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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, 2002

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

         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 and non-voting common stock is privately held and there is no public market for such common stock. The aggregate market value of Registrant’s voting and non-voting common stock cannot be computed by reference to the price at which the stock was sold, or the average bid and ask price of such common stock, as of any date within sixty days prior to the date of filing because there have been no sales of the non-voting common stock within sixty days prior to the date of filing.

         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 November 15, 2002.

DOCUMENTS INCORPORATED BY REFERENCE: None

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PORTOLA PACKAGING, INC.
2002 ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 31, 2002

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     Portola Packaging, Inc. is not required to file, and is not filing, this Form 10-K pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. Portola Packaging, Inc. is filing this Form 10-K 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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SAFE HARBOR STATEMENT UNDER
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         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 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,” “Critical Accounting Policies and Estimates” and “Quantitative and Qualitative Disclosures About Market Risk.” These sections describe risks that 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 and only reflect management’s opinions as of the date hereof. 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. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this paragraph, elsewhere in this report and in other documents the Company files from time to time with the Securities and Exchange Commission, including Quarterly Reports on Form 10-Q to be filed by the Company in fiscal year 2003.

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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 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 manufacturing facilities located throughout the United States, four facilities located in Canada, one facility each located in the United Kingdom, Mexico and China. In Europe, the Company also sells and distributes five-gallon closures and bottles through its joint venture. In addition, the Company has two equipment facilities located in the United States. 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 12.7 billion closures and 219.0 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 115 domestic and foreign patents on the design of container closures, compatible bottlenecks, handling equipment and related processes.

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 $210.8 million in sales and 12.7 billion closures and 219.0 million bottles sold for fiscal year 2002. 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”). 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) engaged in manufacturing and distributing plastic bottles, primarily in eastern Canada. The companies acquired in the Western and Eastern Canadian Acquisitions were amalgamated in March 2002 and operate under the name “Portola Packaging Canada Ltd.” 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.

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         On December 21, 1998 and April 16, 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”), respectively. 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. 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 five-gallon closures and 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 and closures 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 the Company’s 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.

         On February 25, 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 Consolidated Financial Statements. Consumer’s manufacturing and distributing operations have been merged with the Company’s existing operations in Chino, California; Batavia, Illinois; and Sumter, South Carolina.

         On January 19, 2001, the Company formed a wholly-owned subsidiary, now known as Portola (Asia Pacific) Holding Limited (“PH”). PH was formed to facilitate international business relations with the Company’s Chinese operations.

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 positioning and selling 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.

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         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 “Item 1. BUSINESS — Raw Materials and Production.”

         Expanding Sales in Markets Outside of the United States. The Company expects significant growth in markets outside of the United States for plastic closures and capping and filling equipment, as bottled water and other non-carbonated water companies in Europe, the Far East, Latin America, Australia, New Zealand and elsewhere adopt more advanced packaging materials and techniques. The Company is seeking to capitalize on the opportunity for expansion into such markets through joint ventures with local bottle manufacturers, bottlers, and distributors and by increasing export sales of closures and capping and filling equipment. The Company is a partner in CSE, a joint venture in Europe. The Company’s wholly-owned operations in Mexico, Canada, the United Kingdom and China began as joint ventures. See “Item 1. BUSINESS — International Sales and Joint Ventures.”

         Seeking Strategic Acquisitions. Portola plans to continue its program of seeking to acquire businesses that serve similar customers that use proprietary product and process technologies and 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, the Company’s Chinese, Mexican, Canadian, and United Kingdom operations, the assets of Allied Tool, Inc. and Consumer Cap Corporation, and it has entered into joint ventures domestically and in Europe.

Plastic Closure Market

         Portola competes in the closure segment of the worldwide plastic container packaging industry, focusing on proprietary tamper evident plastic closure applications. Plastic closures have various applications and are designed and engineered to meet specific uses. Portola’s major product applications for plastic 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 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.

         The use of plastic closures has grown as the demand for tamper evident packaging has grown. 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. These Portola innovations established 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 climate variations, with warm weather tending to increase consumption. In addition, demand is affected by general economic conditions and business cycles. See “Item 1. BUSINESS — Products” and “Item 1. BUSINESS — Product Development.”

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Products

         Portola designs, manufactures and sells a wide array of tamper evident plastic closures for dairy, fruit juice, bottled water, sport drinks, institutional food products and other non-carbonated beverage products. The Company also designs, manufactures and sells (i) high speed capping equipment used 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, (iv) blow molded bottles used in the dairy, water, juice and industrial markets and (v) injection stretch bottles for water markets. The Company’s sales of plastic closures represented approximately 80%, 79% and 79% of total sales in fiscal years 2002, 2001 and 2000, respectively. In fiscal year 2002, the balance of the sales was for bottles (11%), 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 a great number of application and customer requirements. The Company’s plastic closures range in size from 26mm 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. Most of the Company’s plastic closures offer a snap-on, snap-screw or screw feature, designs which are preferred by packagers because they reduce production costs. 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 following table describes the Company’s principal plastic closure product lines.

         Capping Equipment and Tooling. The Company designs, manufactures and sells 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 put into a position of assuring themselves 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.

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         Water Equipment: PortaPlants/Adapta/ValuLine/Roboloader. In addition to plastic closures and capping equipment, the Company’s Water Equipment Group designs, manufactures and sells customized high production water treatment, bottling and robotic palletizing equipment for the five gallon and other refillable water containers. The Company’s most comprehensive five-gallon water bottling system is its PortaPlant system. The PortaPlant, Adapta, and ValuLine systems are compact bottle washing, filling, capping and conveying systems for glass and plastic refillable water bottles. The Roboloader system is a robotic palletizing system for automated rack loading and unloading at speeds up to 2,200 bottles per hour (“BPH”). The PortaPlant system can process 800 to 3,000 BPH, the Adapta system can process 300 to 600 BPH and the ValuLine can process 150 BPH. The Adapta’s modular and expandable design make it ideal for new and small water bottling companies whose growth requires integrated expansion. Portola’s Water Equipment Group has focused its sales efforts internationally as less developed countries look for improved distribution of safe and reliable drinking water.

         Plastic Bottles. In addition to marketing closures, the Company produces a wide variety of blowmolded high density plastic bottles in Canada for use primarily in the dairy, water and juice industry. The Company also produces five-gallon polycarbonate water bottles in Mexico and the UK.. The ability to sell the closures and bottles together enables the Canadian, Mexican and the UK operations to provide their customers with a complete packaging system. During fiscal year 1999, the Company entered into a joint venture, CSE, which sells five-gallon polycarbonate bottles and closures primarily in Europe.

Product Development

         The Company continues to be committed to product development and engineering. Its research and development group and engineering staff engages in a range of design and development services, focusing on (i) new products and existing 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 2002, 2001 and 2000 were $3.1 million, $3.1 million and $2.9 million, respectively.

         The Company has also made a substantial investment in developing both new and enhanced products for existing markets. To facilitate this process and to increase the chances of 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. Ongoing communication with its customers has enabled the Company to identify new product opportunities to develop improved traditional closures as well as fitments and closures for institutional foods industries.

         The Company’s typical product development cycle has been less than one year. The Company is aware of an increasing pace of innovation in the worldwide plastic packaging industry and is taking steps to address this future need. However, in the past successful introduction of a new closure product has taken as long as two to three years, where customers who are comfortable with their existing closure products are generally slow to switch to a new design.

Intellectual Property

         Currently, the Company holds approximately 115 domestic and foreign patents on the design of the Company’s products, including container closures, compatible bottlenecks, handling equipment and related processes. Although the Company relies on its patents to protect its intellectual property, the Company is committed to developing new proprietary innovations in tamper evident plastic closures, bottles, related equipment and tooling for the food and beverage industry, which are expected to provide the Company with a continuing competitive advantage over its competitors. The Company believes that the expiration of its patents could materially affect future margins as competitors may apply additional pricing pressure. The Company also has a number of trademarks that are deemed valuable to its business. Most of the technical information and know-how necessary to operate its business has been generated by the Company itself. It is proprietary and, in the opinion of the Company, well protected legally. The Company does not license any significant technology from third parties.

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Raw Materials and Production

         The principal raw material for the Company’s plastic closures and bottles is injection and blow molding grade resin, which generally accounts for approximately 60% of the cost of all raw materials purchased for the Company’s plastic closures and bottles. The majority of the resin used by the Company in production is low density polyethylene (LPDE). The Company also uses high density polyethylene, linear low polyethylene, polypropylene and polycarbonate. The Company believes that its volume purchases enable it to negotiate favorable pricing with resin suppliers. Resin prices can, however, 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 eventually pass on increases in resin prices directly to its customers. Significant increases in resin prices from current levels, 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.

         To produce plastic closures and bottles, resin, which is delivered as small pebble-size pellets to large storage silos, is conveyed through a pipeline system to injection or blow molding machines, where it is melted into a thick liquid state. Coloring agents are added as appropriate and the mixture is injected or 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 that 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 similar, highly automated process in the production of its bottles. By continually improving its largely automated 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 sells its products through its decentralized in-house sales staff, domestic and foreign sales representatives, and a number of domestic and foreign distributors. Calls on customers and 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 and each facility may make its own purchase decisions. The Company’s most significant customers are processors and packagers of fluid milk, non-carbonated bottled water, chilled juice and flavored drink products sold on the retail level as well as condiments sold in the wholesale and institutional market. The Company has over 2,500 customers. The Company’s top ten customers accounted for approximately 35% of the Company’s sales during the fiscal year ended August 31, 2002. One United States customer accounted for approximately 10% of sales for the fiscal year ended August 31, 2002 and owed the Company $1.6 million as of August 31, 2002 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 generally 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, many 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 domestic and foreign customers by dispatching service personnel on short notice to solve bottling line problems. 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.

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International Sales and Joint Ventures

         Although the Company’s sales are primarily domestic, the Company has experienced growth in international sales. Export sales from the United States and sales from the Company’s non-U.S. facilities increased to $84.4 million in fiscal year 2002 from $83.7 million and $76.8 million in fiscal years 2001 and 2000. Bottled water companies and other non-carbonated beverage companies in Europe, the Far East, Latin America, Australia, New Zealand and elsewhere have continued to adopt more advanced packaging materials and techniques and have increasingly chosen to purchase Company products from nearby Company plants rather than from the Company’s United States facilities. Correspondingly, the Company’s foreign subsidiaries have increased their production and total foreign sales accounted for 36% of the Company’s consolidated sales in fiscal 2002. For international sales by geographical region, see Note 13 of the Notes to Consolidated Financial Statements. For the fiscal years ended August 31, 2002, 2001, and 2000, export closure sales from the United States to unaffiliated customers were $3.6 million, $2.8 million, and $4.9 million, respectively.

         In the last several years, the Company has entered into joint ventures with bottle manufacturers, bottlers and distributors to gain footholds in markets outside of the United States. The Company has been able to sell plastic closures, bottles, capping equipment and turnkey bottling systems to its joint venture partners and provide them with complete solutions to their bottling and capping requirements. See “Item 1. BUSINESS – History.”

Competition

         The Company competes in sales of 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. The Company believes that its proprietary products and its ability to provide its customers with innovative, low-cost closures and complete capping systems, as well as its reputation for quality, reliability and service, and its automated and strategically located production facilities give it a significant competitive advantage.

         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 encounter 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. Further, numerous well-capitalized competitors might expand their product offerings, either through internal product development or acquisitions of the Company’s direct competitors. Such competitors could introduce products or establish prices for their products in a manner that could adversely affect the Company’s ability to compete. A significant increase in competition through technological innovations, offerings of lower priced products or what the Company has begun to note as a continuing proliferation of new packaging applications that the Company cannot serve because sufficient technology or financial and marketing resources might not be available to it could have a significant adverse effect on the Company’s financial condition and results of operations. Additionally, the Company from time to time also faces direct competition from bottling companies and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources.

Employees

         As of August 31, 2002, the Company had 1,072 full-time employees, 20 of whom were engaged in product development, 104 in marketing, sales and customer support, 851 in manufacturing and 97 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 employees of the Company’s Canadian subsidiary are members of the Teamsters Union. During fiscal year 2002, the Company entered into a three year agreement with the Teamsters Union. The Company has never experienced a work stoppage and believes that employee relations are good.

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Item 2. PROPERTIES

         The Company’s facilities are highly efficient due to continually improved plant layout, procurement of more advanced equipment, enhanced automation and manufacturing procedures and frequently scheduled maintenance throughout the plants. The Company believes that these facilities are well-maintained, in good operating condition and strategically located. The Company believes its facilities are adequate for the Company’s current needs and near-term growth requirements. 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.

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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 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.

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

         None.

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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 November 15, 2002, 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 November 15, 2002, there were approximately 190 holders of record of the 8,596,973 outstanding shares of Class B Common Stock, Series 1 and 13 holders of record of the 1,170,395 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.

Dividend Policy

         The Company has not paid dividends on any class of 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.

Equity Compensation Plan Information

         See Item 12 of this Form 10-K entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

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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, 2002 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.

______________

(footnotes on following page)

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(a)		During the 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 and handling charges in cost of sales. The Company adopted Issue 00-10 in the fourth quarter of fiscal year 2001 and reclassified the previously reported results for fiscal years ended 2000, 1999, and 1998 to conform with the new standard, which had no effect on net income (loss). The effect of this accounting policy change was to increase revenue and cost of sales during the fiscal years 2001, 2000, 1999 and 1998 by $5.1 million, $5.9 million, $5.2 million, and $4.9 million, respectively.
(b)		Includes amortization of patents and technology, licenses, tradename, covenants not-to-compete and customer lists for all years presented and also includes goodwill amortization for fiscal years ended 2001, 2000, 1999 and 1998. Effective September 1, 2001, the Company chose early adoption of the 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 value its goodwill by operating unit and review for impairment. Based on this review, the Company did not record an impairment loss during fiscal year 2002. The effect of the adoption was to eliminate goodwill amortization expense of $2.6 million in fiscal year 2002.
(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 $1.9 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. 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 $0.5 million, 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.
(d)		Other (income) expense in fiscal year 2002 includes income of $0.5 million and $1.1 million recognized on the dissolution of a joint venture and recovery with respect to a promissory note payable to the Company, respectively. See Notes 2 and 14 of the Notes to Consolidated Financial Statements. 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 $0.8 million and fixed assets of $0.7 million, net of other expense of $0.3 million.
(e)		Interest expense was offset by $0.8 million of interest income recognized on the recovery with respect to a promissory note payable to the Company in fiscal year 2002. See Note 14 of the Notes to Consolidated Financial Statements.
(f)		Two redeemable warrants entitle the holders thereof to purchase an aggregate of 2,492,741 shares of the Company’s Class A Common Stock. These 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 the current market value of the Company’s common stock 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, 2002, 2001, 2000 and 1999, the Company’s credit facilities did not permit redemption of the warrants.

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(g)		As of June 30, 2001, the Company applied EITF Issue 00-19, “Accounting for Derivative Financial Instruments 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.
(h)		EBITDA represents, for any relevant period, income (loss) before income taxes, depreciation of property, plant and equipment, net interest expense (including amortization of debt issuance costs and warrant interest income) and amortization of intangible assets. Adjusted EBITDA represents, for any relevant period, income (loss) before income taxes, write-off of intangible assets, restructuring costs, depreciation of property, plant and equipment, net interest expense (including amortization of debt issuance costs), amortization of intangible assets, gains and losses on both foreign exchange and sale of assets. Adjusted EBITDA for fiscal year 2002 also includes as a separate component other income of $0.5 million and $1.1 million recognized on the dissolution of a joint venture and recovery with respect to a promissory note payable to the Company, respectively. See Notes 2 and 14 of the Notes to Consolidated Financial Statements. 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.

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

         In addition to historical information, this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical 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,” “Critical Accounting Policies and Estimates” and “Quantitative and Qualitative Disclosures About Market Risk.” These sections describe risks that 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 and only reflect management’s opinions as of the date hereof. 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. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this paragraph, elsewhere in this report and in other documents the Company files from time to time with the Securities and Exchange Commission, including Quarterly Reports on Form 10-Q to be filed by the Company in 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.

         The Company currently has six wholly-owned operating subsidiaries: two of which are domestic and the remaining four of which are located in the United Kingdom, Canada, Mexico and China. The United Kingdom subsidiary is Portola Packaging Ltd. (U.K.); the Canada subsidiary (formerly the eastern and western Canadian subsidiaries prior to amalgamation in fiscal 2002) is Portola Packaging Canada Ltd., 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. In May 1999, the Company’s western Canadian subsidiary was converted to “restricted subsidiary” status and was treated as a “restricted subsidiary” subsequent to amalgamation during fiscal year 2002. 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.”

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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 judgement based on various assumptions and other factors such as historical experience, current and expected economic conditions, and in some cases, actuarial techniques. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. The Company believes that the following accounting policies are critical due to the degree of estimation required.

         Allowance for Doubtful Accounts. The Company provides credit to its customers in the normal course of business, performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The allowance for doubtful accounts related to trade receivables is determined based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, an evaluation of specific accounts is conducted when information is available indicating a customer may not be able to meet its financial obligations. Judgements are made in these specific cases based on available facts and circumstances, and a specific reserve for that customer may be recorded to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on historical collection and write-off experience. The collectibility of trade receivables could be significantly reduced if default rates are greater than expected or if an unexpected material adverse change occurs in a major customer’s ability to meet its financial obligations. The allowance for doubtful accounts totaled $1.2 million as of both August 31, 2002 and August 31, 2001.

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

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

         Income Taxes. The Company estimates its income taxes in each of the jurisdictions in which it operates. This process involves estimating its current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company then assesses the likelihood that the deferred tax assets will be recovered from future taxable income, and, to the extent recovery is not likely, a valuation allowance is established. When an increase in this allowance within a period is recorded, the Company includes an expense in the tax provision in the consolidated statements of operations. Management’s judgment is required in determining the provision (benefit) for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the deferred tax assets will be realized through the recognition of future taxable income, except for certain foreign jurisdictions for which a full valuation has been provided. Although the deferred tax assets for which full valuation allowances have not been provided are considered realizable, actual amounts could be reduced if future taxable income is not achieved. The Company has provided valuation allowances against net deferred tax assets of $1.9 and $1.0 million as of August 31, 2002 and August 31, 2001.

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         Impact of Equity Issuances. The Company has two outstanding warrants, which are redeemable at the option of the holder upon 60 days written notice to the Company based upon a price equal to the higher of the current fair value per share of the Company’s Common Stock or an amount computed under a formula(s) in the warrant agreements, through June 30, 2004 and June 30, 2008, respectively. The obligation of the Company to redeem the warrants is suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At August 31, 2002, the Company’s credit facilities did not permit redemption of the warrants. At August 31, 2002, the carrying value of the warrants totaled $10.4 million, which represents the fair value of the instruments as determined by the Company’s management. In accordance with EITF Issue 00-19, the change in the fair value of the warrants of $151,000 was recognized as interest income during fiscal year 2002.

Results of Operations

Fiscal Year Ended August 31, 2002 Compared to Fiscal Year Ended August 31, 2001

         Sales. Sales decreased $8.6 million, or 4.0%, from $219.4 million for fiscal 2001 to $210.8 million for fiscal 2002. The decrease in sales for fiscal 2002 compared to the same period in fiscal 2001 was mainly attributable to decreased sales of $7.3 million from the U.S. closure division primarily due to price reductions to customers to reflect lower resin costs and product mix. Equipment sales decreased $2.7 million mainly due to the timing of customer orders. Sales decreased by $0.9 million in Mexico due to sales volume and also decreased by $1.2 million in bottle sales due to discontinuation of one of the Company’s consolidated joint ventures. Offsetting these decreases were increased sales of $2.7 million in the United Kingdom due to sales volume and $0.8 million in tooling due to timing of customer orders.

         Gross Profit. Gross profit increased $3.7 million to $53.6 million for fiscal 2002 as compared to $49.9 million for fiscal 2001 and increased as a percentage of sales from 22.7% in 2001 to 25.5% in 2002. The margin increase was due to overall lower raw material costs, primarily due to the lower resin prices in the closure and bottle operations and improved margins in the equipment operations.

         Overall, fiscal year 2002 direct materials, labor and overhead costs represented 35.1%, 15.7% and 27.6% of sales, respectively, compared to fiscal year 2001 percentages of 40.1%, 14.7%, and 26.4%.

         Selling, General and Administrative Expenses. Selling, general and administrative expense increased from $28.8 million in fiscal year 2001 to $30.8 million in fiscal 2002 and increased as a percentage of sales from 13.1% for fiscal 2001 to 14.6% for fiscal 2002. These increases were primarily due to increased expenses for consulting fees for the Company’s product expansion project and ERP software system, employee costs, travel expenses and bad debt charges.

         Research and Development Expenses. Research and development expenses were $3.1 million in both fiscal years 2001 and 2002, and increased slightly as a percentage of sales from 1.4% in fiscal year 2001 to 1.5% in fiscal year 2002.

         Amortization of Intangibles. Amortization of intangibles (consisting of amortization of patents, goodwill, tradename, covenants not-to-compete and customer lists) decreased $2.6 million, or 62.9%, to $1.6 million for fiscal year 2002 as compared to $4.2 million in fiscal year 2001. The decrease was primarily due to the elimination of goodwill amortization expense due to the early adoption of SFAS No. 142 effective September 1, 2001. The effect of the adoption was to eliminate goodwill amortization expense of $2.6 million in fiscal 2002. There was an additional decrease of amortization expense of $0.3 million primarily due to certain Portola Allied Tool intangibles becoming fully amortized in March 2002. Offsetting this decrease was an increase of $0.2 million in amortization expense for additional patent, tradename, covenants not-to-compete and customer list assets relating to the acquisition of Consumer during fiscal 2001.

         Restructuring Costs. The Company did not incur restructuring charges during fiscal 2002, compared to the $1.9 million incurred during fiscal 2001.

         Income from Operations. Due to the effect of the factors summarized above, income from operations increased $6.3 million, or 52.8%, to $18.2 million for fiscal 2002 as compared to $11.9 million for fiscal 2001 and increased as a percentage of sales from 5.4% in fiscal 2001 to 8.6% in fiscal 2002.

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         Other (Income) Expense. Interest income increased $1.0 million to $1.1 million during fiscal 2002 as compared to $0.1 in fiscal 2001 primarily due to $0.8 million interest income recognized with respect to a promissory note payable to the Company (see Note 14 of the Notes to Consolidated Financial Statements) and also recognized $0.2 million as a result of the change in the fair market value of the warrants as of August 31, 2002.

         The Company recognized income of $0.5 million and $1.1 million on the dissolution of a joint venture and the recovery of a promissory note, respectively. See Notes 2 and 14 of the Notes to Consolidated Financial Statements.

         The Company recognized a net gain of $20,000 on the sale of property, plant and equipment during fiscal year 2002, compared to a gain of $7.0 million recognized on the sale of certain real estate located in San Jose, California, during the same period in fiscal 2001, offset by a $0.2 million loss on the sale of property, plant and equipment.

         Interest Expense. Interest expense decreased by $1.2 million to $13.3 million in fiscal year 2002 as compared to $14.5 million in fiscal year 2001. This decrease was primarily due to the decrease in borrowings on the revolving credit facility and the effect of a decrease in the LIBOR rate during fiscal 2002, as compared to the same period in fiscal 2001.

         Amortization of Debt Financing Costs. Amortization of debt financing costs increased $0.1 million to $0.8 million in fiscal 2002 as compared to $0.7 million for the same period in fiscal 2001 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.

         Income Tax Provision. The income tax provision for fiscal year 2002 was $2.2 million compared to an income tax benefit of $2.1 million in fiscal year 2001. The Company’s effective tax rate differs from the U.S. statutory rate principally due to providing a valuation allowance against net deferred tax assets in certain foreign jurisdictions and nondeductible goodwill and amortization expense in fiscal 2001.

         Net Income (Loss). Net income was $4.6 million in fiscal year 2002 compared to net income of $1.0 million in fiscal 2001.

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

         Sales. 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. 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.

         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. 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. 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. 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.

         Restructuring Costs. 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.

         Income From Operations. 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.

         Other (Income) Expense. Interest income was $0.1 million and interest expense was $14.5 million for both fiscal year 2001 and fiscal year 2000.

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         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.

         Amortization of Debt Financing Costs. 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.

         Income Tax Provision. 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 2002 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 (Loss). Net income was $1.0 million in fiscal year 2001, compared to a net loss of $3.7 million in fiscal 2000.

Liquidity and Capital Resources

Fiscal Year Ended August 31, 2002 Compared to Fiscal Year Ended August 31, 2001

         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, 2002, the Company had cash and cash equivalents of $4.6 million, an increase from $3.3 million as of August 31, 2001.

         Operating Activities. Cash provided by operations totaled $24.4 million and $15.0 million in fiscal years 2002 and 2001, respectively. Net cash provided by operations for fiscal year 2002 was the result of net income plus non-cash charges for depreciation and amortization, offset by an aggregate of $2.4 million other income and interest income recognized on the dissolution of a joint venture and settlement on a promissory note. See Notes 2 and 14 of the Notes to Consolidated Financial Statements. Due to the adoption of SFAS No. 142, amortization expense for fiscal year 2002 did not include goodwill amortization. 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) decreased $0.9 million as of August 31, 2002 to $18.1 million, as compared to $19.0 million as of August 31, 2001, primarily as a result of a decrease in accounts receivable and inventory, offset by a decrease in accounts payable and accrued liabilities.

         Investing Activities. Cash used in investing activities was $11.0 million in fiscal year 2002 as compared to $4.1 million in fiscal year 2001. This consisted primarily of additions to property, plant and equipment of $10.5 million and $14.1 million, in fiscal years 2002 and 2001, respectively. Fiscal year 2001 included additions to intangible and other assets relating to the acquisition of Consumer. Cash used in investing activities was reduced by $0.4 million in fiscal year 2002 by proceeds from the sale of property, plant and equipment and by $10.1 million in fiscal year 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.

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         Financing Activities. At August 31, 2002, the Company had total indebtedness of $131.0 million, $110.0 million of which was attributable to the Company’s senior notes. Of the remaining indebtedness, $9.8 million was attributable to the Company’s senior credit facility and $0.8 million of the indebtedness was principally comprised of capital lease obligations. In addition, the Company’s total indebtedness at August 31, 2002 included redeemable warrants with a carrying value of $10.4 million. See Note 9 of the Notes to 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.

         Cash and Cash Equivalents. At August 31, 2002, the Company had $4.6 million in cash and cash equivalents as well as unused borrowing capacity of approximately $33.0 million under the revolving credit facility, less a minimum availability requirement of $3.0 million. 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 2003. The Company may require additional funds to support other purposes and may seek to raise theses additional funds through debt financing 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 7 and Item 7A of this document.

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

         Operating Activities. Cash provided by operations totaled $15.0 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 noncash 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.

         Investing Activities. 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 $0.5 million in 2000 due to the sale of the Company’s Fort Worth, Texas facilities.

         Financing Activities. 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 of the Notes to Consolidated Financial Statements for additional information on the redeemable warrants.

         Cash and Cash Equivalents. At August 31, 2001, the Company had $3.3 million in cash and cash equivalents as well as unused borrowing capacity of approximately $25.4 million under the revolving credit facility, less a minimum availability requirement of $3.0 million.

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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 7. — Contractual Obligations” and Note 8 of the Notes to Consolidated Financial Statements for off-balance sheet arrangements.

Contractual Obligations

         The following additional information 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 August 31, 2002, the LIBOR Loan rate plus 2.25% was applied to the first $12.0 million outstanding under the facility and the Bank Prime Loan rate plus 1.00% was applied to the negative balance of $2.2 million. At August 31, 2002, the Bank Prime Loan rate and the LIBOR Loan rate were 4.75% and 1.875%, respectively.
(3)		The Company acquired certain machinery and office equipment under noncancelable capital leases.
(4)		As of August 31, 2002, the Company had two outstanding warrants, which are redeemable at the option of the holder upon 60 days written notice to the Company based upon a price equal to the higher of the current fair value per share of the Company’s Common Stock or an amount computed under a formula(s) in the warrant agreements, through June 30, 2004 and June 30, 2008, respectively. The obligation of the Company to redeem the warrants is suspended if the redemption of the warrants would cause a default or event of default under the Company’s credit facilities. At August 31, 2002, the Company’s credit facilities did not permit redemption of the warrants. At August 31, 2002, the carrying value of the warrants totaled $10.4 million, which represents the fair value of the instruments as determined by the Company’s management. The fair value of the warrants was estimated at August 31, 2002 using the Black-Scholes pricing model with the following assumptions: Risk-free interest rate of 2.01% and 3.34%; 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 2002 totaled $3.4 million.
(6)		The Company has issued a letter of credit that guarantees $277,894 of a loan related to the purchase of machinery for CSE’s 50% owned Turkish joint venture, Watertek. CSE is an unconsolidated, 50% owned Austrian joint venture that sells five-gallon water bottles and closures that are produced primarily by the Company’s United Kingdom subsidiary. The Company has issued a letter of credit that also guarantees a loan of $344,635 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 August 31, 2002.
		In November 2000, the Company’s Mexican consolidated subsidiary entered into a ten-year lease for a building in Guadalajara, Mexico commencing in May 2001. The Company’s Mexican operations relocated to the new building during May 2001. The Company guaranteed approximately $595,000 in future lease payments relating to the lease.

Related Party Transactions

         The Company incurs certain related party transactions throughout the course of its business. Significant related party transactions are the following: (i) the consulting agreement between the Company and a director of the Company (see Exhibit 10.33 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2001 filed on January 10, 2002) and (ii) the sale of assets of Sand Hill Systems, Inc., the shareholders of which include the Company, a wholly-owned consolidated subsidiary of the Company and certain officers who formed a limited liability company to invest in SHS. See Note 14 of the Notes to Consolidated Financial Statements.

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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 eventually pass on increases in resin prices directly to its customers.

Seasonality

         The Company’s sales and earnings reflect a slightly seasonal pattern as a result of greater sales volumes during the summer months. In fiscal 2002, 48% of sales occurred in the first half of the year (September through February) while 52% of sales were generated in the second half (March through August). In fiscal 2001, 46% of sales occurred in the first half of the year while 54% 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 not providing a benefit for losses generated in certain foreign jurisdictions and, in fiscal years 2001 and 2000, by nondeductible goodwill arising from the Company’s acquisitions. See Note 12 of the Notes to Consolidated Financial Statements.

Recent Accounting Pronouncements

         During the fourth quarter of fiscal 2001, the Company adopted Financial Accounting Standards Board’s (“FASB”) 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 and handling charges in cost of sales. The effect of this accounting policy change was to increase revenue and cost of sales by $5.1 million and $5.9 million in fiscal years 2001 and 2000, respectively.

         As of June 30, 2001, the Company applied EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The effect of the application of EITF Issue 00-19 was to reclassify the carrying amount of the Company’s warrants from temporary equity to a liability on June 30, 2001. Under EITF Issue 00-19, the warrants are measured at fair value with changes in fair value reported in earnings. As of August 31, 2002, the Company’s management determined that the fair value of the warrants had decreased, resulting in the recognition of interest income of $151,000 in the consolidated statements of operations for fiscal year 2002.

         In July 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. Effective September 1, 2001, the Company adopted SFAS No. 142 for existing goodwill and other identifiable assets and, at August 31, 2002, the Company used the discounted cash flows methodology to value its goodwill by operating unit and reviewed for impairment. Based on this review, the Company did not record an impairment loss during fiscal year 2002. The effect of the adoption was to eliminate goodwill amortization expense of $2.6 million in fiscal year 2002. Prior to its adoption, the Company had recorded goodwill amortization expense of $2.7 million in fiscal year 2001.

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         Actual results of operations for the year ended August 31, 2002 and proforma results of operations for the years ended August 31, 2001 and 2000 had the Company applied the non-amortization provisions of SFAS 142 in these periods are as follows:

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

         Amortization expense for the net carrying amount of intangible assets, including debt financing costs, at August 31, 2002 was $2.3 million for fiscal 2002, and is estimated to be $1.6 million in fiscal 2003, $1.8 million in fiscal 2004, $1.2 million in fiscal 2005, $0.3 million in fiscal 2006, $0.1 million in fiscal 2007 and $1.0 million thereafter.

         On August 15, 2001, FASB issued 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. SFAS No. 143 will be adopted in fiscal year 2003 and is not expected to have a material impact on the Company’s results of operations or financial condition.

         On October 4, 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes or amends existing accounting literature related to the impairment and disposal of long-lived assets. SFAS 144 requires long-lived assets to be tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable from future cashflows 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 provisions of SFAS No. 144 will be adopted in fiscal year 2003 and are not expected to have a material impact on the Company’s results of operations or financial condition.

         In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was issued. 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 previously classified as extraordinary items will be reclassified.

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         SFAS No. 146, “Accounting for Exit or Disposal Activities,” was issued in July 2002. 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 included (1) costs to terminate contracts that are not capital leases; (2) costs to consolidate facilities or relocate employees; and (3) termination benefits provided to employees who are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The provisions of this statement will be effective for disposal activities initiated after December 31, 2002, with early application encouraged.

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, 2002, the Company had indebtedness outstanding of approximately $131.0 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 on October 1, 2005; $9.8 million of the balance represented funds drawn under the Company’s $50.0 million revolving line of credit; and $0.8 million of the indebtedness was principally comprised of capital lease obligations. The Company’s total indebtedness at August 31, 2002 included redeemable warrants with a carrying value of $10.4 million. See Note 9 of the Notes to 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 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 Note 7 of Notes to Consolidated Financial Statements 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. See Note 16 of Notes to Consolidated Financial Statements for additional information regarding the Company’s restricted and unrestricted subsidiaries.

Limitations on Repurchase of Notes

         Upon a change of control of the Company (as defined is the Company’s senior notes), each holder of senior notes will have certain rights to require the Company to repurchase all or a portion of such holder’s senior notes. If a change of control were to occur, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for all senior notes tendered by the holders thereof. In addition, a change of control would constitute a default under the Company’s credit facilities and, since indebtedness under the credit facilities will effectively rank senior in priority to indebtedness under the senior notes, the Company would be obligated to repay indebtedness under the credit facilities in advance of indebtedness under the senior notes. See “Item 7. 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. Further, numerous well-capitalized competitors might expand their product offerings, either through internal product development or acquisitions of the Company’s direct competitors. Such competitors could introduce products or establish prices for their products in a manner that could adversely affect the Company’s ability to compete. A significant increase in competition through technological innovations or offerings of lower prices products or what the Company has begun to note as a continuing proliferation of new packaging applications that the Company can not serve because sufficient technology or financial and marketing resources might not be available to it, could have a significant adverse effect on the Company’s financial condition and results of operations. Additionally, the Company from time to time also faces direct competition from bottling companies and other food and beverage providers that elect to produce their own closures rather than purchase them from outside sources.

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.

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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. It is possible that some of the Company’s products, if used improperly, could cause injury to the end-consumer. From time to time, customers have claimed that defects in their products have been due to defects in the Company’s closures incorporated into those products. The worldwide closure industry has become increasingly aware that children in particular may be prone to misuse a closure and create risks of swallowing a closure component. It appears that all closure manufacturers might experience declines in sales of products previously sold for incorporation into products targeted to small children as customers become increasingly wary of selling such products. In the event of a harmful accident to an end-consumer, the Company could incur substantial costs in responding to complaints or litigation related to its products. 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. 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 might incur significant litigation costs in the future, not all of which have been or will be covered by insurance. To counter the possibility of adverse events of the type discussed, the Company is increasing its research, quality control and testing activities to maximize the safety of its products.

         The Company’s products are subject to governmental regulation, including regulation by the Federal Food and Drug Administration and other agencies that might have jurisdiction over effectiveness of tamper-resistant devices and other closures for dairy and other food and beverage products. A change in government regulation could adversely affect the Company. There can be no assurance that federal, state or foreign authorities will not 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 that its employees, facilities, or products are a target for terrorists, there is a remote risk that terrorist activities could result in contamination or adulteration of its products. The Company’s products are tamper resistant, but not tamper proof. Although the Company has systems and procedures in place that are designed to prevent contamination and adulteration of raw materials used in the manufacture of its products and in its finished products, there is no assurance that a disgruntled employee or third party could not introduce an infectious substance, into packages of our finished products, either at our manufacturing plants or during shipment of our products. The Company has asked all of its employees to maintain a heightened awareness of suspicious circumstances and to be prepared to respond should the need arise. The Company has also asked its customers to inspect incoming shipments of products transported by common carrier to assure that shipments of its products have arrived intact and show no signs of external tampering. Were its products to be tampered with in a manner not readily capable of detection, the Company could experience a material adverse effect in our business, operations and financial condition.

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 margins. 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 margins. See “Item 1. BUSINESS — Raw Materials and Production.”

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

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.

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 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, 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.

         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.

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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 fiscal year 2002, the Company incurred $285,000 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.

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. One United States customer accounted for approximately 10% of sales for the fiscal year ended August 31, 2002 and owed the Company $1.6 million as of August 31, 2002.

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, the Company experienced increases in resin prices. The Company generally has been able to eventually pass on increases in resin prices directly to the customer. 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.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the periods ended August 31, 2002, 2001 and 2000 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 described in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” as of September 1, 2001. The effect of the adoption of this standard was to eliminate $2.6 million of amortization expense for the year ended August 31, 2002.

         As described in Note 1 of 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 11, 2002, except for the
last paragraph of Note 17 for which
the date is October 31, 2002

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PORTOLA PACKAGING, INC. AND SUBSIDIARIES

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