company announced a restructuring plan to reduce its work force and incurred restructuring charges of $405,000 for employee severance costs. The restructuring affected nine employees in production, nine employees in general and administration, four employees in customer service, one employee in research and development and one employee in sales, totaling twenty-four severed employees. As of May 31, 2003, approximately $196,000 had been charged against the restructuring reserve for the employee severance costs.

     The Company expects to incur additional restructuring costs in the fourth quarter of fiscal 2003 related to the closing and relocation of three plants located in San Jose and Chino, California and Sumter, South Carolina. The operations from the two California plants will be relocated to a new facility located in Tolleson, Arizona towards the end of the second quarter fiscal year 2004 for which the Company, in June 2003, entered into a fifteen-year lease commencing November 1, 2003. The Company has contracted with a broker to sell the manufacturing building in San Jose, California. The operations from the South Carolina plant will be relocated primarily to the Company’s existing facility in Kingsport, Tennessee as well as to other facilities within the Company.

8.     Inventories:

     As of May 31, 2003 and August 31, 2002, inventories consisted of the following (in thousands):

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

9.     Goodwill and Intangible Assets:

     As of May 31, 2003 and August 31, 2002, goodwill and accumulated amortization by segment category (see Note 6) consisted of the following (in thousands):

     The change in the gross carrying amount and accumulated amortization for Canada from August 31, 2002 to May 31, 2003 was due to foreign currency translation. The Company has not recognized any impairment losses for the three and nine month periods ended May 31, 2003.

     In connection with the adoption of SFAS No. 142, effective September 1, 2001, the Company reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The remaining lives of these assets range from one to thirteen years. The components of the Company’s intangible assets are as follows (in thousands):

     Gross carrying amounts and accumulated amortization may fluctuate between periods due to foreign currency translation. In addition, amortization expense for the net carrying amount of intangible assets, including debt financing costs, for the nine month period ended May 31, 2003 was $1,128,000 and is estimated to be $1,623,000 for the full fiscal year 2003, $1,858,000 in fiscal 2004, $959,000 in fiscal 2005, $419,000 in fiscal 2006, $272,000 in fiscal 2007, $149,000 in fiscal 2008 and $892,000 in the remaining years thereafter.

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

10.     Commitments and Contingencies:

Legal:

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

Commitments and Contingencies:

     The Company issued a letter of credit in October 1999, expiring in December 2010, that guarantees $332,540 of a loan related to the purchase of machinery for Capsnap Europe Packaging GmbH’s (“CSE”) 50% owned Turkish joint venture, Watertek. CSE is an unconsolidated, 50% owned Austrian joint venture that sells five-gallon water bottles and closures that are produced primarily by the Company’s United Kingdom subsidiary. The Company also issued a letter of credit in February 2000, expiring in February 2004, that guarantees a loan of $412,405 for the purchase of machinery by CSE, presently being used at the Company’s United Kingdom facility. These guarantee agreements are in Eurodollars and were valued using a conversion rate as of May 31, 2003.

     In November 2000, the Company’s Mexican consolidated subsidiary entered into a ten-year lease for a building in Guadalajara, Mexico commencing in May 2001. The Company’s Mexican operations relocated to the new building during May 2001. The Company guarantees approximately $595,000 in future lease payments relating to the lease as of May 31, 2003.

11.     Subsequent event:

     In June 2003, the Company entered into a fifteen-year lease for a new facility in Tolleson, Arizona, commencing November 1, 2003 and contracted with a broker to sell a manufacturing building in San Jose, California related to the closing and relocation of two plants located in San Jose and Chino, California. The operations from the two plants will be relocated to the new facility in Tolleson, Arizona towards the end of the second quarter fiscal year 2004 (see Note 7).

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

Overview

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

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Critical Accounting Policies and Estimates

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

     Allowance for Doubtful Accounts. The Company provides credit to its customers in the normal course of business, performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The allowance for doubtful accounts related to trade receivables is determined based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, an evaluation of specific accounts is conducted when information is available indicating a customer may not be able to meet its financial obligations. 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 $1.3 million and $1.2 million as of May 31, 2003 and August 31, 2002, respectively.

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

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

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     Impairment of Assets. The Company periodically evaluates its property, plant and equipment, goodwill and other intangible assets for potential impairment. Management’s judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business. Future events could cause management to conclude that impairment indicators exist and that property, plant and equipment, goodwill and other intangible assets may be impaired. Any resulting impairment loss could have a material adverse impact on the results of operations and financial condition. No impairment loss was recognized during the nine month period ended May 31, 2003.

     Income Taxes. The Company estimates its income taxes in each of the jurisdictions in which it operates. This process involves estimating its current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company then assesses the likelihood that the deferred tax assets will be recovered from future taxable income, and, to the extent recovery is not likely, a valuation allowance is established. When an increase in this allowance within a period is recorded, the Company includes an expense in the tax provision in the consolidated statements of operations. Management’s judgment is required in determining the provision (benefit) for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the deferred tax assets, as adjusted by valuation allowances, will be realized through the recognition of future taxable income. In this respect, a full valuation allowance has been applied to all deferred tax assets arising from certain foreign jurisdictions and a partial valuation allowance has been applied to U.S. domestic net deferred tax assets. Although the deferred tax assets for which full or partial valuation allowances have not been provided are considered realizable, actual amounts expected to be realized could be reduced if future taxable income necessary to do so is not achieved. The Company has provided valuation allowances against net deferred tax assets of $2.1 million and $1.1 million as of May 31, 2003 and August 31, 2002.

     Impact of Equity Issuances. The Company has two outstanding warrants, which are redeemable at the option of the holder upon sixty days written notice to the Company based upon a price equal to the higher of the current fair value per share of the Company’s Common Stock or an amount computed under a formula(s) in the warrant agreements, through June 30, 2004 and June 30, 2008, respectively. The obligation of the Company to redeem the warrants is suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At May 31, 2003, the Company’s credit facilities did not permit redemption of the warrants. At May 31, 2003, the carrying value of the warrants totaled $10.3 million, which represents the fair value of the instruments as determined by the Company’s management. In accordance with EITF Issue 00-19, the change in the fair value of the warrants of $36,000 and $104,000 was recognized as interest income during the three and nine month periods May 31, 2003, respectively.

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Results of Operations

Three Months Ended May 31, 2003 Compared to the Three Months Ended May 31, 2002

     Sales. Sales increased $0.7 million, or 1.4%, from $53.0 million for the three months ended May 31, 2002 to $53.7 million for the three months ended May 31, 2003. This increase was due to increased sales of $1.6 million in Canada resulting from favorable pricing due to resin related pricing increases as well as increased sales volume, and increased sales of $0.8 million in the United Kingdom and $0.5 million in Mexico due to growth in operations and product mix. Offsetting these increases was decreased sales of $2.2 million in the U.S. domestic operations due to decreased sales volumes mainly due to the general U.S. economic conditions as well as unusually cool weather and an unfavorable product mix.

     Gross Profit. Gross profit decreased $2.5 million to $11.9 million for the third quarter of fiscal 2003 compared to $14.4 million for the third quarter of fiscal 2002. As a percentage of sales, gross profit decreased from 27.1% for the third quarter of fiscal 2002 to 22.2% for the same quarter in fiscal 2003. The margin decrease occurred mainly in the U.S. domestic operations and was primarily due to increasing resin costs that were not reflected in increased prices to contract customers during the third quarter of fiscal year 2003, as well as product mix and dairy customer consolidation which resulted in lower revenue.

     Third quarter of fiscal 2003 direct materials, labor and overhead costs represented 39.0%, 15.8% and 26.4% of sales, respectively, compared to the third quarter of fiscal 2002 percentages of 34.4%, 15.5% and 27.3%, respectively. Direct material costs increased for the third quarter of fiscal year 2003 compared to the third quarter of 2002 due to increased resin prices.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.4 million, or 17.2%, to $6.6 million for the three months ended May 31, 2003, as compared to $8.0 million for the same period in fiscal year 2002, and decreased as a percentage of sales from 15.1% for the three months ended May 31, 2002 to 12.4% for the three months ended May 31, 2003. The decrease in selling, general and administrative expenses was primarily due to decreased incentive compensation costs between the two quarters of fiscal years 2003 and 2002.

     Research and Development Expenses. Research and development expense increased $0.5 million, or 69.8%, to $1.3 million for the three months ended May 31, 2003, as compared to $0.8 million for the three months ended May 31, 2002, and increased as a percentage of sales from 1.4% in the three months ended May 31, 2002 to 2.4% in the three months ended May 31, 2003. The increase in research and development expense was primarily due to an increase in prototype expenses related to new products as well as an increase in employee costs.

     Amortization of Intangibles. Amortization of intangibles (consisting primarily of amortization of patents and technology licenses, tradename, covenants not-to-compete and customer lists) decreased $0.2 million, or 41.1%, to $0.2 million for the three months ended May 31, 2003, as compared to $0.4 million for the three months ended May 31, 2002. The decrease was primarily due to certain intangibles related to the acquisitions of Portola Allied Tool and Consumer Cap Corporation, which were fully amortized in March 2002 and June 2002, respectively.

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     Restructuring. During the second quarter of fiscal year 2003, the Company announced a restructuring plan to reduce its work force and incurred restructuring charges of $0.4 million for employee severance costs. The restructuring affected nine employees in production, nine employees in general and administration, four employees in customer service, one employee in research and development and one employee in sales, totaling twenty-four severed employees. During the third quarter of fiscal year 2003, approximately $0.1 million had been charged against the restructuring reserve for the employee severance costs. The Company expects to record additional restructuring costs in the fourth quarter of fiscal 2003 related to pending plant closures and the relocation of affected Company operations (see Notes 7 and 11 of the Notes to Condensed Consolidated Financial Statements).

     Income from Operations. Reflecting the effect of the factors summarized above, income from operations decreased $1.4 million, or 26.9%, to $3.8 million for third quarter of fiscal year 2003 as compared to $5.2 million for the third quarter of fiscal year 2002 and decreased as a percentage of sales to 7.1% in the third quarter of fiscal year 2003 as compared to 9.8% in the same period of fiscal year 2002.

     Other (Income) Expense. Interest income remained relatively flat for the three month period ended May 31, 2003 compared to the same period ended May 31, 2002. Warrant interest income increased $16,000 to $36,000 for the three month period ended May 31, 2003, compared to $20,000 for the same period in fiscal year 2002 due to a change in the fair market value of the warrants as of May 31, 2003. The Company recognized a net loss of $3,000 on the sale of property, plant and equipment during the third quarter of fiscal year 2003, compared to a net gain of $6,000 recognized during the third quarter of fiscal year 2002.

     Interest Expense. Interest expense decreased $0.1 million to $3.1 million for the three months ended May 31, 2003, as compared to $3.2 million for the three months ended May 31, 2002. This decrease was primarily due to the decrease in the borrowings under the revolving credit facility and the effect of a decrease in the LIBOR rate during the third quarter of fiscal 2003 compared to the same period in fiscal 2002.

     Amortization of Debt Financing Costs. Amortization of debt financing costs remained relatively consistent at approximately $0.2 million for the three month periods ended May 31, 2003 and 2002.

     Income Tax Expense. The Company recorded income tax expense of $1.2 million for the three month period ended May 31, 2003. The Company provided an additional valuation allowance related to the U.S. domestic operations, which incurred a loss for the three month period ended May 31, 2003. The Company recorded income tax expense of $0.6 million for the three month period ended May 31, 2002 based on its pre-tax income using an effective tax rate of 31.4%.

     Net (Loss) Income. Net loss was $0.4 million in the third quarter of fiscal year 2003 as compared to net income of $1.3 million in the third quarter of fiscal year 2002.

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Nine Months Ended May 31, 2003 Compared to the Nine Months Ended May 31, 2002

     Sales. For the first nine months of fiscal year 2003, sales were $156.8 million compared to $155.2 million for the first nine months of fiscal year 2002, an increase of $1.6 million, or 1.0%. The increase in sales for the first nine months of fiscal 2003 compared to the same period in fiscal 2002 was mainly attributable to increased sales of $2.8 million and $1.6 million in Canada and the United Kingdom, respectively, due to favorable selling prices, increased volume growth and changes in product mix. Sales increased by $0.3 million in Mexico due to an increase in bottle sales. Equipment sales increased $0.2 million due to the timing of customer orders. Offsetting these increases were decreased sales of $2.9 million from the U.S. domestic operations due to decreased sales volume and customer consolidation which resulted in lower selling prices as well as a less favorable product mix. Sales decreased by $0.2 million in China due to lower selling prices. Bottle sales decreased by $0.2 million due to the discontinuation of one of the Company’s consolidated joint ventures during fiscal year 2002.

     Gross Profit. Gross profit decreased $5.3 million, or 13.9%, to $33.0 million for the nine months ended May 31, 2003, from $38.3 million for the same period in fiscal year 2002. Gross profit as a percentage of sales decreased to 21.0% for the nine month period ended May 31, 2003 compared to 24.7% for the nine month period ended May 31, 2002. The margin decrease occurred mainly in the U.S. domestic operations and was primarily due to rapidly increasing resin costs that were not immediately reflected in prices to contract customers during the first nine months of fiscal year 2003, as well as changes in product mix and dairy customer consolidation which resulted in lower selling prices, and to a lesser extent due to increased employee costs.

     For the first nine months of fiscal 2003 direct materials, labor and overhead costs represented 38.2%, 16.6% and 27.5% of sales, respectively, compared to the first nine months of fiscal 2002 percentages of 35.2%, 15.9% and 28.1%, respectively. Direct material costs increased for the nine month period ended May 31, 2003 compared to the nine month period ended May 31, 2002 due to increased resin prices and to a lesser extent changes in product mix.

     Selling, General and Administrative Expenses. For the nine months ended May 31, 2003, selling, general and administrative expenses were $21.8 million, a decrease of $2.3 million, or 9.7%, from $24.1 million for the same period in fiscal year 2002. As a percentage of sales, the selling, general and administrative expenses were 13.9% for the nine months ended May 31, 2003 as compared to 15.6% for the same period in fiscal year 2002. These decreases were primarily due to decreased expenses incurred for incentive compensation costs, bad debt expense and legal fees.

     Research and Development Expenses. Research and development expense increased $1.4 million to $3.7 million for the nine month period ended May 31, 2003 as compared to $2.3 million for the same period in fiscal 2002. As a percentage of sales, research and development expense was 2.4% for the nine months ended May 31, 2003 as compared to 1.5% for the same period in fiscal 2002. The increase in research and development expense was primarily due to an increase in prototype expenses related to new products as well as an increase in consulting and employee costs.

     Amortization of Intangibles. Amortization of intangibles (consisting of amortization of patents and technology licenses, tradename, covenants not-to-compete and customer lists) decreased $0.6 million, or 49.0%, to $0.7 million for the nine months ended May 31, 2003 as compared to $1.3 million for the same period in fiscal 2002. The decrease was primarily due to certain intangibles related to the acquisitions of Portola Allied Tool and Consumer Cap Corporation, which were fully amortized in March 2002 and June 2002, respectively.

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     Restructuring. During the second quarter of fiscal year 2003, the Company announced a restructuring plan to reduce its work force and incurred restructuring charges of $0.4 million for employee severance costs. The restructuring affected nine employees in production, nine employees in general and administration, four employees in customer service, one employee in research and development and one employee in sales, totaling twenty-four severed employees. As of May 31, 2003, approximately $0.2 million had been charged against the restructuring reserve for the employee severance costs. The Company expects to record additional restructuring costs in the fourth quarter of fiscal 2003 related to pending plant closures and the relocation of affected Company operations (see Notes 7 and 11 of the Notes to Condensed Consolidated Financial Statements).

     Income from Operations. Reflecting the effect of the factors summarized above, income from operations decreased $4.1 million, or 38.8%, to $6.5 million for the first nine months of fiscal year 2003 as compared to $10.6 million for the first nine months of fiscal year 2002 and decreased as a percentage of sales to 4.1% in the third quarter of fiscal year 2003 as compared to 6.8% in the same period of fiscal year 2002.

     Other (Income) Expense. Interest income decreased $5,000 for the nine month period ended May 31, 2003, as compared to the same period in fiscal year 2002. Warrant interest income increased $58,000 to $104,000 for the nine month period ended May 31, 2003, compared to $46,000 for the same period in fiscal year 2002 due to a change in the fair market value of the warrants as of May 31, 2003. The Company recognized a net loss of $32,000 on the sale of property, plant and equipment during the first nine months of fiscal year 2003, compared to a gain of $12,000 recognized during the first nine months of fiscal year 2002.

     Interest Expense. Interest expense decreased $0.6 million to $9.4 million for the nine month period ended May 31, 2003, as compared to $10.0 million for the same period ended May 31, 2002. This decrease was primarily due to the decrease in the borrowings under the revolving credit facility and the effect of a decrease in the LIBOR rate during the nine month period of fiscal 2003 as compared to the same period in fiscal 2002.

     Amortization of Debt Financing Costs. Amortization of debt financing costs remained relatively consistent at approximately $0.6 million for the nine month periods ended May 31, 2003 and 2002.

     Income Tax (Benefit) Expense. The Company recorded a benefit from income taxes of $0.3 million for the nine month period ended May 31, 2003. This benefit was net of an additional valuation allowance for the three month period ended May 31, 2003 related to the U.S. domestic operations, which incurred a loss for the third quarter of fiscal year 2003. The Company recorded income tax expense of $12,000 for the nine month period ended May 31, 2002 based on its pre-tax income using an effective tax rate of 7.5%.

     Net (Loss) Income. Net loss was $2.8 million for the nine month period ended May 31, 2003 compared to net income of $0.1 million for the same period in fiscal year 2002.

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Liquidity and Capital Resources

     The Company has relied primarily upon cash from operations, borrowings from financial institutions and, to a lesser extent, sales of its common stock to finance its operations, repay long-term indebtedness and fund capital expenditures and acquisitions. At May 31, 2003, the Company had cash and cash equivalents of $5.2 million, an increase of $0.6 million from August 31, 2002.

     Operating Activities. Cash provided by operations totaled $9.4 million for the nine month period ended May 31, 2003, which represented a $4.4 million decrease from the $13.8 million provided by operations for the nine months ended May 31, 2002. Net cash provided by operations for the nine month periods ended May 31, 2003 and 2002 was the result of net (loss) income offset primarily by non-cash charges for depreciation and amortization. In addition, cash was provided by a decrease in accounts receivable and inventory and by an increase accounts payable and accrued liabilities. Working capital (current assets less current liabilities) decreased $0.2 million as of May 31, 2003 to $17.9 million, as compared to $18.1 million as of August 31, 2002.

     Investing Activities. Cash used in investing activities was $8.7 million for the nine month period ended May 31, 2003, as compared to using $7.9 million for the nine month period ended May 31, 2002. In both periods, the use of cash consisted primarily of additions to property, plant and equipment. Proceeds from the sale of property, plant and equipment in the first nine months of fiscal year 2003 and 2002 were $0.1 million and $0.4 million, respectively.

     Financing Activities. Cash used in financing activities was $0.1 million for the nine month period ended May 31, 2003 as compared to cash used in financing activities of $4.8 million for the nine month period ended May 31, 2002. The cash used in fiscal year 2003 was due to a $0.2 million pay down of long-term debt, $0.1 million in payments under covenants not-to-compete agreements and $0.1 million in payments to minority owners, offset by $0.2 million borrowed under the senior revolving credit facility. The cash used in fiscal year 2002 was due to a $4.0 million pay down of the senior revolving credit facility, a $0.3 million pay down of long-term debt, $0.3 million in payments under covenants not-to-compete agreements, and $0.1 million in payments to minority owners.

     Cash and Cash Equivalents. At May 31, 2003, the Company had $5.2 million in cash and cash equivalents as well as borrowing capacity of approximately $29.6 million under the revolving credit line, less a minimum availability requirement of $3.0 million. Management believes that these resources together with anticipated cash flows from operations will be adequate to fund the Company’s operations, debt service requirements and capital expenditures throughout fiscal year 2003. The Company may require additional funds to support other purposes and may seek to raise these additional funds through debt financing or through other sources. There can be no assurances that additional funding will be available at all, or that if available, such financing will be obtainable on terms favorable to the Company. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors presented in Item 2 of this document entitled “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Risk Factors.”

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Off-Balance Sheet Arrangements

     On January 22, 2002, the Securities and Exchange Commission issued an interpretive release on disclosures related to liquidity and capital resources, including off-balance sheet arrangements. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Contractual Obligations” and Note 10 of the Notes to Condensed Consolidated Financial Statements (unaudited) for off-balance sheet arrangements.

Contractual Obligations

     The following additional information as of May 31, 2003 is provided to assist financial statement users.

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(2)		Concurrently with the offering of senior notes, in October 1995, the Company entered into a five-year senior revolving credit facility of up to $35.0 million. On September 29, 2000, the Company entered into a new four year amended and restated senior secured credit facility of $50.0 million for operating purposes subject to a borrowing base of eligible receivables and inventory, plus property, plant and equipment, net, which serve as collateral for the line. The credit facility, which expires on August 31, 2004, contains covenants and provisions that restrict, among other things, the Company’s ability to: (i) incur additional indebtedness, (ii) incur liens on its property, (iii) make investments, (iv) enter into guarantees and other contingent obligations, (v) merge or consolidate with or acquire another person or engage in other fundamental changes, or in certain sales of assets, (vi) engage in certain transactions with affiliates, (vii) make restricted junior payments, and (viii) declare or pay dividends. An unused fee is payable on the facility based on the total commitment amount less the balance outstanding at the rate of 0.375% per annum. In addition, interest payable is based on either the Bank Prime Loan rate plus 1.00% or the LIBOR Loan rate plus 2.25% determined by a pricing table based on total indebtedness to EBITDA. At May 31, 2003, the Bank Prime Loan rate and the LIBOR Loan rate were 4.25% and 1.33%, respectively.
(3)		The Company acquired certain machinery and office equipment under non-cancelable capital leases.
(4)		The Company has two outstanding warrants, which are redeemable at the option of the holder upon 60 days written notice to the Company based upon a price equal to the higher of the current fair value per share of the Company’s Common Stock or an amount computed under a formula(s) in the warrant agreements through June 30, 2004 and June 30, 2008, respectively. The obligation of the Company to redeem the warrants is suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At May 31, 2003, the Company’s credit facilities did not permit redemption of the warrants. At May 31, 2003, the carrying value of the warrants totaled $10.3 million, which represents the fair value of the instruments as determined by the Company’s management. The fair value of the warrants was estimated at May 31, 2003 using the Black-Scholes pricing model with the following assumptions: Risk-free interest rate of 1.11% and 2.27%; expected redemption period of June 30, 2004 and June 30, 2008; and volatility of 20% for each warrant, respectively.
(5)		The Company leases certain office, production and warehouse facilities under operating lease agreements expiring on various dates through 2021. Under the terms of the facilities’ leases, the Company is responsible for common area maintenance expenses, which include taxes, insurance, repairs and other operating costs. Base rent expense for fiscal 2003 is estimated to be $3.0 million.

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(6)

The Company issued a letter of credit in October 1999, expiring in December 2010, that guarantees $332,540 of a loan related to the purchase of machinery for CSE’s 50% owned Turkish joint venture, Watertek. CSE is an unconsolidated, 50% owned Austrian joint venture that sells five-gallon water bottles and closures that are produced primarily by the Company’s United Kingdom subsidiary. The Company also issued a letter of credit in February 2000, expiring in February 2004, that guarantees a loan of $412,405 for the purchase of machinery by CSE, presently being used at the Company’s United Kingdom facility. These guarantee agreements are in Eurodollars and were valued using a conversion rate as of May 31, 2003.

In November 2000, the Company’s Mexican consolidated subsidiary entered into a ten-year lease for a building in Guadalajara, Mexico commencing in May 2001. The Company’s Mexican operations relocated to the new building during May 2001. The Company guarantees approximately $595,000 in future lease payments relating to the lease at May 31, 2003.

Related Party Transactions

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

Recent Accounting Pronouncements

     Effective September 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” for existing goodwill and other identifiable assets and, at August 31, 2002, the Company used the discounted cash flows methodology to measure its goodwill by operating unit and review for impairment. Based on this review, the Company did not record an impairment loss during the fiscal year ended August 31, 2002. No event transpired that would require management to review goodwill for impairment as of May 31, 2003.

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

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

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

     Effective September 1, 2002, the Company adopted SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The scope of SFAS No. 146 includes (1) costs to terminate contracts that are not capital leases; (2) costs to consolidate facilities or relocate employees; and (3) termination benefits provided to employees who are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. During the second quarter of fiscal year 2003, the Company incurred restructuring charges of $405,000, which were determined in accordance with the provisions of SFAS No. 146 (see Notes 7 and 11 of the Notes to Condensed Consolidated Financial Statements).

     Effective December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure an amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies footnote in the financial statements of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has elected to continue to follow the disclosure-only provisions of SFAS No. 123. The Company has evaluated the impact of SFAS No. 148 and has adopted the required disclosure provisions (see Note 4 of the Notes to Condensed Consolidated Financial Statements).

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

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective January 31, 2003 and did not have a material impact on the Company’s results of operations or financial condition.

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

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

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Risk Factors

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

Substantial Leverage; Limitations Associated with Restrictive Covenants

     At May 31, 2003, the Company had indebtedness outstanding of approximately $130.8 million. $110.0 million of this amount represented the principal amount of the senior notes issued by the Company on October 1, 1995, which is due in 2005; $9.9 million of the balance represented funds drawn under the Company’s $50.0 million revolving line of credit; and $0.6 million of the indebtedness was principally comprised of capital lease obligations. The Company’s total indebtedness at May 31, 2003 included redeemable warrants with a carrying value of $10.3 million. See “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition – Contractual Obligations” for additional information on the redeemable warrants.

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

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

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Effective Subordination of Notes in Certain Circumstances

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

Limitations on Repurchase of Notes

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

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Dependence on New Business Development and International Expansion

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

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

Competition

     While no single competitor offers products that compete with all of the Company’s product lines, the Company faces direct competition in each of those lines from a number of companies, many of which have financial and other resources that are substantially greater than those of the Company. The Company can expect to meet significant competition from existing and new competitors with entrenched positions in respect of its existing product lines as well as in respect of new products the Company might introduce. The Company has experienced a negative impact due to competitor pricing. Further, numerous well-capitalized competitors might expand their product offerings, either through internal product development or acquisitions of the Company’s direct competitors. Such competitors could introduce products or establish prices for their products in a manner that could adversely affect the Company’s ability to compete. Additionally, the Company from time to time also faces direct competition from bottling companies and other food and beverage providers that elect to produce their own closures or bottles rather than purchase them from outside sources.

Customer Consolidations

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

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Consumer Complaints; Governmental Regulation; Risk of Contamination

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

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

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

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Possible Adverse Effect of Changes in Resin Prices

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

Limited Protection of Intellectual Property

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

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

Dependence Upon Key Personnel

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

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Absence of a Public Market for the Company’s Securities

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

Inflation

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Sensitivity

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

Exchange Rate Sensitivity

     The Company’s foreign subsidiaries use the local currency as their functional currency. Assets and liabilities are translated at month-end exchange rates. Items of income and expense are translated at average exchange rates. Translation gains and losses are not included in determining net income (loss) but are accumulated as a separate component of shareholders’ equity (deficit). Gains (losses) arising from foreign currency transactions are included in determining net income (loss). During the three and nine month periods ended May 31, 2003, the Company realized $288,000 and $269,000, respectively, in income arising from foreign currency transactions. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates. In addition, the Company has two guarantee agreements in Eurodollars that were valued using a conversion rate as of May 31, 2003 (see Note 10 of the Notes to Condensed Consolidated Financial Statements).

Credit Risk Sensitivity

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

     The Company’s products are principally sold to entities in the beverage and food industries in the United States, Canada, the United Kingdom, Mexico, China and elsewhere in Europe. Ongoing credit evaluations of customers’ financial condition are performed and collateral is generally not required. The Company maintains reserves for potential credit losses which, on a historical basis, have not been significant. There were no customers that accounted for 10% of sales for both the three and nine month periods ended May 31, 2003.

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Resin Price Sensitivity

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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

     Conclusions. Based upon the Controls Evaluation, the Company’s principal executive and accounting officers have concluded that, subject to the limitations noted above, the Company’s Disclosure Controls are effective to ensure that material information relating to the Company and its consolidated subsidiaries is made known to management, including the principal executive and accounting officers, particularly during the period when the Company’s periodic reports are being prepared, and that the Company’s Internal Controls are effective to provide reasonable assurance that the Company’s financial statements are fairly presented in conformity with generally accepted accounting principles in the United States of America.

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PART II - OTHER INFORMATION

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

     Portola Packaging, Inc. is a privately-held company, and currently has no class of voting securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. The Company has two classes of common equity, Class A Common Stock and Class B Common Stock, Series 1 and Series 2. Shares of Class A Common Stock are not entitled to vote. The Company’s Class B Common Stock, Series 1 and Class B Common Stock, Series 2 have the same voting rights, each share being entitled to one vote.

     The annual meeting of the stockholders of the Company was held on April 1, 2003, for the purpose of electing five members of the Board of Directors of the Company and ratifying the selection by the Board of Directors of the Company’s independent public accountants for the fiscal year ending August 31, 2003. Proxies representing 6,025,908 shares of the 8,596,973 shares of Class B Common Stock, Series 1 issued and outstanding on the record date, or approximately 70.1% of the outstanding shares of such series, were received and entitled to be voted at the annual meeting. Proxies representing 822,221 shares of the 1,170,395 shares of Class B Common Stock, Series 2 issued and outstanding on the record date, or approximately 70.2% of the outstanding shares of such series, were received and entitled to be voted at the annual meeting. The holders of Class B Common Stock, Series 1 and Series 2, vote as a single class.

     Jack L. Watts, Jeffrey Pfeffer, Larry C. Williams, Christopher C. Behrens and Timothy Tomlinson each received 6,812,594 votes, representing 99.48% of all shares entitled to vote at the annual meeting. Each such individual was elected to serve as a Director of the Company until the Company’s next annual meeting or until his successor was duly appointed to serve. The holders of 6,812,594 shares entitled to vote at the annual meeting, representing approximately 99.48% of all shares represented and voting at the meeting also ratified and approved the selection of PricewaterhouseCoopers LLP as independent public accountants for the Company for the fiscal year ending August 31, 2003.

     During April 2003, Mr. Behrens resigned as a Director, and the Board of Directors appointed Martin Imbler and Robert Egan to serve as Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits
99.1		Certification of Jack L. Watts, Chief Executive Officer of Portola Packaging, Inc. and Dennis L. Berg, Chief Financial Officer of Portola Packaging, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K
		On April 9, 2003, the Company filed a report on Form 8-K which reported under Item 9 the filing of the certifications required by section 1350 of chapter 63 of title 18 of the United States Code as created by section 906 of the Sarbanes-Oxley Act of 2002, which were filed as exhibits thereto.

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SIGNATURES

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

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CERTIFICATION

I, Jack L. Watts, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Portola Packaging, Inc.;
2.		Based on my knowledge, this quarterly 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 quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: