Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q

 


(Mark One)

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

For Quarterly Period Ended September 30, 2007

OR

 

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

For the transition period from              to             

Commission file number 000-16496

 


Constar International Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   13-1889304

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

One Crown Way, Philadelphia, PA   19154
(Address of principal executive offices)   (Zip Code)

(215) 552-3700

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

As of November 12, 2007, 12,603,760 shares of the Registrant’s Common Stock were outstanding.

 



Table of Contents

TABLE OF CONTENTS

 

         Page
Number
PART I—FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited)    3
  Condensed Consolidated Balance Sheets    3
  Condensed Consolidated Statements of Operations    4
  Condensed Consolidated Statements of Cash Flows    5
  Condensed Consolidated Statements of Stockholders’ Deficit    6
  Notes to Condensed Consolidated Financial Statements    7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    27
Item 3.   Quantitative and Qualitative Disclosure about Market Risk    35
Item 4.   Controls and Procedures    35
PART II—OTHER INFORMATION   
Item 1.   Legal Proceedings    36
Item 1A.   Risk Factors    36
Item 6.   Exhibits    36
Signatures    37

 

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

CONSTAR INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     September 30,
2007
    December 31,
2006
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 8,359     $ 19,370  

Accounts receivable, net

     81,469       61,101  

Accounts receivable—related party

     475       856  

Inventories, net

     92,433       83,355  

Prepaid expenses and other current assets

     4,093       11,274  

Deferred income taxes

     2,179       2,257  

Current assets of discontinued operations

     435       11,602  
                

Total current assets

     189,443       189,815  
                

Property, plant and equipment, net

     150,677       148,235  

Goodwill

     148,813       148,813  

Other assets

     12,879       15,813  

Non-current assets of discontinued operations

     —         1,286  
                

Total assets

   $ 501,812     $ 503,962  
                

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current Liabilities:

    

Short-term debt

   $ 10,855     $ —    

Accounts payable

     83,476       82,611  

Accounts payable—related party

     555       950  

Accrued expenses and other current liabilities

     40,335       31,433  

Current liabilities of discontinued operations

     887       8,680  
                

Total current liabilities

     136,108       123,674  
                

Long-term debt

     393,667       393,466  

Pension and postretirement liabilities

     15,572       19,143  

Deferred income taxes

     2,179       2,257  

Other liabilities

     8,404       8,117  

Non-current liabilities of discontinued operations

     947       2,144  
                

Total liabilities

     556,877       548,801  
                

Commitments and contingent liabilities (Note 9)

    

Stockholders’ deficit:

    

Preferred Stock, $.01 par value—none issued or outstanding at September 30, 2007 and December 31, 2006

     —         —    

Common stock, $.01 par value—12,873 shares and 12,809 shares issued, 12,605 shares and 12,576 shares outstanding at September 30, 2007 and December 31, 2006, respectively

     125       125  

Additional paid-in capital

     276,236       275,754  

Accumulated other comprehensive loss

     (16,537 )     (18,958 )

Treasury stock, at cost—268 and 233 shares at September 30, 2007 and December 31, 2006, respectively

     (881 )     (704 )

Accumulated deficit

     (314,008 )     (301,056 )
                

Total stockholders’ deficit

     (55,065 )     (44,839 )
                

Total liabilities and stockholders’ deficit

   $ 501,812     $ 503,962  
                

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

 

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CONSTAR INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2007     2006     2007     2006  

Net customer sales

   $ 224,694     $ 245,913     $ 675,502     $ 716,808  

Net affiliate sales

     1,133       818       3,245       3,030  
                                

Net sales

     225,827       246,731       678,747       719,838  

Cost of products sold, excluding depreciation

     202,456       218,933       613,021       640,629  

Depreciation

     6,340       7,449       21,733       26,035  
                                

Gross profit

     17,031       20,349       43,993       53,174  
                                

Selling and administrative expenses

     6,594       6,362       18,074       21,280  

Research and technology expenses

     1,627       1,671       5,397       4,697  

Asset impairment charges

     —         —         —         870  

Provision for restructuring

     32       366       3,167       591  
                                

Total operating expenses

     8,253       8,399       26,638       27,438  
                                

Operating income

     8,778       11,950       17,355       25,736  

Interest expense

     (10,435 )     (10,422 )     (31,011 )     (31,072 )

Other income (expense), net

     165       476       1,090       1,427  
                                

Income (loss) from continuing operations before income taxes

     (1,492 )     2,004       (12,566 )     (3,909 )

Provision for income taxes

     —         —         —         —    
                                

Income (loss) from continuing operations

     (1,492 )     2,004       (12,566 )     (3,909 )

Income (loss) from discontinued operations, net of taxes

     347       (621 )     292       (882 )
                                

Net income (loss)

   $ (1,145 )   $ 1,383     $ (12,274 )   $ (4,791 )
                                

Basic earnings (loss) per common share:

        

Continuing operations

   $ (0.12 )   $ 0.16     $ (1.02 )   $ (0.32 )

Discontinued operations

     0.03       (0.05 )     0.02       (0.07 )
                                

Net income (loss) per share

   $ (0.09 )   $ 0.11     $ (1.00 )   $ (0.39 )
                                

Diluted earnings (loss) per common share:

        

Continuing operations

   $ (0.12 )   $ 0.16     $ (1.02 )   $ (0.32 )

Discontinued operations

     0.03       (0.05 )     0.02       (0.07 )
                                

Net income (loss) per share

   $ (0.09 )   $ 0.11     $ (1.00 )   $ (0.39 )
                                

Weighted average common shares outstanding:

        

Basic

     12,315       12,235       12,306       12,214  
                                

Diluted

     12,315       12,589       12,306       12,214  
                                

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

 

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CONSTAR INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine months ended
September 30,
 
     2007     2006  

Cash flows from operating activities:

    

Net loss

   $ (12,274 )   $ (4,791 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     23,162       28,270  

Asset impairment charges

     —         870  

Bad debt expense

     581       153  

Restructuring and other exit activities

     644       (1,157 )

Stock-based compensation

     573       709  

Reclassification gain of foreign currency translation adjustments

     (110 )     —    

Deferred income taxes

     —         (107 )

(Gain) loss on disposal of assets

     (432 )     91  

Minority interest

     (1,893 )     (257 )

Changes in operating assets and liabilities:

    

Accounts receivable

     (8,003 )     (5,062 )

Inventories

     (8,159 )     11,937  

Prepaid expenses and other current assets

     8,205       3,389  

Accounts payable and accrued expenses

     (1,834 )     5,155  

Change in outstanding book overdrafts

     (140 )     (934 )

Pension and postretirement benefits

     (1,293 )     (1,344 )
                

Net cash provided by (used in) operating activities

     (973 )     36,922  
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (23,590 )     (17,240 )

Proceeds from the sale of property, plant and equipment

     2,808       145  
                

Net cash used in investing activities

     (20,782 )     (17,095 )
                

Cash flows from financing activities:

    

Proceeds from Revolver loan

     588,599       616,767  

Repayment of Revolver loan

     (577,744 )     (627,220 )

Costs associated with debt financing

     (385 )     (320 )

Repayment of other debt

     —         (1,540 )
                

Net cash provided by (used in) financing activities

     10,470       (12,313 )
                

Effect of exchange rate changes on cash and cash equivalents

     274       286  
                

Net increase (decrease) in cash and cash equivalents

     (11,011 )     7,800  

Cash and cash equivalents at beginning of period

     19,370       9,663  
                

Cash and cash equivalents at end of period

   $ 8,359     $ 17,463  
                

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

 

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CONSTAR INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands)

(Unaudited)

 

     Common
Stock
   Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
loss
    Treasury
Stock
    Unearned
Compensation
    Accumulated
Deficit
    Total
Stockholders’
Deficit
 

Balance, December 31, 2005

   $ 125    $ 276,331     $ (27,441 )   $ (457 )   $ (1,384 )   $ (289,034 )   $ (41,860 )

Net loss

                (4,791 )     (4,791 )

Foreign currency translation adjustments

          1,808             1,808  

Revaluation of cash flow hedge

          761             761  
                     

Comprehensive loss

                  (2,222 )
                     

Reclassification upon adoption of SFAS 123R

        (1,384 )         1,384         —    

Forfeitures of restricted stock

            (114 )         (114 )

Stock-based compensation

     —        537       —         —         —         —         537  
                                                       

Balance, September 30, 2006

   $ 125    $ 275,484     $ (24,872 )   $ (571 )   $ —       $ (293,825 )   $ (43,659 )
                                                       

Balance, December 31, 2006

   $ 125    $ 275,754     $ (18,958 )   $ (704 )   $ —       $ (301,056 )   $ (44,839 )

Net loss

                (12,274 )     (12,274 )

Foreign currency translation adjustments

          1,497             1,497  

Reclassification of foreign currency translation adjustments

          (110 )           (110 )

Amortization of prior service cost

          (237 )           (237 )

Amortization of actuarial net loss

          2,603             2,603  

Revaluation of cash flow hedge

          (1,332 )           (1,332 )
                     

Comprehensive loss

                  (9,853 )
                     

Cumulative effect adjustment due to the adoption of FIN 48

                (678 )     (678 )

Treasury stock purchased

            (177 )         (177 )

Stock-based compensation

     —        482       —         —         —         —         482  
                                                       

Balance, September 30, 2007

   $ 125    $ 276,236     $ (16,537 )   $ (881 )   $ —       $ (314,008 )   $ (55,065 )
                                                       

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

 

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CONSTAR INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollar and share amounts in thousands, unless otherwise noted)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with Securities and Exchange Commission (“SEC”) regulations for interim financial reporting. In the opinion of management, these consolidated financial statements contain all adjustments of a normal and recurring nature necessary to provide a fair statement of the financial position, results of operations and cash flows for the periods presented. Results for interim periods should not be considered indicative of results for a full year. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in Constar International Inc.’s (the “Company” or “Constar”) Annual Report on Form 10-K for the year ended December 31, 2006. The Condensed Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained.

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company has classified the results of operations of its Turkish joint venture and its Italian operation as discontinued operations in the condensed consolidated statements of operations for all periods presented. The assets and related liabilities of these operations have been classified as assets and liabilities of discontinued operations on the condensed consolidated balance sheets. See Note 3 in Notes to Condensed Consolidated Financial Statements for further discussion of the divestitures. Unless otherwise indicated, amounts provided throughout this Form 10-Q relate to continuing operations only.

Reclassifications – Certain reclassifications have been made to prior year balances in order to conform these balances to the current year’s presentation.

2. Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. The Company adopted FIN 48 at the beginning of the first quarter of 2007. Upon adoption as of January 1, 2007, the Company recorded a reserve for uncertain tax positions in the amount of $0.7 million. This adjustment was recorded as a cumulative effect adjustment to the opening balance of accumulated deficit.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. At September 30, 2007 the Company had $0.2 million accrued for interest and penalties.

 

     Examination Years Open     

Jurisdiction

   From    To     

United States:

        

Federal

   2004    2006   

States (varies by jurisdictions)

   2003    2006   

United Kingdom

   2006    2006   

Netherlands

   2002    2006   

Italy—(discontinued operation)

   2002    2006   

Turkey—(discontinued operation)

   Pending tax clearance at September 30, 2007. Received

tax clearance and liquidated entity in October 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair

 

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Table of Contents

value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material impact on its results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material impact on its results of operations or financial condition.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (“EITF 06-10”). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF 06-10 to have a material impact on its results of operations or financial condition.

In September 2006, the FASB ratified the EITF consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 indicates that an employer should recognize a liability for future post-employment benefits based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF 06-04 to have a material impact on its results of operations or financial condition.

3. Discontinued Operations

The supply agreement for the Company’s Turkish joint venture has expired and the Company has decided to discontinue the joint venture’s operations. Operations of the joint venture ceased in May 2006. The joint venture’s manufacturing assets were sold in December 2006. The Company is in the process of liquidating the joint venture following the sale of the joint venture’s remaining assets during the third quarter. The Company received final tax clearance from the Turkish authorities and completed the liquidation of the joint venture in October 2007.

In addition, the Company has decided to close its Italian operation since its principal customer notified the Company that the customer would not renew its contract effective January 1, 2007. In accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”, for the three and nine months ended September 30, 2007, the Company has reclassified $0.1 million of cumulative translation adjustments related to its Italian operation out of accumulated other comprehensive loss and into other income.

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company has classified the results of operations of its Turkish joint venture and its Italian operation as discontinued operations in the condensed consolidated statements of operations for all periods presented. The assets and related liabilities of these entities have been classified as assets and liabilities of discontinued operations on the condensed consolidated balance sheets.

 

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The following summarizes the assets and liabilities of discontinued operations:

 

     September 30,
2007
   December 31,
2006

Assets of Discontinued Operations:

     

Accounts receivable

   $ 380    $ 11,482

Inventory

     3      82

Prepaid expenses and other current assets

     52      38
             

Total current assets of discontinued operations

     435      11,602

Property, plant and equipment, net

     —        1,286
             

Total assets of discontinued operations

   $ 435    $ 12,888
             

Liabilities of Discontinued Operations:

     

Accounts payable and accrued expenses

   $ 887    $ 8,680
             

Total current liabilities of discontinued operations

     887      8,680

Other liabilities

     743      47

Minority interests

     204      2,097
             

Total liabilities of discontinued operations

   $ 1,834    $ 10,824
             

The following is a summary of the results of operations for discontinued operations:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2007     2006     2007     2006  

Net sales

   $ 88     $ 4,552     $ 617     $ 25,234  

Income (loss) from discontinued operations before income taxes and minority interest

     548       (751 )     320       (1,011 )

(Provision for) benefit from income taxes

     (314 )     130       (319 )     130  
                                

Income (loss) from discontinued operations before minority interest

     234       (621 )     1       (881 )

Minority interest

     113       —         291       (1 )
                                

Income (loss) from discontinued operations, net of taxes

   $ 347     $ (621 )   $ 292     $ (882 )
                                

The Company has accrued an estimate of the total amount of restructuring charges expected to be incurred as a result of the plan to close the joint venture operations in Turkey. The following table presents an analysis of the restructuring reserve activity for the nine months ended September 30, 2007:

 

     Severance
and
Benefits
 

Balance at December 31, 2006

   $ 115  

Charges to income

     238  

Payments

     (348 )

Adjustments

     (5 )
        

Balance at September 30, 2007

   $ —    
        

 

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4. Accounts Receivable

 

     September 30,
2007
    December 31,
2006
 

Trade and notes receivable

   $ 71,358     $ 53,337  

Less: allowance for doubtful accounts

     (518 )     (1,047 )
                

Net trade and notes receivables

     70,840       52,290  

Value added taxes recoverable

     7,122       6,451  

Miscellaneous receivables

     3,507       2,360  
                

Total

   $ 81,469     $ 61,101  
                

5. Inventories

 

     September 30,
2007
   December 31,
2006

Finished goods

   $ 56,692    $ 51,237

Raw materials and supplies

     35,741      32,118
             

Total

   $ 92,433    $ 83,355
             

The inventory balance has been reduced by reserves for obsolete and slow-moving inventories of $1,172 and $931 as of September 30, 2007 and December 31, 2006, respectively.

6. Property, Plant and Equipment

 

     September 30,
2007
    December 31,
2006
 

Land and improvements

   $ 3,771     $ 3,806  

Buildings and improvements

     69,232       70,078  

Machinery and equipment

     602,136       588,973  
                
     675,139       662,857  

Less: accumulated depreciation and amortization

     (539,684 )     (522,513 )
                
     135,455       140,344  

Construction in progress

     15,222       7,891  
                

Property, Plant and Equipment, net

   $ 150,677     $ 148,235  
                

7. Debt

The Company’s debt structure consists of $175.0 million of Senior Subordinated Notes due December 1, 2012 (“Subordinated Notes”), $220.0 million of Senior Secured Floating Rate Notes due February 15, 2012 (“Senior Notes”) and a $75.0 million Senior Secured Asset Based Revolving Credit Facility (“Revolver Loan”). The Subordinated Notes bear interest at a rate of 11.0% per annum. Interest on the Subordinated Notes is payable semi-annually on each December 1 and June 1. The Senior Notes bear interest at the rate of three-month LIBOR plus 3.375% per annum. Interest on the Senior Notes is reset quarterly.

On March 20, 2007, the Company amended the terms of the Revolver Loan. The amendment increased the aggregate lending commitments from $70.0 million to $75.0 million. The amendment also:

 

   

Lowered interest charges by 50 basis points;

 

   

Lowered the cost on the unused portion of the facility;

 

   

Lowered the excess collateral availability requirement to $15.0 million from $20.0 million, and;

 

   

Extended the scheduled termination date of the Revolver Loan from February 11, 2009 to February 11, 2012.

In order to access the additional $5.0 million of the amended Revolver Loan (from $70.0 million to $75.0 million), the Company would have to satisfy the Consolidated Fixed Charge Coverage Ratios contained in the indentures governing the Company’s Senior Notes and Subordinated Notes. Currently, the Company cannot satisfy these ratios.

 

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Under the Revolver Loan, interest charges for loans are calculated based on a floating rate plus a fixed margin. Under the amendment, the fixed margin rates are reduced by 50 basis points to the following rates:

 

Monthly Available Credit

   Base Rate
Loans
    Eurodollar
Rate Loans
 

Greater than $50.0 million

   0.50 %   1.50 %

Less than or equal $50.0 million and greater than $25.0 million

   0.75 %   1.75 %

Less than or equal to $25.0 million

   1.00 %   2.00 %

In addition, under the Revolver Loan, there was a 0.5% per annum unused commitment fee. Under the amendment, this rate is reduced as follows:

 

Monthly Available Credit

   Fee Rate  

Greater than $25.0 million

   0.375 %

Less than or equal to $25.0 million

   0.25 %

A summary of debt follows:

 

     September 30,
2007
    December 31,
2006
 

Long-Term:

    

Senior notes

   $ 220,000     $ 220,000  

Senior subordinated notes

     175,000       175,000  

Unamortized debt discount

     (1,333 )     (1,534 )
                
   $ 393,667     $ 393,466  
                

At September 30, 2007, there was $4.1 million of letters of credit issued under the Revolver Loan.

8. Restructuring

In response to the decision of a customer in Europe not to renew a contract related to the Company’s Dutch facility, the Company evaluated restructuring options for its Dutch subsidiary. On May 22, 2007 the Company received regulatory approval of a plan to terminate the employment of approximately 40 Dutch employees (the “2007 Holland Plan”). In connection with these terminations, the Company estimates that it will make net cash expenditures of approximately $2.8 million. Remaining payments of approximately $0.9 million are expected to be made in the fourth quarter of 2007. The payments principally relate to severance costs.

The following table presents an analysis of the 2007 Holland Plan’s restructuring reserve activity for the nine months ended September 30, 2007:

 

     Severance
and
Benefits
    Other
Costs
    Total  

Balance at December 31, 2006

   $ —       $ —       $ —    

Charges to income

     2,426       331       2,757  

Payments

     (1,701 )     (189 )     (1,890 )

Adjustments

     44       9       53  
                        

Balance at September 30, 2007

   $ 769     $ 151     $ 920  
                        

 

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In September 2003, the Company implemented a cost reduction initiative (“2003 Plan”) under which it closed facilities in Birmingham, Alabama and Reserve, Louisiana. The 2003 Plan was completed during the first quarter of 2007.

The following table presents an analysis of the 2003 Plan’s restructuring reserve activity for the nine months ended September 30, 2007:

 

     Lease
Termination
Costs
 

Balance at December 31, 2006

   $ 98  

Charges to income

     7  

Payments

     (105 )
        

Balance at September 30, 2007

   $ —    
        

The following table presents costs incurred in the Company’s U.S. operations which were charged to restructuring expense in 2007:

 

     Three Months Ended
September 30, 2007
   Nine Months Ended
September 30, 2007

Equipment relocation costs

   $ —      $ 371

Severance and benefits

     —        32
             
   $ —      $ 403
             

9. Commitments and Contingencies

The Company and certain of its present and former directors, along with Crown Holdings, Inc., as well as various underwriters, have been named as defendants in a consolidated putative securities class action lawsuit filed in the United States District Court for the Eastern District of Pennsylvania, In re Constar International Inc. Securities Litigation (Master File No. 03-CV-05020). This action consolidates previous lawsuits, namely Parkside Capital LLC v. Constar International Inc et al.(Civil Action No. 03-5020), filed on September 5, 2003 and Walter Frejek v. Constar International Inc. et al. (Civil Action No. 03-5166), filed on September 15, 2003. The consolidated and amended complaint, filed June 17, 2004, generally alleges that the registration statement and prospectus for the Company’s initial public offering of its common stock on November 14, 2002 contained material misrepresentations and/or omissions. Plaintiffs claim that defendants in these lawsuits violated Sections 11 and 15 of the Securities Act of 1933. Plaintiffs seek class action certification and an award of damages and litigation costs and expenses. Under the Company’s charter documents, an agreement with Crown and an underwriting agreement with Crown and the underwriters, Constar has incurred certain indemnification and contribution obligations to the other defendants with respect to this lawsuit. The court denied the Company’s motion to dismiss for failure to state a claim upon which relief may be granted on June 7, 2005 and the Company’s answer was filed on August 8, 2005. On November 14, 2005, the Company filed a motion for judgment on the pleadings. The court denied the Company’s motion on May 24, 2006. On June 8, 2006, plaintiffs filed a motion for class certification. This motion was referred to the Special Master, and on May 9, 2007, the Special Master issued a Report and Proposed Order granting the motion. Defendants filed objections to the Report and Proposed Order of the Special Master on May 17, 2007. Those objections are currently pending. The Company believes the claims in the action are without merit and intends to defend against them vigorously. The Company cannot reasonably estimate the amount of any loss that may result from this matter.

On March 13, 2007, Marshall Packaging Co. LLC brought suit in the Eastern District of Texas, C. A. No. 6:07cv118, against Amcor PET Packaging USA Inc. and Wal-Mart Stores Inc., alleging infringement of U.S. Patent No. RE 38,770, entitled “Collapsible Container,” and seeking injunctive relief and monetary damages (“the Lawsuit”). On April 5, 2007, Marshall settled with Amcor for an undisclosed amount and Amcor was subsequently dismissed from the Lawsuit. On June 29, 2007, Marshall amended its Complaint to add Premium Waters, Inc., a Wal-Mart supplier, as a defendant. The Company is a supplier of certain containers to Premium, and Premium is claiming indemnity from the Company with respect to some as yet unknown portion of the containers that Premium

 

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sells to Wal-Mart. The Company does not know which or how many Constar containers are included among those accused in the Lawsuit. The Company does not believe that it is subject to liability in connection with the patent at issue and intends to vigorously defend against any attempt to implicate its containers in the Lawsuit.

10. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following:

 

     September 30,
2007
    December 31,
2006
 

Postretirement liabilities, net of tax

   $ (21,021 )   $ (23,387 )

Cash-flow hedge, net of tax

     820       2,152  

Foreign currency translation adjustments

     3,664       2,277  
                

Accumulated other comprehensive loss

   $ (16,537 )   $ (18,958 )
                

The components of comprehensive loss are as follows:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2007     2006     2007     2006  

Net income (loss)

   $ (1,145 )   $ 1,383     $ (12,274 )   $ (4,791 )

Foreign currency translation adjustments

     1,024       251       1,387       1,808  

Postretirement amortization

     788       —         2,366       —    

Revaluation of cash flow hedge

     (2,627 )     (2,761 )     (1,332 )     761  
                                

Comprehensive loss

   $ (1,960 )   $ (1,127 )   $ (9,853 )   $ (2,222 )
                                

11. Stock-Based Compensation

On May 30, 2007, the Company’s stockholders approved the 2007 Stock-Based Incentive Compensation Plan (the “2007 Plan”) and the 2007 Non-Employee Directors’ Equity Incentive Plan (the “2007 Directors Plan”).

Under the 2007 Plan and the Company’s 2002 Stock-Based Incentive Compensation Plan (the “2002 Plan”), employees may be granted deferred stock, restricted stock, stock appreciation rights (“SAR”) and incentive or non-qualified stock options. Under the 2007 Directors Plan and the Company’s 2002 Non-Employee Directors’ Equity Incentive Plan (the “2002 Directors Plan”), non-employee directors may be granted restricted stock or non-qualified stock options to purchase shares of Common Stock. These plans are each administered by the Compensation Committee of the Board of Directors, which determines the vesting provisions, the form of payment for shares and all other terms of the awards.

The following table shows the shares authorized for issuance and shares available for future grants under each of the plans:

 

Plan

   Shares
Authorized
For Issuance
   Shares
Available
For Future
Grants

2007 Plan

   850    815

2002 Plan

   850    15

2007 Directors Plan

   50    50

2002 Directors Plan

   25    7

No more than 300 shares may be granted under the 2007 Plan in any plan year.

 

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Options granted are to be issued at prices not less than fair market value on the date of grant and expire up to ten years after the grant date in the case of the 2007 Plan, 2002 Plan and 2007 Directors Plan and up to five years after the grant date in the case of the 2002 Directors Plan. To date, all grants under the 2002 Directors Plan have been restricted stock grants.

In connection with the Company’s Annual Incentive & Management Stock Purchase Plan (“Incentive Plan”) the Company may issue restricted stock units (“RSUs”). RSUs may be paid, at the discretion of the Compensation Committee of the Company’s Board of Directors, in (i) cash or (ii) stock. Any payments in stock would be made from available shares authorized under a stockholder-authorized plan.

The following table summarizes employee stock option activity for the nine months ended September 30, 2007:

 

     Options
(in thousands)
   

Weighted
Average
Exercise
Price

Per Share

   Weighted
Average
Remaining
Contractual
Term
(years)
   Aggregate
Intrinsic
Value
(in thousands)

Outstanding at December 31, 2006

   169     $ 12.00      

Granted

   —            

Exercised

   —            

Forfeited

   (5 )     —        
                  

Outstanding at September 30, 2007

   164     $ 12.00    0.1    $ —  
                        

Exercisable at September 30, 2007

   164     $ 12.00    0.1    $ —  
                        

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing common stock price on the last trading day of the third quarter of 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2007. The aggregate intrinsic value varies based on the fair market value of the Company’s common stock. The total number of in-the-money options exercisable as of September 30, 2007 was zero.

The following table summarizes restricted stock activity during the nine months ended September 30, 2007:

 

     Number of Shares     Weighted
Average
Grant Date
Fair Value
(Shares in thousands)    2002 Plan     2007 Plan    2002
Directors Plan
    Total    

Nonvested, December 31, 2006

   288     —      10     298     $ 5.03

Granted

   31     35    —       66       5.96

Vested

   (64 )   —      (4 )   (68 )     5.64

Forfeited

   (11 )   —      (2 )   (13 )     5.21
                         

Nonvested, September 30, 2007

   244     35    4     283       5.09
                         

As of September 30, 2007, there was $874 of unrecognized compensation cost related to restricted stock which is expected to be recognized over a weighted average period of 1.6 years. Total fair value of shares vested was $527 for the nine months ended September 30, 2007.

 

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The following table summarizes restricted stock unit activity for the nine months ended September 30, 2007:

 

(RSU’s in thousands)    Number of
Restricted
Stock Units
 

Outstanding, December 31, 2006

   174  

Granted

   76  

Forfeited

   (11 )

Vested

   (8 )
      

Outstanding, September 30, 2007

   231  
      

The RSUs generally vest between three and four years from the grant date. During the nine months ended September 30, 2007, in connection with the Incentive Plan, the Company issued 76 RSUs which cliff-vest three years from the date of grant.

RSUs are classified as liabilities in the accompanying condensed consolidated financial statements. The fair value of the liabilities related to the RSUs is remeasured at each balance sheet date and adjustments to the fair value of the RSU liabilities are recorded as compensation expense. The fair value of the liabilities associated with the outstanding RSUs was $506 as of September 30, 2007.

The following table summarizes total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(in thousands)    2007     2006    2007    2006

Restricted stock

   $ 161     $ 172    $ 482    $ 537

Restricted stock units

     (76 )     99      91      172
                            
   $ 85     $ 271    $ 573    $ 709
                            

12. Earnings (Loss) Per Share

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share (“Diluted EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive securities outstanding during the period.

The Company’s potentially dilutive securities include potential common shares related to our stock options and restricted stock. Diluted EPS includes the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would be anti-dilutive. Diluted EPS also excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period.

The following table presents a reconciliation between the weighted average number of basic shares outstanding and the weighted average number of fully diluted shares outstanding.

 

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Table of Contents
     Three months ended
September 30,
   Nine months ended
September 30,
(shares in thousands)    2007    2006    2007    2006

Basic weighted average shares outstanding

   12,315    12,235    12,306    12,214

Potentially dilutive securities:

           

Employee stock options

   —      —      —      —  

Restricted stock

   —      354    —      —  
                   

Total

   —      354    —      —  
                   

Diluted weighted average shares outstanding

   12,315    12,589    12,306    12,214
                   

Diluted EPS for the three and nine months ended September 30, 2007 and 2006 excludes approximately 0.2 million stock options because the option price was greater than the average market price of our common stock. Diluted EPS for the three and nine months ended September 30, 2007 and the nine months ended September 30, 2006 excludes approximately 0.3 million shares of restricted stock due to the losses for the periods.

13. Pension and Other Postretirement Benefits

The components of net periodic pension cost are as follows:

 

     Three Months Ended
September 30, 2007
    Three Months Ended
September 30, 2006
 
(in thousands)    U.S.     Europe     Total     U.S.     Europe     Total  

Service cost

   $ 258     $ 177     $ 435     $ 559     $ 255     $ 814  

Interest cost

     1,195       162       1,357       1,132       139       1,271  

Expected return on plan assets

     (1,469 )     (208 )     (1,677 )     (1,296 )     (156 )     (1,452 )

Amortization of net loss

     647       42       689       849       42       891  

Amortization of prior service cost

     16       (18 )     (2 )     38       —         38  
                                                

Total pension expense

   $ 647     $ 155     $ 802     $ 1,282     $ 280     $ 1,562  
                                                
     Nine Months Ended
September 30, 2007
    Nine Months Ended
September 30, 2006
 
(in thousands)    U.S.     Europe     Total     U.S.     Europe     Total  

Service cost

   $ 775     $ 530     $ 1,305     $ 1,677     $ 765     $ 2,442  

Interest cost

     3,583       485       4,068       3,397       416       3,813  

Expected return on plan assets

     (4,407 )     (623 )     (5,030 )     (3,888 )     (468 )     (4,356 )

Amortization of net loss

     1,944       126       2,070       2,546       127       2,673  

Amortization of prior service cost

     47       (54 )     (7 )     114       —         114  
                                                

Total pension expense

   $ 1,942     $ 464     $ 2,406     $ 3,846     $ 840     $ 4,686  
                                                

The Company sponsors various retirement plans for most full-time employees. During 2006, the Company conducted a study of its U.S. employee retirement programs. The Board of Directors approved a number of benefit changes during December 2006 that were implemented effective April 1, 2007. The most significant changes involved the freeze of plan benefits as of March 31, 2007 for certain participants and improvements in the rate of employer matching contributions to our defined contribution plan. These changes are expected to modestly reduce our benefit costs and estimated funding requirements, prospectively.

The Company estimates that its expected contribution to its pension plans for 2007 will be approximately $4.9 million of which $1.9 million and $4.2 million was paid during the three and nine months ended September 30, 2007, respectively.

 

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Other Postretirement Benefits

The components of other postretirement benefits cost were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in thousands)    2007     2006     2007     2006  

Interest cost

   $ 63     $ 62     $ 188     $ 186  

Amortization of net loss

     178       171       534       513  

Amortization of prior service cost

     (77 )     (77 )     (231 )     (231 )
                                

Total other postretirement benefits expense

   $ 164     $ 156     $ 491     $ 468  
                                

14. Income Taxes

During the nine months ended September 30, 2007, the Company recorded a valuation allowance of $6.5 million to offset net operating losses and deferred tax assets generated for the U.S. and foreign operations during 2007. The Company does not currently anticipate realizing deferred tax assets to the extent the assets exceed deferred tax liabilities.

15. Derivative Financial Instruments

The Company reviews opportunities and options to reduce the Company’s financial risks and exposure. The Company may enter into a derivative instrument by approval of the Company’s executive management based on guidelines established by the Company’s Board of Directors. Market and credit risks associated with this instrument are regularly reviewed by the Company’s executive management.

The Company has an interest rate swap for a notional amount of $100.0 million relating to its Senior Secured Floating Rate Notes. The Company effectively exchanged its floating interest rate of LIBOR plus 3.375% for a fixed rate of 7.9% over the remaining term of the underlying notes. The objective and strategy for undertaking this interest rate swap was to hedge the exposure to variability in expected future cash flows as a result of the floating interest rate associated with the Company’s debt due in 2012.

The Company designated this interest rate swap as a cash flow hedge and assumes that there is no ineffectiveness in the hedging relationship. Therefore, the entire change in the fair value of the swap is recognized in other comprehensive income. The fair value of the interest rate swap asset was $0.8 million at September 30, 2007 and $2.2 million at December 31, 2006. For the nine months ended September 30, 2007, the Company recorded an unrealized loss in other comprehensive income of $1.3 million related to the cash flow hedge.

16. Other Income (Expense), Net

Other income (expense), net consisted of the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in thousands)    2007     2006     2007     2006  

Royalty income

   $ 225     $ 289     $ 728     $ 612  

Interest income

     107       37       373       85  

Foreign exchange gains (losses)

     (124 )     372       134       905  

Increase (decrease) in cash surrender value of life insurance

     23       (264 )     25       (264 )

Other income (expense)

     (66 )     42       (170 )     89  
                                

Other income (expense), net

   $ 165     $ 476     $ 1,090     $ 1,427  
                                

 

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17. Segment Information

The Company has only one operating segment and one reporting unit. The Company has operating plants in the United States and Europe. Net customer sales by country were as follows:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
(in thousands)    2007    2006    2007    2006

United States

   $ 180,290    $ 197,370    $ 526,333    $ 583,260

United Kingdom

     37,787      32,269      111,253      90,378

Holland

     6,617      16,274      37,916      43,170
                           
   $ 224,694    $ 245,913    $ 675,502    $ 716,808
                           

18. Condensed Consolidating Financial Information

The Company’s Senior Notes are guaranteed on a senior basis by each of the Company’s domestic and United Kingdom restricted subsidiaries. The guarantor subsidiaries are 100% owned and the guarantees are made on a joint and several basis and are full and unconditional. The following guarantor and non-guarantor condensed financial information gives effect to the guarantee of the Senior Notes by each of our domestic and United Kingdom restricted subsidiaries. The following condensed consolidating financial statements are required in accordance with Regulation S-X Rule 3-10:

 

 

Condensed balance sheets as of September 30, 2007 and December 31, 2006;

 

 

Condensed statements of operations for the three and nine months ended September 30, 2007 and 2006; and,

 

 

Condensed statements of cash flows for the nine months ended September 30, 2007 and 2006.

 

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CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2007

(In thousands)

(Unaudited)

 

     Parent     Guarantors    Non-
Guarantors
   Eliminations     Total
Company
 

ASSETS

            

Current Assets:

            

Cash and cash equivalents

   $ —       $ 4,308    $ 4,051    $ —       $ 8,359  

Intercompany receivables

     —         128,813      9,592      (138,405 )     —    

Accounts receivable, net

     —         78,352      3,592      —         81,944  

Inventories, net

     —         89,191      3,242      —         92,433  

Prepaid expenses and other current assets

     —         3,416      677      —         4,093  

Deferred income taxes

     —         2,179      —        —         2,179  

Current assets of discontinued operations

     —         150      285      —         435  
                                      

Total current assets

     —         306,409      21,439      (138,405 )     189,443  
                                      

Property, plant and equipment, net

     —         145,533      5,144      —         150,677  

Goodwill

     —         148,813      —        —         148,813  

Investments in subsidiaries

     478,706       18,959      —        (497,665 )     —    

Other assets

     8,755       4,124      —        —         12,879  
                                      

Total assets

   $ 487,461     $ 623,838    $ 26,583    $ (636,070 )   $ 501,812  
                                      

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

            

Current Liabilities:

            

Short-term debt

   $ 10,855     $ —      $ —      $ —       $ 10,855  

Accounts payable and accrued liabilities

     10,222       109,494      4,650      —         124,366  

Intercompany payable

     127,782       9,483      1,140      (138,405 )     —    

Current liabilities of discontinued operations

     —         —        887      —         887  
                                      

Total current liabilities

     148,859       118,977      6,677      (138,405 )     136,108  
                                      

Long-term debt, net of current portion

     393,667       —        —        —         393,667  

Pension and postretirement liabilities

     —         15,572      —        —         15,572  

Deferred income taxes

     —         2,179      —        —         2,179  

Other liabilities

     —         8,404      —        —         8,404  

Non-current liabilities of discontinued operations

     —         —        947      —         947  
                                      

Total liabilities

     542,526       145,132      7,624      (138,405 )     556,877  
                                      

Commitments and contingent liabilities

            

Stockholders’ equity (deficit)

     (55,065 )     478,706      18,959      (497,665 )     (55,065 )
                                      

Total liabilities and stockholders’ equity (deficit)

   $ 487,461     $ 623,838    $ 26,583    $ (636,070 )   $ 501,812  
                                      

 

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CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2006

(In thousands)

 

     Parent     Guarantors    Non-
Guarantors
   Eliminations     Total
Company
 

ASSETS

            

Current Assets:

            

Cash and cash equivalents

   $ —       $ 16,288    $ 3,082    $ —       $ 19,370  

Intercompany receivables

     —         118,470      7,394      (125,864 )     —    

Accounts receivable, net

     —         55,867      6,090      —         61,957  

Inventories, net

       77,874      5,481        83,355  

Prepaid expenses and other current assets

       11,109      165        11,274  

Deferred income taxes

     —         2,257      —        —         2,257  

Current assets of discontinued operations

     —         —        11,602      —         11,602  
                                      

Total current assets

     —         281,865      33,814      (125,864 )     189,815  
                                      

Property, plant and equipment, net

     —         142,803      5,432      —         148,235  

Goodwill

     —         148,813      —        —         148,813  

Investments in subsidiaries

     457,299       19,757      —        (477,056 )     —    

Other assets

     11,243       4,570           15,813  

Non-current assets of discontinued operations

     —         —        1,286      —         1,286  
                                      

Total assets

   $ 468,542     $ 597,808    $ 40,532    $ (602,920 )   $ 503,962  
                                      

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

            

Current Liabilities:

            

Accounts payable and accrued liabilities

   $ 4,602     $ 103,965    $ 6,427    $ —       $ 114,994  

Intercompany payable

     115,313       7,397      3,154      (125,864 )     —    

Current liabilities of discontinued operations

     —         —        8,680      —         8,680  
                                      

Total current liabilities

     119,915       111,362      18,261      (125,864 )     123,674  
                                      

Long-term debt

     393,466       —        —        —         393,466  

Pension and postretirement liabilities

     —         18,837      306      —         19,143  

Deferred income taxes

     —         2,257      —        —         2,257  

Other liabilities

       8,053      64        8,117  

Non-current liabilities of discontinued operations

     —         —        2,144      —         2,144  
                                      

Total liabilities

     513,381       140,509      20,775      (125,864 )     548,801  
                                      

Commitments and contingent liabilities

            

Stockholders’ equity (deficit)

     (44,839 )     457,299      19,757      (477,056 )     (44,839 )
                                      

Total liabilities and stockholders’ equity (deficit)

   $ 468,542     $ 597,808    $ 40,532    $ (602,920 )   $ 503,962  
                                      

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007

(In thousands)

(Unaudited)

 

     Parent     Guarantors     Non-
Guarantors
    Eliminations     Total
Company
 

Net sales

   $ —       $ 219,210     $ 6,617     $ —       $ 225,827  

Cost of products sold, excluding depreciation

     —         196,176       6,280      
—  
 
    202,456  

Depreciation

     —         6,137       203       —         6,340  
                                        

Gross profit

     —         16,897       134       —         17,031  

Selling and administrative expenses

     —         6,416       178       —         6,594  

Research and technology expenses

     —         1,627       —         —         1,627  

Provision for restructuring

     —         —         32       —         32  
                                        

Total operating expenses

     —         8,043       210       —         8,253  
                                        

Operating income

     —         8,854       (76 )     —         8,778  

Interest expense

     (10,246 )     (272 )     83       —         (10,435 )

Other income (expense), net

     —         321       (156 )     —         165  
                                        

Income (loss) from continuing operations before income taxes

     (10,246 )     8,903       (149 )     —         (1,492 )

Provision for income taxes

     —         —         —         —         —    
                                        

Income (loss) from continuing operations

     (10,246 )     8,903       (149 )     —         (1,492 )

Equity earnings

     9,101       (383 )     —         (8,718 )     —    

Income (loss) from discontinued operations, net of taxes

     —         581       (234 )     —         347  
                                        

Net income (loss)

   $ (1,145 )   $ 9,101     $ (383 )   $ (8,718 )   $ (1,145 )
                                        

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006

(In thousands)

(Unaudited)

 

     Parent     Guarantors     Non-
Guarantors
    Eliminations     Total
Company
 

Net sales

   $ —       $ 230,458     $ 16,273     $ —       $ 246,731  

Cost of products sold, excluding depreciation

     —         203,998       14,935       —         218,933  

Depreciation

     —         7,275       174       —         7,449  
                                        

Gross profit

     —         19,185       1,164       —         20,349  

Selling and administrative expenses

     —         6,090       272       —         6,362  

Research and technology expenses

     —         1,671       —         —         1,671  

Provision for restructuring

     —         366       —         —         366  
                                        

Total operating expenses

     —         8,127       272       —         8,399  
                                        

Operating income

     —         11,058       892       —         11,950  

Interest expense

     (10,222 )     (230 )     30       —         (10,422 )

Other income (expense), net

     —         453       23       —         476  
                                        

Income (loss) from continuing operations before income taxes

     (10,222 )     11,281       945       —         2,004  

Provision for income taxes

     —         —         —         —         —    
                                        

Income (loss) from continuing operations

     (10,222 )     11,281       945       —         2,004  

Equity earnings

     11,605       324       —         (11,929 )     —    

Loss from discontinued operations, net of taxes

     —         —         (621 )     —         (621 )
                                        

Net income (loss)

   $ 1,383     $ 11,605     $ 324     $ (11,929 )   $ 1,383  
                                        

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

(In thousands)

(Unaudited)

 

     Parent     Guarantors     Non-
Guarantors
    Eliminations     Total
Company
 

Net sales

   $ —       $ 640,831     $ 37,916     $ —       $ 678,747  

Cost of products sold, excluding depreciation

     —         578,735       34,286       —         613,021  

Depreciation

     —         21,037       696       —         21,733  
                                        

Gross profit

     —         41,059       2,934       —         43,993  

Selling and administrative expenses

     —         17,648       426         18,074  

Research and technology expenses

     —         5,397       —         —         5,397  

Provision for restructuring

     —         410       2,757       —         3,167  
                                        

Total operating expenses

     —         23,455       3,183       —         26,638  
                                        

Operating income

     —         17,604       (249 )     —         17,355  

Interest expense

     (30,300 )     (934 )     223       —         (31,011 )

Other income (expense), net

     —         1,294       (204 )     —         1,090  
                                        

Income (loss) from continuing operations before income taxes

     (30,300 )     17,964       (230 )     —         (12,566 )

Provision for income taxes

     —         —         —         —         —    
                                        

Income (loss) from continuing operations

     (30,300 )     17,964       (230 )     —         (12,566 )

Equity earnings

     18,026       (519 )     —         (17,507 )     —    

Income from discontinued operations, net of taxes

     —         581       289       —         292  
                                        

Net income (loss)

   $ (12,274 )   $ 18,026     $ (519 )   $ (17,507 )   $ (12,274 )
                                        

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

(In thousands)

(Unaudited)

 

     Parent     Guarantors     Non-
Guarantors
    Eliminations     Total
Company
 

Net sales

   $ —       $ 676,669     $ 43,169     $ —       $ 719,838  

Cost of products sold, excluding depreciation

     —         600,655       39,974       —         640,629  

Depreciation

     —         25,542       493       —         26,035  
                                        

Gross profit

     —         50,472       2,702       —         53,174  

Selling and administrative expenses

     —         20,449       831         21,280  

Research and technology expenses

     —         4,697       —         —         4,697  

Asset impairment charges

     —         870           870  

Provision for restructuring

     —         591       —         —         591  
                                        

Total operating expenses

     —         26,607       831       —         27,438  
                                        

Operating income

     —         23,865       1,871       —         25,736  

Interest expense

     (30,460 )     (669 )     57       —         (31,072 )

Other income (expense), net

     —         1,426       1       —         1,427  
                                        

Income (loss) from continuing operations before income taxes

     (30,460 )     24,622       1,929       —         (3,909 )

Provision for income taxes

     —         —         —         —         —    
                                        

Income (loss) from continuing operations

     (30,460 )     24,622       1,929       —         (3,909 )

Equity earnings

     25,669       1,047       —         (26,716 )     —    

Loss from discontinued operations, net of taxes

     —         —         (882 )     —         (882 )
                                        

Net income (loss)

   $ (4,791 )   $ 25,669     $ 1,047     $ (26,716 )   $ (4,791 )
                                        

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

(In thousands)

(Unaudited)

 

     Parent     Guarantors     Non-
Guarantors
    Eliminations     Total
Company
 

Cash flows from operating activities:

          

Net income (loss)

   $ (12,274 )   $ 18,026     $ (519 )   $ (17,507 )   $ (12,274 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     1,741       20,872       549       —         23,162  

Stock-based compensation

     —         573       —         —         573  

Reclassification gain of foreign currency translation adjustments

     —         —         (110 )       (110 )

Equity earnings

     (18,026 )     519       —         17,507       —    

Changes in operating assets and liabilities

     5,620       (20,637 )     2,693       —         (12,324 )
                                        

Net cash provided by (used in) operating activities

     (22,939 )     19,353       2,613       —         (973 )
                                        

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     —         (23,448 )     (142 )     —         (23,590 )

Proceeds from the sale of property, plant and equipment

     —         950       1,858       —         2,808  

Intercompany dividends

     —         2,070       (2,070 )     —         —    
                                        

Net cash used in investing activities

     —         (20,428 )     (354 )     —         (20,782 )
                                        

Cash flows from financing activities:

          

Proceeds from Revolver loan

     588,599       —         —         —         588,599  

Repayment of Revolver loan

     (577,744 )     —         —         —         (577,744 )

Net change in intercompany loans

     12,469       (10,988 )     (1,481 )     —         —    

Costs associated with debt refinancing

     (385 )     —         —         —         (385 )
                                        

Net cash provided by (used in) financing activities

     22,939       (10,988 )     (1,481 )     —         10,470  
                                        

Effect of exchange rate changes on cash and cash equivalents

     —         83       191       —         274  
                                        

Net increase (decrease) in cash and cash equivalents

     —         (11,980 )     969       —         (11,011 )

Cash and cash equivalents at beginning of period

     —         16,288       3,082       —         19,370  
                                        

Cash and cash equivalents at end of period

   $ —       $ 4,308     $ 4,051     $ —       $ 8,359  
                                        

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

(In thousands)

(Unaudited)

 

     Parent     Guarantor     Non-
Guarantor
    Eliminations     Total
Company
 

Cash flows from operating activities:

          

Net income (loss)

   $ (4,791 )   $ 25,669     $ 1,047     $ (26,716 )   $ (4,791 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     1,714       25,551       1,005       —         28,270  

Stock-based compensation

     —         709       —         —         709  

Asset impairment charges

     —         870       —         —         870  

Equity earnings

     (25,669 )     (1,047 )     —         26,716       —    

Changes in operating assets and liabilities, net

     5,337       5,024       1,503       —         11,864  
                                        

Net cash provided by operating activities

     (23,409 )     56,776       3,555       —         36,922  
                                        

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     —         (16,324 )     (916 )     —         (17,240 )

Proceeds from the sale of property, plant and equipment

     —         145       —         —         145  
                                        

Net cash used in investing activities

     —         (16,179 )     (916 )     —         (17,095 )
                                        

Cash flows from financing activities:

          

Proceeds from Revolver loan

     616,767       —         —         —         616,767  

Repayment of Revolver loan

     (627,220 )     —         —         —         (627,220 )

Net change in intercompany loans

     34,182       (34,182 )     —         —         —    

Costs associated with debt refinancing

     (320 )     —         —         —         (320 )

Other financing activities

     —         —         (1,540 )     —         (1,540 )
                                        

Net cash provided by (used in) financing activities

     23,409       (34,182 )     (1,540 )     —         (12,313 )
                                        

Effect of exchange rate changes on cash and cash equivalents

     —         187       99       —         286  
                                        

Net increase (decrease) in cash and cash equivalents

     —         6,602       1,198       —         7,800  

Cash and cash equivalents at beginning of period

     —         6,744       2,919       —         9,663  
                                        

Cash and cash equivalents at end of period

   $ —       $ 13,346     $ 4,117     $ —       $ 17,463  
                                        

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Constar International Inc. (the “Company” or “Constar”) is a global producer of PET, or polyethylene terephthalate, plastic containers for food, beverages, and other end use applications. Constar manufactures PET containers for conventional PET applications in soft drinks and water and for custom PET applications. Custom PET container applications include food, juices, teas, sport drinks, new age beverages, household chemicals, beer and flavored alcoholic beverages, most of which require a combination of advanced technologies, processing know-how and innovative designs. Beverage categories dominate the PET market.

Constar’s technologies are aimed at enabling the Company to meet the specific needs of products being converted from other forms of packaging to PET. Constar’s oxygen-scavenging technology, Oxbar®, enables the Company to produce the special packaging required to extend the shelf life of oxygen sensitive products. In January 2007, the Company’s DiamondClear™ oxygen scavenger technology completed the Food and Drug Administration’s (“FDA”) food contact notification process and is now available for ketchup. The Company is developing additional DiamondClear™ products targeted towards a variety of food applications. DiamondClear™ is a monolayer oxygen barrier material that can be incorporated into PET containers to produce glass-like clarity. In the second quarter of 2007, the Company commenced its first commercial shipment of DiamondClear™. The Company believes that its portfolio of oxygen scavenging products represents the industry’s best-performing oxygen barrier technologies. The Company has also developed methods for heat-setting containers without the use of traditional vacuum panels. Constar is focused on providing its customer base with the best service through technological innovation, new product development and lowest-cost production. The Company actively seeks new business where its technologies and other competitive strengths can yield attractive and sustainable profitability.

Substantially all of the Company’s sales are covered by existing or pending contracts. Some of these contracts come up for renewal each year, and are often offered to the market for competitive bidding. The Company’s main contract with PepsiCo, its largest customer, is scheduled to expire on December 31, 2008. The Company is currently discussing a contract renewal with PepsiCo and there can be no assurance of the outcome of these discussions. In addition, in negotiations with certain customers for the continuation and the extension of supply agreements, the Company has agreed to price concessions. The net negative impact of contractual price concessions in 2007 as compared to 2006 is approximately $14.0 million to $16.0 million. Compared to 2007, the Company expects contractual net price increases of approximately $7.0 million to $8.0 million in 2008.

Approximately 78% of the Company’s revenues in the first nine months of 2007 were generated in the United States, with the remainder attributable to its European operations. During the first nine months of 2007, one customer accounted for approximately 38% of the Company’s consolidated revenues, while the top ten customers accounted for an aggregate of approximately 71% of the Company’s consolidated revenues. Approximately 74% of the Company’s sales in the first nine months of 2007 related to conventional PET containers which are primarily used for carbonated soft drinks (“CSD”) and bottled water.

The Company believes that water bottlers will continue to shift towards manufacturing their own bottles. This is an accelerating trend in the industry. In addition, the Company believes that some future movement toward self-manufacturing of CSD packages is likely, particularly where freight costs are a significant factor. As a result, profitability from conventional sales is expected to continue to decline for the foreseeable future. Additionally, increased self-manufacturing may result in over-capacity among merchant suppliers and create pricing pressures. The Company believes that in most cases, customers will continue to purchase conventional preforms from merchant suppliers.

The Company is a producer of higher profit custom products that are used in such packaging applications as hot-filled beverages, food, household chemicals, beer and flavored alcoholic beverages, most of which require containers with special performance characteristics. Part of the Company’s strategy is to increase its presence in this higher profit and growth sector of the market. Approximately 21% of the Company’s sales in the first nine months of 2007 related to custom PET containers. Custom unit volume declined approximately 1.9% in the third quarter of 2007 compared to the third quarter of 2006. This decrease was driven by the softening in demand for some of the Company’s customers’ products and the temporary suspension of production by a customer.

 

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Table of Contents

As previously disclosed, the Company has been notified by two of its conventional customers, representing 3.2% of 2006 consolidated revenues, of their decision to manufacture their own bottles. In addition, as previously disclosed, the Company has been notified by one of its CSD customers, representing 1.9% of 2006 consolidated revenues, of its decision not to renew its contract which expires on December 31, 2007. During 2007, the Company has signed new supply agreements that along with the expected net impact of contractual price increases beginning in 2008 of between $7.0 million and $8.0 million are expected to minimize and potentially exceed the impact of the losses noted above.

The primary raw material and component cost of the Company’s products is PET resin, which is a commodity available globally. The price of PET resin is subject to frequent fluctuations as a result of raw material costs, overseas markets, PET production capacity and seasonal demand. Constar is one of the largest purchasers of PET resin in North America, which it believes provides it with negotiating leverage. Higher resin prices may impact the demand for PET packaging where customers have a choice between PET and other forms of packaging.

Substantially all of the Company’s sales are made pursuant to mechanisms that allow for the pass-through of changes in the price of PET resin to its customers. Period-to-period comparisons of gross profit and gross profit as a percentage of sales may not be meaningful indicators of actual performance, because the effects of the pass-through mechanisms are affected by the magnitude and timing of resin price changes.

The Company is highly leveraged. As of September 30, 2007, the Company’s debt structure consisted of a $75.0 million Revolver Loan, $220.0 million of Senior Notes and $175.0 million of Subordinated Notes. As of September 30, 2007, the Company had $10.9 million outstanding under its Revolver Loan and $ 4.1 million of letters of credit issued under its Revolver Loan. Interest expense for the first nine months of 2007 was $31.0 million.

Results of Operations

Three Months Ended September 30, 2007 and 2006

Net Sales

 

(dollars in millions)    Three months ended
September 30,
   Increase
(Decrease)
    %
Increase
(Decrease)
 
   2007    2006     

United States

   $ 181.4    $ 198.2    $ (16.8 )   (8.5 )%

Europe

     44.4      48.5      (4.1 )   (8.5 )
                            

Total

   $ 225.8    $ 246.7    $ (20.9 )   (8.5 )%
                            

The decrease in consolidated sales was driven by a decline in conventional and custom unit volumes and contractual price reductions. The decline in conventional unit volume was driven by a decrease in water volume due to the continued movement of water bottlers to self-manufacturing. In addition, CSD volume decreased due to consumers shifting their preferences from traditional carbonated soft drinks to alternative beverages such as energy drinks and teas, most of which are in non-PET forms of packaging. The decrease in water and CSD bottle volumes was partially offset by an increase in preform volume and a strengthening of the British Pound and Euro against the dollar.

The decrease in U.S. net sales in the third quarter of 2007 compared to the third quarter of 2006 was principally driven by declines in unit volume and the impact of contractual price reductions. Total U.S. unit volume decreased 3.3% over the third quarter of 2006. Conventional unit volume declined 3.5% compared to the third quarter of 2006, while custom unit volume decreased 1.9%.

The decrease in European net sales in the third quarter of 2007 compared to the third quarter of 2006 was primarily due to decreased total unit volume of 3.1%. Total bottle and preform volume decreased by 12.3% due principally to the previously disclosed loss of a major customer in the Netherlands, partially offset by an increase in closure volume of 7.3%. The decline in revenue due to volume losses was partially offset by favorable foreign currency translations.

 

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Gross Profit

 

(dollars in millions)    Three months ended
September 30,
    Increase
(Decrease)
 
   2007     2006    

United States

   $ 16.4     $ 18.8     $ (2.4 )

Europe

     0.6       1.6       (1.0 )
                        

Total

   $ 17.0     $ 20.4     $ (3.4 )
                        

Percent of net sales

     7.5 %     8.3 %  
                  

The decrease in gross profit in the third quarter of 2007 compared to the third quarter of 2006 was the result of lower volumes and contractual price reductions which were partially offset by lower manufacturing costs and favorable foreign currency translations.

Selling and Administrative Expenses

Selling and administrative expenses increased to $6.6 million in the third quarter of 2007 compared to $6.4 million in the third quarter of 2006. The increase relates primarily to salaries and benefits and a $0.3 million charge related to non-restructuring severance costs, offset by decreased legal and stock compensation expenses.

Research and Technology Expenses

Research and technology expenses were $1.6 million in the third quarter of 2007 compared to $1.7 million in the third quarter of 2006. Research and technology expenses relate to spending for the Company’s existing proprietary technologies and new emerging technologies.

Operating Income

Operating income was $8.8 million in the third quarter of 2007 compared to $12.0 million in the third quarter of 2006. This decrease in operating income primarily relates to the lower unit volumes and contractual price concessions discussed above.

Interest Expense

Interest expense remained consistent at $10.4 million in the third quarter of 2007 and 2006.

Other (Income) Expense, net

Other income was $0.2 million in the third quarter of 2007 compared to other income of $0.5 million in the third quarter of 2006. The decrease in other income primarily resulted from decreases in foreign currency gains.

Provision for Income Taxes

The Company recorded no provision for income taxes for the third quarter of 2007 or 2006. During the third quarter of 2007 the Company recorded an additional valuation allowance of $1.6 million to offset net operating losses and deferred tax assets generated for the U.S. and foreign operations. During the third quarter of 2006, the Company recorded a reduction to the valuation allowance of $1.2 million.

 

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Loss from Discontinued Operations, net of taxes

Income from discontinued operations in the third quarter of 2007 was $0.3 million compared to loss from discontinued operations of $0.6 million in the third quarter of 2006 and is related to the shutdown and run-off of operations in Turkey, which began in May 2006, and in Italy, which began in December 2006. Unless otherwise indicated, amounts provided throughout this report relate to continuing operations only.

Net Income (Loss)

Net loss in the third quarter of 2007 was $1.1 million, or $0.09 loss per basic and diluted share, compared to net income in the third quarter of 2006 of $1.4 million, or $0.11 income per basic and diluted share.

Nine Months Ended September 30, 2007 and 2006

Net Sales

 

(dollars in millions)    Nine months ended
September 30,
   Increase
(Decrease)
    %
Increase
(Decrease)
 
   2007    2006     

United States

   $ 529.6    $ 586.3    $ (56.7 )   (9.7 )%

Europe

     149.2      133.5      15.7     11.8  
                            

Total

   $ 678.8    $ 719.8    $ (41.0 )   (5.7 )%
                            

The decrease in consolidated sales was primarily driven by a decline in conventional and custom unit volumes. The decline in conventional unit volume was driven by a decrease in water volume due to the continued movement of water bottlers to self-manufacturing. In addition, CSD volume decreased due to consumers shifting their preferences from traditional carbonated soft drinks to alternative beverages such as energy drinks and teas, most of which are in non-PET forms of packaging. The decrease in water and CSD bottle volumes was partially offset by an increase in preform volume, and a strengthening of the British Pound and Euro against the dollar.

The decrease in U.S. net sales was principally driven by declines in unit volume and the impact of contractual price reductions. Total U.S. unit volume decreased 5.7% compared to the nine months ended September 30, 2006. Custom unit volume decreased 5.8 %, while conventional unit volume declined 5.4 % compared to the nine months ended September 30, 2006.

The increase in European net sales for the nine months ended September 30, 2007 was primarily due to increased total unit volume of 5.2 %, and favorable foreign currency translations compared to the nine months ended September 30, 2006.

Gross Profit

 

(dollars in millions)    Nine months ended
September 30,
    Increase
(Decrease)
 
   2007     2006    

United States

   $ 40.5     $ 50.1     $ (9.6 )

Europe

     3.4       3.1       0.3  
                        

Total

   $ 43.9     $ 53.2     $ (9.3 )
                        

Percent of net sales

     6.5 %     7.4 %  
                  

The decrease in gross profit for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was the result of lower volumes, contractual price reductions, and the $4.0 million impact of last year’s settlement of a pricing dispute with a customer, which were partially offset by lower manufacturing costs and favorable foreign currency translation.

 

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Selling and Administrative Expenses

Selling and administrative expenses decreased $3.2 million, or 15.1%, to $18.1 million for the nine months ended September 30, 2007 from $21.3 million for the nine months ended September 30, 2006. This decrease was primarily driven by lower legal and audit fees.

Research and Technology Expenses

Research and technology expenses were $5.4 million for the nine months ended September 30, 2007 compared to $4.7 million for the nine months ended September 30, 2006. This increase was primarily driven by increased development and regulatory expenses. The research and technology expenses relate to spending for the Company’s existing proprietary technologies and new emerging technologies.

Provision for Restructuring

During the nine months ended September 30, 2007 the Company recorded restructuring charges of $3.2 million, which consisted primarily of severance costs principally related to the Company’s operations in the Netherlands. (See Note 8 of the accompanying Condensed Consolidated Financial Statements).

Operating Income

Operating income was $17.4 million for the nine months ended September 30, 2007 compared to $25.7 million for the nine months ended September 30, 2006. This decrease in operating income primarily relates to the decreased operating performance and restructuring charges described above.

Interest Expense

Interest expense decreased $0.1 million to $31.0 million in the nine months ended September 30, 2007 from $31.1 million in the nine months ended September 30, 2006 as a result of lower average borrowings partially offset by a higher effective interest rate.

Other (Income) Expense, net

Other income, net was $1.1 million in the nine months ended September 30, 2007 compared to $1.4 million for the nine months ended September 30, 2006. Other income, net consists primarily of royalty income, interest income and foreign exchange gains.

Provision for Income Taxes

The Company recorded no provision for income taxes for the nine months ended September 30, 2007 or September 30, 2006. During the nine months ended September 30, 2007 the Company recorded a valuation allowance of $6.5 million to offset net operating losses and deferred tax assets generated for the U.S. and foreign operations during the nine months ended September 30, 2007. During the nine months ended September 30, 2006, the Company recorded an additional valuation allowance of $1.6 million to offset net operating losses and deferred tax assets generated for the U.S. and foreign operations.

Income (Loss) from Discontinued Operations, net of taxes

Income from discontinued operations for the nine months ended September 30, 2007 was $0.3 million compared to loss from discontinued operations of $0.9 million for the nine months ended September 30, 2006 and is related to the shutdown and run-off of operations in Turkey, which began in May 2006, and in Italy, which began in December 2006. Unless otherwise indicated, amounts provided throughout this report relate to continuing operations only.

Net Loss

Net loss for the nine months ended September 30, 2007 was $12.3 million, or $1.00 loss per basic and diluted share, compared to a net loss for the nine months ended September 30, 2006 of $4.8 million, or $0.39 loss per basic and diluted share.

 

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Liquidity and Capital Resources

The Company’s debt structure consists of $175.0 million of Senior Subordinated Notes due December 1, 2012 (“Subordinated Notes”), $220.0 million of Senior Secured Floating Rate Notes due February 15, 2012 (“Senior Notes”) and a $75.0 million Senior Secured Asset Based Revolving Credit Facility (“Revolver Loan”). The Subordinated Notes bear interest at a rate of 11.0% per annum. Interest on the Subordinated Notes is payable semi-annually on each December 1 and June 1. The Senior Notes bear interest at the rate of three-month LIBOR plus 3.375% per annum. Interest on the Senior Notes is reset quarterly.

At September 30, 2007, there was $220.0 million outstanding on the Senior Notes, $175.0 million outstanding on the Subordinated Notes, $10.9 million outstanding on the Revolver Loan, and $4.1 million of letters of credit outstanding issued under the Revolver Loan.

The Revolver Loan imposes a limit on maximum capital expenditures of $47.5 million in 2007 and 2008. These capital expenditure covenants allow for the carry forward of a certain amount of spending below covenant levels in previous periods. In 2006, Constar spent $23.5 million in capital expenditures, allowing $14.3 million to be carried over to 2007. The Company currently expects to spend between $30.0 million and $33.0 million in capital expenditures in 2007, before the impact of capital expenditures for new customer projects that may begin in the second half of 2007 and carry into the first half of 2008.

Liquidity, defined as cash and availability under the Revolver Loan, is a key measure of the Company’s ability to finance its operations. The principal determinant of 2007 liquidity will be 2007 financial performance. Liquidity at September 30, 2007 was $63.4 million as compared to $76.0 million at September 30, 2006.

Liquidity will vary on a daily, monthly and quarterly basis based upon the seasonality of the Company’s sales as well as the factors mentioned above. The Company’s cash requirements are typically greater during the first and second quarters of each year because of the build-up of inventory levels in anticipation of the seasonal sales increase during the warmer months and the collection cycle from customers following the higher seasonal sales.

Cash Flows

The following table presents selected cash flow data.

 

(in millions)    Nine months ended
September 30,
    Increase
(Decrease)
 
   2007     2006    

Net cash provided by (used in) operating activities

   $ (1.0 )   $ 36.9     $ (37.9 )
                        

Net cash used in investing activities

   $ (20.8 )   $ (17.1 )   $ 3.7  
                        

Net cash provided by (used in) financing activities

   $ 10.5     $ (12.3 )   $ 22.8  
                        

Net cash provided by (used in) operations for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, decreased due to lower profitability in the first nine months of 2007 and changes in working capital. Days sales in accounts receivable increased to approximately 33.4 days at September 30, 2007 from 29.2 days at September 30, 2006 primarily driven by the temporary delay in payments related to specific customers, one less collection day at the end of September 2007, and a change in European customer mix which resulted in higher European days sales in accounts receivable than at the end of September 2006. Average days sales in accounts receivable for the nine months ended September 30, 2007 were 30.9 days compared to 30.7 days for the same period of last year. Inventory days increased to approximately 40.7 days at September 30, 2007 from 37.1 days at September 30, 2006 due to a build up of inventory in anticipation of higher demand. Average inventory days for the nine months ended September 30, 2007 were 38.3 days compared to 40.3 days for the same period of last year. Days payable in accounts payable and accrued liabilities decreased to 54.8 days at September 30, 2007 compared to 56.0 days at September 30, 2006. The decrease in days payable was primarily a result of the timing of payments to our resin vendors. During the first nine months of 2007 average days payable were approximately 51.2 days or 0.4 days lower than the average days payable during the first nine months of 2006. This is the result of the normal timing of purchases to meet customer demand and the timing of payments to vendors in accordance with negotiated terms that may vary from year to year and during the year. On October 1, 2007, we made a payment of approximately $6.5 million to a vendor in the normal course of business.

 

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The increase in net cash used in investing activities was primarily due to an increase in capital spending. Capital expenditures primarily related to new business initiatives, implementation of the Company’s Best Cost Producer program, and general plant maintenance. The Company’s Best Cost Producer program is an ongoing initiative to continually reduce manufacturing costs and improve operating efficiencies at its manufacturing facilities. This initiative has in the past resulted in restructuring charges.

Net cash provided by financing activities for the nine months ended September 30, 2007 was primarily comprised of net borrowings of $10.9 million on the Revolver Loan. Net cash used in financing activities for the nine months ended September 30, 2006 was primarily comprised of net repayments of $10.5 million on the Revolver Loan and a $1.5 million repayment of other debt.

Commitments

As a result of the adoption of FIN 48, the Company had a material change to the scheduled contractual obligations table disclosed in its 2006 Annual Report on Form 10-K filed March 29, 2007. As of September 30, 2007, the Company’s contractual obligation related to the adoption of FIN 48 was approximately $0.7 million.

Information regarding the Company’s contingent liabilities appears in Part I within Item 1 of this report under Note 9 to the accompanying Condensed Consolidated Financial Statements, which information is incorporated herein by reference.

Stockholders’ Deficit

Stockholders’ deficit increased to $55.1 million at September 30, 2007 from $44.8 million deficit at December 31, 2006. This increase was primarily due to a net loss for the nine months ended September 30, 2007 of $12.3 million, the revaluation of a cash flow hedge of $1.3 million, and a negative adjustment of $0.7 million due to the adoption of FIN 48, which was partially offset by postretirement amortization of $2.4 million, and currency translation adjustments of $1.4 million during the nine months ended September 30, 2007.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. The Company adopted FIN 48 at the beginning of the first quarter of 2007. Upon adoption as of January 1, 2007, the Company recorded a reserve for uncertain tax positions in the amount of $0.7 million. This adjustment was recorded as a cumulative effect adjustment to the opening balance of accumulated deficit.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material impact on our results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material impact on our results of operations or financial condition.

 

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In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (“EITF 06-10”). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF 06-10 to have a material impact on our results of operations or financial condition.

In September 2006, the FASB ratified the EITF consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 indicates that an employer should recognize a liability for future post-employment benefits based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF 06-4 to have a material impact on our results of operations or financial condition.

Forward-Looking Statements

Statements included herein that are not historical facts (including, but not limited to, any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward-looking statements” within the meaning of the federal securities laws. In addition, the Company and its representatives may from time to time make other oral or written statements which are also “forward-looking” statements.

These forward-looking statements are based on the Company’s current expectations and projections about future events. Statements that include the words “expect,” “believe,” “intend,” “plan,” “anticipate,” “project,” “will,” “may,” “could,” “should,” “pro forma,” “continues,” “estimates,” “potential,” “predicts,” “goal,” “objective” and similar statements of a future nature identify forward-looking statements. These forward-looking statements and forecasts are subject to risks, uncertainties and assumptions. The Company cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. The Company does not intend to review or revise any particular forward-looking statement or forecast in light of future events.

Important factors that could cause the actual results of operations or financial condition of the Company to differ from expectations include the Company’s relationship with its largest customers, the impact of self-manufacturing on the Company’s business, and the impact of pricing changes; the Company’s ability to secure new business, expand sales of custom products, improve the operating performance of its European business and achieve cost savings under its Best Cost Producer program; and the impact of the foregoing factors on the Company’s financial position. Other important factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 under the captions “Cautionary Statement Regarding Forward Looking Statements” and “Item 1.A Risk Factors” and is incorporated herein by reference. Some of the factors are also discussed elsewhere in this Form 10-Q and have been or may be discussed from time to time in the Company’s other filings with the Securities and Exchange Commission.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

In the normal course of business, the Company 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 nine months ended September 30, 2007. 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 in effect 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 increase accordingly. Based on the Company’s revenues for the first nine months of 2007 from its foreign locations that utilize currencies other than the U.S. dollar, a 10.0% increase in the U.S. dollar value would result in approximately a $13.4 million reduction in net sales. The Company may enter into foreign exchange contracts to reduce the effects of fluctuations in foreign currency exchange rates on assets, liabilities, firm commitments and anticipated transactions. However, the Company does not generally hedge its exposure to translation gains or losses on non-U.S. net assets. At September 30, 2007, the Company had no foreign currency derivative contracts outstanding.

Under the procedures and controls of the Company’s risk management, the Company entered into an agreement to manage the floating interest rate on a portion of the Company’s Senior Notes. The interest rate swap involved the exchange of floating interest payments based on the three month LIBOR rate for a fixed rate. The Company uses the interest rate swap to manage and hedge its exposure to interest rate risks. Therefore, the Company has an exposure to interest rate risk on the portion of the Senior Notes and borrowings under the Revolver Loan that is not part of the cash flow hedge. The extent of the Company’s interest rate risk in connection with the Revolver Loan and the Senior Notes is not quantifiable or predictable because of the variability of future interest rates and borrowing requirements. Based on borrowing levels as of September 30, 2007, a 1.0% increase in LIBOR would have resulted in an increase of $1.3 million in annual interest expense. However, current amounts borrowed under the Revolver Loan might not be representative of future borrowings which will be based on our future requirements and seasonal needs.

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 the Company’s sales are made under mechanisms that allow for the pass-through of changes in the price of PET resin under various pass-through mechanisms. PET resin is our principal raw material and a major component of cost of goods sold. Period-to-period comparisons of gross profit and gross profit as a percentage of sales may not be meaningful indicators of actual performance, because the effects of the pass-through mechanisms are affected by the magnitude and timing of resin price changes.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures for financial reporting to give reasonable assurance that information required to be disclosed in the Company’s reports submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.

As of September 30, 2007, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), together with management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.

 

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—Other Information

 

Item 1. Legal Proceedings

Information regarding legal proceedings involving the Company appears in Part I within Item 1 of this quarterly report under Note 9 to the Condensed Consolidated Financial Statements, which information is incorporated herein by reference.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

 

Item 6. Exhibits

 

  3.2

   Amended and Restated Bylaws.

10.5

   Agreement dated August 7, 2007 between Constar International Inc. and Frank Gregory (incorporated by reference to Exhibit 99.1 of the Registrant’s Report on Form 8-K filed August 24, 2007).*

10.27a

   Form of amendment to Change of Control Agreement. *

10.27b

   Agreement dated August 1, 2007 between Constar International Inc. and Chris Phelan.*

10.35a

   Amended and Restated Constar International Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.35a of the Registrant’s Report on form 8-K filed November 6, 2007).*

10.36a

   Amended and Restated Constar International Inc. Annual Incentive and Management Stock Purchase Plan (incorporated by reference to Exhibit 10.36a of the Registrant’s Report on Form 8-K filed November 6, 2007).*

31.1

   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

   Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.

32.2

   Certification of Executive Vice President and Chief Financial Officer Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      Constar International Inc.
Dated: November 14, 2007     By:  

/s/ WALTER S. SOBON

        Walter S. Sobon
        Executive Vice President and Chief Financial Officer
        (duly authorized officer and principal accounting officer)

 

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