Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

For Fiscal Year Ended December 31, 2002

OR

For the transition period from                     to                    

Commission file number 000-16496

Constar International Inc.

(Exact name of registrant as specified in its charter)

(215) 552-3700

(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:

Title of Each Class

Common Stock, $.01 Par Value

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 and 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 Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  ¨ No  x

As of March 14, 2003, 12,015,000 shares of the Registrant’s Common Stock, excluding shares held in Treasury, were issued and outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (treating Crown Cork & Seal Company, Inc. and the Company’s directors and executive officers as the Company’s only affiliates for these purposes) on such date was $75,175,450.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Notice of Annual Meeting and Proxy Statement dated March 28, 2003 are incorporated by Reference into Part III hereof. Only those portions specifically cited in Part III hereof as being so incorporated are to be deemed filed as part of this Annual Report on Form 10-K.

Table of Contents

TABLE OF CONTENTS

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K includes forward-looking statements. Forward-looking statements can be identified by words such as “anticipates”, “believes”, “expects”, “planned”, “scheduled”, or similar expressions. Statements made regarding future results are subject to numerous assumptions, uncertainties and risks that may cause future results to be materially different from the results stated or implied in this document. The following are among the important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted:

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of the Company’s forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. Constar undertakes no obligation to update publicly any forward-looking statement whether as a result of new information or future events.

Table of Contents

PART I

ITEM 1.    BUSINESS

General

Constar International Inc. (the “Company” or “Constar”) is a global producer of PET, or polyethylene terephthalate, plastic containers for food and beverages. Constar manufactures PET containers for conventional PET applications in soft drinks and water and for custom PET applications. Custom PET containers are used for food, juices, teas, new age beverages, beer and flavored alcoholic beverages, all of which require advanced technologies, processing know-how or innovative designs.

Some foods and beverages are sensitive to oxygen and require special protective packaging. Oxbar, the Company’s oxygen-scavenging technology, allows Constar to produce the special packaging required for the protection of oxygen sensitive products. The Company has also developed proprietary methods for addressing the challenges of hot-filling PET containers. The Company has experienced many past conversions of product lines to PET, including soft drinks and water. This gives the Company a strong understanding of the market dynamics associated with expected future large scale conversions to PET. The Company is engaged in development projects with leading consumer product companies to deliver the next generation of PET technologies, and has commenced commercial trials and filed patent applications for some of these technologies.

The PET Container Industry

The PET container industry is generally divided into two product types: conventional PET, which includes beverage containers for soft drinks and water, and custom PET, which includes containers that generally require specialized performance characteristics.

The conventional PET container industry consists of high volume production of containers for use in packaging soft drinks and water. The industry is supplied by independent producers, as well as captive manufacturers.

The custom PET container industry is characterized by complex manufacturing processes, unique materials, innovative product designs and technological know-how for products with special shelf-life requirements. Because of the greater required manufacturing complexity, many custom PET applications have greater profitability and higher barriers to entry than conventional PET.

PET products include both bottles and preforms. Preforms are test tube-shaped intermediate products in the bottle manufacturing process. Some companies purchase preforms that they process into bottles at their own manufacturing facilities. Preforms are utilized in both conventional and custom applications. In the United States, PET bottle manufacturers generally sell completed bottles. In Europe, PET bottle manufacturers generally sell preforms.

The PET container business is a rapidly growing component of the United States packaging market due to new introductions of multi-pack single serve soft drinks in supermarkets and club stores, continued growth in water and smaller sized soft drink containers and conversion opportunities. Most of these conversion opportunities involve the use of custom PET technologies. The PET container business is a rapidly growing component of the European packaging market due to accelerating conversion trends in water, soft drinks, juices and beer, and other products.

PET competes in the packaging market against a number of materials including glass, metal, paperboard and other plastics. Various factors affect the choice of packaging material. In the food and beverage markets, PET containers have been gaining market share due to consumer preference for PET containers’ transparency, resealability, light weight and shatter resistance. PET bottles and jars have also gained acceptance due to PET’s custom molding potential, which allows customers to differentiate their products using innovative designs and shapes that increase promotional appeal.

2

Table of Contents

Historically, conversions to PET from glass have occurred first in larger size bottles within a product category, and then proliferated to smaller sizes. This was the case for two liter soft drinks in the late 1970s, hot-fill gallon juices in the late 1980s, and 1.5 liter water bottles in the mid-1990s, as well as in many food conversions such as edible oil, salad dressings, peanut butter, and mayonnaise. The four main reasons for this phenomenon are:

Glass conversions in large bottles have typically been followed by conversions of small size bottles. This has resulted from both lower costs achieved over time by scale advantages and new technology, and from stronger demand arising when consumer familiarity and preference for larger size bottles in PET transfers to smaller sizes.

Opportunities to Leverage Strong Conventional PET Infrastructure

The Company is one of the largest North American suppliers of PET containers for conventional PET applications in soft drinks and water. The Company’s large manufacturing base allows it to service its customers globally while achieving economies of scale and negotiating leverage with suppliers. The Company is one of the largest purchasers of PET resin in North America, which it believes provides it with negotiating leverage necessary to obtain resin at favorable prices.

The Company believes that its conversion opportunities into custom PET packaging are significantly aided by the following economies of scale provided by its conventional PET business:

Key Markets and Products

The Company is a leading producer of PET containers for food and beverages. The Company’s products are used in a variety of end-use markets, including soft drinks, water, peanut butter, edible oils, salad dressing, juices, teas, beer, flavored alcoholic beverages and coffee. The Company supplies PET products for such well-known brands as Pepsi, Coca-Cola, Dr. Pepper, 7Up, Canada Dry, Evian, Gordon’s, Aquafina, Fanta, Lipton, Peter Pan, Folger’s, Mike’s Hard Lemonade, Rolling Rock and Smirnoff Ice. The Company primarily manufactures and sells bottles in the United States. In Europe, the Company primarily sells preforms. Approximately 78% of the Company’s 2002 revenue was attributable to sales in the United States and approximately 22% was attributable to sales in Europe.

3

Table of Contents

Conventional PET

The Company’s conventional PET sales relate primarily to containers for use in packaging soft drinks and water. In 2002, conventional PET products represented approximately 79% of the Company’s sales.

Soft Drinks.    Constar is a leading independent provider of PET containers to the United States soft drinks market. The Company is the largest domestic supplier of PET containers to PepsiCo, as well as a leading supplier to Cadbury Schweppes plc, the maker of Dr. Pepper and 7Up.

Water.    The Company is the largest supplier to PepsiCo’s water brand Aquafina in the United States. Larger water bottlers, including Perrier’s, Nestlé S.A. and Coca-Cola, predominantly manufacture their own containers. Most companies except for Coca-Cola generally buy water bottles or preforms from PET bottle merchants.

Custom PET

Custom PET products represented approximately 15% of Constar’s sales in 2002. The Company believes that custom PET applications represent significant growth opportunities for the Company. Additionally, custom PET applications generally provide higher margins and have higher barriers to entry than conventional PET, due to greater manufacturing complexity.

Custom PET Technologies

Custom PET technologies are necessary to produce PET bottles for foods and beverages that require advanced technologies for packaging, such as scavenger and hot-fill. Scavenger technologies inhibit oxygen from penetrating the packaging, which can cause the flavor and the color of the product to degrade. Hot-fill technologies are used to allow pouring of heat processed beverages into bottles that can withstand high temperatures without deforming. In the past, products requiring these characteristics were generally packaged in glass. Currently available technologies allow these products to be packaged in PET, which is more desirable than glass because of PET’s light weight and shatter resistance.

Oxygen Scavenger.    The Company’s Oxbar technology increases product shelf-life by inhibiting oxygen from entering the packaging. An additional benefit of Oxbar is that the barrier technology can be incorporated in the preforms from which plastic bottles are blown. This is an important competitive advantage since preforms can be shipped more economically than bottles and allow for the blowing of oxygen-scavenger bottles on the world’s existing base of blow-molding equipment without modification.

Constar is progressing in its effort to develop “monolayer” oxygen-scavenging bottles. As opposed to its existing “multi-layer” oxygen-scavenging bottles, which have Oxbar between two layers of PET, monolayer bottles incorporate the scavenging technology into a single layer container. This will introduce oxygen-scavenging properties into preforms made on conventional injection presses, eliminating significant incremental costs of multi-layer injection molding. The Company’s existing Oxbar patents cover monolayer oxygen-scavenging technology and Constar is testing monolayer bottles for commercial use.

Hot-fill.    The Company possesses expertise and patents that enable it to manufacture bottles that can withstand the hot-fill process. Products within this market are filled at temperatures in excess of 180 degrees Fahrenheit. Hot-fill bottles require specialized equipment and processes that allow the bottles to withstand this heat without deforming. Hot-fill bottles also use vacuum panels to withstand the vacuum created inside the bottle when the contents cool after filling. In response to customer requests for new hot-fill packages, the Company has developed a next generation heat-set container. This new technology allows the Company to produce creative product designs without vacuum panels that meet customer requirements and offer the potential for lighter-weight bottles. The Company is currently testing the container for commercial use.

4

Table of Contents

Pasteurization.    The Company has expertise and proprietary functional design features that enable its PET bottles to be filled on the same filling lines as glass bottles for pasteurized beer. During pasteurization, the sealed bottle and its contents are subjected to heat, which both increases the internal pressure of the bottle and decreases the rigidity of the bottle. The Company’s pasteurizable bottle has a proprietary base design that resists deformation during this process, and a proprietary neck design that expands slightly under heat and pressure to reduce stress on the base.

Customers

Generally, Constar supplies its customers pursuant to contracts with terms of one year or longer. The Company typically protects itself from fluctuations in the price of PET resin through customer contracts that contain price adjustments based on the price of resin. In 2002, the Company’s top five customers accounted for 50% of the Company’s sales, while the Company’s top ten customers accounted for 63% of the Company’s sales. During the same period, purchases by PepsiCo accounted for 37% of the Company’s sales. Other than PepsiCo, no customer accounted for more than 10% of the Company’s sales in 2002.

Research and Development

The Company conducts its major technology and product development work, as well as testing and product qualification, in-house. From laboratory locations in Alsip, Illinois and Wantage, United Kingdom, Constar’s research and development staff provides project support for the design and development needs of its existing and potential customers, and is responsible for the full range of development activity from concept to commercialization. The Company paid its former parent, Crown Cork & Seal Company, Inc. (“Crown”), technology charges of $12.1 million, $13.2 million and $12.5 million in 2002, 2001 and 2000, respectively. The charges represent payments for technology services, including research and development, product testing, legal expenses and laboratory maintenance from shared Crown facilities.

The Company’s research and development staff have advanced degrees in chemical engineering, mechanical engineering and polymer science. Their skills include statistics, process monitoring, process control, product design, computer assisted design, and computer aided engineering. Typical activities of the staff include:

Sales and Marketing

The Company’s management structure includes three regional vice presidents of sales and a vice president of marketing. In addition to having responsibility for overseeing regional sales, each vice president of sales also has product line management responsibilities for certain product lines.

Sources and Availability of Raw Materials

The Company buys PET resin directly from resin suppliers in the United States, Europe and Asia. While specialized PET resin is required for hot-fill and other applications, most of the major PET manufacturers supply a full range of resin specifications. The Company believes that the large volume of resin that it purchases provides leverage that assists it in negotiating favorable resin purchasing agreements.

5

Table of Contents

The Company buys labels from several suppliers, mostly in the United States, for application to bottles for its customers. The Company’s ability to work closely with its customers to forecast, order, and stock the large number of different labels they need and to deliver labeled bottles as needed is an important element of the service it provides.

Competition

PET containers compete with glass bottles, metal cans, paperboard containers and other packaging materials. The Company’s major industry competitors in the United States are Amcor Ltd., Ball Corporation, Graham Packaging Company, Owens-Illinois, Inc. and Plastipak Holdings, Inc. In Europe, the competitive landscape is much more fragmented.

In all of the Company’s markets, high standards of service, reliability, and quality performance are prerequisites to obtaining significant awards of business from customers. Margins are tight in the conventional soft drink and water business, and differentiation is obtained by cost advantage of scale, design and execution capability, and the ability to bring synergies to the supply relationship through innovation and organizational integration. While these capabilities are also valuable for custom PET, the major basis for competition in custom PET applications is technology, since patent protection, know-how, and highly specialized equipment and process techniques are required to manufacture custom PET products.

The PET business is highly capital intensive, with whole manufacturing lines often committed to the requirements of a single customer. An important element of competition is the strength of each company’s process for evaluation, design, presentation and execution of new product development opportunities presented by the packaging needs of customers. Product design, engineering and investment decisions made when new capacity is acquired, and the financial and contractual terms obtained with customers to support that investment, are key determinants of a company’s success in this market. Flexibility of the manufacturing platform, large scale plants that distribute overhead costs broadly and continuous improvement are sources of competitive cost advantage.

Intellectual Property

The Company’s portfolio of intellectual property assets includes U.S. and foreign utility and design patents and patent applications. Among these assets are a number of patents on its oxygen-scavenging technology, as well as patents related to its line of hot-fill bottles. The earliest of the U.S. oxygen-scavenging patents is not due to expire for approximately six years. The Company also owns registrations of, and/or pending applications for registration of, the trademarks CONSTAR, OXBAR and other marks in the United States and various foreign jurisdictions.

The Company’s OXBAR technology is subject to a worldwide royalty-free cross-license with Rexam AB, which owns several patents relating to oxygen-scavenging technology. The cross-license agreement gives both parties the right to use and sublicense each other’s oxygen-scavenging technology patents but not each other’s know-how. The Company is currently negotiating a new cross-license arrangement with Rexam that would modify the parties’ respective rights to the oxygen-scavenging technology. Chevron Phillips Chemical Company LP and Chevron Research and Technology Company, collectively referred to as Chevron, hold a royalty-based, exclusive, worldwide license under certain of the Company’s oxygen-scavenging patents to make, use, and sell a defined type of oxygen-scavenging material and a defined set of products incorporating such material. The Company received a favorable ruling against Chevron in a lawsuit based on the scope of this license, which is more fully described under “Legal Proceedings” below.

In addition, the Company relies on proprietary know-how, continuing technological innovation and other trade secrets to develop products and maintain its competitive position. The Company attempts to protect its proprietary know-how and its other trade secrets by executing, when appropriate, confidentiality agreements with its customers and employees. The Company cannot assure you that its competitors will not discover comparable or the same knowledge and techniques through independent development or other means.

6

Table of Contents

Environmental Liabilities and Costs

The Company’s facilities and operations are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those relating to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. The Company is also subject to employee safety laws. The nature of its operations exposes the Company to the risk of liabilities or claims with respect to environmental and worker health and safety matters. There can be no assurance that material costs will not be incurred in connection with these liabilities or claims. Based on its experiences to date, the Company believes that the future cost of compliance with existing environmental and employee safety laws and regulations will not have a material adverse effect. However, future events, including changes in laws and regulations or their interpretations, may give rise to additional costs that could be material.

Certain environmental laws hold current owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous or toxic substances. Because of its operations, the long history of industrial operations at some of its facilities, the operations of predecessor owners or operators of certain of its businesses, and the use, production and release of hazardous substances at these sites and at surrounding sites, the Company may be affected by liability provisions of environmental laws. Various facilities have experienced some level of regulatory scrutiny in the past and are, or may become, subject to further regulatory inspections, future requests for investigation or liability for past practices.

The Didam, Netherlands facility has been identified as having impacts to soil and groundwater from volatile organic compounds at concentrations that exceed those permissible under Dutch law. The main body of the groundwater plume is beneath Constar’s Didam facility but it also appears to extend from an upgradient neighboring property. At the request of Dutch authorities, the Company’s environmental consultant is in the process of implementing additional investigations at the facility, the results of which will be submitted to the Dutch authorities. Constar has a liability of $0.2 million for costs associated with completing the required investigations and certain other activities that may be required at the Didam facility. As more information becomes available relating to what additional actions may be required at the site, including potential remediation activities, this accrual maybe adjusted, as necessary, to reflect the new information. The Company has no other accruals for environmental matters.

The Comprehensive Environmental Response, Compensation, and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, provides for responses to and joint and several liability for releases of hazardous substances into the environment. The Company has received requests for information or notifications of potential liability from the Environmental Protection Agency, or EPA, under CERCLA and certain state environmental agencies under state superfund laws for off-site locations. The Company has been identified by the Wisconsin Department of Natural Resources as a potentially responsible party at three related sites in Wisconsin and agreed to share in the remediation costs with one other party. Remediation is ongoing at two of these sites and remediation has been completed at the third site. The Company has also been identified as a potentially responsible party at the Bush Valley Landfill site in Abingdon, Maryland and entered into a settlement agreement with the EPA in July 1997. The activities required under that agreement are ongoing. The Company has not incurred any significant costs relating to these matters and does not believe that it will incur material costs in the future in responding to conditions at these sites.

Employees

As of December 31, 2002, the Company employed approximately 2,057 employees, with approximately 1,728 in the United States and approximately 329 in Europe. None of its U.S. employees are unionized, however there are union workers at its Sherburn, United Kingdom plant and its Didam, Netherlands plant. The contract with its union employees in the Didam plant will expire on September 30, 2003 and the contract with the union employees in the Sherburn plant will expire on December 31, 2003. The Company believes that its employee relations are good and that its practices in the areas of training, progression, retention, and team involvement foster continuous improvement in capabilities and satisfaction levels throughout its workforce.

7

Table of Contents

History

Prior to its initial public offering in November 2002, Constar was a wholly owned subsidiary of Crown. The Company was originally incorporated in 1927. From 1969 until it was acquired by Crown in October 1992, Constar operated as an independent publicly held corporation. The Company’s principal executive offices are located at One Crown Way, Philadelphia, PA 19154-4599 and the phone number is (215) 552-3700.

8

Table of Contents

ITEM 2.     PROPERTIES

The Company’s corporate headquarters are located at One Crown Way, Philadelphia, PA. The Company maintains facilities in the United States and Europe, and has a joint venture interest in Turkey. The locations of these facilities, their respective sizes and ownership/lease status are as follows:

The Company from time to time secures additional warehouse space on a short-term basis as needed to meet inventory storage requirements.

9

Table of Contents

ITEM 3.    LEGAL PROCEEDINGS

Prior to Constar’s initial public offering, Crown Cork & Seal Technologies Corporation (“CCK Technologies”) held the patents relating to Oxbar and has subsequently contributed them to the Company as part of the restructuring concurrent with the Company’s initial public offering. CCK Technologies filed a lawsuit seeking unspecified monetary damages on April 8, 1999 in the U.S. District Court for the District of Delaware against Continental PET Technologies, Inc., a subsidiary of Owens-Illinois, Inc., alleging that Continental PET is infringing one of its U.S. Oxbar-related patents. Continental PET has for many years held a leading market position in multi-layer PET bottle production because of its control of a proprietary technology for multi-layer injection of preforms. With the recent development by others of alternative multi-layer technologies for production of PET bottles, the Company and other PET bottle manufacturers are now able to offer multi-layer bottles to customers. To the Company’s knowledge, Continental PET is the only producer other than Constar in the United States market with commercial sales of multilayer oxygen-scavenging bottles. CCK Technologies has claimed that the materials that Continental PET uses and has used since at least 1998 to achieve oxygen-scavenging properties for the bottles it sells infringe CCK Technologies’ Oxbar patents. Chevron intervened in the action on May 31, 2000 to assert cross-claims seeking a declaratory judgment that its rights under its license from CCK Technologies include exclusive rights to the particular application of Oxbar technology in multi-layer PET bottles used by Continental PET, as well as certain other rights. On November 25, 2002, the U.S. District Court for the District of Delaware ruled in favor of CCK Technologies, confirming that the license granted to Chevron did not include the rights that CCK Technologies claims are being infringed by Continental PET and finding instead that Continental PET’s bottles are within the rights retained by CCK Technologies. Subject to any appeal by Chevron, the decision will allow Constar to pursue the lawsuit that Crown initiated against Continental PET. On January 22, 2003, the Company was substituted for CCK Technologies in the lawsuit. Currently pending before the court are the Company’s request to lift the stay of the action as to Continental PET, which was entered pending resolution of the Chevron claims, and Chevron’s request for certification pursuant to F.R. Civ. P. 54(b) so that it may file an immediate appeal.

The Company is also one of 42 defendants in a patent infringement action seeking unspecified monetary damages brought on August 3, 1999 by North American Container, Inc. in the U.S. District Court for the Northern District of Texas based on its patent for a certain plastic container design. The other defendants include many of the principal plastic container manufacturers, various food and beverage companies, and three grocery store chains. The defendants have filed motions for summary judgments that were referred to a Special Master appointed by the court. The Special Master has recommended that those motions be granted in major part and that the defendants be permitted to file a renewed motion for summary judgment, due April 4, 2003, as to allegedly infringing containers not covered in the Special Master’s recommendation. The plaintiff and several of the defendants have filed objections to the Special Master’s recommendation. The District Court has not yet ruled on the recommendation. In the meantime, the Court has ordered the parties to move forward with a “bellwether” proceeding with respect to a limited number of bottles that they believe may remain in the case following the decision on the summary judgment motion. No Constar containers are included among the bellwether bottles. Discovery is proceeding, and a trial date has been set with respect to the bottles in the bellwether proceeding. Although not dispositive, the bellwether proceeding is intended to give the parties an indication of the possible outcome of the case with respect to the defendants’ other containers and thereby facilitate settlement. The case is stayed as to all parties not included in the bellwether proceeding.

The Company is a defendant in a lawsuit filed in the Ninth Judicial Circuit of Florida on January 9, 2001 by former and current employees of its Orlando, Florida facility seeking unspecified monetary damages. The lawsuit alleges bodily injury as a result of exposure to polyvinyl chloride (“PVC”) during the manufacture of plastic bottles during the 1970’s, 1980’s and into the mid-1990’s. The PVC manufacturers and manufacturers of the manufacturing equipment are also defendants. The litigation is currently in its preliminary stages and the Company is aggressively defending against the claims.

The Company is subject to other lawsuits and claims in the normal course of business and related to businesses operated by predecessor corporations. Management believes that the ultimate liabilities resulting from these lawsuits and claims will not materially impact its results of operations or financial position.

10

Table of Contents

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

No matters have been submitted to a vote of security holders since the date of Constar’s initial public offering.

PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Since completing its initial public offering of common stock in the fourth quarter of 2002, the Company’s common stock has been listed on the National Market segment of The Nasdaq Stock Market (“Nasdaq National Market”) under the symbol “CNST.” The following table sets forth the high and low bid prices for each full quarterly period since the Company’s initial public offering in November 2002 as quoted on The Nasdaq National Market.

At March 14, 2003, there were no shares of preferred stock outstanding.

As of March 14, 2003, there were approximately 62 holders of record of the Company’s common stock. The Company did not declare dividends on its common stock after its initial public offering in fiscal 2002 and it does not intend to declare dividends on its common stock in the foreseeable future.

Use of Proceeds

On November 20, 2002, the Company completed an initial public offering of 10,500,000 shares of common stock and a concurrent offering of $175 million of its 11% Senior Subordinated Notes due 2012 (“Notes”). The offerings were effected through a registration statement on Form S-1 (File No. 333-88878) that was declared effective by the Securities and Exchange Commission on November 14, 2002. A total of 13,500,000 shares of the Company’s common stock were registered and 10,745,000 (including the underwriters’ over-allotment option) sold in the stock offering at an initial public offering price of $12.00 per share, for an aggregate offering price of $128.9 million. The shares were sold by a syndicate of underwriters managed by Salomon Smith Barney, Deutsche Bank Securities and JPMorgan and the notes were sold by a syndicate of underwriters managed by Salomon Smith Barney and Deutsche Bank Securities. 10,500,000 shares offered in the initial public offering were sold by Crown, as the selling stockholder. In addition, the underwriters exercised an over-allotment option they had been granted to purchase from Crown an additional 245,000 shares of common stock. The Company did not receive any proceeds from the stock offering or from the exercise of the over-allotment option. Expenses incurred in connection with the initial public offering of common stock totaled approximately $4.5 million, of which the Company paid $2.0 million and Crown paid the balance.

The Company registered $175,000,000 of Notes that were issued at 98.51% of their principal amount, resulting in an aggregate offering price of $172.4 million. Net proceeds were $167.1 million to the Company after the underwriters’ discount and offering expenses, which totaled approximately $5.3 million. The proceeds from the note offering were used to pay a portion of the Company’s $350 million intercompany note to Crown.

No offering expenses were paid directly or indirectly to any of the Company’s officers or directors (or their associates) or persons owning ten percent (10%) or more of any class of the Company’s equity securities or to any other affiliates of the Company.

11

Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

The following selected combined and consolidated financial data should be read in conjunction with the Company’s Combined and Consolidated Financial Statements, including the notes thereto. The Combined and Consolidated Statement of Operations data for the years ended December 31, 2002, 2001, 2000 and 1999 and the Combined and Consolidated Balance Sheet data at December 31, 2002, 2001 and 2000, have been derived from the Company’s Combined and Consolidated Financial Statements that have been audited. The Combined Statement of Operations data for the year ended December 31, 1998 and the Combined Balance Sheet data at December 31, 1999 and 1998, are derived from unaudited financial statements and contain all adjustments of a normal and recurring nature necessary to present fairly the financial position, the results of operations and cash flow of Constar.

After the completion of the Company’s initial public offering, Crown transferred to Constar, and Constar transferred to Crown, their respective interests in certain of their affiliates. With the exception of dividends paid by the Company’s subsidiaries, the combined and consolidated financial data below gives retroactive effect to these transfers for all periods presented.

12

Table of Contents

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

General

Constar International Inc. is a multinational producer of polyethylene terephthalate (“PET”), containers for food and beverages and operates 17 manufacturing sites: 14 in the United States and 3 in Europe.

Conventional PET products represented approximately 79% of the Company’s sales in 2002 and custom PET bottles represented approximately 15% of sales in 2002. The remainder of the Company’s sales are derived from plastic closures and extrusion blow molding.

Conventional PET products are primarily used in packaging applications for soft drinks and water and are typically characterized by high volume requirements for large consumer product customers. Critical success factors in the conventional market include generating high volume production to create economies of scale in manufacturing and purchasing, as well as offering a full service product line. The manufacturing process is highly automated, and therefore much of the cost of operating a bottle-making plant is incurred in indirect manufacturing overhead expense, such as the cost of leasing and maintaining the plant. High production volume allows the Company to allocate this overhead to a greater number of units and to operate equipment more efficiently. Being a high volume producer helps provide the Company with purchasing advantages for resin and equipment.

Custom PET products are used in such packaging applications as hot-fill beverages, food, beer and flavored alcoholic beverages, most of which require containers with special performance characteristics. As a result of these special performance requirements, custom PET products typically are characterized by higher prices and margins compared to conventional PET products. Critical success factors in the custom PET market include technology, design capabilities and expertise with specialized equipment and processes.

The Company believes that the introduction of new PET technologies has created significant opportunities for conversion of glass bottles to PET bottles for juices, teas, and other custom applications. PET conversions were previously constrained by the limited availability of commercially proven technologies.

13

Table of Contents

PET bottle manufacturing is capital intensive, requiring both specialized production equipment and significant support infrastructure for power, high pressure air and resin handling. The Company’s existing infrastructure provides the ability to place new capacity into existing facilities at a relatively low incremental cost compared to the cost of building a new facility.

Relationship with Crown

Constar was a wholly owned subsidiary of Crown from 1992 until the closing of Constar’s initial public offering on November 20, 2002. At December 31, 2002, Crown owned 1,255,000 shares, or 10.5%, of the Company’s common stock. The following executive officers of Crown serve on Constar’s Board of Directors: John W. Conway, Chief Executive Officer; Frank J. Mechura, Executive Vice President—Americas Division; and Alan W. Rutherford, Chief Financial Officer.

The Company’s historical costs and expenses include charges from Crown for certain centralized corporate services and for the use of Crown’s infrastructure. These costs and expenses were based on methodologies that Crown believed to be reasonable and are consistent with charges made to other Crown operations; however, they may not be indicative of Constar’s future expenses. Certain of these services that had been provided by Crown prior to the Company’s initial public offering are now provided by the Company’s current employees, some of whom were Crown employees. In addition, the Company entered into a transition services agreement with Crown under which it continues to receive certain services from Crown while it develops its own capabilities. The services provided by Crown under the transition services agreement include payroll, systems for accounting, reporting, tax, information technology, benefits administration, purchasing and logistics. See Note 19 of the accompanying Combined and Consolidated Financial Statements.

Assuming that, throughout the term of the transition services agreement, Constar does not purchase any optional services from Crown, it does not terminate any of the services to be initially provided by Crown and costs do not increase due to outsourcing of services by Crown, the Company expects the cost of the services, using currency exchange rates as of February 28, 2003, to be approximately $372,000 per month from March 2003 through November 2003 and approximately $304,000 in December 2003.

The Company’s historical expenses also include a technology fee of approximately 1.8% of net sales assessed by Crown Cork & Seal Technologies Corporation (“CCK Technologies”), a wholly owned subsidiary of Crown. In exchange for this fee, CCK Technologies provided Constar with access to CCK Technologies’ intellectual property related to PET, paid for direct costs related to the Company’s research, development and engineering activities, provided the Company with legal services related to the defense of Constar’s rights to certain technologies, and provided the Company with support for customer claims resolution, supplier qualifications, spoilage reduction and product and material specifications. Upon completion of Constar’s initial public offering and the contribution of certain technology from CCK Technologies to the Company, the agreement with CCK Technologies was discontinued and Constar’s technology and research and development requirements are now met through a combination of new employees, including transfers from CCK Technologies, outsourcing with unrelated third-party providers, and a research and development agreement between Constar, Inc. and CCK Technologies for certain services. Assuming that, throughout the term of the research and development agreement, Constar, Inc. does not purchase any optional services from Crown and does not terminate any of the services to be initially provided by CCK Technologies, the Company expects the cost of the services to be approximately $105,000 per month through May 2003 and approximately $40,000 per month from June 2003 through December 2003. In addition, Constar, Inc. hired certain Crown personnel who worked at Crown’s Alsip, Illinois research and development facility. Constar, Inc. paid the actual salary and benefits for these persons until they transferred over to Constar, Inc. at a total cost of approximately $44,000.

The Company cannot make assurances that the fees charged to it by Crown under the transition services agreement or the research and development agreement reflect the costs of obtaining these services from a third party or of providing these services internally or that these costs will not deviate from the Company’s estimated costs. These agreements were negotiated in the context of a parent/subsidiary relationship and are not on arm’s

14

Table of Contents

length terms. However, Constar believes that purchasing these services from Crown for some period of time is the most efficient way to maintain Constar’s operations as it transitions to third party or internal services.

Prior to the completion of the Company’s initial public offering, Crown charged the Company interest expense on the net average intercompany indebtedness the Company owed to Crown based on the average actual interest costs to Crown. The Company believes the methodology that was used to calculate this charge was reasonable but may not be indicative of the Company’s current and future expenses as an independent entity. On October 15, 2002, Constar distributed to Crown a note in the principal amount of $350 million. Prior to the completion of the Company’s initial public offering, the Company’s other intercompany indebtedness to Crown was capitalized. In addition, concurrent with the closing of the Company’s initial public offering on November 20, 2002, the Company issued $175 million of 11% Senior Subordinated Notes due 2012 (“Notes”) at 98.51% of their principal amount and also entered into a $250 million Senior Secured Credit Agreement, consisting of a $150 million seven-year Term Loan (“Term B Loan”) and a $100 million five-year Revolving Loan (“Revolver Loan”). The Company used the proceeds from the Notes and the Term B Loan along with $27.6 million of borrowings under the Revolver Loan to repay the Company’s note to Crown.

Since the completion of the Company’s initial public offering, Crown has been operating Constar’s equipment in Salt Lake City, Utah and Voghera, Italy on the Company’s behalf under manufacturing and supply agreements, and Crown supplies Constar with bottles produced by Crown’s Faba Sirma facility in Parma, Italy. In addition, the Company is supplying Crown with closure components produced by the Company’s facility in Newark, Ohio and has been providing technical services to some of Crown’s joint ventures in the PET preform and container manufacturing business. In addition, Constar has granted Crown a non-exclusive, royalty-free license to use Oxbar technology in products not manufactured with PET and has agreed to share with Crown royalties that the Company earns from licensing Oxbar to third parties. These agreements were negotiated in the context of a parent/subsidiary relationship and are not on arm’s length terms.

Basis of Presentation

Net Sales

The Company recognizes revenue from product sales when the goods are shipped and the title and risk of loss pass to the customer. Provisions for discounts and rebates to customers, returns, and other adjustments are netted against sales in the same period that the related sales are recorded.

PET containers can be sold either as finished bottles or as preforms. Preforms are test tube-shaped intermediate products in the manufacturing process for bottles and are purchased by customers or other PET container manufacturers that operate equipment to convert preforms into bottles. Unit selling prices for preforms are lower than unit selling prices for corresponding finished bottles because of their lower added value. In the United States, the Company’s customers typically buy finished bottles, while its European customers typically buy preforms.

From year to year, the composition of the Company’s portfolio of products sold changes significantly due to changes in the Company’s customer base, changes in the mix of products presented to the marketplace by its customers, and by incremental opportunities for preform sales. Greater proportions of larger, heavier or more specialized bottles will lead to higher net sales, even if total unit volumes remain stable.

Many of the Company’s products have seasonal demand characteristics typically resulting in higher sales and profits in the second and third quarters compared to the first and fourth quarters. Sales of single service convenience beverage bottles are strongest in the summer months. At the end of 2002, the Company experienced unusually low seasonal demand due to poor weather, slow economic conditions and disruptions in the Turkish market as a result of the threat of war. This slowness extended into the first quarter of 2003. Some potential high- growth product categories are developed first in conjunction with seasonal promotions and in stadium and special events markets. All of Constar’s sales are subject to marketing actions taken by customers as they adjust their mix of product presentations.

15

Table of Contents

The potential for continued conversion to PET from metal, glass and other packaging materials is an important determinant of future demand in the Company’s industry. Constar believes that the potential for continued conversions to PET is significant.

As is common in its industry, the Company’s contracts are generally requirements-based, granting it all or a percentage of the customer’s actual requirements for a particular period of time, instead of a specific commitment of unit volume. Most of its customer contracts contain provisions permitting the Company to pass resin price changes through to its customers as adjustments to selling price. PET resin is the Company’s principal raw material and a major component of its cost. When the Company uses this mechanism to pass resin price changes through to its customers, the price changes generally affect its net sales and cost of sales in approximately equal amounts and do not generally affect its gross profit except as a result of valuation and timing issues.

In 2002, approximately 22% of the Company’s net sales were recorded in currencies other than in U.S. dollars. Because sales denominated in foreign currencies are translated into U.S. dollars in Constar’s financial statements using the average exchange rates for the period, net sales reported in its financial statements that are denominated in foreign currencies will fluctuate as a result of variations in the value of foreign currencies relative to the U.S. dollar.

Cost of Products Sold, Excluding Depreciation

Cost of products sold, excluding depreciation includes raw material costs, principally PET resin, other direct and indirect manufacturing costs and shipping and handling costs. PET resin is the largest component of cost of products sold. The prices the Company pays for PET resin are subject to frequent fluctuations resulting from cost changes in the raw materials for PET, which are affected by prices of oil and its derivatives in the U.S. and overseas markets, normal supply and demand influences, and seasonal demand effects.

Direct and indirect manufacturing costs include labor costs, electricity and other utilities, maintenance expense and other fixed and variable expenses required to operate the Company’s plants. The Company’s cost of products sold also includes expenses for the engineering, production control and manufacturing administration activities that support plant operations.

Depreciation

Property, plant and equipment are depreciated on a straight-line basis for financial reporting purposes over the estimated useful lives of the assets, ranging from 3 to 40 years. Typical depreciation periods are 5 years for molds, 10 years for machinery and equipment and 40 years for buildings.

Gross Profit

The Company defines gross profit as net sales less cost of products sold and depreciation expense. As discussed above, the Company’s agreements with customers typically have provisions that insulate gross profit from changes in resin prices by allowing the Company to pass those changes through to its customers with equivalent price changes for its products.

Important determinants of profitability are volume, product mix, and competitive pricing in relation to resin cost. Volume is significant because the capital intensity of PET bottle manufacturing and the highly automated manufacturing process make fixed overhead costs a high percentage of cost of products sold excluding raw materials. Constar’s various products have widely different proportions of variable cost in relation to selling price because of their different sizes and weights and because of the different technologies and machine types used to manufacture them. This results in significant differences in the volume effect on profitability for different products. Generally, larger, heavier, and more technologically specialized bottles have higher overhead absorption rates, and therefore have proportionately greater effect on gross profit when volumes vary from period to period. Although price pass-through mechanisms can generally protect profits from short term changes in the market price for resin, it is largely the competitive conditions in the market for the Company’s products that ultimately determine the selling prices for its products. It is the Company’s ability to purchase PET resin at consistently competitive prices that determines its cost of acquiring PET resin.

16

Table of Contents

Also important to the Company’s profitability is its ability to operate its plants and distribution system efficiently. The Company operates most of its equipment seven days per week and 24 hours per day, with a formal program for scheduled weekly, monthly, and annual preventative maintenance activities. Constar’s ability to operate equipment at high output levels and with low unscheduled downtime affects its profitability directly as a result of labor efficiency and the cost of additional freight if product must be shipped from more distant plants to meet commitments to its customers. The Company ships mostly full truckload quantities to its customers using commercial carriers.

Because resin represents a large component of cost of products sold and since the Company typically passes through changes in resin prices to its customers, Constar believes that period-to-period comparison of its gross profit as a percent of net sales may not accurately reflect performance, as changes in net sales caused by changes in resin prices will not change gross profit. During periods when resin costs are rising the Company’s net sales will tend to rise but there will be little effect on gross profit. The opposite is true during periods of declining resin pricing; the Company’s net sales will tend to be lower with little or no decrease in gross profit, causing gross margins to increase.

Amortization of Goodwill

This consists of the amortization of goodwill which arose from Crown’s acquisition of Constar in 1992 and has been amortized on a straight-line basis over 40 years. On January 1, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets,” requiring that goodwill no longer be amortized, but instead be tested for impairment at least annually.

Selling and Administrative Expense

This includes compensation and related expenses for employees in the selling and administrative functions as well as other operating expenses not directly related to manufacturing or research, development and engineering activities. It does not include depreciation and amortization charges. Crown historically provided the Company with certain centrally managed services as discussed below in the Management Charges section. Charges for these services are classified as management charges through the closing of the Company’s initial public offering on November 20, 2002. Since the closing date, the Company has fulfilled these services with internal resources, third parties, or through its transition services agreement with Crown.

Management Charges

Prior to the closing of the Company’s initial public offering on November 20, 2002, Crown charged the Company certain management fees for payroll, benefits administration, purchasing, information systems and other centrally managed services. The cost of these services was directly charged and/or allocated to the Company using a method that Crown and the Company believed was reasonable. Such charges were not necessarily indicative of the costs that would have been incurred if the Company had been a separate entity. Constar’s financial results reflect these management charges through the closing of the Company’s initial public offering on November 20, 2002. Since November 20, 2002, the Company has provided these services with its own resources or continued to receive them through its transition services agreement with Crown. All expenses for these services are included in administrative expense.

Research and Technology Expense

Prior to the closing of the Company’s initial public offering on November 20, 2002, the Company paid CCK Technologies, a wholly owned subsidiary of Crown, a charge approximately equal to 1.8% of sales. In return, CCK Technologies provided the Company with access to CCK Technologies’ intellectual property related to PET; paid for the Company’s direct costs of research, development and engineering activities; provided the Company with legal services for the defense of rights for existing technologies; and provided the Company with support for customer claims resolution, supplier qualifications, spoilage reduction, and product and material specifications. As of November 20, 2002, this arrangement was discontinued and the Company’s requirements are now met through a combination of new employees, including transfers from CCK Technologies; outsourcing with unrelated third-party providers; and a research and development agreement with CCK Technologies for

17

Table of Contents

certain services. The Company expects that future research and technology expense will be less than has been incurred under the agreement with CCK Technologies.

Provision for Income Taxes

The effective tax rate on income or loss was 40.7% in 2002 compared to (22.3%) in 2001. The change in the effective tax rate was primarily due to the amortization of goodwill, which is included in 2001 pretax income but was not a deductible expense for purposes of computing the tax provision. As explained in Note 7 to the accompanying Combined and Consolidated Financial Statements, the Company adopted the provisions of SFAS 142 effective January 1, 2002, requiring the Company to discontinue amortizing goodwill. A reconciliation of the provision for income taxes and the amount of income tax determined by applying the U.S. federal statutory rate of 35% to pretax income or loss is presented in Note 12 to the accompanying Combined and Consolidated Financial Statements.

Interest Expense

Crown charged the Company interest based on the average actual interest costs to Crown on the net average intercompany indebtedness. The Company believes that the methodology used to calculate this charge was reasonable but not necessarily indicative of interest expense that would have been incurred if the Company had been a standalone entity.

Other Expenses, Net

Other expenses, net include operating expenses not included elsewhere, a component of which is bad debt expense.

Critical Accounting Policies

The accompanying Combined and Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and financial position of the Company. The Company’s significant accounting principles are more fully described in Note 3 to the accompanying Combined and Consolidated Financial Statements. Certain accounting policies, however, are considered to be critical in that (i) they are most important to the depiction of the Company’s financial condition and results of operations and (ii) their application requires management’s most subjective judgment in making estimates about the effect of matters that are inherently uncertain.

On an annual basis, or more frequently if facts and circumstances indicate that goodwill may be impaired, the Company performs an impairment review by comparing the fair value of a reporting unit, including goodwill, to its carrying value. The impairment review involves a number of assumptions and judgments including the identification of the appropriate reporting units and the calculation of fair value. The Company uses a combination of market values for comparable businesses and discounted cash flow projections to calculate fair value. If the Company’s share price or operating results sustain an extended decline, this could trigger an impairment review. The Company’s estimates of future cash flows includes assumptions concerning future operating performance, economic conditions, and technological changes and may differ from actual future cash flows.

Accounting for pensions and postretirement benefit plans requires the use of estimates and assumptions regarding numerous factors, including discount rate, rate of return on plan assets, compensation increases, health care cost increases, mortality and employee turnover. Actual results may differ from the Company’s actuarial assumptions, which may have an impact on the amount of reported expense or liability for pensions or postretirement benefits. The rate of return assumption is reviewed at each measurement date based on the pension plans’ investment policies and an analysis of the historical returns of the capital markets, adjusted for current interest rates as appropriate. For 2003 the Company is lowering its expected rate of return on plan assets to 9.0% in the U.S. from 9.5% in 2002. The discount rate is developed at each measurement date by reference to published indices of high-quality bond yields. A 1.0% change in the expected rate of return on plan assets would have changed

18

Table of Contents

2002 U.S. pension expense by approximately $497,000. A 0.5% change in the discount rate would have changed 2002 U.S. pension expense by approximately $441,000 and 2002 postretirement expense by approximately $52,000.

Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating losses and tax credit carry forwards. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Management provides valuation allowances against the deferred tax assets for amounts, which are not considered more likely than not to be realized.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143 (“FAS 143”), “Accounting for Asset Retirement Obligations.” This standard, which became effective for the Company on January 1, 2003, establishes accounting guidelines for the recognition and measurement of obligations for the retirement of tangible long-lived assets. The obligation is to be recorded at fair value in the period in which it is incurred. Adoption of this standard is not expected to have a material impact on the Company’s results of operations or financial position.

In April 2002, the FASB issued SFAS No. 145 (“FAS 145”), “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” In the fourth quarter of 2002, effective January 1, 2002, the Company early adopted FAS 145. Among other provisions, the new standard no longer permits gains or losses from the extinguishments of debt to be reported as an extraordinary item unless the extinguishments qualify as extraordinary under the criteria of APB 30. The standard requires that prior gains or losses that were reported as extraordinary items and do not qualify under APB 30 be reclassified within income (loss) from continuing operations. The adoption of this standard is not expected to have a material impact on the Company’s results of operations or financial position.

During July 2002, the FASB issued SFAS No. 146 (“FAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” FAS 146 establishes accounting and reporting guidelines for the recognition and measurement of a liability at its fair value for the cost associated with an exit, including restructuring, or disposal activity in the period in which the liability is incurred, rather than at the date of a commitment to an exit or disposal plan. The standard supercedes Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The standard is effective for exit or disposal activities initiated on or after January 1, 2003 and does not impact recognition of costs under the Company’s outstanding programs. Adoption by the Company of this standard may impact the timing of the recognition of costs associated with future exit or disposal activities, dependent upon the nature of the actions initiated.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor to recognize at the inception of a qualified guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The guarantee disclosure requirements of FIN 45 became effective in the fourth quarter of 2002. The initial recognition and measurement requirements are effective on a prospective basis for qualified guarantees issued or modified after December 31, 2002. The Company does not expect the implementation of this interpretation to have a material impact on its results of operations or financial position.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 sets forth the criteria used in determining whether an investment in a variable interest entity (“VIE”) should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN 46 would require the consolidation of specified VIEs created before February 1, 2003 commencing in the third quarter of 2003. For specified VIEs created after January 31, 2003, the interpretation would require immediate consolidation if circumstances warrant such consolidation. The Company does not expect the implementation of this interpretation to have a material impact on its Combined and Consolidated Financial Statements.

19

Table of Contents

Results of Operations

2002 Compared to 2001

Net Sales

Net sales decreased by $41.5 million, or 5.6%, to $704.3 million in 2002 from $745.8 million in 2001. In the U.S., net sales decreased $30.9 million, or 5.3%, to $549.7 million in 2002 from $580.6 million in 2001. In Europe net sales decreased $10.6 million, or 6.4%, to $154.6 million in 2002 from $165.2 million in 2001. Net sales in the U.S. accounted for 78% of total net sales in both 2002 and 2001.

In the United States, the decrease in net sales in 2002 from 2001 reflects the pass-through of lower resin prices and reduced shipments of carbonated soft drink bottles and preforms, partially offset by increased shipments of water bottles and higher value custom products. In Europe, the decrease in net sales in 2002 from 2001 reflects decreased sales volumes and the pass-through of lower resin prices.

Gross Profit

Gross profit increased $18.6 million, or 45.8%, to $59.2 million in 2002 from $40.6 million in 2001. The increase was primarily due to increased shipments of higher value custom products and reduced shipments of lower value preforms.

Amortization of Goodwill

Amortization of goodwill was $12.2 million in 2001. Effective January 1, 2002 the Company adopted the provisions of SFAS 142, “Goodwill and Other Intangible Assets.” See Note 7 to the accompanying Combined and Consolidated Financial Statements. In accordance with this new pronouncement the Company ceased amortizing goodwill.

Selling and Administrative Expenses

Selling and administrative expenses increased by $1.7 million, or 18.7%, to $10.8 million in 2002 from $9.1 million in 2001. As a percentage of net sales, selling and administrative expenses increased to 1.5% in 2002 from 1.2% in 2001. The increase reflected a $0.9 million charge for the excess of expected lease costs over the related sublease income for certain operations closed in 1997 and additional costs incurred after the closing date of the Company’s initial public offering to replace services that had previously been provided by Crown. This was partly offset by the reversal of an environmental liability accrual.

Management Charges

Effective November 20, 2002, the closing date of Constar’s initial public offering, Crown ceased providing certain centralized corporate services and the use of its infrastructure to Constar. As a result, management charges decreased $0.8 million, or 18.2%, in 2002 to $3.6 million from $4.4 million in 2001.

Research and Technology Expense

Research and technology expense decreased $1.1 million, or 8.3%, to $12.1 million in 2002 from $13.2 million in 2001. The decrease was primarily due to the lower sales in 2002 compared to 2001 because the fees charged to the Company by CCK Technologies were based on net sales.

20

Table of Contents

Provision for Restructuring and Asset Impairments

The $0.9 million charge in 2002 for the excess of expected lease costs over the related sublease income for certain operations closed in 1997 was recorded in selling and administrative expenses. The 2001 charge of $2.0 million reflects a $0.2 million provision that the Company recorded in the United States for costs associated with the termination of 27 employees and $1.8 million for the write-off of machinery and equipment due to the loss of a customer. The loss of the customer did not have a material impact on net sales or gross profit. Activity in the reserves were:

Interest Expense, Net

Interest expense, net declined $3.4 million, or 32.7%, to $7.0 million in 2002 from $10.4 million in 2001. The decrease was the result of both a decline in the interest rates charged to the Company by Crown and a reduction in average outstanding indebtedness in 2002 compared to 2001. The $63.3 million cash flow from operating activities in 2002 was primarily used to reduce outstanding indebtedness.

Other Expenses, Net

Other expenses, net increased to $0.6 million in 2002 compared to $0.1 million in 2001 due to an increase in bad debt expense.

Foreign Exchange Adjustments

Unfavorable foreign exchange adjustments decreased $0.4 million to $0.1 million in 2002 from $0.5 million in 2001. These adjustments reflect the impact on Constar’s Turkish operations of fluctuations in the exchange rate between the Turkish lira and the U.S. dollar.

Provision for Income Taxes

Provision for income taxes increased $7.7 million, or 308.0%, to $10.2 million in 2002 from $2.5 million in 2001 on pretax profit of $25.0 million in 2002 and pretax loss of $11.3 million in 2001. In 2002, the principal reason for the difference between the effective tax rate and the U.S. statutory tax rate was the taxable gains related to net monetary assets held in U.S. dollars in Turkey that are not included in pretax income in the accompanying financial statements. In 2001, the principal reasons for the differences between the effective tax rate and the U.S. statutory tax rate were amortization of goodwill, which is included in 2001 pretax income, but is not a deductible expense for purposes of computing the tax provision, and taxable gains related to net monetary assets held in U.S. dollars in Turkey that are not included in pretax income in the accompanying financial statements.

21

Table of Contents

Net Income (Loss)

Net loss increased $21.8 million, or 160.3%, to $35.4 million in 2002 from $13.6 million in 2001. This was primarily due to the cumulative effect of a change in accounting for goodwill charge of $50.1 million partly offset by an increase in gross profit reflecting higher shipments of higher-margin custom products. In addition, the Company stopped amortizing goodwill effective January 1, 2002 in accordance with the adopton of FAS 142. Income before cumulative effect of a change in accounting for goodwill was $14.7 million in 2002.

EBITDA

Although EBITDA is a non-GAAP measurement, the Company believes it is a useful measure of pre-tax operating cash flow prior to debt service. It is also a key financial measure used by its Senior Secured Credit Agreement lenders. The Company defines EBITDA as net income (loss) before interest expense, provision for income taxes, depreciation and amortization, minority interests and the cumulative effect of a change in accounting. The Company’s definition of EBITDA may not be comparable to EBITDA as defined by other companies.

EBITDA increased $20.1 million, or 29.6%, to $87.9 million in 2002 from $67.8 million in 2001 for the reasons described above.

2001 Compared to 2000

Net Sales

Net sales increased $33.9 million, or 4.8%, to $745.8 million in 2001 from $711.9 million in 2000. In the U.S., net sales increased $16.2 million, or 2.9%, to $580.6 million in 2001 from $564.4 million in 2000. In Europe, net sales increased $17.7 million, or 12.0%, to $165.2 million in 2001 from $147.5 million in 2000. Net sales in the U.S. accounted for 78% of total net sales in 2001 compared to 79% in 2000.

In the United States, the increase in sales in 2001 compared to 2000 reflected higher unit shipments in water bottles and preforms and increased sales of higher-priced, higher value added hot-fill bottles due to recent capacity expansion in that product line, and a slight increase in soft drink bottle sales.

In Europe, the increase in net sales in 2001 from 2000 primarily reflects higher sales of preforms due to the full year impact of a new supply agreement with a customer in the U.K. This was partially offset by a $5.3 million unfavorable impact of foreign currency translation.

Gross Profit

Gross profit declined $4.4 million, or 9.8%, to $40.6 million in 2001 from $45.0 million in 2000. The decrease was primarily due to lower prices, partly offset by higher unit sales volumes in both the United States and Europe, especially in hot-fill bottles. Higher electricity rates partly offset manufacturing cost reductions resulting from improved equipment productivity.

Amortization of Goodwill

Amortization of goodwill was $12.2 million in each of the years 2001 and 2000.

22

Table of Contents

Selling and Administrative Expenses

Selling and administrative expenses remained stable at $9.1 million in 2001 and 2000. As a percentage of net sales, selling and administrative expenses declined slightly to 1.2% in 2001 from 1.3% in 2000.

Management Charges

Management charges increased $0.4 million, or 10.0%, in 2001 to $4.4 million from $4.0 million in 2000.

Research and Technology Expense

Research and technology expense increased $0.7 million, or 5.6%, to $13.2 million in 2001 from $12.5 million in 2000. The increase was primarily due to the higher sales in 2001 compared to 2000 because the fees charged to the Company by CCK Technologies were based on net sales.

Provision for Restructuring and Asset Impairments

Provision for restructuring and asset impairment increased $1.3 million to $2.0 million in 2001 from $0.7 million in 2000. See Note 11 to the accompanying Combined and Consolidated Financial Statements. The 2001 charge reflects a $0.2 million provision that the Company recorded in the United States for costs associated with the termination of 27 employees and $1.8 million for the write-off of machinery and equipment due to the loss of a customer. The loss of the customer did not have a material impact on net sales or gross profit.

Interest Expense, Net

Interest expense, net declined $2.7 million, or 20.6%, to $10.4 million in 2001 from $13.1 million in 2000. The decrease was the result of both a decline in the interest rates charged to the Company by Crown and a reduction in average outstanding indebtedness in 2001 compared to 2000. The $126.2 million cash flow from operating activities in 2001 was primarily used to reduce outstanding indebtedness.

Other Expenses, Net

Other expenses, net were $0.1 million in 2001 and $6.8 million in 2000. The amount in 2000 reflected an $8.0 million charge against the receivables of a large independent water company that filed for bankruptcy in 2000.

Foreign Exchange Adjustments

Unfavorable foreign exchange adjustments increased $0.2 million to $0.5 million in 2001 from $0.3 million in 2000. These adjustments reflect the impact on the Company’s Turkish operations of fluctuations in the exchange rate between the Turkish lira and the U.S. dollar.

Provision for Income Taxes

Provision for income taxes increased $1.5 million to $2.5 million in 2001 from $1.0 million in 2000 on pretax losses of $11.3 million in 2001 and $13.7 million in 2000. The principal reasons for the differences between the effective tax rate and the U.S. statutory tax rate are amortization of goodwill, which is included in pretax income, but is not a deductible expense for purposes of computing the tax provision, and taxable gains related to net monetary assets held in U.S. dollars in Turkey that are not included in pretax income in the accompanying financial statements.

Net Income (Loss)

Net loss decreased $1.2 million to $13.6 million in 2001 from $14.8 million in 2000. This was due to the reasons discussed above, primarily a $6.7 million decrease in other expense, partially offset by a $4.4 million decline in gross profit.

23

Table of Contents

EBITDA

EBITDA declined $0.5 million, or 0.7%, to $67.8 million in 2001 from $68.3 million in 2000 for the reasons described above.

Liquidity and Capital Resources

On November 20, 2002, the Company completed its public offering of $175 million aggregate principal amount of 11% Senior Subordinated Notes due 2012 (“Notes”). The Notes were issued at 98.51% of face value. The Notes will mature on December 1, 2012. Interest on the Notes will be payable semi-annually on each December 1 and June 1, commencing on June 1, 2003. The net proceeds from the Notes offering were used to repay indebtedness to Crown.

Concurrent with the closing of the Company’s initial public offering of common stock and the concurrent offering of the Notes, the Company entered into a senior secured credit agreement (“Senior Secured Credit Agreement”). The Senior Secured Credit Agreement consists of a $150 million seven-year term loan (“Term B Loan”) and a $100 million five-year revolving loan (“Revolver Loan”). The Term B Loan bears interest at a rate of LIBOR plus 450 basis points with a 200 basis point LIBOR floor. The Revolver Loan carries interest of LIBOR plus 350 basis points with a 200 basis point LIBOR floor. The Term B Loan will require quarterly payments of $375,000, with a final balloon payment of $139.5 million due on the loan maturity date in November 2009. The proceeds of $322.4 million from the Notes sales and the Term B Loan were used to partially repay the Company’s $350 million note that had been issued as a dividend to Crown.

As of December 31, 2002, there was $149.6 million outstanding on the Term B Loan and $55.0 million outstanding on the Revolver Loan, leaving $45 million available under the Revolver Loan. As of December 31, 2002, no letters of credit were outstanding under the Senior Secured Credit Agreement. The Company’s obligations under the Senior Secured Credit Agreement are guaranteed by the Company’s domestic subsidiaries on a joint and several basis. In addition, borrowings under the Senior Secured Credit Agreement are secured by all of the Company’s domestic assets and a security interest in 65% of the issued and outstanding shares of voting stock of each non-U.S. subsidiary. These loans bear interest at rates which vary based on certain financial measurements, as defined in the Senior Secured Credit Agreement, and the type of borrowing. As of December 31, 2002 the effective interest rate for the Term B Loan was 6.5% and 5.61% for the Revolver Loan.

The Senior Secured Credit Agreement contains customary affirmative and negative covenants, including certain covenants requiring the Company to maintain Senior Leverage, Total Leverage, Interest Expense Coverage and Fixed Charge Leverage ratios, as well as Capital Expenditures limits. In addition, there is a minimum earnings requirement through March 31, 2003. The Company was in compliance with all covenants at December 31, 2002.

The Company incurred approximately $2.0 million in refinancing fees in connection with its initial public offering and $11.7 million of financing costs in connection with the debt offering. The financing costs will be amortized over the lives of the Notes and the Senior Secured Credit Agreement. Further borrowings under the Revolver Loan to fund the Company’s liquidity are subject to its compliance with the covenants and other provisions thereof.

Interest expense for 2002 was $7.0 million, of which $3.2 million was on borrowings from Crown and the remaining $3.8 million was on borrowings from third parties.

Total debt increased $302.7 million to $377.0 in 2002 from $74.3 million in 2001. The increase in debt primarily reflected the $351.7 million dividends to Crown and its affiliates, partly offset by net cash provided by operating activities of $63.3 million. As a result, the Company’s ratio of total debt to total capitalization increased to 60.2% from 11.7% in 2001. The Company defines total capitalization as the sum of total debt, minority interests, and stockholder’s equity.

24

Table of Contents

In 2001, the Company’s U.S. operations entered into a North American receivables securitization program administered by Crown. Receivables securitization transactions were accounted for as sales because the Company had relinquished control of the receivables. Accordingly, the Company’s accounts receivable balance at December 31, 2001 was reduced for $18.4 million of receivables that were sold under that program as of that date. As of the closing date of the Company’s initial public offering, the Company’s participation in the securitization program was terminated.

The Company will secure financing for future operations from cash flow from operations and from external sources. The Company believes that the net cash provided by operating activities and the cash available under the Revolver Loan will be sufficient to finance its activities through 2003.

Cash Flow

The following table shows selected cash flow data.

Net cash provided by operating activities declined $62.9 million, or 49.8%, to $63.3 million at December 31, 2002 from $126.2 million at December 31, 2001. The decrease primarily reflected a $28.3 million decline in net income (loss) before the cumulative effect of a change in accounting for goodwill to $14.7 million income in 2002 from $13.6 million loss in 2002. For 2002, excluding the effects of asset securitization, receivables and inventories increased $12.6 million, reflecting the unusually low inventories at the end of 2001. The Company’s inventories balance at December 31, 2002, was $85.9 million, an increase of $11.4 million from December 31, 2001, due to increased production to meet the expected requirements of new customers in the first quarter of 2003. The Company’s net receivables balance at December 31, 2002 was $55.4 million compared to $54.1 million, excluding asset securitization, at December 31, 2001.

Net cash used for investing activities increased $16.5 million to $29.2 million in 2002 from $12.7 million for 2001. The 2001 net cash used for investing activities was favorably affected by the receipt of $9.5 million for the cash surrender value of a life insurance policy in the third quarter of 2001.

Net cash used for financing activities was $17.7 million for 2002 and $112.8 million for 2001. In 2002, the financing activities reflected Constar’s new capitalization as a result of its initial public offering. In 2001, they represented $111.1 million of payments on long-term debt to Crown, and $1.7 million of dividends to affiliates of Crown who have direct ownership interests in the Company’s operations in the UK and Turkey, and to a minority shareholder of the Company’s affiliate in Turkey.

Commitments

25

Table of Contents

At December 31, 2002, the Company had certain commitments that will require future outlays of cash. Commitments related to future minimum lease payments under long-term operating leases, principally for real estate, were $10.4 million for 2003, $7.7 million for 2004, $4.7 million for 2005, $2.4 million for 2006, $0.7 million for 2007 and $1.1 million thereafter. Commitments related to future expenditures on approved capital projects were $20.0 million. The Company will be required to pay $1.5 million annually in respect of the $150 million term loan that the Company entered into in connection with its initial public offering. The term loan matures in 2009, and the Company’s $175 million of subordinated Notes mature in 2012. There were no other commitments outstanding at December 31, 2002 that were material to the Company’s financial condition. See Note 10 to the accompanying Combined and Consolidated Financial Statements for information related to Senior Subordinated Notes and Senior Secured Credit Agreement.

Constar entered into a lease agreement during February 2003, which began on March 1, 2003 and terminates on March 4, 2013. The Company’s total expected payments associated with this operating lease are $11.1 million.

Capital Expenditures

Capital expenditures increased $6.5 million, or 27.7%, to $30.0 million in 2002 from $23.5 million in 2001.

New capital investments for 2002 included the following:

Capital expenditures were $23.5 million in 2001 compared to $34.9 million in 2000. New capacity investments included in those amounts were:

The decline in capital spending in 2001 compared to 2000 was primarily due to reductions in the amount of capital expenditures required to satisfy the Company’s customers’ requirements and the use of an operating lease for the acquisition of one hot-fill production line.

Over the last three years, excess capacity in the Company’s industry reduced the need for capital spending. The Company’s existing equipment is currently operating near full capacity, and consequently, unit growth can only be achieved by acquisition of new capacity. In order to serve its existing customers, and to participate in the conversion to PET from glass or aluminum that the Company expects in both the custom and conventional PET markets, Constar will require significantly greater rates of capital investment over the coming years than in the past three years. Generally, the Company intends to purchase new equipment only after entering into long-term customer contracts that justify additional capacity. A single high speed production unit costs approximately $10 million and investments may occur in increments of two, three or more production units. It is Constar’s experience from previous large-scale conversions to PET bottles that whole product lines generally convert at once in conjunction with regional or national marketing campaigns. The Company’s customers require an ability to meet timelines for commitment of capacity expansion and implementation of project plans. Additionally, because of the large volumes controlled by the major consumer product companies that are its customers, many

26

Table of Contents

of the capacity investments the Company makes may be fully or largely committed to agreements with only one customer each. If the Company grows as anticipated, it would expect to make approximately $125 million in capacity investments over the next three years.

Environmental Matters

The Company’s Didam, Netherlands facility has been identified as having impacts to soil and groundwater from volatile organic compounds at concentrations that exceed those permissible under Dutch law. The main body of the groundwater plume is beneath the Company’s Didam facility but it also appears to extend from an upgradient neighboring property. At the request of Dutch authorities, the Company’s environmental consultant is in the process of implementing additional investigations at the facility, the results of which will be submitted to the Dutch authorities. At December 31, 2002, the Company had a liability of $0.2 million for costs associated with completing the required investigations and certain other activities that may be required at the Didam facility. As more information becomes available relating to what additional actions may be required at the site, including potential remediation activities, this accrual may be adjusted, as necessary, to reflect the new information. The Company has no other accruals for environmental matters.

Stockholder’s Equity

Stockholders’ equity decreased $309.8 million to $246.1 million at December 31, 2002 from $555.9 million at December 31, 2001. The decrease was primarily due to a net loss of $35.4 million for the year, and a dividend payment to Crown of $351.7 million, which was partially offset by capital contributions from Crown of $72.2 million.

Stockholders’ equity decreased $32.3 million to $555.9 million at December 31, 2001 from $588.2 million at December 31, 2000. This decrease was primarily due to the $13.6 million net loss for the year and a $16.2 million adjustment to the minimum pension liability.

Constar distributed dividends of $351.7 million in 2002 consisting of a note to Crown in the principal amount of $350 million and $1.7 million to a Crown subsidiary who had a direct ownership interest in the Company’s operations in Turkey. Constar also distributed dividends of $0.9 million in 2001 and $1.7 million in 2000 to affiliates of Crown who had direct ownership interests in the Company’s operations in the U.S., in the U.K. and in Turkey.

Inflation

Inflation has not had a significant impact on the Company’s operations over the past three years and Constar does not expect it to have a significant impact on the results of operations or financial condition in the foreseeable future.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

In the normal course of business, Constar is exposed to fluctuations in currency values, interest rates, commodity prices and other market risks.

The Company derived approximately 22% of total revenues from sales in foreign currencies during the year ending December 31, 2002. In the Company’s financial statements operating results in local currency are translated into U.S. dollars based on average exchange rates during the period and balance sheet items are translated at rates on the balance sheet date. During periods of a strengthening dollar, the Company’s U.S. dollar financial results related to operations conducted in foreign currencies are reduced because the local currency amounts are translated into fewer U.S. dollars. Conversely, as the dollar weakens, the Company’s foreign results reported in U.S. dollars will improve. Approximately 2% of total revenues in 2002 were derived from sales in Turkey. These sales were made in Turkish lira and the invoiced sale prices are adjusted to account for fluctuations in the exchange rate between the lira and the dollar. The Company is exposed to fluctuations in such exchange rate from the date of the invoice until

27

Table of Contents

settlement. If required, and where possible, the Company enters into foreign exchange contracts to reduce the effects of fluctuations in foreign currency exchange rates on assets, liabilities, firm commitments and anticipated transactions. Constar does not generally hedge its exposure to translation gains or losses on non-U.S. net assets because it reinvests the cash flows within the operations where they are generated.

During 2002, the Company utilized three foreign currency derivative instruments to hedge the exposure of its U.K. operations to resin purchases made in euros. At December 31, 2002, there were no foreign currency derivatives outstanding.

Prior to the Company’s initial public offering, Crown charged Constar interest expense based on the actual interest cost on net average intercompany indebtedness. Consequently, prior to Constar’s initial public offering, the Company had not directly managed its interest rate risk, but had instead relied on Crown to balance its overall exposure between fixed and variable rates on a consolidated basis, while attempting to minimize its interest costs. Since the completion of Constar’s initial public offering, the Company managed its own interest rate risk.

The principal raw materials used in the manufacture of the Company’s products are resins that are petrochemical derivatives. The markets for these resins are cyclical, and are characterized by fluctuations in supply, demand and pricing. Substantially all of Constar’s customer contracts contain provisions permitting it to pass through the changes in the price of resin, Constar’s principal raw material and a major component of cost of goods sold. When the Company adjusts its prices under these agreements to pass through changes in resin prices, its net sales change accordingly but there is little effect on gross profit. In the aggregate, the lag between effective date of resin price changes and the effective date of price adjustments to its customers under various pass through mechanisms is approximately equal to the Company’s inventory exposure.

28

Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Constar International Inc.

Index to Combined and Consolidated Financial Statements and Financial Statement Schedules

29

Table of Contents

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of Constar International Inc.:

In our opinion, the combined and consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Constar International Inc. (the “Company”) and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined and consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits 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 our audits provide a reasonable basis for our opinion.

As discussed in Note 7, the Company adopted a new financial accounting standard for goodwill in 2002.

In addition, as discussed in Note 19, the Company has significant transactions with Crown Cork & Seal Company, Inc., its former parent.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 24, 2003

30

Table of Contents

CONSTAR INTERNATIONAL INC.

COMBINED AND CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)