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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 March 31, 2007
 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
(State or other jurisdiction of 
incorporation or organization)
    
    94-2805249
(I.R.S. Employer Identification No.)15710 John F. Kennedy Blvd. Suite 300
Houston, TX 77032
(Address of principal executive offices, 
including zip code)
    
    281-504-4700
(Registrants telephone number, including area code)
 o þ
 
 o o þ




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TABLE OF CONTENTS


PAGE  
 Part I  Financial InformationItem 1.
    
    Financial Statements and Accompanying NotesKraton Polymers LLC:Consolidated Balance Sheets  March 31, 2007 (Unaudited) and December 31, 2006
    
    
    4Consolidated Statements of Operations (Unaudited)  Three Months Ended March 31, 2007 and 2006
    
    
    5Consolidated Statements of Cash Flows (Unaudited)  Three Months Ended March 31, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    32Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Securityholders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits
    
    
    33Certification 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
 
 Consolidated Balance Sheets
March 31, 2007 and December 31, 2006
(In thousands of U.S. dollars)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    47,760
    
    
    $
    43,601Receivables, net of allowances of $2,169 and $2,157
    
    
    142,998
    
    
    
    135,937Inventories of products, net
    
    
    265,304
    
    
    
    256,785Inventories of materials and supplies, net
    
    
    11,522
    
    
    
    10,903Other current assets
    
    
    17,375
    
    
    
    13,308Deferred income taxes
    
    
    1,931
    
    
    
    1,931Total current assets
    
    
    486,890
    
    
    
    462,465Property, plant and equipment, less accumulated depreciation of $115,886 and $105,219
    
    
    400,070
    
    
    
    403,743Identifiable intangible assets, less accumulated amortization of $23,786 and $21,978
    
    
    84,823
    
    
    
    86,631Investment in unconsolidated joint venture
    
    
    9,683
    
    
    
    9,376Deferred financing costs
    
    
    12,504
    
    
    
    13,038Other long-term assets
    
    
    14,935
    
    
    
    13,900Total assets
    
    $
    1,008,905
    
    
    $
    989,153Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    3,850Accounts payable-trade
    
    
    100,498
    
    
    
    68,940Other payables and accruals
    
    
    49,070
    
    
    
    53,130Due to related parties
    
    
    8,989
    
    
    
    9,351Insurance note payable
    
    
    4,771
    
    
    
    739Total current liabilities
    
    
    167,178
    
    
    
    136,010Long-term debt, net of current portion
    
    
    577,300
    
    
    
    578,263Deferred income taxes
    
    
    38,490
    
    
    
    40,107Other long-term liabilities
    
    
    35,226
    
    
    
    35,032Total liabilities
    
    
    818,194
    
    
    
    789,412Commitments and contingencies (note 9)Members equity:Common equity
    
    
    171,889
    
    
    
    184,111Accumulated other comprehensive income
    
    
    18,822
    
    
    
    15,630Total members equity
    
    
    190,711
    
    
    
    199,741Total liabilities and members equity
    
    $
    1,008,905
    
    
    $
    989,153
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Kraton Polymers LLC
 
 Consolidated Statements of Operations
Three Months Ended March 31, 2007 and 2006
(in thousands of U.S. dollars)
(Unaudited)
 March 31, 2007
    
    
    March 31, 2006RevenuesSales
    
    $
    240,502
    
    
    $
    220,786Other
    
    
    6,324
    
    
    
    8,603Total revenues
    
    
    246,826
    
    
    
    229,389Costs and
expense:Costs of goods sold
    
    
    214,501
    
    
    
    176,944Gross profit
    
    
    32,325
    
    
    
    52,445Research and development expenses
    
    
    6,523
    
    
    
    5,941Selling, general, and administrative expenses
    
    
    17,009
    
    
    
    17,904Depreciation and amortization of identifiable intangibles
    
    
    12,050
    
    
    
    11,040Earnings in joint venture
    
    
    (230
    )
    
    
    (306
    )Interest
Expense, net
    
    
    10,730
    
    
    
    8,425(Loss) income before income taxes
    
    
    (13,757
    )
    
    
    9,441Income tax benefit (provision)
    
    
    561
    
    
    
    (2,946
    )Net (loss) income
    
    $
    (13,196
    )
    
    $
    6,495
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Kraton Polymers LLC
 
 Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and 2006
(in thousands of U.S. dollars)
(Unaudited)
 March 31,
    
    
    March 31,2007
    
    
    2006Cash flows provided by (used in) operating activities:Net (loss) income
    
    $
    (13,196
    )
    
    $
    6,495Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of identifiable intangibles
    
    
    12,050
    
    
    
    11,040Amortization of deferred financing costs
    
    
    534
    
    
    
    562Loss on disposal of fixed assets
    
    
    193
    
    
    
    34(Undistributed) distributed earnings in joint venture
    
    
    (230
    )
    
    
    959Deferred tax (benefit) provision
    
    
    (1,361
    )
    
    
    1,465Non-cash
compensation related to equity awards
    
    
    620
    
    
    
    617Decrease (increase) in working capital:Accounts receivable
    
    
    (5,732
    )
    
    
    (22,696
    )Due to related party
    
    
    (335
    )
    
    
    1,726Inventories of products, materials and supplies
    
    
    (6,600
    )
    
    
    (43,074
    )Other assets
    
    
    (5,641
    )
    
    
    4,751Accounts payable-trade, other payables and accruals, and long-term liabilities
    
    
    26,133
    
    
    
    4,684Net cash provided by (used in) operating activities
    
    
    6,435
    
    
    
    (33,437
    )Cash flows (used in) provided by investing activities:Purchase of property, plant and equipment
    
    
    (4,704
    )
    
    
    (6,154
    )Proceeds from sale of property, plant and equipment
    
    
    17
    
    
    
    Net cash used in investing activities
    
    
    (4,687
    )
    
    
    (6,154
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (963
    )
    
    
    (670
    )Net proceeds from insurance note payable
    
    
    4,032
    
    
    
    7,392Net cash provided by financing activities
    
    
    3,069
    
    
    
    6,722Effect of exchange rate differences on cash
    
    
    (658
    )
    
    
    (1,673
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,159
    
    
    
    (34,542
    )Cash and cash equivalents, beginning of period
    
    
    43,601
    
    
    
    100,934Cash and cash equivalents, end of period
    
    $
    47,760
    
    
    $
    66,392Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of refunds received
    
    $
    1,177
    
    
    $
    814Cash paid during the period for interest
    
    
    10,087
    
    
    
    12,769
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Kraton Polymers LLC
 
 Notes to Consolidated Financial Statements
(Unaudited)
 (1) Summary of Significant Accounting Policies
 (a) Organization and Description of Business
   (b) Basis of Presentation
     (c) Recently Issued Accounting Standards
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(2) Share-Based Compensation
 Share-Based Payment, ,
  WeightedNumber
    
    
    Averageof
    
    
    ExerciseOptions
    
    
    PriceOutstanding at December 31, 2006
    
    
    15,368
    
    
    $
    1.00Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (111
    )
    
    
    1.00Outstanding at March 31, 2007
    
    
    15,257
    
    
    $
    1.00
 (3) Restructuring Activities
    Selling, general and administrative
    
    
    
    
    
    
    
    
    
    $
    479
  Severance
    
    
    Exit ActivityCosts (1)
    
    
    Costs
    
    
    TotalReserve balance at December 31, 2006
    
    $
    2,042
    
    
    $
    935
    
    
    $
    2,977Cash payments
    
    
    (1,090
    )
    
    
    (54
    )
    
    
    (1,144
    )Reserve balance at March 31, 2007
    
    $
    952
    
    
    $
    881
    
    
    $
    1,833
 (1)
    
    Excludes additional pension and other postretirement benefits expense of approximately $2.3
million.
 8




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(4) Detail of Certain Balance Sheet Accounts
  March 31,
    
    
    December 31,2007
    
    
    2006Inventories of products, net:Finished products
    
    $
    216,931
    
    
    $
    211,120Work in progress
    
    
    3,793
    
    
    
    4,098Raw materials
    
    
    44,580
    
    
    
    41,567$
    265,304
    
    
    $
    256,785Other payables and accruals:Employee related
    
    $
    8,148
    
    
    $
    14,979Interest
    
    
    7,992
    
    
    
    7,604Property and other taxes
    
    
    5,229
    
    
    
    4,102Customer rebates
    
    
    3,313
    
    
    
    3,089Income taxes payable
    
    
    8,306
    
    
    
    8,504Other
    
    
    16,082
    
    
    
    14,852$
    49,070
    
    
    $
    53,130
 (5) Comprehensive Income (Loss)
  Three Months EndedMarch 312007
    
    
    2006Net (loss) income
    
    $
    (13,196
    )
    
    $
    6,495Foreign currency adjustments
    
    
    3,639
    
    
    
    6,273Unrealized (loss) gain on interest rate swaps, net of tax
    
    
    (447
    )
    
    
    205Total comprehensive (loss) income
    
    $
    (10,004
    )
    
    $
    12,973
  March 31,
    
    
    December 31,2007
    
    
    2006Foreign currency adjustments
    
    $
    18,601
    
    
    $
    14,962Unrealized gain on interest rate swaps, net of tax
    
    
    1,416
    
    
    
    1,863Pension adjustment, net of tax
    
    
    (1,195
    )
    
    
    (1,195
    )Total accumulated other comprehensive income
    
    $
    18,822
    
    
    $
    15,630
 (6) Long-Term Debt
  March 31,
    
    
    December 31,2007
    
    
    2006Senior Secured Credit Facilities:Term loans
    
    $
    381,150
    
    
    $
    382,113Revolver
    
    
    
    
    
    
    8.125% Notes
    
    
    200,000
    
    
    
    200,000Total debt
    
    
    581,150
    
    
    
    582,113Less current portion of long-term debt
    
    
    3,850
    
    
    
    3,850Total long-term debt
    
    $
    577,300
    
    
    $
    578,263
 (a) Senior Secured Credit Facilities
  9




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Maturity
  Interest
  Mandatory Prepayments
  10




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Covenants
    (b) Senior Subordinated Notes Due January 15, 2014
  Interest
  Optional Redemption
   Covenants
    (7) Financial Instruments
 (a) Interest Rate Swap Agreements
  11




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(b) Fair Value of Financial Instruments
  March 31, 2007Carrying Value
    
    Fair ValueTerm loans
    
    $
    381,150
    
    
    $
    381,1508.125% Notes
    
    
    200,000
    
    
    
    200,000
 December 31, 2006Carrying Value
    
    Fair ValueTerm loans
    
    $
    382,113
    
    
    $
    382,1138.125% Notes
    
    
    200,000
    
    
    
    200,000
  (8) Income Taxes
   Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109
  12




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(9) Commitments and Contingencies
 Legal Proceedings
  (10) Employee Benefits
 (a) Investment in Kraton Management LLC
  (b) TJ Chemical Holdings LLC 2004 Option Plan
     13




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(c) Other Equity Awards
  (d) Kraton Polymers LLC Executive Deferred Compensation Plan
  (e) 2006 Incentive Compensation Plan
  14




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(f) Retirement Plans
  Three Months EndedMarch 312007
    
    
    2006Components of net periodic benefit cost:Service cost
    
    $
    644
    
    
    $
    797Interest cost
    
    
    969
    
    
    
    849Expected return on plan assets
    
    
    (908
    )
    
    
    (799
    )Net periodic benefit cost
    
    $
    705
    
    
    $
    847
  Three Months EndedMarch 312007
    
    
    2006Components of net periodic benefit cost:Service cost
    
    $
    88
    
    
    $
    103Interest cost
    
    
    187
    
    
    
    137Recognized actuarial gain
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    275
    
    
    $
    240
 15




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(11) Industry Segment and Foreign Operations
   Three Months Ended March 31,2007
    
    
    2006Net Revenues:United States
    
    $
    86,581
    
    
    $
    85,309Germany
    
    
    33,954
    
    
    
    24,293Japan
    
    
    12,511
    
    
    
    16,107Netherlands
    
    
    11,942
    
    
    
    14,323Italy
    
    
    11,915
    
    
    
    13,289United Kingdom
    
    
    9,362
    
    
    
    9,326Brazil
    
    
    8,936
    
    
    
    7,233China
    
    
    8,033
    
    
    
    8,923Belgium
    
    
    7,540
    
    
    
    1,999France
    
    
    5,738
    
    
    
    6,993Taiwan
    
    
    5,269
    
    
    
    3,634Canada
    
    
    4,746
    
    
    
    6,100Thailand
    
    
    3,612
    
    
    
    3,679Argentina
    
    
    3,484
    
    
    
    3,125Turkey
    
    
    2,807
    
    
    
    2,777Sweden
    
    
    2,699
    
    
    
    2,124Mexico
    
    
    2,625
    
    
    
    1,968Denmark
    
    
    2,608
    
    
    
    1,311Australia
    
    
    2,475
    
    
    
    2,980All other countries
    
    
    19,989
    
    
    
    13,896$
    246,826
    
    
    $
    229,389
 March 31,
    
    
    December 31,2007
    
    
    2006Long-lived Assets:United States
    
    $
    284,164
    
    
    $
    283,171Germany
    
    
    33,884
    
    
    
    32,506Japan
    
    
    3,310
    
    
    
    3,225France
    
    
    101,582
    
    
    
    100,476Netherlands
    
    
    30,345
    
    
    
    29,436Brazil
    
    
    50,351
    
    
    
    48,485China
    
    
    521
    
    
    
    54All other countries
    
    
    11,799
    
    
    
    11,609$
    515,956
    
    
    $
    508,962
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(12) Supplemental Guarantor Information
  Balance Sheet
 As of March 31, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    13,305
    
    
    $
    34,455
    
    
    $
    
    
    
    $
    47,760Receivables, net
    
    
    5,424
    
    
    
    67,633
    
    
    
    94,209
    
    
    
    (24,268
    )
    
    
    142,998Inventories of products, net
    
    
    
    
    
    
    135,551
    
    
    
    133,885
    
    
    
    (4,132
    )
    
    
    265,304Inventories of materials and supplies
    
    
    
    
    
    
    6,797
    
    
    
    4,725
    
    
    
    
    
    
    
    11,522Other current assets
    
    
    7,076
    
    
    
    1,453
    
    
    
    8,846
    
    
    
    
    
    
    
    17,375Deferred income taxes
    
    
    
    
    
    
    8,665
    
    
    
    (6,734
    )
    
    
    
    
    
    
    1,931Total current assets
    
    $
    12,500
    
    
    $
    233,404
    
    
    
    269,386
    
    
    
    (28,400
    )
    
    
    486,890Property, plant and equipment, less accumulated
depreciation
    
    
    115,001
    
    
    
    165,663
    
    
    
    119,406
    
    
    
    
    
    
    
    400,070Identifiable intangible assets
    
    
    36,012
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    84,823Investment in unconsolidated joint venture
    
    
    813
    
    
    
    
    
    
    
    8,870
    
    
    
    
    
    
    
    9,683Deferred financing costs
    
    
    12,504
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,504Other long-term assets
    
    
    97,569
    
    
    
    352,114
    
    
    
    8,437
    
    
    
    (443,185
    )
    
    
    14,935Total assets
    
    $
    274,399
    
    
    $
    751,181
    
    
    $
    454,910
    
    
    $
    (471,585
    )
    
    $
    1,008,905Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,850Accounts payable-trade
    
    
    2,900
    
    
    
    41,516
    
    
    
    56,082
    
    
    
    
    
    
    
    100,498Other payables and accruals
    
    
    7,992
    
    
    
    12,628
    
    
    
    28,450
    
    
    
    
    
    
    
    49,070Due to (from) related parties
    
    
    
    
    
    
    6,554
    
    
    
    26,703
    
    
    
    (24,268
    )
    
    
    8,989Insurance note payable
    
    
    4,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,771Total current liabilities
    
    
    19,513
    
    
    
    60,698
    
    
    
    111,235
    
    
    
    (24,268
    )
    
    
    167,178Long-term debt, net of current portion
    
    
    577,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    577,300Deferred income taxes
    
    
    (48,995
    )
    
    
    77,308
    
    
    
    10,177
    
    
    
    
    
    
    
    38,490Long-term liabilities
    
    
    346,655
    
    
    
    34,341
    
    
    
    97,415
    
    
    
    (443,185
    )
    
    
    35,226Total liabilities
    
    
    894,473
    
    
    
    172,347
    
    
    
    218,827
    
    
    
    (467,453
    )
    
    
    818,194Commitments and contingencies (note 9)
Members equity:Common equity
    
    
    (621,490
    )
    
    
    580,029
    
    
    
    217,482
    
    
    
    (4,132
    )
    
    
    171,889Accumulated other comprehensive income
    
    
    1,416
    
    
    
    (1,195
    )
    
    
    18,601
    
    
    
    
    
    
    
    18,822Total members equity
    
    
    (620,074
    )
    
    
    578,834
    
    
    
    236,083
    
    
    
    (4,132
    )
    
    
    190,711Total liabilities and members equity
    
    $
    274,399
    
    
    $
    751,181
    
    
    $
    454,910
    
    
    $
    (471,585
    )
    
    $
    1,008,905
 
 (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. 17




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Balance Sheet
 As of December 31, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    13,850
    
    
    $
    29,751
    
    
    $
    
    
    
    $
    43,601Receivables, net
    
    
    3,509
    
    
    
    47,194
    
    
    
    97,259
    
    
    
    (12,025
    )
    
    
    135,937Inventories of products, net
    
    
    
    
    
    
    141,164
    
    
    
    119,514
    
    
    
    (3,893
    )
    
    
    256,785Inventories of materials and supplies
    
    
    
    
    
    
    6,615
    
    
    
    4,288
    
    
    
    
    
    
    
    10,903Other current assets
    
    
    3,659
    
    
    
    1,022
    
    
    
    8,627
    
    
    
    
    
    
    
    13,308Deferred income taxes
    
    
    
    
    
    
    8,665
    
    
    
    (6,734
    )
    
    
    
    
    
    
    1,931Total current assets
    
    
    7,168
    
    
    
    218,510
    
    
    
    252,705
    
    
    
    (15,918
    )
    
    
    462,465Property, plant and equipment, less
accumulated depreciation
    
    
    117,519
    
    
    
    169,727
    
    
    
    116,497
    
    
    
    
    
    
    
    403,743Identifiable intangible assets
    
    
    37,820
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    86,631Investment in unconsolidated joint venture
    
    
    813
    
    
    
    
    
    
    
    8,563
    
    
    
    
    
    
    
    9,376Deferred financing costs
    
    
    13,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,038Other long-term assets
    
    
    97,657
    
    
    
    338,894
    
    
    
    7,314
    
    
    
    (429,965
    )
    
    
    13,900Total assets
    
    $
    274,015
    
    
    $
    727,131
    
    
    $
    433,890
    
    
    $
    (445,883
    )
    
    $
    989,153Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,850Accounts payable-trade
    
    
    2,900
    
    
    
    23,432
    
    
    
    42,608
    
    
    
    
    
    
    
    68,940Other payables and accruals
    
    
    7,605
    
    
    
    16,415
    
    
    
    29,110
    
    
    
    
    
    
    
    53,130Due to (from) related parties
    
    
    
    
    
    
    704
    
    
    
    20,672
    
    
    
    (12,025
    )
    
    
    9,351Insurance note payable
    
    
    739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    739Total current liabilities
    
    
    15,094
    
    
    
    40,551
    
    
    
    92,390
    
    
    
    (12,025
    )
    
    
    136,010Long-term debt, net of current portion
    
    
    578,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,263Deferred income taxes
    
    
    (43,583
    )
    
    
    72,164
    
    
    
    11,526
    
    
    
    
    
    
    
    40,107Long-term liabilities
    
    
    333,435
    
    
    
    34,158
    
    
    
    97,404
    
    
    
    (429,965
    )
    
    
    35,032Total liabilities
    
    
    883,209
    
    
    
    146,873
    
    
    
    201,320
    
    
    
    (441,990
    )
    
    
    789,412Commitments and contingencies (note 9)Members equity:Common equity
    
    
    (611,057
    )
    
    
    581,453
    
    
    
    217,608
    
    
    
    (3,893
    )
    
    
    184,111Accumulated other comprehensive income
    
    
    1,863
    
    
    
    (1,195
    )
    
    
    14,962
    
    
    
    
    
    
    
    15,630Total members equity
    
    
    (609,194
    )
    
    
    580,258
    
    
    
    232,570
    
    
    
    (3,893
    )
    
    
    199,741Total liabilities and members equity
    
    $
    274,015
    
    
    $
    727,131
    
    
    $
    433,890
    
    
    $
    (445,883
    )
    
    $
    989,153
 
 (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




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##### Table of Contents



Statement of Operations
 Three Months Ended March 31, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    126,533
    
    
    $
    149,696
    
    
    $
    (35,727
    )
    
    $
    240,502Other
    
    
    
    
    
    
    41
    
    
    
    6,283
    
    
    
    
    
    
    
    6,324Total revenues
    
    
    
    
    
    
    126,574
    
    
    
    155,979
    
    
    
    (35,727
    )
    
    
    246,826Costs and expenses:Cost of goods sold
    
    
    239
    
    
    
    108,940
    
    
    
    141,049
    
    
    
    (35,727
    )
    
    
    214,501Gross profit
    
    
    (239
    )
    
    
    17,634
    
    
    
    14,930
    
    
    
    
    
    
    
    32,325Research and development expenses
    
    
    
    
    
    
    3,869
    
    
    
    2,654
    
    
    
    
    
    
    
    6,523Selling, general, and administrative expenses
    
    
    
    
    
    
    9,928
    
    
    
    7,081
    
    
    
    
    
    
    
    17,009Depreciation and amortization
    
    
    4,324
    
    
    
    5,149
    
    
    
    2,577
    
    
    
    
    
    
    
    12,050Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    (230
    )Interest expense (income)
    
    
    11,253
    
    
    
    (2,281
    )
    
    
    1,758
    
    
    
    
    
    
    
    10,730Income (loss) before income taxes
    
    
    (15,816
    )
    
    
    969
    
    
    
    1,090
    
    
    
    
    
    
    
    (13,757
    )Income tax benefit (provision)
    
    
    5,144
    
    
    
    (5,144
    )
    
    
    561
    
    
    
    
    
    
    
    561Net (loss) income
    
    $
    (10,672
    )
    
    $
    (4,175
    )
    
    $
    1,651
    
    
    $
    
    
    
    $
    (13,196
    )
 Three Months Ended March 31, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    121,514
    
    
    $
    147,276
    
    
    $
    (48,004
    )
    
    $
    220,786Other
    
    
    
    
    
    
    
    
    
    
    8,603
    
    
    
    
    
    
    
    8,603Total revenues
    
    
    
    
    
    
    121,514
    
    
    
    155,879
    
    
    
    (48,004
    )
    
    
    229,389Costs and expenses:Cost of goods sold
    
    
    2,430
    
    
    
    91,635
    
    
    
    130,883
    
    
    
    (48,004
    )
    
    
    176,944Gross profit
    
    
    (2,430
    )
    
    
    29,879
    
    
    
    24,996
    
    
    
    
    
    
    
    52,445Research and development expenses
    
    
    
    
    
    
    3,170
    
    
    
    2,771
    
    
    
    
    
    
    
    5,941Selling, general, and administrative expenses
    
    
    
    
    
    
    10,607
    
    
    
    7,297
    
    
    
    
    
    
    
    17,904Depreciation and amortization
    
    
    4,479
    
    
    
    4,562
    
    
    
    1,999
    
    
    
    
    
    
    
    11,040Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (306
    )
    
    
    
    
    
    
    (306
    )Interest expense (income)
    
    
    9,637
    
    
    
    (2,310
    )
    
    
    1,098
    
    
    
    
    
    
    
    8,425Income (loss) before income taxes
    
    
    (16,546
    )
    
    
    13,850
    
    
    
    12,137
    
    
    
    
    
    
    
    9,441Income tax benefit (provision)
    
    
    4,573
    
    
    
    (3,828
    )
    
    
    (3,691
    )
    
    
    
    
    
    
    (2,946
    )Net (loss) income
    
    $
    (11,973
    )
    
    $
    10,022
    
    
    $
    8,446
    
    
    $
    
    
    
    $
    6,495
 
 (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




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##### Table of Contents



Statement of Cash Flows
 Three Months Ended March 31, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (16,288
    )
    
    $
    13,759
    
    
    $
    8,964
    
    
    $
    
    
    
    $
    6,435Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (1,085
    )
    
    
    (3,602
    )
    
    
    
    
    
    
    (4,687
    )Net cash used in investing activities
    
    
    
    
    
    
    (1,085
    )
    
    
    (3,602
    )
    
    
    
    
    
    
    (4,687
    )Cash flows provided by (used in) financing activities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    (963
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (963
    )Proceeds from (payments on) intercompany loans
    
    
    13,219
    
    
    
    (13,219
    )
    
    
    
    
    
    
    
    
    
    
    Net proceeds from insurance note payable
    
    
    4,032
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,032Net cash provided by (used in) financing activities
    
    
    16,288
    
    
    
    (13,219
    )
    
    
    
    
    
    
    
    
    
    
    3,069Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (658
    )
    
    
    
    
    
    
    (658
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (545
    )
    
    
    4,704
    
    
    
    
    
    
    
    4,159Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    13,850
    
    
    
    29,751
    
    
    
    
    
    
    
    43,601Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    13,305
    
    
    $
    34,455
    
    
    $
    
    
    
    $
    47,760
 Three Months Ended March 31, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (46,515
    )
    
    $
    (2,412
    )
    
    $
    15,490
    
    
    $
    
    
    
    $
    (33,437
    )Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (2,332
    )
    
    
    (3,822
    )
    
    
    
    
    
    
    (6,154
    )Net cash used in investing activities
    
    
    
    
    
    
    (2,332
    )
    
    
    (3,822
    )
    
    
    
    
    
    
    (6,154
    )Cash flows provided by (used in) financing activities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    (670
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (670
    )Proceeds from (payments on) intercompany loans
    
    
    39,793
    
    
    
    (27,053
    )
    
    
    (12,740
    )
    
    
    
    
    
    
    Net proceeds from insurance note payable
    
    
    7,392
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,392Net cash provided by (used in) financing activities
    
    
    46,515
    
    
    
    (27,053
    )
    
    
    (12,740
    )
    
    
    
    
    
    
    6,722Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (1,673
    )
    
    
    
    
    
    
    (1,673
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (31,797
    )
    
    
    (2,745
    )
    
    
    
    
    
    
    (34,542
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    54,941
    
    
    
    45,993
    
    
    
    
    
    
    
    100,934Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    23,144
    
    
    $
    43,248
    
    
    $
    
    
    
    $
    66,392
 
 (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




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
    Recent Developments
 New Innovations
  
    
    In our Adhesives, Sealants and Coating end-use market, we
announced in March 2007 the commercial availability of a new
Kraton SIBS product, for use in hot melt adhesive labels. This new
polymer has been designed specifically for label applications and
offers economic and performance advantages over other conventional
products. This unique polymer exhibits outstanding adhesive
properties with an excellent balance of tack, peel, shear,
adhesion and resistance to flagging in even the most demanding
label applications.
    
    In our Packaging and Films end-use market, we announced in April
2007 the Food and Drug Administration (FDA) cleared Kratons
styrene-ethylene-butylene-styrene (SEBS) products for use in
fatty food applications. This product line has been cleared for
use in non-fatty food applications for over 30 years. All current
FDA grade Kraton SEBS products can now be used for all types of
food packaging in all conditions of use as defined by the FDA.
This will allow Kratons customers the flexibility of using our
SEBS polymers in direct contact with food containing free fats and
oils. Kraton SEBS products offer impact and puncture resistance,
clarity, flexibility and toughness which are unmatched in the
industry.
 21




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##### Table of Contents



Critical Accounting Policies
  Revenue Recognition
   Inventories
  Property, Plant and Equipment
   Pensions
 Employers Accounting for Pensions
 22




---



##### Table of Contents



Income Taxes
  Factors Affecting Our Results of Operations
 Raw Materials
      23




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##### Table of Contents



Seasonality
  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 March 31, 2007
    
    
    1.310
    
    
    
    1.333
    
    
    
    83.61
    
    
    
    84.71
    
    
    
    0.473
    
    
    
    0.488Quarter Ended March 31, 2006
    
    
    1.202
    
    
    
    1.207
    
    
    
    85.50
    
    
    
    85.13
    
    
    
    0.456
    
    
    
    0.460
   24




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##### Table of Contents



Results of Operations
 Three Months Ended March 31, 2007, Compared to Three Months Ended March 31, 2006
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Revenues:Sales
    
    $
    240,502
    
    
    $
    220,786Other
    
    
    6,324
    
    
    
    8,603Total revenues
    
    
    246,826
    
    
    
    229,389Costs and expenses:Cost of goods sold
    
    
    214,501
    
    
    
    176,944Gross profit
    
    
    32,325
    
    
    
    52,445Research and development expenses
    
    
    6,523
    
    
    
    5,941Selling, general and administrative expenses
    
    
    17,009
    
    
    
    17,904Depreciation and amortization of identifiable intangibles
    
    
    12,050
    
    
    
    11,040Earnings in joint venture
    
    
    (230
    )
    
    
    (306
    )Interest, net
    
    
    10,730
    
    
    
    8,425Income (loss) before income taxes
    
    
    (13,757
    )
    
    
    9,441Income tax benefit (provision)
    
    
    561
    
    
    
    (2,946
    )Net (loss) income
    
    $
    (13,196
    )
    
    $
    6,495
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Revenues:Sales
    
    
    97.4
    %
    
    
    96.2
    %Other
    
    
    2.6
    
    
    
    3.8Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    86.9
    
    
    
    77.1Gross profit
    
    
    13.1
    
    
    
    22.9Research and development expenses
    
    
    2.6
    
    
    
    2.6Selling, general and administrative expenses
    
    
    6.9
    
    
    
    7.8Depreciation and amortization of identifiable intangibles
    
    
    4.9
    
    
    
    4.8Earnings in joint venture
    
    
    (0.1
    )
    
    
    (0.1
    )Interest, net
    
    
    4.4
    
    
    
    3.7Income (loss) before income taxes
    
    
    (5.6
    )
    
    
    4.1Income tax
benefit (provision)
    
    
    0.2
    
    
    
    (1.2
    )Net (loss) income
    
    
    (5.4
    )%
    
    
    2.9
    %
 25




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##### Table of Contents



Total Revenues
  Sales
 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.
 26




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##### Table of Contents



Earnings in joint venture .
 Interest expense.
 Income tax benefit (provision).
 Net
(loss) income.
 Liquidity and Capital Resources
 Operating activities.
 Investing activities .
 Financing activities.
 Sources of liquidity.
  27




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##### Table of Contents



Capital Expenditures.
  Description of Our Indebtedness
 Senior Secured Credit Facility
    Maturity.
 28




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##### Table of Contents



Interest.
 Mandatory Prepayments.
 Covenants.
   Kratons 8.125% Senior Subordinated Notes due 2014
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 29




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##### Table of Contents



Optional Redemption.
 Covenants.
   Other Contingencies
        30




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##### 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
  
 ITEM 4. CONTROLS AND PROCEDURES
   31




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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
  32




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##### Table of Contents



ITEM 6. EXHIBITS
 31.1
    
    Certification of Chief Executive Officer under Section 302 of SarbanesOxley Act of 200231.2
    
    Certification of Chief Financial Officer under Section 302 of SarbanesOxley Act of 200232.1
    
    Certification Pursuant to Section 906 of SarbanesOxley Act of 2002
 33




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##### Table of Contents



Signatures
  Kraton Polymers LLCDate: May 14, 2007
    /s/ George B. GregoryGeorge B. GregoryChief Executive Officer and President/s/ Nicholas G. DekkerNicholas G. DekkerChief Financial Officer      and Vice President 34




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002