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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 June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Kraton Polymers LLC
 (Exact name of Register as specified in its Charter)
 Delaware
    
    94-2805249(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)15710 John F. Kennedy Blvd. Suite 300Houston, TX 77032
    
    281-504-4700(Address of principal executive offices,
    
    (Registrants telephone number, including area code)including zip code)
 R £
  £ £ R




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##### 



TABLE OF CONTENTS
  
 PAGEPart I  Financial InformationItem 1. Financial Statements and Accompanying Notes
    
    
    4Kraton Polymers LLC:Consolidated Balance Sheets  June 30, 2006 (Unaudited) and December 31, 2005
    
    
    4Consolidated Statements of Operations (Unaudited)  Three Months Ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Operations (Unaudited)  Six Months Ended June 30, 2006 and 2005
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended June 30, 2006 and 2005
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    38Part II  Other InformationItem 1. Legal Proceedings
    
    
    38Item 2. Changes in Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Securityholders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    40Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
  
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FORWARD LOOKING STATEMENTS
  3




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PART I  Financial Information
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 Kraton Polymers LLC
 
 
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    32,399
    
    
    $
    100,934Receivables, net of allowances of $1,241 and $1,013
    
    
    164,045
    
    
    
    107,586Inventories of products
    
    
    248,636
    
    
    
    192,595Inventories of materials and supplies
    
    
    9,888
    
    
    
    9,336Other current assets
    
    
    17,969
    
    
    
    23,511Deferred income taxes
    
    
    1,953
    
    
    
    1,953Total current assets
    
    
    474,890
    
    
    
    435,915Property, plant and equipment, at cost, less accumulated depreciation
    
    
    398,998
    
    
    
    394,192Identifible intangible assets, less accumulated amortization
    
    
    97,924
    
    
    
    101,848Investment in joint venture
    
    
    9,909
    
    
    
    10,542Deferred financing costs
    
    
    13,677
    
    
    
    12,711Other long term assets
    
    
    13,101
    
    
    
    9,605Total assets
    
    $
    1,008,499
    
    
    $
    964,813Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    30,570Accounts payable - trade
    
    
    82,027
    
    
    
    64,345Other payables and accruals
    
    
    45,465
    
    
    
    48,758Due to related party
    
    
    15,021
    
    
    
    13,119Insurance note payable
    
    
    5,174
    
    
    
    Total current liabilities
    
    
    151,537
    
    
    
    156,792Long-term debt, net of current portion
    
    
    580,188
    
    
    
    432,093Deferred income taxes
    
    
    34,307
    
    
    
    34,010Long-term liabilities
    
    
    33,467
    
    
    
    29,713Total liabilities
    
    
    799,499
    
    
    
    652,608Commitments and contingencies (See Note 9)Members equityCommon equity
    
    
    196,562
    
    
    
    314,897Accumulated other comprehensive income (loss)
    
    
    12,438
    
    
    
    (2,692
    )Total members equity
    
    
    209,000
    
    
    
    312,205Total liabilities and members equity
    
    $
    1,008,499
    
    
    $
    964,813
  4




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Kraton Polymers LLC
 
 
 June 30,
    
    
    June 30,2006
    
    
    2005Revenues:Sales
    
    $
    275,997
    
    
    $
    261,390Other Income
    
    
    9,291
    
    
    
    7,561Total revenue
    
    
    285,288
    
    
    
    268,951Costs and expenses:Costs of goods sold
    
    
    232,788
    
    
    
    202,836Gross profit
    
    
    52,500
    
    
    
    66,115Research and development expenses
    
    
    7,125
    
    
    
    6,803Selling, general and administrative expenses
    
    
    20,084
    
    
    
    17,490Depreciation and amortization of identifiable intangibles
    
    
    10,974
    
    
    
    11,230(Earnings) in joint venture
    
    
    (134
    )
    
    
    (311
    )Interest expense
    
    
    10,144
    
    
    
    8,657Income before income taxes
    
    
    4,307
    
    
    
    22,246Income tax provision
    
    
    (883
    )
    
    
    (6,027
    )Net income
    
    $
    3,424
    
    
    $
    16,219
  5




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Kraton Polymers LLC
 
 
 June 30,
    
    
    June 30,2006
    
    
    2005Revenues:Sales
    
    $
    496,783
    
    
    $
    463,321Other income
    
    
    17,894
    
    
    
    12,830Total revenue
    
    
    514,677
    
    
    
    476,151Costs and expenses:Costs of goods sold
    
    
    409,732
    
    
    
    360,200Gross profit
    
    
    104,945
    
    
    
    115,951Research and development expenses
    
    
    13,066
    
    
    
    12,800Selling, general and administrative expenses
    
    
    37,988
    
    
    
    35,562Depreciation and amortization
    
    
    22,014
    
    
    
    22,212(Earnings) in joint venture
    
    
    (440
    )
    
    
    (868
    )Interest expense
    
    
    18,569
    
    
    
    17,150Income before income taxes
    
    
    13,748
    
    
    
    29,095Income tax provision
    
    
    (3,829
    )
    
    
    (7,921
    )Net income
    
    $
    9,919
    
    
    $
    21,174
  6




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Kraton Polymers LLC
 
 
 June 30,
    
    
    June 30,2006
    
    
    2005Cash flows (used in) provided by operating activities:Net income
    
    $
    9,919
    
    
    $
    21,174Adjustments to reconcile net loss to net cash
provided by op erating activities:Depreciation and amortization of identifiable intangibles
    
    
    22,014
    
    
    
    22,212Amortization of deferred financing costs
    
    
    1,271
    
    
    
    1,133Loss on disposal of fixed assets
    
    
    60
    
    
    
    20Distributed (undistributed) earnings in joint venture
    
    
    825
    
    
    
    (407
    )Deferred tax provision
    
    
    585
    
    
    
    4,556Non-cash compensation
    
    
    1,249
    
    
    
    249Increase (decrease) in working capital:Accounts receivable
    
    
    (49,100
    )
    
    
    (46,154
    )Due to related party
    
    
    1,896
    
    
    
    (1,066
    )Inventories
    
    
    (46,872
    )
    
    
    (34,380
    )Other assets
    
    
    3,323
    
    
    
    (5,240
    )Accounts payable, other payables and accruals and
long-term liabilities
    
    
    12,193
    
    
    
    9,192Net cash used in operating
activities
    
    
    (42,637
    )
    
    
    (28,711
    )Cash flows (used in) provided by investing activities:Purchase of plant and equipment
    
    
    (17,507
    )
    
    
    (4,291
    )Proceeds from sale of property, plant and equipment
    
    
    12
    
    
    
    122Net cash used in investing activities
    
    
    (17,495
    )
    
    
    (4,169
    )Cash flows (used in) provided by financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    Repayment of debt
    
    
    (1,633
    )
    
    
    (1,340
    )Cash dividend to parent
    
    
    (129,503
    )
    
    
    Deferred financing costs
    
    
    (2,237
    )
    
    
    Net proceeds from insurance note payable
    
    
    5,174
    
    
    
    3,449Net cash (used in) provided by financing
activities
    
    
    (5,191
    )
    
    
    2,109Effects of exchange rate differences on cash
    
    
    (3,212
    )
    
    
    2,782Net decrease in
cash and cash equivalents
    
    
    (68,535
    )
    
    
    (27,989
    )Cash and cash equivalents at beginning of the period
    
    
    100,934
    
    
    
    46,357Cash and cash equivalents at end of the period
    
    $
    32,399
    
    
    $
    18,368Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of refunds received
    
    $
    1,777
    
    
    $
    411Cash paid during the period for interest
    
    $
    18,746
    
    
    $
    16,481
  7




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Kraton Polymers LLC
 
 
 (1) Summary of Significant Accounting Policies
 (a) Organization and Description of Business
   (b) Basis of Presentation
     (c) Recently Issued Accounting Standards
  8




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(2) Stock-Based Compensation
 Share-Based Payment,
    Year EndedDecember 31,
    
    Amount2006
    
    $
    2.52007
    
    
    2.52008
    
    
    2.52009
    
    
    1.52010
    
    
    0.6
  Three Months EndedJune 30, 2006Risk-free interest rate
    
    
    4.26
    %Expected dividend yield
    
    
    0.0
    %Expected volatility
    
    
    0.945Expected term (in years)
    
    
    5.0
   Three Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2005Reported net income
    
    $
    16,219
    
    
    $
    21,174Add: Stock based employee compensation expense (1)
    
    
    
    
    
    Less: Total fair value computed stock-based compensation, net of tax
    
    
    (271
    )
    
    
    (523
    )Pro forma net income
    
    $
    15,948
    
    
    $
    20,651
 
 (1)
    
    Amount does not include stock-based compensation of $43,000 and $249,000 for the three months
and six months ended June 30, 2005, respectively, related to the Companys restricted stock
awards, as these amounts are included in reported net income. 9




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Weighted
    
    WeightedNumber
    
    Average
    
    Average
    
    Aggregateof
    
    Exercise
    
    Remaining
    
    IntrinsicOptions
    
    Price
    
    Life
    
    Value (1)Outstanding-beginning of year
    
    
    14,835
    
    
    $
    1.00
    
    
    
    Granted
    
    
    1,243
    
    
    $
    1.00
    
    
    
    Exercised
    
    
    
    
    
    
    1.00
    
    
    
    Cancelled
    
    
    345
    
    
    
    1.00
    
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    15,733
    
    
    $
    1.00
    
    
    
    2.2
    
    
    
    Exercisable at June 30, 2006
    
    
    2,963
    
    
    $
    1.00
    
    
    
    
    
    
    
    
 
 (1)
    
    The intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option. The fair value of our stock was
estimated to be $0.89 at December 31, 2005. Management believes there has been no significant
change in the market value of our stock as of June 30, 2006.  Weighted
    
    WeightedRange of
    
    Number of
    
    Average
    
    AverageExercise Prices
    
    Options
    
    Exercise Price
    
    Remaining LifeOutstanding options:
    
    $
    1.00
    
    
    
    15,733
    
    
    $
    1.00
    
    
    
    2.2Exercisable options:
    
    $
    1.00
    
    
    
    2,963
    
    
    $
    1.00
 (3) Restructuring Activities
    Three Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2006Cost of goods sold
    
    $
    4,986
    
    
    $
    4,986Research and development
    
    $
    585
    
    
    $
    585Selling, general and administrative
    
    $
    477
    
    
    $
    956
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(4) Detail of Certain Balance Sheet Accounts
  June 30,
    
    
    December 31,2006
    
    
    2005Inventories:Finished products
    
    $
    211,402
    
    
    $
    167,454Work in progress
    
    
    3,702
    
    
    
    2,615Raw materials
    
    
    33,532
    
    
    
    22,526$
    248,636
    
    
    $
    192,595Other payables and accruals:Employee related
    
    $
    13,865
    
    
    $
    16,217Interest
    
    
    7,527
    
    
    
    8,069Property and other taxes
    
    
    6,708
    
    
    
    5,095Customer rebates
    
    
    2,980
    
    
    
    4,382Income taxes payable
    
    
    1,251
    
    
    
    752Other
    
    
    13,134
    
    
    
    14,243$
    45,465
    
    
    $
    48,758
 (5) Comprehensive Income (Loss)
  Three Month Ended
    
    
    Six Month EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    3,424
    
    
    $
    16,219
    
    
    $
    9,919
    
    
    $
    21,174Foreign currency adjustments
    
    
    8,468
    
    
    
    (10,480
    )
    
    
    12,271
    
    
    
    (22,083
    )Unrealized (loss) gain on interest rate swaps
    
    
    (38
    )
    
    
    (686
    )
    
    
    167
    
    
    
    858Total comprehensive income (loss)
    
    $
    11,854
    
    
    $
    5,053
    
    
    $
    22,357
    
    
    $
    (51
    )
  June 30, 2006
    
    
    December 31, 2005Foreign currency adjustments
    
    $
    9,384
    
    
    $
    (5,579
    )Unrealized gain on interest rate swaps
    
    
    3,054
    
    
    
    2,887Total accumulated other comprehensive income (loss)
    
    $
    12,438
    
    
    $
    (2,692
    )
 (6) Long-Term Debt
  June 30, 2006
    
    
    December 31, 2005Senior Secured Credit Facility:Term Loans
    
    $
    384,038
    
    
    $
    262,663Revolving Loans
    
    
    
    
    
    
    8.125% Senior Subordinated Notes
    
    
    200,000
    
    
    
    200,000Total long-term debt
    
    
    584,038
    
    
    
    462,663Less current portion of long-term debt
    
    
    3,850
    
    
    
    30,570Total
    
    $
    580,188
    
    
    $
    432,093
 (a) Senior Secured Credit Facility
  11




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Maturity
  Interest
  Mandatory Prepayments
  Covenants
  12




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(b) Senior Subordinated Notes Due January 15, 2014
  Interest
  Optional Redemption
   Covenants
    (7) Financial Instruments
 (a) Interest Rate Swap Agreements
  13




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(b) Fair Value of Financial Instruments
  June 30, 2006Carrying Value
    
    Fair ValueTerm Loans
    
    $
    384,038
    
    
    $
    384,0388.125% Notes
    
    
    200,000
    
    
    
    198,500
 December 31, 2005Carrying Value
    
    Fair ValueTerm Loans
    
    $
    262,663
    
    
    $
    262,6638.125% Notes
    
    
    200,000
    
    
    
    192,000
  (8) Income Taxes
  (9) Commitments and Contingencies
 Legal Proceedings
  (10) Employee Benefits
 (a) Investment in Kraton Management LLC
  (b) TJ Chemical Holdings LLC 2004 Option Plan
   14




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(c) Other Equity Awards
  (d) Kraton Polymers LLC Executive Deferred Compensation Plan
  (e) 2006 Incentive Compensation Plan
  15




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(f) Retirement Plans
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    797
    
    
    $
    886
    
    
    $
    1,594
    
    
    $
    1,772Interest cost
    
    
    849
    
    
    
    779
    
    
    
    1,698
    
    
    
    1,558Expected return on plan assets
    
    
    (799
    )
    
    
    (736
    )
    
    
    (1,598
    )
    
    
    (1,472
    )Restructuring costs (See Note 3)
    
    
    772
    
    
    
    
    
    
    
    772
    
    
    
    Net periodic benefit cost
    
    $
    1,619
    
    
    $
    929
    
    
    $
    2,466
    
    
    $
    1,858
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    103
    
    
    $
    92
    
    
    $
    206
    
    
    $
    184Interest cost
    
    
    137
    
    
    
    119
    
    
    
    274
    
    
    
    238Recognized actuarial gain
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )Restructuring costs (See Note 3)
    
    
    1,401
    
    
    
    
    
    
    
    1,401
    
    
    
    Net periodic benefit cost
    
    $
    1,641
    
    
    $
    210
    
    
    $
    1,881
    
    
    $
    420
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(11) Industry Segment and Foreign Operations
   Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Net Revenues:United States
    
    $
    105,691
    
    
    $
    115,132
    
    
    $
    190,999
    
    
    $
    198,694Germany
    
    
    30,102
    
    
    
    25,602
    
    
    
    54,395
    
    
    
    47,314Japan
    
    
    15,041
    
    
    
    13,385
    
    
    
    31,148
    
    
    
    27,692Netherlands
    
    
    14,340
    
    
    
    12,954
    
    
    
    28,663
    
    
    
    23,072Italy
    
    
    15,216
    
    
    
    13,404
    
    
    
    28,505
    
    
    
    25,531United Kingdom
    
    
    13,779
    
    
    
    16,303
    
    
    
    23,105
    
    
    
    23,217China
    
    
    12,199
    
    
    
    6,576
    
    
    
    21,122
    
    
    
    10,286Brazil
    
    
    7,089
    
    
    
    5,671
    
    
    
    14,322
    
    
    
    11,858Canada
    
    
    7,027
    
    
    
    6,841
    
    
    
    13,127
    
    
    
    12,685France
    
    
    5,729
    
    
    
    4,652
    
    
    
    12,722
    
    
    
    16,691Turkey
    
    
    5,896
    
    
    
    3,092
    
    
    
    8,673
    
    
    
    5,069Thailand
    
    
    4,704
    
    
    
    3,126
    
    
    
    8,383
    
    
    
    5,885Taiwan
    
    
    4,586
    
    
    
    5,249
    
    
    
    8,220
    
    
    
    8,119Belgium
    
    
    5,668
    
    
    
    1,503
    
    
    
    7,667
    
    
    
    3,012Argentina
    
    
    3,032
    
    
    
    3,080
    
    
    
    6,157
    
    
    
    5,913All other countries
    
    
    35,189
    
    
    
    32,381
    
    
    
    57,469
    
    
    
    51,113$
    285,288
    
    
    $
    268,951
    
    
    $
    514,677
    
    
    $
    476,151
 June 30,
    
    
    December 31,2006
    
    
    2005Long-lived Assets:United States
    
    $
    276,641
    
    
    $
    270,639France
    
    
    95,943
    
    
    
    91,593Brazil
    
    
    40,711
    
    
    
    30,008Germany
    
    
    28,481
    
    
    
    26,011Netherlands
    
    
    25,681
    
    
    
    23,732Japan
    
    
    3,576
    
    
    
    3,342All other countries
    
    
    13,206
    
    
    
    12,837$
    484,239
    
    
    
    458,162Less accumulated depreciation
    
    
    (85,241
    )
    
    
    (63,970
    )$
    398,998
    
    
    $
    394,192
 (12) Supplemental Guarantor Information
  17




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Balance Sheet
 As of June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    (135
    )
    
    $
    32,534
    
    
    $
    
    
    
    $
    32,399Receivables, net
    
    
    
    
    
    
    64,134
    
    
    
    110,033
    
    
    
    (10,122
    )
    
    
    164,045Inventories of products
    
    
    
    
    
    
    142,202
    
    
    
    114,333
    
    
    
    (7,899
    )
    
    
    248,636Inventories of materials and supplies
    
    
    
    
    
    
    6,151
    
    
    
    3,737
    
    
    
    
    
    
    
    9,888Other current assets
    
    
    8,763
    
    
    
    414
    
    
    
    8,792
    
    
    
    
    
    
    
    17,969Deferred income taxes
    
    
    
    
    
    
    6,027
    
    
    
    (4,074
    )
    
    
    
    
    
    
    1,953Total current assets
    
    
    8,763
    
    
    
    218,793
    
    
    
    265,355
    
    
    
    (18,021
    )
    
    
    474,890Property, plant, and equipment, less
accumulated depreciation
    
    
    122,554
    
    
    
    171,379
    
    
    
    105,065
    
    
    
    
    
    
    
    398,998Identifiable intangible assets, less
accumulated amortization
    
    
    49,113
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    97,924Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    9,096
    
    
    
    
    
    
    
    9,909Deferred financing costs
    
    
    13,677
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,677Other long-term assets
    
    
    116,987
    
    
    
    331,484
    
    
    
    6,343
    
    
    
    (441,713
    )
    
    
    13,101Total assets
    
    $
    311,907
    
    
    $
    721,656
    
    
    $
    434,670
    
    
    $
    (459,734
    )
    
    $
    1,008,499Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,850Accounts payable  trade
    
    
    2,900
    
    
    
    32,213
    
    
    
    46,914
    
    
    
    
    
    
    
    82,027Other payables and accruals
    
    
    7,527
    
    
    
    16,902
    
    
    
    21,036
    
    
    
    
    
    
    
    45,465Due to (from) related parties
    
    
    
    
    
    
    3,603
    
    
    
    21,540
    
    
    
    (10,122
    )
    
    
    15,021Insurance note payable
    
    
    5,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,174Total current liabilities
    
    
    19,451
    
    
    
    52,718
    
    
    
    89,490
    
    
    
    (10,122
    )
    
    
    151,537Long-term debt, net of current portion
    
    
    580,188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580,188Deferred income taxes
    
    
    (17,320
    )
    
    
    47,399
    
    
    
    4,228
    
    
    
    
    
    
    
    34,307Long-term liabilities
    
    
    326,032
    
    
    
    32,985
    
    
    
    116,163
    
    
    
    (441,713
    )
    
    
    33,467Total liabilities
    
    
    908,351
    
    
    
    133,102
    
    
    
    209,881
    
    
    
    (451,835
    )
    
    
    799,499Commitments and contingencies (See Note 9)Members equity:Common equity
    
    
    (599,498
    )
    
    
    588,554
    
    
    
    215,405
    
    
    
    (7,899
    )
    
    
    196,562Accumulated other comprehensive income
    
    
    3,054
    
    
    
    
    
    
    
    9,384
    
    
    
    
    
    
    
    12,438Total members equity
    
    
    (596,444
    )
    
    
    588,554
    
    
    
    224,789
    
    
    
    (7,899
    )
    
    
    209,000Total liabilities and members equity
    
    $
    311,907
    
    
    $
    721,656
    
    
    $
    434,670
    
    
    $
    (459,734
    )
    
    $
    1,008,499
 
 (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. 18




---



##### Table of Contents



Balance Sheet
 As of December 31, 2005Guarantor
    
    
    Non-GuarantorIssuers(1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    54,941
    
    
    $
    45,993
    
    
    $
    
    
    
    $
    100,934Receivables, net
    
    
    
    
    
    
    45,048
    
    
    
    69,950
    
    
    
    (7,412
    )
    
    
    107,586Inventories of products
    
    
    
    
    
    
    109,691
    
    
    
    88,697
    
    
    
    (5,793
    )
    
    
    192,595Inventories of materials and supplies
    
    
    
    
    
    
    5,935
    
    
    
    3,401
    
    
    
    
    
    
    
    9,336Other current assets
    
    
    4,729
    
    
    
    9,565
    
    
    
    9,217
    
    
    
    
    
    
    
    23,511Deferred income taxes
    
    
    
    
    
    
    6,027
    
    
    
    (4,074
    )
    
    
    
    
    
    
    1,953Total current assets
    
    
    4,729
    
    
    
    231,207
    
    
    
    213,184
    
    
    
    (13,205
    )
    
    
    435,915Property, plant, and equipment, less
accumulated depreciation
    
    
    127,589
    
    
    
    173,900
    
    
    
    92,703
    
    
    
    
    
    
    
    394,192Identifiable intangible assets, less accumulated amortization
    
    
    53,037
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    101,848Investment in consolidated
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    9,729
    
    
    
    
    
    
    
    10,542Deferred financing costs
    
    
    12,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,711Other long-term assets
    
    
    105,385
    
    
    
    290,963
    
    
    
    4,127
    
    
    
    (390,870
    )
    
    
    9,605Total assets
    
    $
    304,264
    
    
    $
    696,070
    
    
    $
    368,554
    
    
    $
    (404,075
    )
    
    $
    964,813Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    30,570
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30,570Accounts payable  trade
    
    
    2,900
    
    
    
    26,726
    
    
    
    34,719
    
    
    
    
    
    
    
    64,345Other payables and accruals
    
    
    8,069
    
    
    
    21,448
    
    
    
    19,241
    
    
    
    
    
    
    
    48,758Due to (from) related parties
    
    
    
    
    
    
    1,835
    
    
    
    18,696
    
    
    
    (7,412
    )
    
    
    13,119Total current liabilities
    
    
    41,539
    
    
    
    50,009
    
    
    
    72,656
    
    
    
    (7,412
    )
    
    
    156,792Long-term debt, net of current portion
    
    
    432,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    432,093Deferred income taxes
    
    
    (9,055
    )
    
    
    42,764
    
    
    
    301
    
    
    
    
    
    
    
    34,010Long-term liabilities
    
    
    285,485
    
    
    
    28,950
    
    
    
    106,148
    
    
    
    (390,870
    )
    
    
    29,713Total liabilities
    
    
    750,062
    
    
    
    121,723
    
    
    
    179,105
    
    
    
    (398,282
    )
    
    
    652,608Commitments and contingencies (See Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    (448,685
    )
    
    
    574,347
    
    
    
    195,028
    
    
    
    (5,793
    )
    
    
    314,897Accumulated other comprehensive income (loss)
    
    
    2,887
    
    
    
    
    
    
    
    (5,579
    )
    
    
    
    
    
    
    (2,692
    )Total members equity
    
    
    (445,798
    )
    
    
    574,347
    
    
    
    189,449
    
    
    
    (5,793
    )
    
    
    312,205Total liabilities and members equity
    
    $
    304,264
    
    
    $
    696,070
    
    
    $
    368,554
    
    
    $
    (404,075
    )
    
    $
    964,813
 
 (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. 19




---



##### Table of Contents



Statement of Operations
 Three Months Ended June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    144,231
    
    
    $
    179,173
    
    
    $
    (47,407
    )
    
    $
    275,997Other
    
    
    
    
    
    
    135
    
    
    
    9,156
    
    
    
    
    
    
    
    9,291Total revenues
    
    
    
    
    
    
    144,366
    
    
    
    188,329
    
    
    
    (47,407
    )
    
    
    285,288Costs and expenses:Cost of goods sold
    
    
    (324
    )
    
    
    122,256
    
    
    
    158,263
    
    
    
    (47,407
    )
    
    
    232,788Gross profit
    
    
    324
    
    
    
    22,110
    
    
    
    30,066
    
    
    
    
    
    
    
    52,500Research and development expenses
    
    
    
    
    
    
    3,445
    
    
    
    3,680
    
    
    
    
    
    
    
    7,125Selling, general, and administrative expenses
    
    
    
    
    
    
    12,636
    
    
    
    7,448
    
    
    
    
    
    
    
    20,084Depreciation and amortization
    
    
    4,479
    
    
    
    4,548
    
    
    
    1,947
    
    
    
    
    
    
    
    10,974(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )Interest expense (income)
    
    
    11,070
    
    
    
    (2,260
    )
    
    
    1,334
    
    
    
    
    
    
    
    10,144Income (loss) before income taxes
    
    
    (15,225
    )
    
    
    3,741
    
    
    
    15,791
    
    
    
    
    
    
    
    4,307Income tax (provision) benefit
    
    
    3,781
    
    
    
    (807
    )
    
    
    (3,857
    )
    
    
    
    
    
    
    (883
    )Net income (loss)
    
    $
    (11,444
    )
    
    $
    2,934
    
    
    $
    11,934
    
    
    $
    
    
    
    $
    3,424
 Three Months Ended June 30, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    147,082
    
    
    $
    162,040
    
    
    $
    (47,732
    )
    
    $
    261,390Other
    
    
    
    
    
    
    
    
    
    
    7,561
    
    
    
    
    
    
    
    7,561Total revenues
    
    
    
    
    
    
    147,082
    
    
    
    169,601
    
    
    
    (47,732
    )
    
    
    268,951Costs and expenses:Cost of goods sold
    
    
    3,835
    
    
    
    109,082
    
    
    
    137,651
    
    
    
    (47,732
    )
    
    
    202,836Gross profit
    
    
    (3,835
    )
    
    
    38,000
    
    
    
    31,950
    
    
    
    
    
    
    
    66,115Research and development expenses
    
    
    
    
    
    
    3,475
    
    
    
    3,328
    
    
    
    
    
    
    
    6,803Selling, general, and administrative expenses
    
    
    
    
    
    
    11,441
    
    
    
    6,049
    
    
    
    
    
    
    
    17,490Depreciation and amortization
    
    
    4,595
    
    
    
    4,640
    
    
    
    1,995
    
    
    
    
    
    
    
    11,230(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (311
    )
    
    
    
    
    
    
    (311
    )Interest expense (income)
    
    
    9,072
    
    
    
    (1,732
    )
    
    
    1,317
    
    
    
    
    
    
    
    8,657Income (loss) before income taxes
    
    
    (17,502
    )
    
    
    20,176
    
    
    
    19,572
    
    
    
    
    
    
    
    22,246Income tax (provision) benefit
    
    
    4,697
    
    
    
    (5,442
    )
    
    
    (5,282
    )
    
    
    
    
    
    
    (6,027
    )Net income (loss)
    
    $
    (12,805
    )
    
    $
    14,734
    
    
    $
    14,290
    
    
    $
    
    
    
    $
    16,219
 
 (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. 20




---



##### Table of Contents



Statement of Operations
 Six Months Ended June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    265,745
    
    
    $
    326,449
    
    
    $
    (95,411
    )
    
    $
    496,783Other
    
    
    
    
    
    
    135
    
    
    
    17,759
    
    
    
    
    
    
    
    17,894Total revenues
    
    
    
    
    
    
    265,880
    
    
    
    344,208
    
    
    
    (95,411
    )
    
    
    514,677Costs and expenses:Cost of goods sold
    
    
    2,106
    
    
    
    213,891
    
    
    
    289,146
    
    
    
    (95,411
    )
    
    
    409,732Gross profit
    
    
    (2,106
    )
    
    
    51,989
    
    
    
    55,062
    
    
    
    
    
    
    
    104,945Research and development expenses
    
    
    
    
    
    
    6,615
    
    
    
    6,451
    
    
    
    
    
    
    
    13,066Selling, general, and administrative expenses
    
    
    
    
    
    
    23,243
    
    
    
    14,745
    
    
    
    
    
    
    
    37,988Depreciation and amortization
    
    
    8,958
    
    
    
    9,110
    
    
    
    3,946
    
    
    
    
    
    
    
    22,014(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (440
    )
    
    
    
    
    
    
    (440
    )Interest expense (income)
    
    
    20,707
    
    
    
    (4,570
    )
    
    
    2,432
    
    
    
    
    
    
    
    18,569Income (loss) before income taxes
    
    
    (31,771
    )
    
    
    17,591
    
    
    
    27,928
    
    
    
    
    
    
    
    13,748Income tax (provision) benefit
    
    
    8,354
    
    
    
    (4,635
    )
    
    
    (7,548
    )
    
    
    
    
    
    
    (3,829
    )Net income (loss)
    
    $
    (23,417
    )
    
    $
    12,956
    
    
    $
    20,380
    
    
    $
    
    
    
    $
    9,919
 Six Months Ended June 30, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    255,710
    
    
    $
    287,004
    
    
    $
    (79,393
    )
    
    $
    463,321Other
    
    
    
    
    
    
    
    
    
    
    12,830
    
    
    
    
    
    
    
    12,830Total revenues
    
    
    
    
    
    
    255,710
    
    
    
    299,834
    
    
    
    (79,393
    )
    
    
    467,151Costs and expenses:Cost of goods sold
    
    
    5,946
    
    
    
    189,101
    
    
    
    244,546
    
    
    
    (79,393
    )
    
    
    360,200Gross profit
    
    
    (5,946
    )
    
    
    66,609
    
    
    
    55,288
    
    
    
    
    
    
    
    115,951Research and development expenses
    
    
    
    
    
    
    6,346
    
    
    
    6,454
    
    
    
    
    
    
    
    12,800Selling, general, and administrative expenses
    
    
    
    
    
    
    22,573
    
    
    
    12,989
    
    
    
    
    
    
    
    35,562Depreciation and amortization
    
    
    8,958
    
    
    
    9,242
    
    
    
    4,012
    
    
    
    
    
    
    
    22,212(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (868
    )
    
    
    
    
    
    
    (868
    )Interest expense (income)
    
    
    17,974
    
    
    
    (3,401
    )
    
    
    2,577
    
    
    
    
    
    
    
    17,150Income (loss) before income taxes
    
    
    (32,878
    )
    
    
    31,849
    
    
    
    30,124
    
    
    
    
    
    
    
    29,095Income tax (provision) benefit
    
    
    8,951
    
    
    
    (8,671
    )
    
    
    (8,201
    )
    
    
    
    
    
    
    (7,921
    )Net income (loss)
    
    $
    (23,927
    )
    
    $
    23,178
    
    
    $
    21,923
    
    
    $
    
    
    
    $
    21,174
 
 (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. 21




---



##### Table of Contents



Statement of Cash Flows
 Six Months Ended June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (45,651
    )
    
    $
    (7,841
    )
    
    $
    10,855
    
    
    $
    
    
    
    $
    (42,637
    )Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (6,689
    )
    
    
    (10,806
    )
    
    
    
    
    
    
    (17,495
    )Net cash used in investing activities
    
    
    
    
    
    
    (6,689
    )
    
    
    (10,806
    )
    
    
    
    
    
    
    (17,495
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,008Repayment of debt
    
    
    (1,633
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,633
    )Cash dividend to parent
    
    
    (129,503
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129,503
    )Deferred financing costs
    
    
    (2,237
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,237
    )Net proceeds from insurance note payable
    
    
    5,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,174Proceeds from (payments on) intercompany loans
    
    
    50,842
    
    
    
    (40,546
    )
    
    
    (10,296
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    45,651
    
    
    
    (40,546
    )
    
    
    (10,296
    )
    
    
    
    
    
    
    (5,191
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (3,212
    )
    
    
    
    
    
    
    (3,212
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (55,076
    )
    
    
    (13,459
    )
    
    
    
    
    
    
    (68,535
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    54,941
    
    
    
    45,993
    
    
    
    
    
    
    
    100,934Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    (135
    )
    
    $
    32,534
    
    
    $
    
    
    
    $
    32,399
 Six Months Ended June 30, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (20,865
    )
    
    $
    12,877
    
    
    $
    (20,723
    )
    
    $
    
    
    
    $
    (28,711
    )Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (2,792
    )
    
    
    (1,377
    )
    
    
    
    
    
    
    (4,169
    )Net cash used in investing activities
    
    
    
    
    
    
    (2,792
    )
    
    
    (1,377
    )
    
    
    
    
    
    
    (4,169
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (1,340
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,340
    )Net proceeds from insurance note payable
    
    
    3,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,449Proceeds from (payments on) intercompany loans
    
    
    18,756
    
    
    
    (24,155
    )
    
    
    5,399
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    20,865
    
    
    
    (24,155
    )
    
    
    5,399
    
    
    
    
    
    
    
    2,109Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    2,782
    
    
    
    
    
    
    
    2,782Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (14,070
    )
    
    
    (13,919
    )
    
    
    
    
    
    
    (27,989
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    15,981
    
    
    
    30,376
    
    
    
    
    
    
    
    46,357Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    1,911
    
    
    $
    16,457
    
    
    $
    
    
    
    $
    18,368
 
 (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. 22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   ® ® ® ®
 Recent Developments
 Restructuring Actions
  
    
    We recently announced a plan at our Belpre, Ohio facility to restructure our work
processes to improve quality, capacity and productivity. As a result, we are reducing
the number of employees through a voluntary separation program. We will also reduce our
spending on outside contractors at the site. We recorded expenses of approximately $5.0
million associated with this restructuring during the three months ended June 30, 2006.
    
    We reorganized our office in Tokyo, Japan which resulted in a workforce reduction.
We recorded expenses associated with employee separations during the three and six months ended June 30, 2006 of approximately, $0.5 million and $1.0 million, respectively.
    
    In the United Kingdom, we closed our business office in London shifting
responsibilities to personnel in other locations, and took a reduction in work force
with expenses of approximately $0.1 million recognized during the three months ended
June 30, 2006.
    
    We plan to shut down our research laboratory in Louvain-la-Neuve, Belgium and
consolidate these activities in other locations during early 2007. Our intent is to
maintain our outstanding research capability while improving productivity.
 23




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##### Table of Contents



Customers should see no impact from this change. We gave notification to the lessor of
the facility of our planned lease termination and incurred an early termination penalty
of approximately $0.6 million during the three months ended June 30, 2006.
  New Kraton Logo and Brand
    New Polyisoprene Latex Plant, Paulinia, Brazil
  Monomer Contracts
   Asia Pacific Expansion Plans
   24




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##### Table of Contents



New Innovations
  
    
    In our Compounding Channels market, we announced in April 2006 the availability of two
additional grades which allow compounders to formulate compounds with higher flow, better
transparency, enhanced overmold adhesion, yet retain the same strength and service
temperature as compounds made with the industry standard Kraton G1651 polymer.
    
    In our Adhesive, Sealants and Coatings market, we announced in May 2006 the availability
of new technology created for hot melt butyl sealant manufacturers which allows for an
increase in the range of product service temperatures, as well as the potential for
expanded use into new markets, including insulated glass windows for warmer climates.
    
    In our Personal Care market, we announced in June 2006 a breakthrough in bicomponent
fiber technology. Our advancement in bicomponent fiber enables for the first time the
combination of elastic spunbond grades offering biaxial stretch, with the well-known and
expected strength of a Kraton SBC. These spunbond grades require no additional drying,
offer excellent process stability, and can be spun at world-class speeds.
 European Capacity Expansions
  Amendment to Kratons Senior Secured Credit Facility
  25




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##### Table of Contents



Staff
  Change in Board of Directors
  Critical Accounting Policies
  Revenue Recognition
   Inventories
  Property, Plant and Equipment
   26




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##### Table of Contents



Income Taxes
  Factors Affecting Our Results of Operations
 Raw Materials
      Seasonality
  27




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##### Table of Contents



Economic and Market Conditions
  International Operations and Currency Fluctuations
   U.S. $ per Euro
    
    U.S. $ per 10,000 Japanese Yen
    
    U.S. $ per Brazilian RealAverage
    
    Period End
    
    Average
    
    Period End
    
    Average
    
    Period EndQuarter Ended June 30, 2005
    
    
    1.259
    
    
    
    1.206
    
    
    
    93.02
    
    
    
    90.40
    
    
    
    0.402
    
    
    
    0.425Quarter Ended June 30, 2006
    
    
    1.255
    
    
    
    1.255
    
    
    
    87.33
    
    
    
    86.78
    
    
    
    0.457
    
    
    
    0.462Six Months Ended June 30, 2005
    
    
    1.286
    
    
    
    1.206
    
    
    
    94.38
    
    
    
    90.40
    
    
    
    0.389
    
    
    
    0.425Six Months Ended June 30, 2006
    
    
    1.228
    
    
    
    1.255
    
    
    
    86.41
    
    
    
    86.78
    
    
    
    0.456
    
    
    
    0.462
   28




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##### Table of Contents



Results of Operations
 Three Months Ended June 30, 2006, Compared to Three Months Ended June 30, 2005
  Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Revenues:Sales
    
    $
    275,997
    
    
    $
    261,390Other
    
    
    9,291
    
    
    
    7,561Total revenues
    
    
    285,288
    
    
    
    268,951Costs and expenses:Cost of goods sold
    
    
    232,788
    
    
    
    202,836Gross profit
    
    
    52,500
    
    
    
    66,115Research and development expenses
    
    
    7,125
    
    
    
    6,803Selling, general and administrative expenses
    
    
    20,084
    
    
    
    17,490Depreciation and amortization of identifiable intangibles
    
    
    10,974
    
    
    
    11,230(Earnings) in joint venture
    
    
    (134
    )
    
    
    (311
    )Interest, net
    
    
    10,144
    
    
    
    8,657Income before income taxes
    
    
    4,307
    
    
    
    22,246Income tax provision
    
    
    (883
    )
    
    
    (6,027
    )Net income
    
    $
    3,424
    
    
    $
    16,219
  Three Months Ended
    
    
    Three Months EndedJune 30, 2006
    
    
    June 30, 2005Revenues:Sales
    
    
    96.7
    %
    
    
    97.2
    %Other
    
    
    3.3
    
    
    
    2.8Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    81.6
    
    
    
    75.4Gross profit
    
    
    18.4
    
    
    
    24.6Research and development expenses
    
    
    2.5
    
    
    
    2.5Selling, general and administrative expenses
    
    
    7.0
    
    
    
    6.5Depreciation and amortization of identifiable intangibles
    
    
    3.8
    
    
    
    4.2(Earnings) in joint venture
    
    
    (0.0
    )
    
    
    (0.1
    )Interest, net
    
    
    3.6
    
    
    
    3.2Income before income taxes
    
    
    1.5
    
    
    
    8.3Income tax provision
    
    
    (0.3
    )
    
    
    (2.2
    )Net income
    
    
    1.2
    %
    
    
    6.0
    %
 Total Revenues
  Sales
 29




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##### Table of Contents



Other revenue
 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
 30




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##### Table of Contents



Interest expense 
 Income Tax Provision
 Income tax provision 
 Net Income
 Net income 
 Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005
  Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Revenues:Sales
    
    $
    496,783
    
    
    $
    463,321Other
    
    
    17,894
    
    
    
    12,830Total revenues
    
    
    514,677
    
    
    
    476,151Costs and expenses:Cost of goods sold
    
    
    409,732
    
    
    
    360,200Gross profit
    
    
    104,945
    
    
    
    115,951Research and development expenses
    
    
    13,066
    
    
    
    12,800Selling, general and administrative expenses
    
    
    37,988
    
    
    
    35,562Depreciation and amortization of identifiable intangibles
    
    
    22,014
    
    
    
    22,212(Earnings) in joint venture
    
    
    (440
    )
    
    
    (868
    )Interest, net
    
    
    18,569
    
    
    
    17,150Income before income taxes
    
    
    13,748
    
    
    
    29,095Income tax provision
    
    
    (3,829
    )
    
    
    (7,921
    )Net income
    
    $
    9,919
    
    
    $
    21,174
 31




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##### Table of Contents



Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005Revenues:Sales
    
    
    96.5
    %
    
    
    97.3
    %Other
    
    
    3.5
    
    
    
    2.7Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    79.6
    
    
    
    75.6Gross profit
    
    
    20.4
    
    
    
    24.4Research and development expenses
    
    
    2.5
    
    
    
    2.7Selling, general and administrative expenses
    
    
    7.4
    
    
    
    7.5Depreciation and amortization of identifiable intangibles
    
    
    4.3
    
    
    
    4.7(Earnings) in joint venture
    
    
    (0.1
    )
    
    
    (0.2
    )Interest, net
    
    
    3.6
    
    
    
    3.6Income before income taxes
    
    
    2.7
    
    
    
    6.1Income tax provision
    
    
    (0.8
    )
    
    
    (1.7
    )Net income
    
    
    1.9
    %
    
    
    4.4
    %
 Revenues
  Sales
   Other revenue
 32




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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
 Interest expense 
 Income Tax Provision
 Income tax provision 
 33




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##### Table of Contents



Net Income
 Net income 
 Liquidity and Capital Resources
 Operating activities.
 Investing activities
 Financing activities.
 Sources of liquidity.
   Capital expenditures.
  34




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##### Table of Contents



Description of Our Indebtedness
 Senior Secured Credit Facility
    Maturity.
 Interest.
 Mandatory Prepayments.
 35




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##### Table of Contents



Covenants.
   Kratons 8.125% Senior Subordinated Notes due 2014
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 Optional Redemption.
 Covenants.
   Other Contingencies
  36




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##### Table of Contents



Off-Balance Sheet Transactions
  Market Risk
  Interest rate risk.
 Foreign currency risk
 37




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##### Table of Contents



Commodity price risk
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II  Other Information
 
 ITEM 1. LEGAL PROCEEDINGS
   ITEM 1A.
  38




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##### Table of Contents



ITEM 2. UNRESTRICTED SALES OR EQUITY 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
  39




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##### Table of Contents



ITEM 6. EXHIBITS
 Exhibit Index
 4.1
    
    First Supplemental Indenture dated as of May 9, 2006, by
and among Polymer Holdings, Polymer Holdings Capital Corporation and
Wells Fargo Bank, N.A. (incorporated by reference from Exhibit 4.1 to
Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.1
    
    Amendment No. 3 to Credit and Guaranty Agreement dated
as of February 16, 2006, by and among Kraton, each of the
Guarantors listed on the signature pages attached thereto, the
Lenders, and UBS AG, Stamford Branch. (incorporated by reference from Exhibit 10.1 to Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.2
    
    Sales Contract dated April 25, 2006, between Kraton Polymers U.S. LLC and Shell Chemical LP.  (incorporated by reference from Exhibit 10.2 to Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.3
    
    Amendment No. 4 to Credit and Guaranty Agreement dated
as of May 12, 2006, by and among Kraton; Polymer Holdings and
certain subsidiary companies; Goldman Sachs Credit Partners L.P.; UBS
AG, Stamford Branch; Morgan Stanley Senior Funding Inc.; Credit
Suisse, Cayman Island Branch; and General Electric Capital
Corporation.  (incorporated by reference from Exhibit 10.3 to Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.4
    
    Joinder Agreement dated as of June 7, 2006, by and among Amegy Bank National Association,
Kraton, each of the guarantors listed on the signature pages thereto, and UBS AG, Stamford Branch.
(incorporated by reference from Exhibit 10.1 to Kratons Current Report on Form 8-K filed with the Commission on June 7, 2006)31.1
    
    Certification of Chief Executive Officer under Section 302 of
SarbanesOxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer under Section 302 of
SarbanesOxley Act of 2002 *32.1
    
    Certification Pursuant to Section 906 of SarbanesOxley
Act of 2002 ** Filed herewith.
 40




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##### Table of Contents



Signatures
  Kraton Polymers LLCDate: August 11, 2006
    /s/ George B. GregoryGeorge B. GregoryChief Executive Officer and President/s/ Raymond K. GubaRaymond K. GubaVice President and Chief Financial Officer 41




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##### Table of Contents



Exhibit Index
 4.1
    
    First Supplemental Indenture dated as of May 9, 2006, by
and among Polymer Holdings, Polymer Holdings Capital Corporation and
Wells Fargo Bank, N.A. (incorporated by reference from Exhibit 4.1 to
Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.1
    
    Amendment No. 3 to Credit and Guaranty Agreement dated
as of February 16, 2006, by and among Kraton, each of the
Guarantors listed on the signature pages attached thereto, the
Lenders, and UBS AG, Stamford Branch. (incorporated by reference from Exhibit 10.1 to Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.2
    
    Sales Contract dated April 25, 2006, between Kraton Polymers U.S. LLC and Shell Chemical LP.  (incorporated by reference from Exhibit 10.2 to Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.3
    
    Amendment No. 4 to Credit and Guaranty Agreement dated
as of May 12, 2006, by and among Kraton; Polymer Holdings and
certain subsidiary companies; Goldman Sachs Credit Partners L.P.; UBS
AG, Stamford Branch; Morgan Stanley Senior Funding Inc.; Credit
Suisse, Cayman Island Branch; and General Electric Capital
Corporation.  (incorporated by reference from Exhibit 10.3 to Kratons Quarterly Report on Form 10-Q filed with the Commission on May 12, 2006)10.4
    
    Joinder Agreement dated as of June 7, 2006, by and among Amegy Bank National Association,
Kraton, each of the guarantors listed on the signature pages thereto, and UBS AG, Stamford Branch.
(incorporated by reference from Exhibit 10.1 to Kratons Current Report on Form 8-K filed with the Commission on June 7, 2006)31.1
    
    Certification of Chief Executive Officer under Section 302 of
SarbanesOxley Act of 2002 *31.2
    
    Certification of Chief Financial Officer under Section 302 of
SarbanesOxley Act of 2002 *32.1
    
    Certification Pursuant to Section 906 of SarbanesOxley
Act of 2002 ** Filed herewith.
 42