##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Polymer Holdings LLC
  Commission file number 333-123749
 Delaware
    
    20-0411521(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation)700 Milam Street, 13thFloor, North TowerHouston, TX 77002
    
    832-204-5400(Address of principal executive offices,
    
    (Registrants telephone number, including area code)including zip code)
 KRATON Polymers LLC
  Commission file number 333-123747
 Delaware
    
    94-2805249(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)700 Milam Street, 13thFloor, North TowerHouston, TX 77002
    
    832-204-5400(Address of principal executive offices,
    
    (Registrants telephone number, including area code)including zip code)
 o þ
 o þ
 o þ




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TABLE OF CONTENTS
 PAGEPart I  Financial InformationItem 1. Financial Statements and Accompanying NotesPolymer Holdings LLC:Consolidated Balance Sheets (Unaudited)  September 30, 2005 and December 31, 2004
    
    
    4Consolidated Statements of Operations (Unaudited)  Three Months Ended September 30, 2005 and 2004
    
    
    5Consolidated Statements of Operations (Unaudited)  Nine Months Ended September 30, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows (Unaudited)  Nine Months Ended September 30, 2005 and 2004
    
    
    6KRATON Polymers LLC:Consolidated Balance Sheets (Unaudited)  September 30, 2005 and December 31, 2004
    
    
    7Consolidated Statements of Operations (Unaudited)  Three Months Ended September 30, 2005 and 2004
    
    
    8Consolidated Statements of Operations (Unaudited)  Nine Months Ended September 30, 2005 and 2004
    
    
    8Consolidated Statements of Cash Flows (Unaudited)  Nine Months Ended September 30, 2005 and 2004
    
    
    9Notes to Consolidated Financial Statements (Unaudited)
    
    
    10Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 4. Controls and Procedures
    
    
    53Part II  Other InformationItem 1. Legal Proceedings
    
    
    54Item 2. Changes in Securities and Use of Proceeds
    
    
    54Item 3. Defaults Upon Senior Securities
    
    
    54Item 4. Submission of Matters to a Vote of Securityholders
    
    
    54Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    54Option Grant Agreement - TJ Chemical and Steven DemetriouOption Grant Agreement - TJ Chemical and James BallEmployment Agreement - KRATON and Kevin M. FogartyOption Grant Agreement - TJ Chemical and Raymond K. GubaProfit Unit Award Agreement - KRATON Management LLC and Raymond K. GubaNotional Unit Award Grant Agreement - KRATON and Raymond K. GubaCertification of CEO pursuant to Section 302Certification of Interim CFO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO and CFO pursuant to Section 906
  2




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FORWARD LOOKING STATEMENTS
  PRESENTATION OF FINANCIAL STATEMENTS
  3




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PART I  Financial Information
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 Polymer Holdings LLC
 
 
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Restated See note 1(c))AssetsCurrent assets:Cash and cash equivalents
    
    $
    71,550
    
    
    $
    46,357Receivables, net of allowances of $884 and $750
    
    
    150,612
    
    
    
    120,596Inventories of products
    
    
    191,303
    
    
    
    211,076Inventories of materials and supplies
    
    
    9,412
    
    
    
    8,778Other current assets
    
    
    17,495
    
    
    
    10,381Total current assets
    
    
    440,372
    
    
    
    397,188Property,
plant, and equipment, less accumulated depreciation of $57,654 and $38,086
    
    
    395,453
    
    
    
    424,333Identifiable intangible assets, less accumulated amortization of $13,887 and $8,002
    
    
    103,809
    
    
    
    109,694Investment in joint venture
    
    
    10,539
    
    
    
    10,753Deferred financing costs
    
    
    14,999
    
    
    
    16,799Other long-term assets
    
    
    9,014
    
    
    
    8,646Total assets
    
    $
    974,186
    
    
    $
    967,413Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    2,680
    
    
    $
    2,680Accounts payabletrade
    
    
    64,853
    
    
    
    79,968Other payables and accruals
    
    
    50,269
    
    
    
    40,059Due to related parties
    
    
    11,937
    
    
    
    14,471Deferred income taxes
    
    
    1,240
    
    
    
    1,240Insurance bond payable
    
    
    1,380
    
    
    
    Total current liabilities
    
    
    132,359
    
    
    
    138,418Long-term debt, net of current portion
    
    
    562,970
    
    
    
    556,335Deferred income taxes
    
    
    27,020
    
    
    
    24,513Long-term liabilities
    
    
    29,317
    
    
    
    25,629Total liabilities
    
    
    751,666
    
    
    
    744,895Commitments and contingencies (note 5)Members equity:Common equity
    
    
    219,779
    
    
    
    200,528Accumulated other comprehensive income
    
    
    2,741
    
    
    
    21,990Total members equity
    
    
    222,520
    
    
    
    222,518Total liabilities and members equity
    
    $
    974,186
    
    
    $
    967,413
  4




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Polymer Holdings LLC
 
 
 September 30,
    
    
    September 30,2005
    
    
    2004(Restated See note 1(c))RevenuesSales
    
    $
    269,017
    
    
    $
    209,407Other
    
    
    7,457
    
    
    
    1,840Total revenues
    
    
    276,474
    
    
    
    211,247Costs and expenseCosts of goods sold
    
    
    225,945
    
    
    
    179,186Gross profit
    
    
    50,529
    
    
    
    32,061Research and development expenses
    
    
    6,700
    
    
    
    5,530Selling, general, and administrative expenses
    
    
    19,130
    
    
    
    16,467Depreciation and amortization of
identifiable intangibles
    
    
    11,548
    
    
    
    11,185Earnings in joint venture
    
    
    (182
    )
    
    
    11Interest, net
    
    
    11,746
    
    
    
    11,722Income (loss) before income taxes
    
    
    1,587
    
    
    
    (12,854
    )Income tax (provision) benefit
    
    
    (633
    )
    
    
    6,848Net income (loss)
    
    $
    954
    
    
    $
    (6,006
    )
  Polymer Holdings LLC
 
 
 September 30,
    
    
    September 30,2005
    
    
    2004(Restated See note 1(c))RevenuesSales
    
    $
    732,338
    
    
    $
    589,886Other
    
    
    20,287
    
    
    
    8,738Total revenues
    
    
    752,625
    
    
    
    598,624Costs and expenseCosts of goods sold
    
    
    586,145
    
    
    
    514,692Gross profit
    
    
    166,480
    
    
    
    83,932Research and development expenses
    
    
    19,500
    
    
    
    17,246Selling, general, and administrative expenses
    
    
    54,692
    
    
    
    46,503Depreciation and amortization of
identifiable intangibles
    
    
    33,760
    
    
    
    31,849Earnings in joint venture
    
    
    (1,050
    )
    
    
    (134
    )Interest, net
    
    
    34,578
    
    
    
    27,719Income (loss) before income taxes
    
    
    25,000
    
    
    
    (39,251
    )Income tax (provision) benefit
    
    
    (6,159
    )
    
    
    15,332Net income (loss)
    
    $
    18,841
    
    
    $
    (23,919
    )
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Polymer Holdings LLC
 
 
 September 30,
    
    
    September 30,2005
    
    
    2004(Restated See note 1(c))Cash flows provided by (used in) operating activities:Net income (loss)
    
    $
    18,841
    
    
    $
    (23,919
    )Adjustments to reconcile net income to net cash provided by
operating
activities:Depreciation and amortization of identifiable intangibles
    
    
    33,760
    
    
    
    31,849Amortization of deferred financing costs
    
    
    1,800
    
    
    
    2,522Accretion of discount on senior subordinated notes
    
    
    8,645
    
    
    
    Change in the fair value of interest rate swaps
    
    
    (128
    )
    
    
    1,669Loss on disposal of fixed assets
    
    
    55
    
    
    
    637(Undistributed) distributed earnings in joint venture
    
    
    (589
    )
    
    
    427Deferred tax provision (benefit)
    
    
    483
    
    
    
    (17,053
    )Non-cash compensation
    
    
    410
    
    
    
    Increase (decrease) in working capital:Accounts receivable
    
    
    (43,567
    )
    
    
    (27,426
    )Due from related party
    
    
    351
    
    
    
    Inventories
    
    
    5,373
    
    
    
    49,530Other assets
    
    
    (6,274
    )
    
    
    (6,330
    )Accounts payable, other payables and accruals, and long-term
Liabilities
    
    
    10,004
    
    
    
    45,877Net cash provided by operating activities
    
    
    29,164
    
    
    
    57,783Cash flows (used in) provided by investing activities:Purchase of property, plant and equipment
    
    
    (8,604
    )
    
    
    (28,816
    )Proceeds from sale of property, plant and equipment
    
    
    122
    
    
    
    88Net cash used in investing activities
    
    
    (8,482
    )
    
    
    (28,728
    )Cash flows (used in) provided by financing activities:Repayment of debt
    
    
    (2,010
    )
    
    
    (17,787
    )Net proceeds from insurance bond
    
    
    1,380
    
    
    
    Net cash used in by financing activities
    
    
    (630
    )
    
    
    (17,787
    )Effect of exchange rate differences on cash
    
    
    5,141
    
    
    
    138Net increase in cash and cash equivalents
    
    
    25,193
    
    
    
    11,406Cash and cash equivalents, beginning of period
    
    
    46,357
    
    
    
    17,500Cash and cash equivalents, end of period
    
    $
    71,550
    
    
    $
    28,906Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of
refunds received
    
    $
    1,058
    
    
    $
    4,547Cash paid during the period for interest
    
    
    28,821
    
    
    
    20,910
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KRATON Polymers LLC
 
 
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Restated See note 1(c))AssetsCurrent assets:Cash and cash equivalents
    
    $
    71,550
    
    
    $
    46,357Receivables, net of allowances of $884 and $750
    
    
    150,612
    
    
    
    120,596Inventories of products
    
    
    191,303
    
    
    
    211,076Inventories of materials and supplies
    
    
    9,412
    
    
    
    8,778Other current assets
    
    
    17,495
    
    
    
    10,381Total current assets
    
    
    440,372
    
    
    
    397,188Property,
plant, and equipment, less accumulated depreciation of $57,654 and $38,086
    
    
    395,453
    
    
    
    424,333Identifiable intangible assets, less accumulated amortization of $13,887 and $8,002
    
    
    103,809
    
    
    
    109,694Investment in joint venture
    
    
    10,539
    
    
    
    10,753Deferred financing costs
    
    
    13,275
    
    
    
    14,973Other long-term assets
    
    
    9,014
    
    
    
    8,646Total assets
    
    $
    972,462
    
    
    $
    965,587Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    2,680
    
    
    $
    2,680Accounts payabletrade
    
    
    64,853
    
    
    
    79,968Other payables and accruals
    
    
    50,269
    
    
    
    40,059Due to related parties
    
    
    11,937
    
    
    
    14,471Deferred income taxes
    
    
    1,240
    
    
    
    1,240Insurance bond payable
    
    
    1,380
    
    
    
    Total current liabilities
    
    
    132,359
    
    
    
    138,418Long-term debt, net of current portion
    
    
    460,653
    
    
    
    462,663Deferred income taxes
    
    
    30,723
    
    
    
    25,184Long-term liabilities
    
    
    29,317
    
    
    
    25,629Total liabilities
    
    
    653,052
    
    
    
    651,894Commitments and contingencies (note 5)Members equity:Common equity
    
    
    316,669
    
    
    
    291,703Accumulated other comprehensive income
    
    
    2,741
    
    
    
    21,990Total members equity
    
    
    319,410
    
    
    
    313,693Total liabilities and members equity
    
    $
    972,462
    
    
    $
    965,587
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KRATON Polymers LLC
 
 
 September 30,
    
    
    September 30,2005
    
    
    2004(Restated See note 1(c))RevenuesSales
    
    $
    269,017
    
    
    $
    209,407Other
    
    
    7,457
    
    
    
    1,840Total revenues
    
    
    276,474
    
    
    
    211,247Costs and expenseCosts of goods sold
    
    
    225,945
    
    
    
    179,186Gross profit
    
    
    50,529
    
    
    
    32,061Research and development expenses
    
    
    6,700
    
    
    
    5,530Selling, general, and administrative expenses
    
    
    19,130
    
    
    
    16,467Depreciation and amortization of
identifiable intangibles
    
    
    11,548
    
    
    
    11,185Earnings in joint venture
    
    
    (182
    )
    
    
    11Interest, net
    
    
    8,683
    
    
    
    11,722Income (loss) before income taxes
    
    
    4,650
    
    
    
    (12,854
    )Income tax (provision) benefit
    
    
    (1,268
    )
    
    
    6,848Net income (loss)
    
    $
    3,382
    
    
    $
    (6,006
    )
  KRATON Polymers LLC
 
 
 September 30,
    
    
    September 30,2005
    
    
    2004(Restated See note 1(c))RevenuesSales
    
    $
    732,338
    
    
    $
    589,886Other
    
    
    20,287
    
    
    
    8,738Total revenues
    
    
    752,625
    
    
    
    598,624Costs and expenseCosts of goods sold
    
    
    586,145
    
    
    
    514,692Gross profit
    
    
    166,480
    
    
    
    83,932Research and development expenses
    
    
    19,500
    
    
    
    17,246Selling, general, and administrative expenses
    
    
    54,692
    
    
    
    46,503Depreciation and amortization of
identifiable intangibles
    
    
    33,760
    
    
    
    31,849Earnings in joint venture
    
    
    (1,050
    )
    
    
    (134
    )Interest, net
    
    
    25,833
    
    
    
    27,719Income (loss) before income taxes
    
    
    33,745
    
    
    
    (39,251
    )Income tax (provision) benefit
    
    
    (9,189
    )
    
    
    15,332Net income (loss)
    
    $
    24,556
    
    
    $
    (23,919
    )
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KRATON Polymers LLC
 
 
 September 30,
    
    
    September 30,2005
    
    
    2004(Restated See note 1(c))Cash flows provided by (used in) operating activities:Net income (loss)
    
    $
    24,556
    
    
    $
    (23,919
    )Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization of identifiable intangibles
    
    
    33,760
    
    
    
    31,849Amortization of deferred financing costs
    
    
    1,698
    
    
    
    2,522Changes in the fair value of interest rate swaps
    
    
    (128
    )
    
    
    1,669Loss on disposal of fixed assets
    
    
    55
    
    
    
    637(Undistributed) distributed earnings in joint venture
    
    
    (589
    )
    
    
    427Deferred tax provision (benefit)
    
    
    3,515
    
    
    
    (17,053
    )Non-cash compensation
    
    
    410
    
    
    
    Increase (decrease) in working capital:Accounts receivable
    
    
    (43,567
    )
    
    
    (27,426
    )Due from related party
    
    
    351
    
    
    
    Inventories
    
    
    5,373
    
    
    
    49,530Other assets
    
    
    (6,274
    )
    
    
    (6,330
    )Accounts payable, other payables and accruals, and long-term
liabilities
    
    
    10,004
    
    
    
    45,877Net cash provided by operating activities
    
    
    29,164
    
    
    
    57,783Cash flows (used in) provided by investing activities:Purchase of property, plant and equipment
    
    
    (8,604
    )
    
    
    (28,816
    )Proceeds from sale of property, plant and equipment
    
    
    122
    
    
    
    88Net cash used in investing activities
    
    
    (8,482
    )
    
    
    (28,728
    )Cash flows (used in) provided by financing activities:Repayment of debt
    
    
    (2,010
    )
    
    
    (17,787
    )Net proceeds from insurance bond
    
    
    1,380
    
    
    
    Net cash used in financing activities
    
    
    (630
    )
    
    
    (17,787
    )Effect of exchange rate differences on cash
    
    
    5,141
    
    
    
    138Net increase in cash and cash equivalents
    
    
    25,193
    
    
    
    11,406Cash and cash equivalents, beginning of period
    
    
    46,357
    
    
    
    17,500Cash and cash equivalents, end of period
    
    $
    71,550
    
    
    $
    28,906Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of refunds received
    
    $
    1,058
    
    
    $
    4,547Cash paid during the period for interest
    
    
    28,821
    
    
    
    20,910
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Polymer Holdings LLC and KRATON Polymers LLC
 
 
 (1) Summary of Significant Accounting Policies
 (a) Organization, Acquisition and Description of Business
    (b) Basis of Presentation
  a.
    
    Polymer Holdings and its wholly-owned subsidiaries, which include both Polymer
Holdings and KRATON and its wholly-owned subsidiaries.b.
    
    KRATON and its wholly-owned subsidiaries, which include only KRATON and its
wholly-owned subsidiaries.
  10




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Polymer Holdings LLC and KRATON Polymers LLC
 
    (c) Restatement of prior financial statements
     11




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Polymer Holdings LLC and KRATON Polymers LLC
 
  Three months endedSeptember 30, 2004 (1)As previouslyreported
    
    
    As restatedCost of goods sold
    
    $
    176,848
    
    
    $
    179,186Gross profit
    
    
    34,399
    
    
    
    32,061Loss before income taxes
    
    
    (10,516
    )
    
    
    (12,854
    )Income tax benefit
    
    
    5,940
    
    
    
    6,848Net loss
    
    
    (4,576
    )
    
    
    (6,006
    )
 Nine months endedSeptember 30, 2004 (1)As previouslyreported
    
    
    As restatedCost of goods sold
    
    $
    510,984
    
    
    $
    514,692Gross profit
    
    
    87,640
    
    
    
    83,932Loss before income taxes
    
    
    (35,543
    )
    
    
    (39,251
    )Income tax benefit
    
    
    13,943
    
    
    
    15,332Net loss
    
    
    (21,600
    )
    
    
    (23,919
    )
 KRATON
    
    
    Polymer HoldingsDecember 31, 2004
    
    
    December 31, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restatedInventories of product
    
    $
    216,090
    
    
    $
    211,076
    
    
    $
    216,090
    
    
    $
    211,076Total current assets
    
    
    402,202
    
    
    
    397,188
    
    
    
    402,202
    
    
    
    397,188Total assets
    
    
    970,601
    
    
    
    965,587
    
    
    
    972,427
    
    
    
    967,413Deferred
income taxes  noncurrent
    
    
    26,509
    
    
    
    25,184
    
    
    
    25,837
    
    
    
    24,513Total liabilities
    
    
    653,219
    
    
    
    651,894
    
    
    
    746,219
    
    
    
    744,895Common equity
    
    
    294,837
    
    
    
    291,703
    
    
    
    203,663
    
    
    
    200,528Accumulated other comprehensive
income
    
    
    22,545
    
    
    
    21,990
    
    
    
    22,545
    
    
    
    21,990Total members equity
    
    
    317,382
    
    
    
    313,693
    
    
    
    226,208
    
    
    
    222,518Total liabilities and members equity
    
    
    970,601
    
    
    
    965,587
    
    
    
    972,427
    
    
    
    967,413
 
 (1)
    
    The financial information for Polymer Holdings and KRATON are identical for the items set
forth in the table. 12




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Polymer Holdings LLC and KRATON Polymers LLC
 
 (d) Recently Issued Accounting Standards
  Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143 Asset Retirement Obligations
 (2) Detail of Certain Balance Sheet Accounts
 September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Inventories:Finished products
    
    $
    171,915
    
    
    $
    185,609Work in progress
    
    
    3,413
    
    
    
    3,844Raw materials
    
    
    15,975
    
    
    
    21,623$
    191,303
    
    
    $
    211,076
 13




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Polymer Holdings LLC and KRATON Polymers LLC
 
 September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Other payables and accruals:Employee related
    
    $
    17,357
    
    
    $
    6,250Interest
    
    
    3,845
    
    
    
    8,143Property and other taxes
    
    
    6,347
    
    
    
    5,814Customer rebates
    
    
    6,238
    
    
    
    6,417Income taxes payable
    
    
    2,131
    
    
    
    174Other
    
    
    14,351
    
    
    
    13,261$
    50,269
    
    
    $
    40,059
 (3) Comprehensive Income (Loss)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    

September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Polymer HoldingsNet income (loss)
    
    $
    954
    
    
    $
    (6,006
    )
    
    $
    18,841
    
    
    $
    (23,919
    )Foreign currency Adjustments
    
    
    1,157
    
    
    
    4,998
    
    
    
    (20,925
    )
    
    
    (2,861
    )Unrealized gain on interest rate swaps
    
    
    818
    
    
    
    
    
    
    
    1,676
    
    
    
    Total comprehensive income (loss)
    
    $
    2,929
    
    
    $
    (1,008
    )
    
    $
    (408
    )
    
    $
    (26,780
    )KRATONNet income (loss)
    
    $
    3,382
    
    
    $
    (6,006
    )
    
    $
    24,556
    
    
    $
    (23,919
    )Foreign currency Adjustments
    
    
    1,157
    
    
    
    4,998
    
    
    
    (20,925
    )
    
    
    (2,861
    )Unrealized gain on interest rate swaps
    
    
    818
    
    
    
    
    
    
    
    1,676
    
    
    
    Total comprehensive income (loss)
    
    $
    5,357
    
    
    $
    (1,008
    )
    
    $
    5,307
    
    
    $
    (26,780
    )
  September 30, 2005
    
    
    December 31, 2004Foreign currency Adjustments
    
    $
    35
    
    
    $
    20,960Unrealized gain on interest rate swaps
    
    
    2,706
    
    
    
    1,030Total accumulated
other comprehensive income
    
    $
    2,741
    
    
    $
    21,990
 (4) Long-Term Debt
  September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)KRATON:Senior Secured Credit Facility:Term loans
    
    $
    263,333
    
    
    $
    265,343Revolver
    
    
    
    
    
    
    8.125% Senior Subordinated Notes
    
    
    200,000
    
    
    
    200,000Total long-term debt
    
    
    463,333
    
    
    
    465,343Less current portion of long-term
debt
    
    
    2,680
    
    
    
    2,680Total KRATON
    
    
    460,653
    
    
    
    462,663Polymer Holdings:12% Senior Discount Notes
    
    
    102,317
    
    
    
    93,672Total Polymer Holdings
    
    $
    562,970
    
    
    $
    556,335
 (a) Senior Secured Credit Facility
  14




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Maturity
  Interest
   Mandatory Prepayments
   Covenants
    (b) Senior Subordinated Notes Due January 15, 2014
  15




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
  Interest
  Optional Redemption
   Covenants
    Exchange Offer
  (c) Senior Discount Notes Due July 15, 2014
  16




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Interest
  Optional Redemption
  Covenants
    Exchange Offer
  (5) Income Taxes
  (6) Commitments and Contingencies
 Legal Proceedings
  17




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Pernis, The Netherlands Manufacturing Facility Fire
   (7) Employee Benefits
 (a) Investment in KRATON Management LLC
  (b) TJ Chemical Holdings LLC 2004 Option Plan
  18




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
     (c) Other Equity Awards
  19




---



##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
  (d) KRATON Polymers LLC Executive Deferred Compensation Plan
  (e) 2005 Incentive Compensation Plan
  (f)
Retirement Plans
  Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302005
    
    2004
    
    2005
    
    2004Components of net periodic
benefit cost:Service cost
    
    $
    886
    
    
    $
    831
    
    
    $
    2,658
    
    
    $
    2,493Interest cost
    
    
    779
    
    
    
    694
    
    
    
    2,337
    
    
    
    2,082Expected return on plan assets
    
    
    (736
    )
    
    
    (683
    )
    
    
    (2,208
    )
    
    
    (2,048
    )Net periodic benefit cost
    
    $
    929
    
    
    $
    842
    
    
    $
    2,787
    
    
    $
    2,527
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302005
    
    2004
    
    2005
    
    2004Components of net periodic
benefit cost:Service cost
    
    $
    91
    
    
    $
    106
    
    
    $
    275
    
    
    $
    319Interest cost
    
    
    119
    
    
    
    134
    
    
    
    357
    
    
    
    402Recognized actuarial gain
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Net periodic benefit cost
    
    $
    210
    
    
    $
    240
    
    
    $
    629
    
    
    $
    721
 20




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 (8) Supplemental
Guarantor Information  Polymer Holdings LLC
  Balance Sheet
 As of September 30, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    32,847
    
    
    $
    38,703
    
    
    $
    
    
    
    $
    71,550Receivables, net
    
    
    
    
    
    
    
    
    
    
    60,423
    
    
    
    97,563
    
    
    
    (7,374
    )
    
    
    150,612Inventories of products
    
    
    
    
    
    
    
    
    
    
    118,606
    
    
    
    79,935
    
    
    
    (7,238
    )
    
    
    191,303Inventories of materials and supplies
    
    
    
    
    
    
    
    
    
    
    5,853
    
    
    
    3,559
    
    
    
    
    
    
    
    9,412Other current assets
    
    
    
    
    
    
    5,795
    
    
    
    970
    
    
    
    10,730
    
    
    
    
    
    
    
    17,495Total current assets
    
    
    
    
    
    
    5,795
    
    
    
    218,699
    
    
    
    230,490
    
    
    
    (14,612
    )
    
    
    440,372Property, plant, and equipment, less
accumulated depreciation
    
    
    
    
    
    
    130,106
    
    
    
    173,176
    
    
    
    92,171
    
    
    
    
    
    
    
    395,453Identifiable intangible assets, less
accumulated amortization
    
    
    
    
    
    
    54,998
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    103,809Investment in consolidated subsidiaries
    
    
    329,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (329,582
    )
    
    
    Investment in joint venture
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    9,726
    
    
    
    
    
    
    
    10,539Deferred financing costs
    
    
    1,724
    
    
    
    13,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,999Other long-term assets
    
    
    
    
    
    
    104,981
    
    
    
    272,814
    
    
    
    3,964
    
    
    
    (372,745
    )
    
    
    9,014Total assets
    
    $
    331,306
    
    
    $
    309,968
    
    
    $
    664,689
    
    
    $
    385,162
    
    
    $
    (716,939
    )
    
    $
    974,186Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    2,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,680Accounts
payable  trade
    
    
    
    
    
    
    2,900
    
    
    
    22,931
    
    
    
    39,022
    
    
    
    
    
    
    
    64,853Other payables and accruals
    
    
    
    
    
    
    3,844
    
    
    
    19,947
    
    
    
    26,478
    
    
    
    
    
    
    
    50,269Due to (from) related parties
    
    
    
    
    
    
    
    
    
    
    2,127
    
    
    
    17,184
    
    
    
    (7,374
    )
    
    
    11,937Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (417
    )
    
    
    1,657
    
    
    
    
    
    
    
    1,240Insurance bond payable
    
    
    
    
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,380Total current liabilities
    
    
    
    
    
    
    10,804
    
    
    
    44,588
    
    
    
    84,341
    
    
    
    (7,374
    )
    
    
    132,359Long-term debt, net of current portion
    
    
    102,317
    
    
    
    460,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    562,970Deferred income taxes
    
    
    (3,703
    )
    
    
    299
    
    
    
    30,815
    
    
    
    (391
    )
    
    
    
    
    
    
    27,020Long-term liabilities
    
    
    
    
    
    
    279,765
    
    
    
    16,583
    
    
    
    105,714
    
    
    
    (372,745
    )
    
    
    29,317Total liabilities
    
    
    98,614
    
    
    
    751,521
    
    
    
    91,986
    
    
    
    189,664
    
    
    
    (380,119
    )
    
    
    751,666Commitments and contingencies (note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    232,692
    
    
    
    (444,259
    )
    
    
    572,703
    
    
    
    195,463
    
    
    
    (336,820
    )
    
    
    219,779Accumulated other comprehensive income
    
    
    
    
    
    
    2,706
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    2,741Total members equity
    
    
    232,692
    
    
    
    (441,553
    )
    
    
    572,703
    
    
    
    195,498
    
    
    
    (336,820
    )
    
    
    222,520Total liabilities and members equity
    
    $
    331,306
    
    
    $
    309,968
    
    
    $
    664,689
    
    
    $
    385,162
    
    
    $
    (716,939
    )
    
    $
    974,186
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes.(2)
    
    KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. 21




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Balance Sheet
 As of December 31, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    15,981
    
    
    $
    30,376
    
    
    $
    
    
    
    $
    46,357Receivables, net
    
    
    
    
    
    
    454
    
    
    
    43,143
    
    
    
    84,467
    
    
    
    (7,468
    )
    
    
    120,596Inventories of products
    
    
    
    
    
    
    1,684
    
    
    
    120,264
    
    
    
    91,666
    
    
    
    (2,538
    )
    
    
    211,076Inventories of materials and supplies
    
    
    
    
    
    
    
    
    
    
    5,673
    
    
    
    3,105
    
    
    
    
    
    
    
    8,778Other current assets
    
    
    
    
    
    
    2,288
    
    
    
    577
    
    
    
    7,516
    
    
    
    
    
    
    
    10,381Total current assets
    
    
    
    
    
    
    4,426
    
    
    
    185,638
    
    
    
    217,130
    
    
    
    (10,006
    )
    
    
    397,188Property, plant, and equipment, less
accumulated depreciation
    
    
    
    
    
    
    138,133
    
    
    
    181,292
    
    
    
    104,908
    
    
    
    
    
    
    
    424,333Identifiable intangible assets, less
accumulated amortization
    
    
    
    
    
    
    60,883
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    109,694Investment in consolidated subsidiaries
    
    
    329,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (329,582
    )
    
    
    Investment in joint venture
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    9,940
    
    
    
    
    
    
    
    10,753Deferred financing costs
    
    
    1,826
    
    
    
    14,973
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,799Other long-term assets
    
    
    
    
    
    
    118,127
    
    
    
    252,066
    
    
    
    3,529
    
    
    
    (365,076
    )
    
    
    8,646Total assets
    
    $
    331,408
    
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (704,664
    )
    
    $
    967,413Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    2,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,680Accounts
payable  trade
    
    
    
    
    
    
    2,900
    
    
    
    29,977
    
    
    
    47,091
    
    
    
    
    
    
    
    79,968Other payables and accruals
    
    
    
    
    
    
    8,143
    
    
    
    16,199
    
    
    
    15,717
    
    
    
    
    
    
    
    40,059Due to (from) related parties
    
    
    
    
    
    
    
    
    
    
    456
    
    
    
    21,483
    
    
    
    (7,468
    )
    
    
    14,471Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (417
    )
    
    
    1,657
    
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    
    
    
    
    13,723
    
    
    
    46,215
    
    
    
    85,948
    
    
    
    (7,468
    )
    
    
    138,418Long-term debt, net of current portion
    
    
    93,672
    
    
    
    462,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    556,335Deferred income taxes
    
    
    (671
    )
    
    
    12,344
    
    
    
    19,053
    
    
    
    (6,213
    )
    
    
    
    
    
    
    24,513Long-term liabilities
    
    
    
    
    
    
    261,950
    
    
    
    12,865
    
    
    
    115,890
    
    
    
    (365,076
    )
    
    
    25,629Total liabilities
    
    
    93,001
    
    
    
    750,680
    
    
    
    78,133
    
    
    
    195,625
    
    
    
    (372,544
    )
    
    
    744,895Commitments and contingencies (note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    238,407
    
    
    
    (414,355
    )
    
    
    540,863
    
    
    
    167,733
    
    
    
    (332,120
    )
    
    
    200,528Accumulated other comprehensive income
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    20,960
    
    
    
    
    
    
    
    21,990Total members equity
    
    
    238,407
    
    
    
    (413,325
    )
    
    
    540,863
    
    
    
    188,693
    
    
    
    (332,120
    )
    
    
    222,518Total liabilities and members equity
    
    $
    331,408
    
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (704,664
    )
    
    $
    967,413
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes.(2)
    
    KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. 22




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Statement of Operations
 Three Months Ended September 30, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    143,409
    
    
    $
    154,784
    
    
    $
    (29,176
    )
    
    $
    269,017Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,457
    
    
    
    
    
    
    
    7,457Total revenues
    
    
    
    
    
    
    
    
    
    
    143,409
    
    
    
    162,241
    
    
    
    (29,176
    )
    
    
    276,474Costs and expenses:Cost of goods sold
    
    
    
    
    
    
    438
    
    
    
    115,689
    
    
    
    138,994
    
    
    
    (29,176
    )
    
    
    225,945Gross profit
    
    
    
    
    
    
    (438
    )
    
    
    27,720
    
    
    
    23,247
    
    
    
    
    
    
    
    50,529Research and development expenses
    
    
    
    
    
    
    
    
    
    
    3,437
    
    
    
    3,263
    
    
    
    
    
    
    
    6,700Selling, general, and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    10,252
    
    
    
    8,878
    
    
    
    
    
    
    
    19,130Depreciation and amortization
    
    
    
    
    
    
    4,953
    
    
    
    4,572
    
    
    
    2,023
    
    
    
    
    
    
    
    11,548Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (182
    )
    
    
    
    
    
    
    (182
    )Interest expense (income)
    
    
    3,063
    
    
    
    9,284
    
    
    
    (1,885
    )
    
    
    1,284
    
    
    
    
    
    
    
    11,746Income (loss) before income taxes
    
    
    (3,063
    )
    
    
    (14,675
    )
    
    
    11,344
    
    
    
    7,981
    
    
    
    
    
    
    
    1,587Income tax (provision) benefit
    
    
    635
    
    
    
    3,998
    
    
    
    (3,091
    )
    
    
    (2,175
    )
    
    
    
    
    
    
    (633
    )Net income (loss)
    
    $
    (2,428
    )
    
    $
    (10,677
    )
    
    $
    8,253
    
    
    $
    5,806
    
    
    $
    
    
    
    $
    954
 Three Months Ended September 30, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    115,682
    
    
    $
    124,379
    
    
    $
    (30,654
    )
    
    $
    209,407Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,840
    
    
    
    
    
    
    
    1,840Total revenues
    
    
    
    
    
    
    
    
    
    
    115,682
    
    
    
    126,219
    
    
    
    (30,654
    )
    
    
    211,247Costs and expenses:
    
    
    Cost of goods sold
    
    
    
    
    
    
    6,011
    
    
    
    92,003
    
    
    
    111,826
    
    
    
    (30,654
    )
    
    
    179,186Gross profit
    
    
    
    
    
    
    (6,011
    )
    
    
    23,679
    
    
    
    14,393
    
    
    
    
    
    
    
    32,061Research and development expenses
    
    
    
    
    
    
    
    
    
    
    2,681
    
    
    
    2,849
    
    
    
    
    
    
    
    5,530Selling, general, and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    11,296
    
    
    
    5,171
    
    
    
    
    
    
    
    16,467Depreciation and amortization
    
    
    
    
    
    
    4,692
    
    
    
    4,482
    
    
    
    2,011
    
    
    
    
    
    
    
    11,185Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Interest expense (income)
    
    
    
    
    
    
    12,107
    
    
    
    (1,583
    )
    
    
    1,198
    
    
    
    
    
    
    
    11,722Income (loss) before income taxes
    
    
    
    
    
    
    (22,810
    )
    
    
    6,803
    
    
    
    3,153
    
    
    
    
    
    
    
    (12,854
    )Income tax (provision) benefit
    
    
    
    
    
    
    9,532
    
    
    
    (3,038
    )
    
    
    354
    
    
    
    
    
    
    
    6,848Net income (loss)
    
    $
    
    
    
    $
    (13,278
    )
    
    $
    3,765
    
    
    $
    3,507
    
    
    $
    
    
    
    $
    (6,006
    )
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes.(2)
    
    KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. 23




---



##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Statement of Operations
 Nine Months Ended September 30, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    399,119
    
    
    $
    441,788
    
    
    $
    (108,569
    )
    
    $
    732,338Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,287
    
    
    
    
    
    
    
    20,287Total revenues
    
    
    
    
    
    
    
    
    
    
    399,119
    
    
    
    462,075
    
    
    
    (108,569
    )
    
    
    752,625Costs and expenses:Cost of goods sold
    
    
    
    
    
    
    6,384
    
    
    
    304,790
    
    
    
    383,540
    
    
    
    (108,569
    )
    
    
    586,145Gross profit
    
    
    
    
    
    
    (6,384
    )
    
    
    94,329
    
    
    
    78,535
    
    
    
    
    
    
    
    166,480Research and development expenses
    
    
    
    
    
    
    
    
    
    
    9,783
    
    
    
    9,717
    
    
    
    
    
    
    
    19,500Selling, general, and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    32,825
    
    
    
    21,867
    
    
    
    
    
    
    
    54,692Depreciation and amortization
    
    
    
    
    
    
    13,911
    
    
    
    13,814
    
    
    
    6,035
    
    
    
    
    
    
    
    33,760Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    
    
    
    
    (1,050
    )Interest expense (income)
    
    
    8,745
    
    
    
    27,258
    
    
    
    (5,286
    )
    
    
    3,861
    
    
    
    
    
    
    
    34,578Income (loss) before income taxes
    
    
    (8,745
    )
    
    
    (47,553
    )
    
    
    43,193
    
    
    
    38,105
    
    
    
    
    
    
    
    25,000Income tax (provision) benefit
    
    
    3,030
    
    
    
    12,949
    
    
    
    (11,762
    )
    
    
    (10,376
    )
    
    
    
    
    
    
    (6,159
    )Net income (loss)
    
    $
    (5,715
    )
    
    $
    (34,604
    )
    
    $
    31,431
    
    
    $
    27,729
    
    
    $
    
    
    
    $
    18,841
 Nine Months Ended September 30, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    319,311
    
    
    $
    347,593
    
    
    $
    (77,018
    )
    
    $
    589,886Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,738
    
    
    
    
    
    
    
    8,738Total revenues
    
    
    
    
    
    
    
    
    
    
    319,311
    
    
    
    356,331
    
    
    
    (77,018
    )
    
    
    598,624Costs and expenses:Cost of goods sold
    
    
    
    
    
    
    30,940
    
    
    
    245,390
    
    
    
    315,380
    
    
    
    (77,018
    )
    
    
    514,692Gross profit
    
    
    
    
    
    
    (30,940
    )
    
    
    73,921
    
    
    
    40,951
    
    
    
    
    
    
    
    83,932Research and development expenses
    
    
    
    
    
    
    
    
    
    
    8,174
    
    
    
    9,072
    
    
    
    
    
    
    
    17,246Selling, general, and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    28,135
    
    
    
    18,368
    
    
    
    
    
    
    
    46,503Depreciation and amortization
    
    
    
    
    
    
    13,297
    
    
    
    13,210
    
    
    
    5,342
    
    
    
    
    
    
    
    31,849Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )Interest expense (income)
    
    
    
    
    
    
    28,549
    
    
    
    (4,498
    )
    
    
    3,668
    
    
    
    
    
    
    
    27,719Income (loss) before income taxes
    
    
    
    
    
    
    (72,786
    )
    
    
    28,900
    
    
    
    4,635
    
    
    
    
    
    
    
    (39,251
    )Income tax (provision) benefit
    
    
    
    
    
    
    25,567
    
    
    
    (10,115
    )
    
    
    (120
    )
    
    
    
    
    
    
    15,332Net income (loss)
    
    $
    
    
    
    $
    (47,219
    )
    
    $
    18,785
    
    
    $
    4,515
    
    
    $
    
    
    
    $
    (23,919
    )
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes.(2)
    
    KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. 24




---



##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Statements of Cash Flows
 Nine Months Ended September 30, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings(1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    
    
    
    $
    (30,332
    )
    
    $
    43,542
    
    
    $
    15,954
    
    
    $
    
    
    
    $
    29,164Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds
from sales of equipment
    
    
    
    
    
    
    
    
    
    
    (5,860
    )
    
    
    (2,622
    )
    
    
    
    
    
    
    (8,482
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (5,860
    )
    
    
    (2,622
    )
    
    
    
    
    
    
    (8,482
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    
    
    
    
    (2,010
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,010
    )Proceeds from (payments on) intercompany loans
    
    
    
    
    
    
    30,962
    
    
    
    (20,816
    )
    
    
    (10,146
    )
    
    
    
    
    
    
    Net proceeds from insurance bond
    
    
    
    
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,380Net cash provided by (used in) financing
activities
    
    
    
    
    
    
    30,332
    
    
    
    (20,816
    )
    
    
    (10,146
    )
    
    
    
    
    
    
    (630
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,141
    
    
    
    
    
    
    
    5,141Net decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    16,866
    
    
    
    8,327
    
    
    
    
    
    
    
    25,193Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    
    
    
    
    15,981
    
    
    
    30,376
    
    
    
    
    
    
    
    46,357Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    
    
    
    $
    32,847
    
    
    $
    38,703
    
    
    $
    
    
    
    $
    71,550
 Nine Months Ended September 30, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings(1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    
    
    
    $
    (22,936
    )
    
    $
    57,332
    
    
    $
    23,387
    
    
    $
    
    
    
    $
    57,783Cash flows used in investing activities:Purchase of plant and equipment, net of
proceeds from sales of equipment
    
    
    
    
    
    
    
    
    
    
    (21,908
    )
    
    
    (6,820
    )
    
    
    
    
    
    
    (28,728
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (21,908
    )
    
    
    (6,820
    )
    
    
    
    
    
    
    (28,728
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    
    
    
    
    (17,787
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,787
    )Net proceeds from insurance bond
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from (payments on) intercompany loans
    
    
    
    
    
    
    40,704
    
    
    
    (32,380
    )
    
    
    (8,324
    )
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    
    
    
    
    22,917
    
    
    
    (32,380
    )
    
    
    (8,324
    )
    
    
    
    
    
    
    (17,787
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    138Net increase (decrease) in cash and
cash equivalents
    
    
    
    
    
    
    (19
    )
    
    
    3,044
    
    
    
    8,381
    
    
    
    
    
    
    
    11,406Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    19
    
    
    
    (182
    )
    
    
    17,663
    
    
    
    
    
    
    
    17,500Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    
    
    
    $
    2,862
    
    
    $
    26,044
    
    
    $
    
    
    
    $
    28,906
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes.(2)
    
    KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. 25




---



##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 (9) Supplemental Guarantor Information  KRATON Polymers LLC
  Balance Sheet
 As of September 30, 2005Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    32,847
    
    
    $
    38,703
    
    
    $
    
    
    
    $
    71,550Receivables, net
    
    
    
    
    
    
    60,423
    
    
    
    97,563
    
    
    
    (7,374
    )
    
    
    150,612Inventories of products
    
    
    
    
    
    
    118,606
    
    
    
    79,935
    
    
    
    (7,238
    )
    
    
    191,303Inventories of materials and supplies
    
    
    
    
    
    
    5,853
    
    
    
    3,559
    
    
    
    
    
    
    
    9,412Other current assets
    
    
    5,795
    
    
    
    970
    
    
    
    10,730
    
    
    
    
    
    
    
    17,495Total current assets
    
    
    5,795
    
    
    
    218,699
    
    
    
    230,490
    
    
    
    (14,612
    )
    
    
    440,372Property, plant, and equipment, less accumulated depreciation
    
    
    130,106
    
    
    
    173,176
    
    
    
    92,171
    
    
    
    
    
    
    
    395,453Identifiable intangible assets, less accumulated amortization
    
    
    54,998
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    103,809Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    9,726
    
    
    
    
    
    
    
    10,539Deferred financing costs
    
    
    13,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,275Other long-term assets
    
    
    104,981
    
    
    
    272,814
    
    
    
    3,964
    
    
    
    (372,745
    )
    
    
    9,014Total assets
    
    $
    309,968
    
    
    $
    664,689
    
    
    $
    385,162
    
    
    $
    (387,357
    )
    
    $
    972,462Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    2,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,680Accounts payable  trade
    
    
    2,900
    
    
    
    22,931
    
    
    
    39,022
    
    
    
    
    
    
    
    64,853Other payables and accruals
    
    
    3,844
    
    
    
    19,947
    
    
    
    26,478
    
    
    
    
    
    
    
    50,269Due to related parties
    
    
    
    
    
    
    2,127
    
    
    
    17,184
    
    
    
    (7,374
    )
    
    
    11,937Deferred income taxes
    
    
    
    
    
    
    (417
    )
    
    
    1,657
    
    
    
    
    
    
    
    1,240Insurance bond payable
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,380Total current liabilities
    
    
    10,804
    
    
    
    44,588
    
    
    
    84,341
    
    
    
    (7,374
    )
    
    
    132,359Long-term debt, net of current portion
    
    
    460,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460,653Deferred income taxes
    
    
    299
    
    
    
    30,815
    
    
    
    (391
    )
    
    
    
    
    
    
    30,723Long-term liabilities
    
    
    279,765
    
    
    
    16,583
    
    
    
    105,714
    
    
    
    (372,745
    )
    
    
    29,317Total liabilities
    
    
    751,521
    
    
    
    91,986
    
    
    
    189,664
    
    
    
    (380,119
    )
    
    
    653,052Commitments and contingencies (note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    (444,259
    )
    
    
    572,703
    
    
    
    195,463
    
    
    
    (7,238
    )
    
    
    316,669Accumulated other comprehensive income
    
    
    2,706
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    2,741Total members equity
    
    
    (441,553
    )
    
    
    572,703
    
    
    
    195,498
    
    
    
    (7,238
    )
    
    
    319,410Total liabilities and members equity
    
    $
    309,968
    
    
    $
    664,689
    
    
    $
    385,162
    
    
    $
    (387,357
    )
    
    $
    972,462
 
 (1)
    
    KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 26




---



##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Balance Sheet
 As of December 31, 2004Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    15,981
    
    
    $
    30,376
    
    
    $
    
    
    
    $
    46,357Receivables, net
    
    
    454
    
    
    
    43,143
    
    
    
    84,467
    
    
    
    (7,468
    )
    
    
    120,596Inventories of products
    
    
    1,684
    
    
    
    120,264
    
    
    
    91,666
    
    
    
    (2,538
    )
    
    
    211,076Inventories of materials and supplies
    
    
    
    
    
    
    5,673
    
    
    
    3,105
    
    
    
    
    
    
    
    8,778Other current assets
    
    
    2,288
    
    
    
    577
    
    
    
    7,516
    
    
    
    
    
    
    
    10,381Total current assets
    
    
    4,426
    
    
    
    185,638
    
    
    
    217,130
    
    
    
    (10,006
    )
    
    
    397,188Property, plant, and equipment, less accumulated depreciation
    
    
    138,133
    
    
    
    181,292
    
    
    
    104,908
    
    
    
    
    
    
    
    424,333Identifiable intangible assets, less accumulated amortization
    
    
    60,883
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    109,694Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    9,940
    
    
    
    
    
    
    
    10,753Deferred financing costs
    
    
    14,973
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,973Other long-term assets
    
    
    118,127
    
    
    
    252,066
    
    
    
    3,529
    
    
    
    (365,076
    )
    
    
    8,646Total assets
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (375,082
    )
    
    $
    965,587Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    2,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,680Accounts payable  trade
    
    
    2,900
    
    
    
    29,977
    
    
    
    47,091
    
    
    
    
    
    
    
    79,968Other payables and accruals
    
    
    8,143
    
    
    
    16,199
    
    
    
    15,717
    
    
    
    
    
    
    
    40,059Due to (from) related parties
    
    
    
    
    
    
    456
    
    
    
    21,483
    
    
    
    (7,468
    )
    
    
    14,471Deferred income taxes
    
    
    
    
    
    
    (417
    )
    
    
    1,657
    
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    13,723
    
    
    
    46,215
    
    
    
    85,948
    
    
    
    (7,468
    )
    
    
    138,418Long-term debt, net of current portion
    
    
    462,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462,663Deferred income taxes
    
    
    12,344
    
    
    
    19,053
    
    
    
    (6,213
    )
    
    
    
    
    
    
    25,184Long-term liabilities
    
    
    261,950
    
    
    
    12,865
    
    
    
    115,890
    
    
    
    (365,076
    )
    
    
    25,629Total liabilities
    
    
    750,680
    
    
    
    78,133
    
    
    
    195,625
    
    
    
    (372,544
    )
    
    
    651,894Commitments and contingencies (note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    (414,355
    )
    
    
    540,863
    
    
    
    167,733
    
    
    
    (2,538
    )
    
    
    291,703Accumulated other comprehensive income
    
    
    1,030
    
    
    
    
    
    
    
    20,960
    
    
    
    
    
    
    
    21,990Total members equity
    
    
    (413,325
    )
    
    
    540,863
    
    
    
    188,693
    
    
    
    (2,538
    )
    
    
    313,693Total liabilities and members equity
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (375,082
    )
    
    $
    965,587
 
 (1)
    
    KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 27




---



##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Statement of Operations
 Three Months Ended September 30, 2005Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    143,409
    
    
    $
    154,784
    
    
    $
    (29,176
    )
    
    $
    269,017Other
    
    
    
    
    
    
    
    
    
    
    7,457
    
    
    
    
    
    
    
    7,457Total revenues
    
    
    
    
    
    
    143,409
    
    
    
    162,241
    
    
    
    (29,176
    )
    
    
    276,474Costs and expenses:Cost of goods sold
    
    
    438
    
    
    
    115,689
    
    
    
    138,994
    
    
    
    (29,176
    )
    
    
    225,945Gross profit
    
    
    (438
    )
    
    
    27,720
    
    
    
    23,247
    
    
    
    
    
    
    
    50,529Research and development expenses
    
    
    
    
    
    
    3,437
    
    
    
    3,263
    
    
    
    
    
    
    
    6,700Selling, general, and
administrative expenses
    
    
    
    
    
    
    10,252
    
    
    
    8,878
    
    
    
    
    
    
    
    19,130Depreciation and amortization
    
    
    4,953
    
    
    
    4,572
    
    
    
    2,023
    
    
    
    
    
    
    
    11,548Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (182
    )
    
    
    
    
    
    
    (182
    )Interest expense (income)
    
    
    9,284
    
    
    
    (1,885
    )
    
    
    1,284
    
    
    
    
    
    
    
    8,683Income (loss) before income taxes
    
    
    (14,675
    )
    
    
    11,344
    
    
    
    7,981
    
    
    
    
    
    
    
    4,650Income tax (provision) benefit
    
    
    3,998
    
    
    
    (3,091
    )
    
    
    (2,175
    )
    
    
    
    
    
    
    (1,268
    )Net income (loss)
    
    $
    (10,677
    )
    
    $
    8,253
    
    
    $
    5,806
    
    
    $
    
    
    
    $
    3,382
 Three Months Ended September 30, 2004Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    115,682
    
    
    $
    124,379
    
    
    $
    (30,654
    )
    
    $
    209,407Other
    
    
    
    
    
    
    
    
    
    
    1,840
    
    
    
    
    
    
    
    1,840Total revenues
    
    
    
    
    
    
    115,682
    
    
    
    126,219
    
    
    
    (30,654
    )
    
    
    211,247Costs and expenses:Cost of goods sold
    
    
    6,011
    
    
    
    92,003
    
    
    
    111,826
    
    
    
    (30,654
    )
    
    
    179,186Gross profit
    
    
    (6,011
    )
    
    
    23,679
    
    
    
    14,393
    
    
    
    
    
    
    
    32,061Research and development expenses
    
    
    
    
    
    
    2,681
    
    
    
    2,849
    
    
    
    
    
    
    
    5,530Selling, general, and
administrative expenses
    
    
    
    
    
    
    11,296
    
    
    
    5,171
    
    
    
    
    
    
    
    16,467Depreciation and amortization
    
    
    4,692
    
    
    
    4,482
    
    
    
    2,011
    
    
    
    
    
    
    
    11,185Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Interest expense (income)
    
    
    12,107
    
    
    
    (1,583
    )
    
    
    1,198
    
    
    
    
    
    
    
    11,722Income (loss) before income taxes
    
    
    (22,810
    )
    
    
    6,803
    
    
    
    3,153
    
    
    
    
    
    
    
    (12,854
    )Income tax (provision) benefit
    
    
    9,532
    
    
    
    (3,038
    )
    
    
    354
    
    
    
    
    
    
    
    6,848Net income (loss)
    
    $
    (13,278
    )
    
    $
    3,765
    
    
    $
    3,507
    
    
    $
    
    
    
    $
    (6,006
    )
 
 (1)
    
    KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 28




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Statement of Operations
 Nine Months Ended September 30, 2005Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    399,119
    
    
    $
    441,788
    
    
    $
    (108,569
    )
    
    $
    732,338Other
    
    
    
    
    
    
    
    
    
    
    20,287
    
    
    
    
    
    
    
    20,287Total revenues
    
    
    
    
    
    
    399,119
    
    
    
    462,075
    
    
    
    (108,569
    )
    
    
    752,625Costs and expenses:Cost of goods sold
    
    
    6,384
    
    
    
    304,790
    
    
    
    383,540
    
    
    
    (108,569
    )
    
    
    586,145Gross profit
    
    
    (6,384
    )
    
    
    94,329
    
    
    
    78,535
    
    
    
    
    
    
    
    166,480Research and development expenses
    
    
    
    
    
    
    9,783
    
    
    
    9,717
    
    
    
    
    
    
    
    19,500Selling, general, and
administrative expenses
    
    
    
    
    
    
    32,825
    
    
    
    21,867
    
    
    
    
    
    
    
    54,692Depreciation and amortization
    
    
    13,911
    
    
    
    13,814
    
    
    
    6,035
    
    
    
    
    
    
    
    33,760Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    
    
    
    
    (1,050
    )Interest expense (income)
    
    
    27,258
    
    
    
    (5,286
    )
    
    
    3,861
    
    
    
    
    
    
    
    25,833Income (loss) before income taxes
    
    
    (47,553
    )
    
    
    43,193
    
    
    
    38,105
    
    
    
    
    
    
    
    33,745Income tax (provision) benefit
    
    
    12,949
    
    
    
    (11,762
    )
    
    
    (10,376
    )
    
    
    
    
    
    
    (9,189
    )Net income (loss)
    
    $
    (34,604
    )
    
    $
    31,431
    
    
    $
    27,729
    
    
    $
    
    
    
    $
    24,556
 Nine Months Ended September 30, 2004Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    319,311
    
    
    $
    347,593
    
    
    $
    (77,018
    )
    
    $
    589,886Other
    
    
    
    
    
    
    
    
    
    
    8,738
    
    
    
    
    
    
    
    8,738Total revenues
    
    
    
    
    
    
    319,311
    
    
    
    356,331
    
    
    
    (77,018
    )
    
    
    598,624Costs and expenses:Cost of goods sold
    
    
    30,940
    
    
    
    245,390
    
    
    
    315,380
    
    
    
    (77,018
    )
    
    
    514,692Gross profit
    
    
    (30,940
    )
    
    
    73,921
    
    
    
    40,951
    
    
    
    
    
    
    
    83,932Research and development expenses
    
    
    
    
    
    
    8,174
    
    
    
    9,072
    
    
    
    
    
    
    
    17,246Selling, general, and
administrative expenses
    
    
    
    
    
    
    28,135
    
    
    
    18,368
    
    
    
    
    
    
    
    46,503Depreciation and amortization
    
    
    13,297
    
    
    
    13,210
    
    
    
    5,342
    
    
    
    
    
    
    
    31,849Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )Interest expense (income)
    
    
    28,549
    
    
    
    (4,498
    )
    
    
    3,668
    
    
    
    
    
    
    
    27,719Income (loss) before income taxes
    
    
    (72,786
    )
    
    
    28,900
    
    
    
    4,635
    
    
    
    
    
    
    
    (39,251
    )Income tax (provision) benefit
    
    
    25,567
    
    
    
    (10,115
    )
    
    
    (120
    )
    
    
    
    
    
    
    15,332Net income (loss)
    
    $
    (47,219
    )
    
    $
    18,785
    
    
    $
    4,515
    
    
    $
    
    
    
    $
    (23,919
    )
 
 (1)
    
    KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 29




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##### Table of Contents



Polymer Holdings LLC and KRATON Polymers LLC
 
 Statement of Cash Flows
 Nine Months Ended September 30, 2005Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    (30,332
    )
    
    $
    43,542
    
    
    $
    15,954
    
    
    $
    
    
    
    $
    29,164Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (5,860
    )
    
    
    (2,622
    )
    
    
    
    
    
    
    (8,482
    )Net cash used in investing activities
    
    
    
    
    
    
    (5,860
    )
    
    
    (2,622
    )
    
    
    
    
    
    
    (8,482
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (2,010
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,010
    )Proceeds from (payments on) intercompany loans
    
    
    30,962
    
    
    
    (20,816
    )
    
    
    (10,146
    )
    
    
    
    
    
    
    Net proceeds from insurance bond
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,380Net cash provided by (used in) financing
activities
    
    
    30,332
    
    
    
    (20,816
    )
    
    
    (10,146
    )
    
    
    
    
    
    
    (630
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    5,141
    
    
    
    
    
    
    
    5,141Net decrease in cash and cash equivalents
    
    
    
    
    
    
    16,866
    
    
    
    8,327
    
    
    
    
    
    
    
    25,193Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    15,981
    
    
    
    30,376
    
    
    
    
    
    
    
    46,357Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    32,847
    
    
    $
    38,703
    
    
    $
    
    
    
    $
    71,550
 Nine Months Ended September 30, 2004Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    (22,936
    )
    
    $
    57,332
    
    
    $
    23,387
    
    
    $
    
    
    
    $
    57,783Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from sales of
equipment
    
    
    
    
    
    
    (21,908
    )
    
    
    (6,820
    )
    
    
    
    
    
    
    (28,728
    )Net cash used in investing activities
    
    
    
    
    
    
    (21,908
    )
    
    
    (6,820
    )
    
    
    
    
    
    
    (28,728
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (17,787
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,787
    )Net proceeds from insurance bond
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from (payments on) intercompany loans
    
    
    40,704
    
    
    
    (32,380
    )
    
    
    (8,324
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    22,917
    
    
    
    (32,380
    )
    
    
    (8,324
    )
    
    
    
    
    
    
    (17,787
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    138Net increase (decrease) in cash and cash equivalents
    
    
    (19
    )
    
    
    3,044
    
    
    
    8,381
    
    
    
    
    
    
    
    11,406Cash and cash equivalents at beginning of period
    
    
    19
    
    
    
    (182
    )
    
    
    17,663
    
    
    
    
    
    
    
    17,500Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    2,862
    
    
    $
    26,044
    
    
    $
    
    
    
    $
    28,906
 
 (1)
    
    KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 30




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
    Recent Developments
 Gulf Coast Hurricanes Impact Update
  
    
    Our operations were not directly affected since our USA manufacturing plant is
located in Ohio;
    
    We currently anticipate that we will be able to serve customers as planned, with
limitations only applying to our isoprene-based products;
    
    Our current inventory levels are sufficient due to our proactive efforts in securing
additional raw materials where available, with limitations only applying to our
isoprene-based products;
    
    We see further tightening of both primary and secondary raw material supply,
translating into increased cost proportional to the prevailing markets; and
 31




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##### Table of Contents




    
    Delivery capabilities were briefly affected by the current nationwide freight
availability issue but are now normalized.
 Supply Disruption Issues
      SIS Sales Allocations
  Belpre, Ohio Production Facility Capacity Expansion
  32




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##### Table of Contents



Paulinia, Brazil New Polyisoprene Latex Plant
  Changes in Executive Officers
     Changes in Board of Directors
  End-Use Realignment
   Exchange Offers
  33




---



##### Table of Contents



Restatement of Prior Financial Statements
      Three months endedSeptember 30, 2004 (1)As previouslyreported
    
    
    As restatedCost of goods sold
    
    $
    176,848
    
    
    $
    179,186Gross profit
    
    
    34,399
    
    
    
    32,061Loss before income taxes
    
    
    (10,516
    )
    
    
    (12,854
    )Income tax benefit
    
    
    5,940
    
    
    
    6,848Net loss
    
    
    (4,576
    )
    
    
    (6,006
    )
 34




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##### Table of Contents



Nine months endedSeptember 30, 2004 (1)As previouslyreported
    
    
    As restatedCost of goods sold
    
    $
    510,984
    
    
    $
    514,692Gross profit
    
    
    87,640
    
    
    
    83,932Loss before income taxes
    
    
    (35,543
    )
    
    
    (39,251
    )Income tax benefit
    
    
    13,943
    
    
    
    15,332Net loss
    
    
    (21,600
    )
    
    
    (23,919
    )
 KRATON
    
    
    Polymer HoldingsDecember 31, 2004
    
    
    December 31, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restatedInventories of product
    
    $
    216,090
    
    
    $
    211,076
    
    
    $
    216,090
    
    
    $
    211,076Total current assets
    
    
    402,202
    
    
    
    397,188
    
    
    
    402,202
    
    
    
    397,188Total assets
    
    
    970,601
    
    
    
    965,587
    
    
    
    972,427
    
    
    
    967,413Deferred income taxes  noncurrent
    
    
    26,509
    
    
    
    25,184
    
    
    
    25,837
    
    
    
    24,513Total liabilities
    
    
    653,219
    
    
    
    651,894
    
    
    
    746,219
    
    
    
    744,895Common equity
    
    
    294,837
    
    
    
    291,703
    
    
    
    203,663
    
    
    
    200,528Accumulated other comprehensive
income
    
    
    22,545
    
    
    
    21,990
    
    
    
    22,545
    
    
    
    21,990Total members equity
    
    
    317,382
    
    
    
    313,693
    
    
    
    226,208
    
    
    
    222,518Total liabilities and members equity
    
    
    970,601
    
    
    
    965,587
    
    
    
    972,427
    
    
    
    967,413
 
 (1)
    
    The financial information for Polymer Holdings and KRATON are identical for the items set
forth in the table. Critical Accounting Policies
  Revenue Recognition
   Inventories
  35




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##### Table of Contents



Property, Plant and Equipment
   Income Taxes
  Factors Affecting Our Results of Operations
 Raw Materials
     36




---



##### Table of Contents



Seasonality
  Economic and Market Conditions
  International Operations and Currency Fluctuations
  37




---



##### Table of Contents



U.S. $ per 10,000U.S. $ per Euro
    
    Japanese Yen
    
    U.S. $ per Brazilian RealAverage
    
    Period End
    
    Average
    
    Period End
    
    Average
    
    Period EndQuarter Ended
    
    September 30, 2004
    
    
    1.222
    
    
    
    1.232
    
    
    
    90.99
    
    
    
    90.05
    
    
    
    0.336
    
    
    
    0.350Quarter Ended
    
    September 30, 2005
    
    
    1.220
    
    
    
    1.204
    
    
    
    89.93
    
    
    
    88.35
    
    
    
    0.426
    
    
    
    0.450Nine Months Ended
    
    September 30, 2004
    
    
    1.225
    
    
    
    1.232
    
    
    
    91.77
    
    
    
    90.05
    
    
    
    0.336
    
    
    
    0.350Nine Months Ended
    
    September 30, 2005
    
    
    1.262
    
    
    
    1.204
    
    
    
    92.83
    
    
    
    88.35
    
    
    
    0.400
    
    
    
    0.450
   Results of Operations
 Three Months Ended September 30, 2005, Compared to Three Months Ended September 30, 2004
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005 (1)
    
    
    September 30, 2004(in thousands)
    
    
    (in thousands)(Restated)Revenues:Sales
    
    $
    269,017
    
    
    $
    209,407Other
    
    
    7,457
    
    
    
    1,840Total revenues
    
    
    276,474
    
    
    
    211,247Costs and expenses:Cost of goods sold
    
    
    225,945
    
    
    
    179,186Gross profit
    
    
    50,529
    
    
    
    32,061Research and development expenses
    
    
    6,700
    
    
    
    5,530Selling, general and administrative expenses
    
    
    19,130
    
    
    
    16,467Depreciation and amortization of
identifiable intangibles
    
    
    11,548
    
    
    
    11,185Earnings (loss) in joint venture
    
    
    (182
    )
    
    
    11Interest, net
    
    
    8,683
    
    
    
    11,722Income (loss) before income taxes
    
    
    4,650
    
    
    
    (12,854
    )Income tax (provision) benefit
    
    
    (1,268
    )
    
    
    6,848Net income (loss)
    
    $
    3,382
    
    
    $
    (6,006
    )
 
 (1)
    
    The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net loss were $11.7 million, $0.6
million and $1.0 million, respectively, for the three months ended September 30, 2005. 38




---



##### Table of Contents



Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005 (1)
    
    
    September 30, 2004(Restated)Revenues:Sales
    
    
    97.3
    %
    
    
    99.1
    %Other
    
    
    2.7
    
    
    
    0.9Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    81.7
    
    
    
    84.8Gross profit
    
    
    18.3
    
    
    
    15.2Research and development expenses
    
    
    2.4
    
    
    
    2.6Selling, general and administrative expenses
    
    
    6.9
    
    
    
    7.8Depreciation and amortization of
identifiable intangibles
    
    
    4.2
    
    
    
    5.3Earnings in joint venture
    
    
    (0.1
    )
    
    
    Interest, net
    
    
    3.1
    
    
    
    5.5Income (loss) before income taxes
    
    
    1.7
    
    
    
    (6.1
    )Income tax (provision) benefit
    
    
    (0.5
    )
    
    
    3.2Net income (loss)
    
    
    1.2
    %
    
    
    (2.8
    )%
 
 (1)
    
    The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net income were 4.2%, 0.2%
and 0.3%, respectively, for the three months ended September 30, 2005. Total Revenues
  Sales
   Other revenue
 39




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##### Table of Contents



Cost of Goods Sold
  Gross Profit
  Operating Expenses
 Research and development expenses
 Selling, general and administrative expenses
 Depreciation and amortization of identifiable intangibles.
 Earnings in joint venture
 40




---



##### Table of Contents



Interest expense  Polymer Holdings
 Interest expense  KRATON
 Income Tax (Provision) Benefit
 Income tax (provision) benefit  Polymer Holdings.
 Income tax (provision) benefit  KRATON .
 Net Income (Loss)
 Net income (loss) Polymer Holdings.
 Net income (loss) KRATON.
 41




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##### Table of Contents



Nine Months Ended September 30, 2005, Compared to Nine Months Ended September 30, 2004
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005 (1)
    
    
    September 30, 2004(in thousands)
    
    
    (in thousands)(Restated)Revenues:Sales
    
    $
    732,338
    
    
    $
    589,886Other
    
    
    20,287
    
    
    
    8,738Total revenues
    
    
    752,625
    
    
    
    598,624Costs and expenses:Cost of goods sold
    
    
    586,145
    
    
    
    514,692Gross profit
    
    
    166,480
    
    
    
    83,932Research and development expenses
    
    
    19,500
    
    
    
    17,246Selling, general and administrative expenses
    
    
    54,692
    
    
    
    46,503Depreciation and amortization of
identifiable intangibles
    
    
    33,760
    
    
    
    31,849Earnings (loss) in joint venture
    
    
    (1,050
    )
    
    
    (134
    )Interest, net
    
    
    25,833
    
    
    
    27,719Income (loss) before income taxes
    
    
    33,745
    
    
    
    (39,251
    )Income tax benefit
    
    
    (9,189
    )
    
    
    15,332Net income (loss)
    
    $
    24,556
    
    
    $
    (23,919
    )
 
 (1)
    
    The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net income were $34.6 million,
$6.2 million and $18.8 million, respectively, for the nine months ended September 30, 2005.  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005 (1)
    
    
    September 30, 2004(Restated)Revenues:Sales
    
    
    97.3
    %
    
    
    98.5
    %Other
    
    
    2.7
    
    
    
    1.5Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    77.9
    
    
    
    86.0Gross profit
    
    
    21.1
    
    
    
    14.0Research and development expenses
    
    
    2.6
    
    
    
    2.9Selling, general and administrative expenses
    
    
    7.3
    
    
    
    7.8Depreciation and amortization of
identifiable intangibles
    
    
    4.5
    
    
    
    5.3Earnings (loss) in joint venture
    
    
    (0.1
    )
    
    
    Interest, net
    
    
    3.4
    
    
    
    4.6Income (loss) before income taxes
    
    
    4.5
    
    
    
    (6.6
    )Income tax benefit
    
    
    (1.2
    )
    
    
    2.6Net income (loss)
    
    
    3.3
    %
    
    
    (4.0
    )%
 
 (1)
    
    The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net income were 4.6%, 0.8% and
2.5%, respectively, for the nine months ended September 30, 2005. Total Revenues
  42




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##### Table of Contents



Sales
   Other revenue
 Cost of Goods Sold
  Gross Profit
  43




---



##### Table of Contents



Operating Expenses
 Research and development expenses
 Selling, general and administrative expenses
 Depreciation and amortization of identifiable intangibles.
 Earnings in joint venture
 Interest expense-Polymer Holdings
 Interest expense-KRATON
 44




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##### Table of Contents



Income Tax (Provision) Benefit
 Income tax (provision) benefit  Polymer Holdings.
 Income tax (provision) benefit  KRATON .
 Net Income (Loss)
 Net income (loss) Polymer Holdings.
 Net income (loss) KRATON.
 Liquidity and Capital Resources
 Operating activities.
 Investing activities
 Financing activities.
 Sources of liquidity.
  45




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##### Table of Contents



Capital expenditures.
 Contractual Commitments
  46




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##### Table of Contents



Payments Due by Period
  Contractual Obligations
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter(in millions)Long-term debt(1)
    
    $
    613.3
    
    
    $
    0.7
    
    
    $
    2.7
    
    
    $
    2.7
    
    
    $
    2.7
    
    
    $
    2.7
    
    
    $
    601.8Estimated interest payments on
debt(1)
    
    
    313.9
    
    
    
    4.0
    
    
    
    32.3
    
    
    
    32.1
    
    
    
    31.9
    
    
    
    40.8
    
    
    
    172.8Operating leases
    
    
    37.9
    
    
    
    1.7
    
    
    
    6.4
    
    
    
    5.5
    
    
    
    5.4
    
    
    
    5.2
    
    
    
    13.7Purchase obligations(2)(3)
    
    
    300.8
    
    
    
    3.1
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    248.1Total contractual cash obligations
    
    $
    1,265.9
    
    
    $
    9.5
    
    
    $
    53.8
    
    
    $
    52.7
    
    
    $
    52.4
    
    
    $
    61.1
    
    
    $
    1,036.4
 
 (1)
    
    KRATONs contractual obligations exclude $150.0 million related to Polymer Holdings 12%
Discount Notes all of which is due in 2014. KRATONs total long-term debt, estimated interest
payments and contractual cash obligations subsequent to 2009 are $451.8 million, $82.8 million
and $795.5 million, respectively.(2)
    
    Pursuant to the feedstock supply contracts with Shell Chemicals or its affiliates, we are
obligated to purchase minimum quantities of isoprene each year. We have two isoprene supply
contracts, which require us to purchase minimum quantities. If we do not meet these minimums,
we would be obligated to pay a penalty of approximately U.S. $300.0 per ton up to a maximum
aggregate penalty of approximately $4.2 million.(3)
    
    Pursuant to a production agreement with Basell Polyfine GMBH, we are obligated to pay a
minimum indirect service fee each year of approximately $8.2 million. Not included in this
table are future obligations arising under our Operating Agreements and Site Services,
Utilities, Materials and Facilities Agreements that do not specify fixed or minimum quantities
of goods or services to be purchased and do not contain fixed, minimum or variable price
provisions. Under such agreements, our obligations to third parties are based on costs
incurred by them in connection with the operation and maintenance of, and other services
provided to, our European facilities. For a description of these agreements, see
BusinessShell Chemicals Operating Agreements. The initial terms of these agreements range
between 20 years and 40 years and each agreement includes bilateral renewal rights. During the
years ended December 31, 2004, 2003 and 2002, we incurred costs aggregating $66.5 million,
$55.9 million and $44.2 million, respectively, under these agreements.  Description of Our Indebtedness
 Senior Secured Credit Facility
  Structure.
  
    
    a senior secured term loan of $360.0 million, which we refer to as the Term Facility,
and
    
    a senior secured revolving credit facility of up to $60.0 million, which we refer to as
the Revolving Facility.
  47




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##### Table of Contents



Maturity, Amortization and Prepayment.
  Interest and Fees.
 Guarantees.
 Security.
 Covenants.
   Events of Default.
 48




---



##### Table of Contents



Amendment and Waiver under the senior secured credit facility.
 KRATONs 8.125% Senior Subordinated Notes due 2014
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 Optional Redemption.
 Covenants.
    49




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##### Table of Contents



Polymer Holdings 12% Senior Discount Notes Due 2014
  Maturity Date.
 Accretion.
 Cash Interest Payment Dates.
 Guarantees.
 Holding Company Structure and Ranking.
 Optional Redemption.
 Covenants.
  50




---



##### Table of Contents



Other Contingencies
       51




---



##### Table of Contents



Off-Balance Sheet Transactions
  Market Risk
  Interest rate risk.
 Foreign currency risk
 Commodity price risk
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  52




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   53




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##### Table of Contents



PART II  Other Information
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  10.1
    
    Option Grant Agreement dated December 2, 2004, between TJ Chemical Holdings LLC, or TJ
Chemical, and Steven Demetriou.10.2
    
    Option Grant Agreement dated December 2, 2004, between TJ Chemical and James Ball.10.3
    
    Employment Agreement dated November 9, 2005, between KRATON and Kevin M. Fogarty.10.4
    
    Option Grant Agreement dated October 24, 2005, between TJ Chemical and Raymond K. Guba.10.5
    
    Profit Unit Award Agreement Dated October 24, 2005, between KRATON Management LLC and Raymond
K. Guba.10.6
    
    Notional Unit Award Grant Agreement dated October 24, 2005, between KRATON and Raymond K.
Guba.31.1
    
    Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes  Oxley Act of 2002.31.2
    
    Certification of Interim CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes  Oxley Act of 2002.31.3
    
    Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the
Securities Exchange Commission Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes  Oxley Act of 2002.32.1
    
    Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002.
 54




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##### Table of Contents



Signatures
  Polymer Holdings LLC
KRATON Polymers LLCDate: November 14, 2005
    /s/ George B. GregoryGeorge B. GregoryChief Executive Officer /s/ Nicholas G. DekkerNicholas G. DekkerInterim Chief Financial Officer 55




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##### Table of Contents



Exhibit Index
 10.1
    
    Option Grant Agreement dated December 2, 2004, between TJ Chemical Holdings LLC, or TJ
Chemical, and Steven Demetriou.10.2
    
    Option Grant Agreement dated December 2, 2004, between TJ Chemical and James Ball.10.3
    
    Employment Agreement dated November 9, 2005, between KRATON and Kevin M. Fogarty.10.4
    
    Option Grant Agreement dated October 24, 2005, between TJ Chemical and Raymond K. Guba.10.5
    
    Profit Unit Award Agreement Dated October 24, 2005, between KRATON Management LLC and Raymond
K. Guba.10.6
    
    Notional Unit Award Grant Agreement dated October 24, 2005, between KRATON and Raymond K.
Guba.31.1
    
    Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes  Oxley Act of 2002.31.2
    
    Certification of Interim CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes  Oxley Act of 2002.31.3
    
    Certification of CFO pursuant to Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Commission Act of 1934, as
adopted pursuant to Section 302 of the SarbanesOxley Act of 2002.32.1
    
    Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002.
 56