Back to GetFilings.com

Table of Contents

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

FORM 10-K

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

For the fiscal year ended August 31, 2001

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

For the Transition Period from                      to

Commission File No. 33-95318

PORTOLA PACKAGING, INC.
(Exact name of Registrant as specified in its charter)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. o

     Registrant’s voting stock is privately held and the aggregate market value of the voting stock held by non-affiliates is not calculable.

     12,412,871 shares of Registrant’s $.001 par value Common Stock, consisting of 2,134,992 shares of nonvoting Class A Common Stock and 10,277,879 shares in the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were outstanding at October 31, 2001.

     Documents incorporated by reference: None

Table of Contents

PORTOLA PACKAGING, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

     Trademark acknowledgments:

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

2

Table of Contents

PART I

Item 1. BUSINESS

Overview

     Portola Packaging, Inc. (together with its subsidiaries referred to hereinafter as the “Company” or “Portola”) is a leading designer, manufacturer and marketer of tamper evident plastic closures, bottles, related equipment and tooling used for packaging applications in dairy, fruit juice, bottled water, sports drinks, institutional food products and other non-carbonated beverage products. The Company’s principal closure product lines include (i) small closures, (ii) five-gallon closures, (iii) widemouth closures, (iv) fitments and (v) push-pull dispensing closures. Portola also designs, manufactures and supplies high speed capping equipment and complete turnkey water bottling systems, which are marketed by the Company primarily under the tradenames “PortaPlant” and “Adapta”. The Company’s Canadian, Mexican and United Kingdom operations, as well as Sterling Containers, LLC, a domestic joint venture, also manufacture a wide variety of blow molded plastic bottles for dairy, water, juice and industrial applications. Portola’s closure and bottle products are primarily manufactured through technologically advanced, high speed injection and blow molding processes at six modern manufacturing facilities strategically located throughout the United States, four facilities located in Canada, one facility each located in the United Kingdom, Mexico, China and a joint venture in Europe. In addition, the Company has two equipment facilities, one each located in Michigan and Pennsylvania. Management believes that the Company is a leader in a majority of the markets it serves and that the Company is the sole or largest supplier of plastic closures for a majority of its customers. The Company sells over 12.9 billion closures and 205 million bottles annually under the names CapSnap, Nepco, Portola Packaging and other brand names to over 2,500 customers. Most of the Company’s customers have been doing business with the Company for more than ten years. Many features of the Company’s closure products are proprietary, and Portola holds more than 100 domestic and international patents on the design of container closures and compatible bottlenecks.

History

     The Company was incorporated in California in 1964, and reincorporated in Delaware in April 1994. Portola (formerly known as Cap Snap Seal, Inc.) was acquired from the founders in 1986 by a group led by Jack L. Watts, the Company’s current Chairman of the Board and Chief Executive Officer. Since Portola was acquired from the founding family, the size of the Company as measured by sales and closure and bottle unit volume has increased from $26.1 million in sales and 2.1 billion in closure units sold for fiscal 1987 to $219.4 million in sales and 12.9 billion closures and 205 million bottles sold for fiscal year 2001. Portola’s senior management has significant experience in the plastic packaging business and an average tenure of seven years at the Company.

     Consistent with the Company’s objective to expand through strategic acquisitions, on June 30, 1994, the Company acquired Northern Engineering & Plastics Corp., a Pennsylvania corporation, and certain related companies and assets (collectively, “Pennsylvania Nepco”) for a purchase price of $43.7 million. The acquisition of Pennsylvania Nepco, a designer, manufacturer and marketer of tamper evident plastic closures in markets similar to those served by Portola, has enabled the Company to establish new customer relationships, diversify and expand its product offerings and customer base and benefit from Pennsylvania Nepco’s proprietary product designs. On June 16, 1995, the Company purchased for $13.6 million the 50% interest it had not previously owned in Canada Cap Snap Corporation, a British Columbia corporation engaged in manufacturing and distributing small closures in western Canada, together with all the capital stock of two affiliated plastic bottle manufacturers (the “Western Canadian Acquisition”). The companies acquired in the Western Canadian Acquisition were amalgamated and now operate under the name “Portola Packaging Canada Ltd”. On September 1, 1996, the Company purchased for $2.1 million Rapid Plast J-P. Inc. (“Rapid Plast”), a company headquartered in Montreal, Quebec (the “Eastern Canadian Acquisition”). Rapid Plast now operates under the name “Portola Packaging Ltd.” and is engaged in manufacturing and distributing plastic bottles, primarily in eastern Canada. The Canadian acquisitions have enabled the Company to establish a position in the Canadian bottle manufacturing marketplace and to advance its position in the Canadian closure marketplace. On September 1, 1995, the Company completed the acquisition of the 50% interest it had not previously owned in Cap Snap (U.K.) Ltd., now known as Portola Packaging Limited (“Portola Packaging Ltd. (U.K.)”) for a purchase price of approximately $1.5 million. Portola Packaging Ltd. (U.K.), a corporation organized under the laws of England and Wales, is engaged in manufacturing closures for distribution primarily in the United Kingdom with some exports to other European countries and the Middle East.

3

Table of Contents

     During fiscal year 1999, the Company acquired 65% interests in two newly formed limited liability companies, Associated Sales Group, LLC (“ASG”) and Leonard S. Slaughter and Associates, LLC (“LSA”). ASG and LSA are organizations that market products primarily for the Company and generate commissions based on sales made primarily to the Company’s customers. Also, during fiscal year 1999, the Company entered into a joint venture with Greiner A.G. of Austria to form an Austrian company now named Capsnap Europe Packaging Gmb.H (“CSE”), which is 50% owned by the Company. CSE currently sells closures for five-gallon water bottles that are produced primarily by the Company’s United Kingdom subsidiary. CSE also has a 50% ownership interest in Watertek, a joint venture in Turkey which produces and sells five-gallon water bottles for the European and Middle Eastern market places. On March 31, 1999, the Company purchased certain operating and intangible assets and paid off certain liabilities of Allied Tool, Inc. through its wholly-owned subsidiary, Portola Allied Tool, Inc. (“Portola Allied”), for a total purchase price of $2.2 million. Portola Allied is located in Michigan and is engaged primarily in the manufacture and sale of tooling and molds used in the blowmolding industry. Effective July 27, 1999, the Company completed the acquisition of the remaining 50% interest in Portola Packaging Inc. Mexico, S.A. de C.V. (“PPI Mexico”) for a purchase price of $3.0 million. PPI Mexico is engaged in the manufacture and distribution of plastic water bottles and plastic closures. In April 1999, the Company entered into a joint venture with Kimex Group, LLC (“Kimex”) to form Sterling Containers, LLC (“Sterling”), a 50% owned company that produces and sells five-gallon PET water bottles out of one of the Company’s domestic plants. Sterling leases the bottle making machinery from Kimex and plant space and support equipment from the Company.

     During fiscal year 2000, the Company acquired a 70% interest in a newly formed limited liability company, Great Lakes Sales Associates, LLC (“GLA”). GLA is an organization that markets products primarily for the Company and generates commissions based on sales made primarily to the Company’s customers. Effective March 22, 2000, the Company acquired the remaining 45% ownership interest in Shanghai Portola Packaging Company Limited (“PPI China”) for $1.4 million. PPI China is located in the Shanghai province of China and is engaged in the manufacture and distribution of plastic closures for the Asian marketplace, Australia and New Zealand.

     Effective January 1, 2001, the Company purchased certain assets and assumed certain liabilities of Consumer Cap Corporation (“Consumer”) through its wholly-owned Delaware subsidiary, Northern Engineering and Plastics Corporation (“Delaware Nepco”), for approximately $9.9 million (See Note 2 of the Notes to the Consolidated Financial Statements). Consumer is engaged in manufacturing and distributing closures in Chino, California; Batavia, Illinois; and Sumter, South Carolina.

     During fiscal year 2001, the Company formed a wholly-owned subsidiary, Atlantic Packaging Sales LLC (“APS”). APS is an organization that will market products primarily for the Company and will generate commissions based on sales made primarily to the Company’s customers. APS will begin operations during the first quarter of fiscal year 2002.

Disclosures Regarding Forward-Looking Statements

     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 facts included in this Form 10-K, including, without limitation, statements contained in the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” regarding the Company’s 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 the sections of this Report entitled “Plastic Closure Market”, “Raw Materials and Production”, “Competition”, “Risk Factors”, and “Quantitative and Qualitative Disclosures About Market Risk”. These sections describe risks which could cause actual results to differ materially from such forward-looking statements. 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. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements disclosed in this paragraph and elsewhere in this report.

4

Table of Contents

Business Strategy

     The Company’s primary strategy is to increase cash flow by maintaining and extending its leading position in product applications within the plastic closure and bottling industry. To support this strategy, the Company focuses on (i) advancing research and development and product engineering, (ii) providing dedicated customer support and total product solutions for customers, (iii) continuing to improve production efficiencies and enhance low cost manufacturing capabilities, (iv) expanding sales in international markets where significant growth opportunities exist and (v) where appropriate, seeking strategic acquisitions that will strengthen the Company’s competitive position.

     Emphasizing Research and Development and Product Engineering. The Company is continuing its commitment to research and development, a commitment that has led to significant product innovations. These innovations include the original snap cap design, the five-gallon closure, the “tear strip” feature that has become a standard tamper evident mechanism for food and non-carbonated beverage products, improved recloseable plastic dispensing fitments for gable-top fruit juice and milk cartons, and improvements to the snap-screw cap.

     Emphasizing Customer Support and Total Product Solutions. The Company seeks to preserve its long-term relationships with customers and attract new customers by providing on-time delivery and technical service and support and by marketing its products as “total product solutions.” The total product solution approach includes seeking at all times to provide plastic closures and packaging systems designed to meet customer specifications, compatible container necks and neck inserts, capping and filling equipment and on-going service and support.

     Continuing to Enhance Low Cost Manufacturing Capabilities. The Company’s operations emphasize minimizing production and raw materials purchasing costs. The Company has a continuing productivity improvement program designed to further automate its production flow, streamline its workforce and upgrade its molds, equipment and systems. See “Raw Materials and Production.”

     Expanding Sales in International Markets. The Company expects significant growth in international markets for plastic closures and capping and filling equipment, as bottled water and other non-carbonated water companies in Europe, the Far East, Latin America and elsewhere adopt more advanced packaging materials and techniques. The Company is seeking to capitalize on the opportunity for expansion into international markets through the formation and purchase of its joint ventures with local bottle manufacturers, bottlers, and distributors and by increasing export sales of closures and capping and filling equipment. The Company has a joint venture in Europe and in the United States. The Company’s wholly-owned operations in Mexico, Canada, the United Kingdom and China began as joint ventures. See “International Sales and Joint Ventures.”

     Seeking Strategic Acquisitions. Portola plans to continue its program of seeking to acquire businesses serving similar customers using proprietary product and process technologies that offer opportunities to improve costs or extend the Company’s product lines. The Company may also expand its acquisition strategy to include businesses that serve other customer bases as well. Since fiscal 1994, the Company has acquired Pennsylvania Nepco, its Chinese, Mexican, Canadian, and United Kingdom operations, the assets of both Allied Tool, Inc. and Consumer Cap Corporation, and entered into joint ventures domestically as well as in Europe.

Plastic Closure Market

     Portola competes in the closure segment of the worldwide container packaging industry, focusing specifically on proprietary tamper evident plastic closure applications. Container closure devices have various applications with designs engineered to meet specific use requirements. Major product applications for container closures include dairy, fruit juice, bottled water, sport drinks, institutional food products and other non-carbonated beverage products.

     Closure design is a function of the type of container and its contents. Products which are carbonated, perishable, highly acidic or susceptible to tampering all require specialized capping applications. In many instances, it may be necessary for the container to be resealable, or it may be preferable for the contents to be dispensed through the closure without the closure being removed. Subject to these and other packaging requirements, container closures can be made from either plastic or metal.

5

Table of Contents

     The use of plastic closures has grown with the trend toward tamper evident packaging. A tamper evident feature is highly valued by the food and beverage market. While certain tamper evident devices can be incorporated into metal closures, the most sophisticated devices have been developed for plastic closures. Portola invented the original snap-on cap design as well as the “tear strip” feature with breakaway bands for plastic closures, which provided the standard tamper evident mechanism for the food and non-carbonated beverage industries.

     Historically, demand for the Company’s products has been a function of population growth, increasing concerns by the public about the sanitation of packaged food and beverage products, and the continued increase in the use of plastic containers, as opposed to glass or metal, throughout the packaged food industry. For juice, dairy and bottled water markets, demand is also a function of seasonal climate variations, warm weather being responsible for increased consumption. In addition, demand is a function of general economic conditions and business cycles. See “Products” and “Product Development.”

Products

     Portola designs, manufactures and markets a wide array of tamper evident plastic closures for applications in dairy, fruit juice, bottled water, sport drinks, institutional food products and other non-carbonated beverage products. The Company also designs, manufactures and markets (i) high speed capping equipment for use by its plastic closure customers in their bottling and packaging operations, (ii) tooling and molds used in the blowmolding industry (iii) customized bottling systems for returnable water cooler bottles which it markets primarily under the names “PortaPlant” and “Adapta”, and (iv) blow molded bottles for use in the dairy, water, juice and industrial markets. The Company’s sales of plastic closures represented approximately 79%, 79% and 80% of total sales in fiscal years 2001, 2000 and 1999, respectively. In fiscal year 2001, the balance of the sales was for bottles (12%), equipment (6%) and other (3%).

Plastic Closures

     The Company’s plastic closures are broadly grouped into five categories: (i) small closures used to cap blow-molded plastic bottles, (ii) closures for five-gallon returnable glass and plastic water cooler bottles, (iii) widemouth closures for institutional food products, (iv) fitments for gable-top containers (such as conventional paperboard milk and juice cartons) and (v) push-pull dispensing closures for bottled water, flavored water and sports drinks. The Company offers a wide variety of plastic closures under each of its principal product lines to satisfy specific market application and customer requirements. Most of the Company’s plastic closures offer a snap-on or snap-screw feature, designs which are preferred by packagers because they reduce production costs and leakage. The Company’s plastic closures also incorporate tear strips, breakaway bands or other visible tamper evident devices, a feature that has become an industry standard for food and non-carbonated beverage products. The Company’s plastic closures range in size from 28mm to 110mm, and conform to international packaging standards. The Company offers over 50 individual closure products. The Company also offers 40 standard colors, in addition to custom-blended colors, and sophisticated printing, embossing and adhesive labeling capabilities to provide product distinction for its customers.

     The following table describes the Company’s principal plastic closure product lines.

6

Table of Contents

Capping Equipment and Tooling

     The Company also designs, manufactures and markets capping equipment for use in high speed bottling, filling and packaging production lines. A substantial majority of the Company’s plastic closure customers use the Company’s capping equipment. The Company’s ability to supply capping equipment and technical assistance along with its plastic closures represents an important competitive advantage, as customers are assured that the Company’s plastic closures will be applied properly to provide leakproof seals, and that any capping problems will be resolved quickly.

     Portola Allied is engaged in the manufacture and sale of high quality tooling and molds used in the blowmolding industry.

PortaPlants/Adapta

     In addition to plastic closures and capping equipment, the Company also designs, manufactures and markets customized five-gallon water capping and filling systems. The Company’s most comprehensive five-gallon water bottling system is its PortaPlant system. The PortaPlant and Adapta systems are compact bottle washing, filling, capping and conveying systems for glass and plastic water bottles. Depending on size, the Adapta system can process 300 to 600 bottles per hour and the PortaPlant system can process 600 to 3,000 bottles per hour. The PortaPlant’s modular design makes it ideal for new and small water bottling companies as well as established companies whose growth requires integrated expansion. Portola has focused its sales efforts for PortaPlants internationally as less developed countries look for improved distribution of safe and reliable drinking water.

Plastic Bottles

     In Canada and Mexico, in addition to marketing closures, the Company produces a wide variety of blowmolded plastic bottles for use in the dairy, water and juice industries. The ability to market the closures and bottles together enables the Canadian and Mexican operations to provide their customers with a complete packaging system.

     In the UK, in addition to marketing closures, the Company produces five-gallon polycarbonate water bottles for use in the water industries throughout Europe.

     During fiscal year 1999, the Company also formed two joint ventures, one of which produces and sells five- gallon PET water bottles domestically from an existing Company plant located in the United States and one of which sells five-gallon polycarbonate bottles in the European marketplace.

Product Development

     The Company continues to be committed to product development and engineering. Its research and development group and engineering staff provide a range of design and development services, focusing primarily on (i) new products and product enhancements, (ii) tooling and molds necessary for manufacturing plastic closures and (iii) capping equipment compatible with the Company’s closures and its customers’ containers. Research and development expenditures for fiscal years 2001, 2000 and 1999 were $3.1 million, $2.9 million and $2.7 million, respectively.

     The Company has also made a substantial investment in developing new product applications for existing markets as well as applications for new markets. To facilitate the process of enhancing and developing new products and to ensure ultimate market acceptance of such products, the Company encourages an on-going exchange of ideas with customers, container manufacturers, machinery manufacturers, and sales and service personnel. This approach has enabled the Company to identify new product opportunities, including improved closures developed for the fitment and institutional foods industries.

     The Company’s typical product development cycle has been less than one year. However, successful introduction of a new closure product can take two to three years, principally because customers who are comfortable with their existing closure products are generally slow to switch to a new design, particularly in light of the relatively small cost of the closure component to the overall packaging unit.

7

Table of Contents

Raw Materials and Production

     The majority of the resin used in production is low density polyethylene (LPDE), but the Company also uses high density, linear low, polypropylene and polycarbonate. The principal raw material for the Company’s plastic closures and bottles is injection and blow molding grade resin, which generally accounts for at least 60% of the cost of all raw materials purchased for the Company’s plastic closures and bottles. The Company believes that due to its volume purchases it is able to negotiate better pricing with resin suppliers, although prices for resin can fluctuate substantially over relatively short periods of time. The Company has not experienced any significant difficulties over the past ten years in obtaining sufficient quantities of resin. The Company generally has been able to pass on increases in resin prices directly to its customers. Significant increases in resin prices, coupled with an inability to promptly pass such increases on to customers, could have a material adverse effect on the Company’s financial condition and results of operations.

     In order to produce plastic closures and bottles, the resin, which is delivered as small pebble-size pellets to large storage silos, is conveyed through a pipeline system to injection and blow molding machines, where it is melted into a thick liquid state. Coloring agents are added as appropriate and the mixture is injected and blow molded at high pressure into a specially designed, multi-cavity mold. The principal equipment in the Company’s plants includes injection and blow molding machines, finishing lines to print, label and insert closures with foam or foil to meet customer requirements, and automated systems for handling and processing raw materials and finished goods. The Company uses a similar, highly automated process in the production of its bottles. By automating its manufacturing operations, the Company is able to limit its direct labor costs while meeting the strict sanitary requirements necessary for producing food and beverage packaging products.

Backlog

     Production and delivery cycles for closures and bottles are very short and the Company’s backlog is generally cancelable on short notice. Backlog for closures and bottles is generally two to three weeks of orders and is relatively constant from period to period. Contracts for equipment purchases generally include cancellation penalties. Due to the short production and delivery cycles for closures and bottles, the Company does not believe backlog information is a material factor in understanding its business.

Sales, Marketing and Customer Service

     The Company markets its products through its internal sales department, through domestic and international networks of sales representatives, and through some distributors. Calls on customers by these internal salespersons and external representatives, along with participation at trade shows, are the primary means of customer contact. A number of the Company’s customers are large corporate clients with numerous production facilities, each of which may make its own separate purchase decisions. The Company’s most significant customers are processors and packagers of fluid milk, non-carbonated bottled water, chilled juice, other flavored drinks and condiments for wholesale and institutional use. The Company’s customer base includes over 2,500 customers. The Company’s top ten customers accounted for approximately 36% of the Company’s sales during the fiscal year ended August 31, 2001, and none accounted for more than 9% of sales during that period. Most of the Company’s customers have been doing business with the Company for more than ten years.

     Attention to customer service is a critical component of the Company’s marketing effort. The Company’s customers operate high-speed, high-volume production lines, with many handling perishable products. In order to assure that the production lines operate efficiently and avoid costly line stoppages, customers rely on the Company’s ability to provide reliable, on-time delivery of its closure and bottle products and to maintain uniform quality of those products. The Company also provides technical assistance to its customers in the form of an in-house service team that can be dispatched on short notice to solve bottling line problems throughout the world. Several of the Company’s field service representatives have extensive blow-molding technical expertise that is especially important in resolving bottle leakage problems for customers.

8

Table of Contents

International Sales and Joint Ventures

     Although the Company’s sales are primarily domestic, the Company has experienced growth in international sales. International sales increased to $83.7 million in 2001 from $76.8 million and $70.3 million in 2000 and 1999, respectively, due to bottled water companies and other non-carbonated beverage companies in Europe, the Far East, Latin America and elsewhere adopting more advanced packaging materials and techniques as well as a shift to local production by the Company’s subsidiaries. For the fiscal years ended August 31, 2001, 2000, and 1999, export closure sales from the United States to unaffiliated customers were $2.8 million, $4.9 million, and $10.0 million, respectively. The Company’s export closure sales from the United States have declined, as the Company’s international subsidiaries located in the United Kingdom, Canada, Mexico and China have developed, produced, and sold more product locally. As a result of the shift to local production, sales in these regions are growing with the aid of local increased capacity.

     In the last several years, the Company has utilized joint ventures with bottle manufacturers, bottlers and distributors to gain footholds in international markets. By offering plastic closures, bottles, capping equipment and turnkey bottling systems, the Company can provide joint venture partners with a complete solution to their bottling and capping requirements. Now wholly-owned by Portola, subsidiaries in the United Kingdom, Canada, Mexico and China each began as joint ventures. During fiscal year 1999, the Company formed a joint venture with Greiner A.G. of Austria to form Capsnap Europe Gmb.H (“CSE”), to sell five-gallon water caps and five-gallon water bottles for the European and Middle Eastern marketplaces. Also during fiscal year 1999, the Company entered into a joint venture with Kimex Group, LLC to form Sterling Containers, LLC, to sell five-gallon PET water bottles out of one of the Company’s domestic plants.

Competition

     The Company competes in marketing container closures and bottles to the food and beverage industry on the basis of price, product design, product quality, reliability, on-time delivery and customer service. Among the attributes that the Company believes distinguish it from other sellers of closure systems and provide a competitive advantage are the Company’s proprietary products, the Company’s ability to provide its customers with innovative, low-cost closures and complete capping systems, the Company’s reputation for quality, reliability and service, and the Company’s automated and strategically located production facilities.

     While no single competitor offers products that compete with all of the Company’s product lines, the Company faces direct competition in each of its product lines from a number of companies, many of which have financial and other resources that are substantially greater than those of the Company. As the Company broadens its product offerings, it can expect to meet increased competition from additional competitors with entrenched positions in those product lines. The Company also faces direct competition from bottling companies and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources. In addition, the packaging industry has numerous well-capitalized competitors, and there is a risk that these companies will expand their product offerings, either through internal product development or acquisitions of the Company’s direct competitors, to compete in the niche markets that are currently served by the Company. These competitors, as well as other existing competitors, could introduce products or establish prices for their products in a manner that could adversely affect the Company’s ability to compete. Because of the Company’s product concentration, an increase in competition or any technological innovations with respect to the Company’s specific product applications, such as the introduction of lower-priced competitive products or products containing technological improvements over the Company’s products, could have a significant adverse effect on the Company’s financial condition and results of operations.

Employees

     As of August 31, 2001, the Company had 1,072 full-time employees, 43 of whom were engaged in product development, 93 in marketing, sales and customer support, 859 in manufacturing and 77 in finance and administration. The Company uses seasonal and part-time employees for training, vacation replacements and other short-term requirements. None of the Company’s employees in the United States are covered by any collective bargaining agreement; approximately 33 of the employees of one of the Company’s Canadian subsidiaries are members of the Teamsters Union. The Company has never experienced a work stoppage and believes that employee relations are good.

9

Table of Contents

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 captions “Plastic Closure Market”, “Raw Materials and Production”, “Competition” and “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 August 31, 2001, the Company had indebtedness outstanding of approximately $142.0 million. $110.0 million of this amount represented the principal amount of the senior notes issued by the Company in October 1995, which is due in 2005; $20.9 million of the balance represented funds drawn under the Company’s $50.0 million revolving line of credit; and $1.0 million of the indebtedness was principally comprised of foreign subsidiary loans and capital lease obligations. In addition, the Company’s total indebtedness at August 31, 2001 included redeemable warrants with a carrying value of $10.1 million. See Note 9 of the Notes to the Consolidated Financial Statements 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 from time to time in the future may be limited; (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.

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 will increasingly rely on new products, such as single start, fitments and non-spill closures, as well as expansion into international markets. Developing new products and expanding into new markets will require a substantial investment and involve additional risks such as assessing the values, strengths, weaknesses and potential profitability of acquisition candidates. There can be no assurance that the Company’s efforts to achieve such development and expansion will be successful. There are additional risks of 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.

     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, exchange rate fluctuations and other potential risks. There can be no assurance that the Company’s foreign operations will be successful. Also, these operations may require additional funding, which the Company may or may not be able to provide.

Customer Consolidations

     There is continuing consolidation in the dairy, water and juice industries through mergers and acquisition activities. As a result, the Company’s top ten customers may continue to be a growing percent of the Company’s business. Loss of one of these customers could have a significant adverse effect on the Company’s financial condition.

10

Table of Contents

Consumer Complaints; Governmental Regulation; Risk of Contamination

     Many of the Company’s products are used to cap food and beverage products. It is possible that some of the Company’s products, if used improperly, could cause injury to consumers of food and beverage products capped with the Company’s closures. In such event, the Company could incur substantial costs in responding to complaints or litigation related to its products, which could materially adversely affect the financial condition and operations of the Company. In addition, if any of the Company’s products were found to be defective, the Company could incur significant costs in correcting any product deficiencies, in addition to suffering the loss of revenues derived from such products. From time to time, customers have claimed that defects in their products have been due to defects in the Company’s products. To date, no such claims have been adjudicated adversely to the Company, however, the Company has had to pay amounts in settlement to avoid litigation and has incurred and may be expected to incur significant litigation costs in the future, not all of which have been or will be covered by insurance.

     The Company’s products are subject to governmental regulation, including regulation by the Federal Food and Drug Administration and other agencies with 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 develop protocols in the future that could materially increase the Company’s costs of manufacturing certain of its products.

     While the Company does not believe their people, facilities, or products are a target for terrorists, there is a remote risk that terrorist activities could result in contamination or adulteration of our products. Our 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 our products and in our finished products, there is no assurance that (a disgruntled employee or) third party could not introduce an infectious substance, such as anthrax, 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 it customers to inspect incoming shipments of products transported by common carrier to assure that shipments of our products have arrived intact and show no signs of external tampering. Were our products to be tampered with in a manner not readily capable of detection, we could experience a material adverse effect in our business, operations and financial condition.

Limited Protection of Intellectual Property

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

     The Company now markets its products internationally, and 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 and industry knowledge to maintain its competitive position. While the Company enters into confidentiality agreements with employees and consultants who have access to proprietary information, there can be no assurance that these measures will prevent the unauthorized disclosure or use of such trade secrets and industry knowledge.

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.

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, there are substantial restrictions on the ability of a holder of the Company’s Common Stock to transfer shares of such stock. Accordingly, 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.

11

Table of Contents

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 pass on increases in resin prices directly to its customers.

Item 2. PROPERTIES

     The Company’s facilities are highly efficient due to automation and frequently scheduled maintenance throughout the plants. The Company believes that these facilities are well-maintained and in good operating condition. However, substantial capital expenditures will be required to meet the production requirements for new and developing product lines. There can be no assurance that unanticipated developments will not occur that would require the Company to add production facilities sooner than expected. The following table indicates the locations, functions, square footage and nature of ownership of the Company’s current facilities.

12

Table of Contents

Item 3. LEGAL PROCEEDINGS

     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 financial position, results of operations or cash flows of the Company. 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.

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

     None.

13

Table of Contents

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company’s equity securities are privately held and no class of voting securities is registered pursuant to Section 12 of the Securities Exchange Act of 1934. There is no established trading market for any class of the Company’s common equity.

     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.

     As of October 31, 2001, there were two holders of record of the 2,134,992 outstanding shares of Class A Common Stock. Additionally, there were two holders of record of immediately exercisable warrants to purchase 2,492,741 shares of Class A Common Stock. As of October 31, 2001, there were approximately 188 holders of record of the 9,106,449 outstanding shares of Class B Common Stock, Series 1 and 14 holders of record of the 1,171,430 outstanding shares of Class B Common, Series 2. See Note 9 of the Notes to Consolidated Financial Statements for additional information on stock and warrants.

     The Company has not paid dividends on its Common Stock and presently intends to continue this policy in order to retain earnings for the development of the Company’s business. Furthermore, certain of the Company’s credit agreements, including the senior notes issued on October 2, 1995, and the new amended and restated senior revolving credit facility entered into on September 29, 2000, restrict the Company’s ability to pay dividends.

Item 6. SELECTED FINANCIAL DATA

Selected Historical Condensed Consolidated Financial Data

     The selected historical condensed consolidated statement of operations and balance sheet data set forth in the table below for, and at the end of, each of the fiscal years in the five year period ended August 31, 2001 have been derived from, and are qualified by reference to, the consolidated financial statements of the Company. The information below should be read in conjunction with “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” the consolidated financial statements of the Company and the accompanying notes thereto, and other financial information appearing elsewhere in this report on Form 10-K.

14

Table of Contents

15

Table of Contents

(a)		During its fourth quarter of fiscal 2001, the Company adopted the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue 00-10, “Accounting for Shipping and Handling Fees and Costs”, which requires all shipping and handling fees billed to customers to be classified as revenue. Prior to August 31, 2001, the Company included both shipping revenues and shipping costs in cost of goods sold. The Company adopted Issue 00-10 in the fourth quarter in the current year and reclassified fiscal years ended 2000, 1999, 1998 and 1997. The effect of this accounting policy change was to increase revenue and cost of sales during the fiscal years 2001, 2000, 1999, 1998 and 1997 by $5.1 million, $5.9 million, $5.2 million, $4.9 million and $4.8 million, respectively. All prior periods have been reclassified to conform with the new standard. This reclassification had no effect on net income.
(b)		Includes amortization of patents and technology, licenses, goodwill, tradename, covenants not-to-compete and customer lists.
(c)		During the first quarter of fiscal 2001, the Company announced a restructuring plan involving the relocation of the Company’s New Castle, Pennsylvania closure operation to Sumter, South Carolina and Kingsport, Tennessee, and the relocation of the Cap Snap Equipment Manufacturing group from San Jose, California to New Castle, Pennsylvania. These relocations affected approximately 88 employees. The Company recorded restructuring charges during fiscal year 2001 totaling approximately $1,939,000, which consisted of approximately $900,000 for employee severance costs and approximately $1,039,000 for the non-cash write-down of certain assets. During the fourth quarter of fiscal 2000, the Company effected a reduction in work force which affected 22 employees. In connection with the reduction in work force, the Company recorded restructuring charges in the fourth quarter of fiscal year 2000, totaling approximately $493,000, which were primarily for employee severance costs. In fiscal year 1998, the Company took measures to improve profitability and announced staffing reductions and the closure of its Fort Worth, Texas facility effective October 1998. The Company recorded a restructuring charge of $3.1 million in fiscal year 1998, which consisted primarily of impairment loss on intangible assets of $1.3 million, loss on property, plant and equipment and employee severance costs. During fiscal year 1997, the Company reduced staff positions and closed the Portland, Oregon plant in February 1997 and its Bettendorf, Iowa plant in July 1997. The Company recorded a restructuring charge of $4.1 million in fiscal year 1997, which consisted primarily of employee severance, impairment loss on intangible assets and loss on property, plant and equipment.
(d)		Other (income) expense in fiscal year 2001 includes a gain of $7.0 million from the sale of certain real estate located in San Jose, California, offset by a $0.2 million loss on the sale of property, plant and equipment. Other (income) expense in 1998 includes gains from the sale of securities of $750,000 and fixed assets of $714,000, net of other expense of $332,000.
(e)		The redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company’s Class A Common Stock. Two warrants to purchase 2,052,526 and 440,215 shares of Class A Common Stock are exercisable, in whole or in part, through June 30, 2004 and June 30, 2008, respectively. Effective June 30, 1999 and August 1, 2001, respectively, these warrants became redeemable at the option of the holder upon 60 days prior written notice to the Company. The obligation of the Company to redeem the warrants is calculated based on the higher of current market value or an amount computed under the warrant agreements and would be suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At August 31, 2001, 2000 and 1999, the Company’s credit facilities did not permit redemption of the warrants.

16

Table of Contents

(f)		As of June 30, 2001, the Company applied EITF Issue 00-19, “Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s Own Stock”. The effect of the application of Issue 00-19 was to reclassify the Company's redeemable warrants from temporary equity to a liability on June 30, 2001.
(g)		EBITDA represents, for any relevant period, income (loss) before income taxes, extraordinary item, cumulative effect of change in accounting principle, depreciation of property, plant and equipment, net interest expense (including amortization of debt issuance costs) and amortization of intangible assets. Adjusted EBITDA represents, for any relevant period, income (loss) before income taxes, extraordinary item, cumulative effect of change in accounting principle, write-off of intangible assets, restructuring costs, depreciation of property, plant and equipment, net interest expense (including amortization of debt issuance costs) and amortization of intangible assets. In 2001, 2000 and 1999, the Company’s equity share of its unconsolidated investees’ EBITDA of approximately $37,000, $469,000 and $120,000, respectively, is included as a separate component of the Adjusted EBITDA calculation. EBITDA and Adjusted EBITDA are not intended to represent and should not be considered more meaningful than, or an alternative to, net income (loss), cash flow or other measures of performance in accordance with generally accepted accounting principles. EBITDA and Adjusted EBITDA data are included because the Company understands that such information is used by certain investors as one measure of an issuer’s historical ability to service debt and because certain restrictive covenants in the Indenture are based on a term very similar to the Company’s Adjusted EBITDA.

17

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Overview

     Portola Packaging, Inc. 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.

     The Company currently has seven wholly-owned operating subsidiaries: two of which are domestic, two of which are located in Canada, and the remaining three of which are located in the United Kingdom, Mexico and China. The two Canadian subsidiaries are Portola Packaging Canada Ltd. (located in western Canada) and Portola Packaging Ltd. (located in eastern Canada); the United Kingdom subsidiary is Portola Packaging Ltd. (U.K.); the Mexico subsidiary is Portola Packaging Inc. Mexico, S.A. de C.V. (“PPI Mexico”); and the China subsidiary is Shanghai Portola Packaging Company Limited (“PPI China”). The Company’s two domestic operating subsidiaries are Portola Allied Tool, Inc., located in Michigan and Northern Engineering and Plastics Corporation (“Delaware Nepco”), operated in Chino, California; Batavia, Illinois; and Sumter, South Carolina. In April 1997, the Company’s United Kingdom subsidiary and eastern Canadian subsidiary were converted to “restricted subsidiary” status (See Note 2 of the Notes to the Consolidated Financial Statements). In May 1999, the Company’s western Canadian subsidiary was converted to “restricted subsidiary” status. In March 1999, the Company formed a new subsidiary named Portola Allied Tool, Inc. to acquire the assets of Allied Tool, Inc., a corporation headquartered in Michigan, and elected “restricted subsidiary” status for Portola Allied Tool. In July 1999, the Company acquired the remaining interest in the Mexican joint venture in which it had held a 50% interest and elected “restricted subsidiary” status at that time. Effective January 1, 2001, the Company’s Delaware Nepco subsidiary purchased certain assets and assumed certain liabilities of Consumer Cap Corporation; Delaware Nepco is a “restricted subsidiary”. Restricted subsidiary status allows greater flexibility in funding the operations of these subsidiaries under the terms of the indenture governing the senior notes issued by the Company in October 1995 and under the terms of the Company’s senior credit facility. Although the Company elected “restricted subsidiary” status for PPI Mexico when it acquired the remaining 50% interest in July 1999, in September 2000, the Company agreed in its new amended and restated credit facility to treat PPI Mexico as an “unrestricted subsidiary” for purposes of the credit facility; PPI Mexico continues to be treated as a “restricted subsidiary” under the indenture. Unrestricted subsidiary status imposes limitations on the ability of the Company and its restricted subsidiaries to finance the operations of unrestricted subsidiaries. PPI China and domestic joint ventures in which the Company owns more than a 50% interest are “unrestricted subsidiaries”.

Results of Operations

Fiscal Year Ended August 31, 2001 Compared to Fiscal Year Ended August 31, 2000

     Sales increased $10.5 million, or 5.0%, from $208.9 million for fiscal 2000 to $219.4 million for fiscal 2001. The increase in sales for fiscal 2001 compared to the same period in fiscal 2000 was mainly attributable to increased sales of approximately $7.3 million from the Company’s foreign operations due to increased market demand and $2.3 million in increased sales in the equipment division. U.S. closure division sales increased $1.7 million primarily due to the Company’s acquisition of Consumer Cap Corporation (“Consumer”). Other domestic operations decreased in sales by $0.8 million primarily due to a decrease in bottle sales by the Company’s joint venture and a decrease in tooling sales due to a soft tooling market.

     Gross profit increased $3.3 million to $49.9 million for fiscal 2001, as compared to $46.6 million for fiscal 2000 and increased slightly as a percentage of sales from 22.3% in 2000 to 22.7% in 2001. The margin increase was primarily due to increased margins in domestic closures and added gross margin due to the acquisition of Consumer, totaling $3.9 million and $1.2 million, respectively. The United Kingdom, Mexico, and PPI China operations also experienced increased margins of $1.3 million, $1.2 million and $0.4 million, respectively. Offsetting these increases were decreased margins in Canada and the equipment division of $1.8 million and $2.7 million, respectively. Gross profit increased in dollars, primarily due to domestic raw material and employee cost savings, synergies from the Consumer acquisition and increased margins from the United Kingdom, Mexico and PPI China as these operations mature and operate more efficiently.

18

Table of Contents

     Overall, fiscal year 2001 direct materials, labor and overhead costs represented 40.1%, 14.7% and 26.4% of sales, respectively, compared to fiscal year 2000 percentages of 42.3%, 14.9%, and 23.2%.

     Selling, general and administrative expense decreased from $30.4 million in fiscal year 2000 to $28.8 million in fiscal 2001 and decreased as a percentage of sales from 14.5% for fiscal 2000 to 13.1% for fiscal 2001. These decreases were primarily due to reduced legal expenses as a result of the Company successfully defending certain of its patents during the second quarter of fiscal year 2001.

     Research and development expenses increased from $2.9 million and 1.4% of sales in fiscal year 2000 to $3.1 million and 1.4% of sales in fiscal year 2001. The slight increase in research and development expenses was primarily due to prototype expenses related to the introduction of new products.

     Amortization of intangibles (consisting of amortization of patents and technology licenses, goodwill, tradename, covenants not-to-compete and customer lists) totaled $4.2 million for fiscal year 2001 as compared to $3.5 million for fiscal 2000. The increase was primarily due to amortization of goodwill related to the Company’s acquisition of the remaining interest in Shanghai Portola Packaging Company Limited and amortization of additional patent, tradename, covenants not-to-compete and customer list assets relating to the acquisition of Consumer.

     During the first quarter of fiscal 2001, the Company announced a restructuring plan involving the relocation of the Company’s New Castle, Pennsylvania closure operation to Sumter, South Carolina and Kingsport, Tennessee, and the relocation of the Cap Snap Equipment Manufacturing group from San Jose, California to New Castle, Pennsylvania. These relocations affected approximately 88 employees. The Company recorded restructuring charges during fiscal year 2001 totaling approximately $1.9 million, which consisted of approximately $0.9 million for employee severance costs and approximately $1.0 million for the non-cash write-down of certain assets. As of August 31, 2001, approximately $1.9 million had been charged against the restructuring reserve for severance and the write-down of equipment during fiscal year 2001.

     Due to the effect of the factors summarized above, income from operations increased $2.5 million, or 26.8%, to $11.9 million for fiscal 2001, as compared to $9.4 million for fiscal 2000, and increased as a percentage of sales from 4.5% in fiscal 2000 to 5.4% in fiscal 2001.

     Interest income was $0.1 million and interest expense was $14.5 million for both fiscal year 2001 and fiscal year 2000.

     Amortization of debt financing costs increased $0.3 million to $0.7 million in fiscal 2001 as compared to $0.4 million for the same period in fiscal 2000 due to the additional loan fees that are being amortized as a result of the amended and restated senior revolving credit facility entered into on September 29, 2000.

     During fiscal year 2001, a gain of $7.0 million was recognized on the sale of certain real estate located in San Jose, California, offset by a $0.2 million loss on the sale of property, plant and equipment.

     The income tax provision for fiscal year 2001 was $2.1 million, compared to an income tax benefit of $2.2 million in fiscal year 2000. The income tax provision (benefit) for fiscal years 2001 and 2000 differs from the U.S. federal tax rate primarily due to non-deductible goodwill and not providing a benefit for losses generated in certain foreign jurisdictions.

     Net income was $1.0 million in fiscal year 2001, compared to a net loss of $3.7 million in fiscal 2000.

19

Table of Contents

Fiscal Year Ended August 31, 2000 Compared to Fiscal Year Ended August 31, 1999

     Sales increased $13.0 million, or 6.6%, from $195.9 million for fiscal 1999 to $208.9 million for fiscal 2000. Of the increase, $4.6 million and $1.6 million was attributable to the addition of sales from the full year consolidation of the Company’s PPI Mexico and PPI China subsidiaries, respectively. In addition, $4.8 million was attributable to increased closure sales in the United Kingdom, $1.6 million was attributable to an increase in sales from the Canadian operations (increased bottle sales of $2.5 million, net of decreased closure sales of $0.9 million), and $2.2 million was attributable to sales from Portola Allied. Also contributing to the sales increases were sales from joint ventures in the United States, totaling $3.0 million. The increases in sales in the United Kingdom and Canada resulted mainly from increased unit shipments and a shift of sales to more profitable product lines. The sales increases were partially offset by a $1.5 million decrease in domestic equipment division sales and $3.3 million decrease in domestic closure sales due in part to consolidation in the dairy industry and also due to transfer of capacity to international operations. The Company’s international operations continue to comprise a larger percentage of the Company’s sales volume as they increase market share.

     Gross profit decreased $0.3 million to $46.6 million for fiscal 2000, as compared to $46.9 million for fiscal 1999 and decreased slightly as a percentage of sales from 23.9% in 1999 to 22.3% in 2000. The margin decrease was primarily due to decreased margins in the domestic closures and equipment divisions, totaling $4.1 million. PPI China and Portola Allied also experienced decreased margins of $0.2 and $0.1 million, respectively. Offsetting these decreases were improved margins in Canada, the United Kingdom and Mexico of $1.3, $0.7 and $0.3 million, respectively. In addition the domestic joint ventures contributed $1.8 million gross profit. The decreases in domestic closures were in part due to an increase in resin costs associated with a worldwide increase in oil prices that, due to timing and competitive issues, the Company was unable to immediately pass on to all customers during the first and second quarters of fiscal 2000. Additionally, the decreased margins for PPI China and Portola Allied are due to the full year consolidation of these subsidiaries in fiscal 2000. The increased margins of Canada, the United Kingdom and Mexico continued to improve as these operations mature and operate more efficiently. Also, the United States joint ventures added to gross profit as these operations were new during fiscal year 1999 and 2000.

     Overall, fiscal year 2000 direct materials, labor and overhead costs represented 42.3%, 14.9% and 23.2% of sales, respectively, compared to fiscal year 1999 percentages of 39.1%, 15.2%, and 25.2%.

     Selling, general and administrative expense increased from $28.0 million in fiscal year 1999 to $30.4 million in fiscal 2000 and increased as a percentage of sales from 14.3% for fiscal 1999 to 14.5% for fiscal 2000. These increases were primarily due to additional expenses related to the new domestic subsidiaries, international subsidiaries and joint ventures.

     Research and development expenses increased from $2.7 million and 1.4% of sales in fiscal year 1999 to $2.9 million and 1.4% of sales in fiscal year 2000. The increase in research and development expenses was primarily due to prototype expenses related to the introduction of new products.

     Amortization of intangibles (consisting of amortization of patents and technology licenses, goodwill, customer lists and covenants not to compete) totaled $3.5 million for fiscal year 2000 as compared to $2.6 million for fiscal 1999. The increase is primarily a result of goodwill amortization related to PPI Mexico, PPI China and Portola Allied.

     Due to the effect of the factors summarized above, income from operations decreased $4.2 million, or 30.9%, to $9.4 million for fiscal 2000, as compared to $13.6 million for fiscal 1999, and decreased as a percentage of sales from 7.1% in fiscal 1999 to 4.6% in fiscal 2000.

     Interest income decreased to $75,000 in fiscal year 2000 from $181,000 in fiscal year 1999 primarily due to lower levels of excess cash available for investment.

     Fiscal year 2000 interest expense remained relatively flat for fiscal 2000 at $14.5 million as compared to $14.4 million for fiscal 1999.

20

Table of Contents

     Amortization of debt financing costs decreased $118,000 to $428,000 in fiscal 2000 as compared to $546,000 for the same period in fiscal 1999 due to the payoff of the Canadian term and revolver loan notes. Debt financing costs were primarily attributable to the $110 million senior notes issued in October 1995.

     Income tax benefit for fiscal years 2000 and 1999 differs from the U.S. federal tax rate due principally to non-deductible goodwill and not providing a benefit for losses generated in certain foreign jurisdictions.

     Net loss increased to $3.7 million in fiscal 2000 compared to a $0.6 million loss in fiscal 1999.

Liquidity and Capital Resources

Fiscal Year Ended August 31, 2001 Compared to Fiscal Year Ended August 31, 2000

     The Company has relied primarily upon cash from operations and 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. On October 2, 1995, the Company completed a $110.0 million senior notes offering; the notes mature on October 1, 2005 and bear interest at the rate of 10.75% per annum. The net proceeds of the notes offering were approximately $106.0 million, of which $83.0 million was used to retire the Company’s debt then outstanding under its senior term loans, revolving credit facility and senior subordinated notes. As of August 31, 2001, the Company had cash and cash equivalents of $3.3 million, a decrease from $3.9 million as of August 31, 2000.

     Cash provided by operations totaled $14.9 million and $17.6 million in fiscal years 2001 and 2000, respectively. Net cash provided by operations for fiscal year 2001 was the result of net income plus non-cash charges for depreciation and amortization, offset by the net gain on the sale of property of $6.8 million. Working capital (current assets less current liabilities) increased $0.8 million as of August 31, 2001 to $19.0 million, as compared to $18.2 million as of August 31, 2000, primarily as a result of a decrease in short-term deferred taxes, an increase in the current portion of long-term debt, accrued liabilities and accrued compensation, partially offset by a decrease in accounts payable, book overdraft and accrued compensation.

     Cash used in investing activities was $4.1 million in fiscal year 2001 as compared to $11.7 million in fiscal year 2000. This consisted primarily of additions to property, plant and equipment of $14.1 million and $10.9 million, in fiscal years 2001 and 2000, respectively. Fiscal year 2001 included additions to intangible and other assets relating to the acquisition of Consumer. Fiscal year 2000 also included the acquisition of the remaining interest in PPI China for $1.4 million. Cash used in investing activities was reduced by $10.1 million in 2001 by proceeds from the sale of property, plant and equipment, primarily related to the sale of certain real estate located in San Jose, California and by $469,000 in 2000 due to the disposition of the Company’s Fort Worth, Texas facilities.

     At August 31, 2001, the Company had total indebtedness of $142.0 million, $110.0 million of which was attributable to the Company’s senior notes. Of the remaining indebtedness, $20.9 million was attributable to the Company’s senior credit facility and $1.0 million of the indebtedness was principally comprised of foreign subsidiary loans and capital lease obligations. In addition, the Company’s total indebtedness at August 31, 2001 included redeemable warrants with a carrying value of $10.1 million. See Note 9 to the Consolidated Financial Statements for additional information on the redeemable warrants. On September 29, 2000, the Company entered into a new four-year amended and restated senior secured revolving credit facility of up to $50.0 million, subject to a borrowing base of eligible receivables and inventory, plus net property plant and equipment. This credit facility 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. See Note 7 of the Notes to Consolidated Financial Statements for additional information.

21

Table of Contents

     At August 31, 2001, the Company had $3.3 million in cash and cash equivalents as well as unused borrowing capacity of approximately $25.1 million under the revolving credit facility. Management believes that these resources and increased resources from the amended and restated revolving credit facility, together with anticipated cash flows from operations, will be adequate to fund the Company’s operations, debt service requirements and capital expenditures through fiscal year 2002. However, there can be no assurance that additional capital beyond the amounts currently forecasted by the Company will not be required or that any such required additional capital will be available on reasonable terms, if at all, or at such time or times as required by the Company.

Fiscal Year Ended August 31, 2000 Compared to Fiscal Year Ended August 31, 1999

     Cash provided by operations totaled $17.6 million and $11.6 million in fiscal years 2000 and 1999, respectively. Net cash provided by operations for both fiscal years was the result of a net loss offset primarily by non-cash charges for depreciation and amortization. Working capital (current assets less current liabilities) increased $1.2 million as of August 31, 2000 to $18.2 million, as compared to $17.0 million as of August 31, 1999, primarily as a result of a decrease in current portion of long-term debt, accrued liabilities and accrued compensation partially offset by an increase in accounts payable.

     Cash used in investing activities was $11.7 million in fiscal year 2000 as compared to $21.4 million in fiscal year 1999. This consisted primarily of additions to property, plant and equipment of $10.9 million and $16.6 million in fiscal years 2000 and 1999, respectively. Fiscal year 2000 also included the acquisition of the remaining interest in PPI China for $1.4 million. Fiscal year 1999 included the acquisition of the remaining interest in PPI Mexico and the acquisition of the assets of Allied Tool, Inc. for approximately $3.0 million and $2.2 million, respectively. Cash used in investing activities was reduced by $469,000 in 2000 and $945,000 in 1999 by proceeds from the sale of property, plant and equipment, primarily related to the disposition of the Company’s Fort Worth, Texas facilities in fiscal 2000 and its Bettendorf, Iowa facilities in fiscal 1999.

     At August 31, 2000, the Company had total indebtedness of $134.8 million, $110.0 million of which was attributable to the Company’s senior notes. Of the remaining indebtedness, $24.5 million was attributable to the Company’s senior credit facility and the remainder was principally comprised of capital leases expiring in September 2000.

     At August 31, 2000, the Company had $3.9 million in cash and cash equivalents as well as unused borrowing capacity of approximately $10.5 million under the revolving credit facility.

Inflation

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

Seasonality

     The Company’s sales and earnings reflect a seasonal pattern as a result of greater sales volumes during the summer months. In fiscal 2001, 46% of sales occurred in the first half of the year (September through February) while 54% of sales were generated in the second half (March through August). In fiscal 2000, 47% of sales occurred in the first half of the year while 53% of sales were generated in the second half.

Income Taxes

     The relationship of income tax expense to income before income taxes is affected primarily by nondeductible goodwill arising from the Company’s acquisitions (See Note 12 of the Notes to Consolidated Financial Statements).

22

Table of Contents

Recent Accounting Pronouncements

     In the first quarter of fiscal 2001, the Company adopted the Securities and Exchange Commission (the “SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The impact of SAB No. 101 had no effect on the Company’s financial statements.

     Also in the first quarter of fiscal 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 established accounting and reporting standards for derivative instruments and hedging activities and requires the recognition of all derivatives in the balance sheet at their fair market values. The impact of adopting SFAS No. 133 was not material to the Company’s financial statements.

     During its fourth quarter of fiscal 2001, the Company adopted FASB’s Emerging Issues Task Force (“EITF”) Issue 00-10, “Accounting for Shipping and Handling Fees and Costs”, which requires all shipping and handling fees billed to customers to be classified as revenue. Prior to August 31, 2001, the Company included both shipping revenues and shipping in cost of goods sold. The Company adopted Issue 00-10 in the fourth quarter in the current year and reclassified fiscal years ended 2000 and 1999 to conform with the new standard. The effect of this accounting policy change was to increase revenue and cost of sales by $1.4 million in the fourth quarter of fiscal year 2001 and by $1.6 million for the same quarter of the prior year. During the fiscal years 2001, 2000 and 1999, revenue and cost of sales increased by $5.1 million, $5.9 million and $5.2 million, respectively. This reclassification had no effect on net income.

     As of June 30, 2001, the Company applied EITF Issue 00-19, “Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s Own Stock”. The effect of the application of Issue 00-19 was to reclassify the Company’s redeemable warrants from temporary equity to a liability on June 30, 2001. The application of Issue 00-19 had no effect on net income for the year ended August 31, 2001.

     In July 2001, FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 established accounting and reporting standards for business combinations. SFAS No. 142 established accounting and reporting standards for acquired goodwill and other intangible assets, specifically how they should be treated upon and subsequent to their acquisition. Both SFAS No. 141 and SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001; however, early adoption is permitted. The Company is assessing the impact of adoption and is expecting to adopt SFAS No. 141 and SFAS No. 142 during fiscal year 2002.

     On August 15, 2001, FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. On October 4, 2001, FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. These statements will be adopted in fiscal year 2003 and are not expected to impact the Company’s results of operations or financial condition.

Item 7A. 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 and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes.

     The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company manages such risk through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk.

23

Table of Contents

     The following table provides information about the Company’s debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related interest rates by expected maturity dates.

     At August 31, 2001, the Company had two outstanding warrants, which were 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 would be suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At August 31, 2001, the Company’s credit facilities did not permit redemption of the warrants. At August 31, 2001, the carrying value of the warrants totaled $10.1 million, which approximated fair value of the Company’s Common Stock as determined by the Company’s Board of Directors.

     The Company’s foreign subsidiaries use the local currency as their functional currency. Assets and liabilities are translated at year-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 common stock and other shareholders’ equity (deficit). Gains (losses) arising from foreign currency transactions are included in determining net income (loss). During the year ended August 31, 2001, the Company recognized $50,000 in losses arising from foreign currency transactions. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates.

24

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

25

Table of Contents

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Portola Packaging, Inc. and Subsidiaries:

     In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Portola Packaging, Inc. and its Subsidiaries (the Company) at August 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     As discussed in Note 9 of the Notes to the Consolidated Financial Statements, the Company applied Emerging Issues Task Force Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” as of June 30, 2001. The effect of the application of Issue 00-19 was to reclassify the Company’s redeemable warrants from temporary equity to a liability on June 30, 2001. The application of Issue 00-19 had no effect on net income for the year ended August 31, 2001.

PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania

October 17, 2001

26

Table of Contents

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

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

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

27

Table of Contents

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

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

28

Table of Contents

PORTOLA PACKAGING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)