##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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)
 þ o
  o o þ
  þ o




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TABLE OF CONTENTS
 PAGEPart I  Financial InformationItem 1. Financial Statements and Accompanying NotesKraton Polymers LLC:Consolidated Balance Sheets  September 30, 2006 (Unaudited) and December 31, 2005
    
    
    4Consolidated Statements of Operations (Unaudited)  Three Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Operations (Unaudited)  Nine Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows (Unaudited)  Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 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
    
    
    39Item 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 under Section 302Certification of CFO under Section 302Certification Pursuant to Section 906
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FORWARD LOOKING STATEMENTS
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PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 Kraton Polymers LLC
 
    September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    28,715
    
    
    $
    100,934Receivables, net of allowances of $1,298 and $1,013
    
    
    154,982
    
    
    
    107,586Inventories of products
    
    
    266,575
    
    
    
    192,595Inventories of materials and supplies
    
    
    10,291
    
    
    
    9,336Other current assets
    
    
    17,905
    
    
    
    23,511Deferred income taxes
    
    
    1,953
    
    
    
    1,953Total current assets
    
    
    480,421
    
    
    
    435,915Property, plant and equipment, at cost, less accumulated depreciation of $94,200 and $63,970
    
    
    400,624
    
    
    
    394,192Identifiable intangible assets, less accumulated amortization of $21,733 and $15,848
    
    
    95,963
    
    
    
    101,848Investment in joint venture
    
    
    9,506
    
    
    
    10,542Deferred financing costs
    
    
    13,588
    
    
    
    12,711Other long term assets
    
    
    12,636
    
    
    
    9,605Total assets
    
    $
    1,012,738
    
    
    $
    964,813Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    30,570Accounts payable  trade
    
    
    81,953
    
    
    
    64,345Other payables and accruals
    
    
    44,357
    
    
    
    48,758Due to related party
    
    
    11,294
    
    
    
    13,119Insurance note payable
    
    
    2,957
    
    
    
    Total current liabilities
    
    
    144,411
    
    
    
    156,792Long-term debt, net of current portion
    
    
    579,225
    
    
    
    432,093Deferred income taxes
    
    
    34,544
    
    
    
    34,010Long-term liabilities
    
    
    31,998
    
    
    
    29,713Total liabilities
    
    
    790,178
    
    
    
    652,608Commitments and contingencies (See Note 9)Members equityCommon equity
    
    
    208,801
    
    
    
    314,897Accumulated other comprehensive income (loss)
    
    
    13,759
    
    
    
    (2,692
    )Total members equity
    
    
    222,560
    
    
    
    312,205Total liabilities and members equity
    
    $
    1,012,738
    
    
    $
    964,813
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Kraton Polymers LLC
 
     September 30,
    
    
    September 30,2006
    
    
    2005Revenues:Sales
    
    $
    278,409
    
    
    $
    269,017Other Income
    
    
    9,745
    
    
    
    7,457Total revenue
    
    
    288,154
    
    
    
    276,474Costs and expenses:Costs of goods sold
    
    
    225,820
    
    
    
    225,945Gross profit
    
    
    62,334
    
    
    
    50,529Research and development expenses
    
    
    6,084
    
    
    
    6,700Selling, general and administrative expenses
    
    
    18,884
    
    
    
    19,130Depreciation and amortization of identifiable intangibles
    
    
    11,187
    
    
    
    11,548Loss (earnings) in joint venture
    
    
    208
    
    
    
    (182
    )Interest expense
    
    
    10,932
    
    
    
    8,683Income before income taxes
    
    
    15,039
    
    
    
    4,650Income tax provision
    
    
    (3,404
    )
    
    
    (1,268
    )Net income
    
    $
    11,635
    
    
    $
    3,382
  Kraton Polymers LLC
 
     September 30,
    
    
    September 30,2006
    
    
    2005Revenues:Sales
    
    $
    775,192
    
    
    $
    732,338Other income
    
    
    27,639
    
    
    
    20,287Total revenue
    
    
    802,831
    
    
    
    752,625Costs and expenses:Costs of goods sold
    
    
    635,552
    
    
    
    586,145Gross profit
    
    
    167,279
    
    
    
    166,480Research and development expenses
    
    
    19,150
    
    
    
    19,500Selling, general and administrative expenses
    
    
    56,872
    
    
    
    54,692Depreciation and amortization of identifiable intangibles
    
    
    33,201
    
    
    
    33,760(Earnings) in joint venture
    
    
    (232
    )
    
    
    (1,050
    )Interest expense
    
    
    29,501
    
    
    
    25,833Income before income taxes
    
    
    28,787
    
    
    
    33,745Income tax provision
    
    
    (7,233
    )
    
    
    (9,189
    )Net income
    
    $
    21,554
    
    
    $
    24,556
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Kraton Polymers LLC
 
     September 30,
    
    
    September 30,2006
    
    
    2005Cash flows (used in) provided by operating activities:Net income
    
    $
    21,554
    
    
    $
    24,556Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of identifiable intangibles
    
    
    33,201
    
    
    
    33,760Amortization of deferred financing costs
    
    
    1,801
    
    
    
    1,698Loss on disposal of fixed assets
    
    
    228
    
    
    
    55Distributed (undistributed) earnings in joint venture
    
    
    1,033
    
    
    
    (589
    )Deferred tax provision
    
    
    1,239
    
    
    
    3,515Non-cash compensation
    
    
    1,881
    
    
    
    410Decrease (increase) in working capital:Accounts receivable
    
    
    (38,949
    )
    
    
    (43,567
    )Due to related party
    
    
    (1,553
    )
    
    
    351Inventories
    
    
    (62,765
    )
    
    
    5,373Other assets
    
    
    2,931
    
    
    
    (6,402
    )Accounts payable, other payables and accruals and long-term liabilities
    
    
    8,018
    
    
    
    10,004Net cash (used in) provided by operating activities
    
    
    (31,381
    )
    
    
    29,164Cash flows (used in) provided by investing activities:Purchase of plant and equipment
    
    
    (28,049
    )
    
    
    (8,604
    )Proceeds from sale of property, plant and equipment
    
    
    54
    
    
    
    122Net cash used in investing activities
    
    
    (27,995
    )
    
    
    (8,482
    )Cash flows (used in) provided by financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    Repayment of debt
    
    
    (2,596
    )
    
    
    (2,010
    )Cash dividend to parent
    
    
    (129,531
    )
    
    
    Deferred financing costs
    
    
    (2,678
    )
    
    
    Net proceeds from insurance note payable
    
    
    2,957
    
    
    
    1,380Net cash used in financing activities
    
    
    (8,840
    )
    
    
    (630
    )Effects of exchange rate differences on cash
    
    
    (4,003
    )
    
    
    5,141Net (decrease) increase in cash and cash equivalents
    
    
    (72,219
    )
    
    
    25,193Cash and cash equivalents at beginning of the period
    
    
    100,934
    
    
    
    46,357Cash and cash equivalents at end of the period
    
    $
    28,715
    
    
    $
    71,550Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of refunds received
    
    $
    3,856
    
    
    $
    1,058Cash paid during the period for interest
    
    $
    33,364
    
    
    $
    28,821
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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
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(2) Stock-Based Compensation
 Share-Based Payment,
    Year EndedDecember 31,
    
    Amount2006
    
    $
    2.52007
    
    
    2.62008
    
    
    2.52009
    
    
    1.52010
    
    
    0.62011
    
    
    0.1
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Three Months EndedSeptember 30, 2006Risk-free interest rate
    
    
    4.26
    %Expected dividend yield
    
    
    0.0
    %Expected volatility
    
    
    0.945Expected term (in years)
    
    
    5.0
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Reported net income
    
    $
    3,382
    
    
    $
    24,556Add: Stock based employee
compensation expense (1)
    
    
    
    
    
    
    Less: Total fair value computed stock-based
compensation, net of tax
    
    
    (381
    )
    
    
    (966
    )Pro forma net income
    
    $
    3,001
    
    
    $
    23,590
 
 (1)
    
    Amount does not include stock-based compensation of $161,000 and $410,000 for the three
months and nine months ended September 30, 2005, respectively, related to the Companys
restricted stock awards, as these amounts are included in reported net income.  Weighted
    
    
    WeightedNumber
    
    
    Average
    
    
    Average
    
    
    Aggregateof
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    Value (1)Outstanding-beginning of year
    
    
    14,835
    
    
    $
    1.00Granted
    
    
    1,608
    
    
    
    1.00
    
    
    
    Exercised
    
    
    
    
    
    
    1.00
    
    
    
    Cancelled
    
    
    358
    
    
    
    1.00
    
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    16,085
    
    
    $
    1.00
    
    
    
    1.9
    
    
    
    Exercisable at September 30, 2006
    
    
    3,583
    
    
    $
    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 September 30, 2006. 9




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Weighted
    
    
    WeightedRange of
    
    
    Number of
    
    
    Average
    
    
    AverageExercise Prices
    
    
    Options
    
    
    Exercise Price
    
    
    Remaining LifeOutstanding options:
    
    $
    1.00
    
    
    
    16,085
    
    
    $
    1.00
    
    
    
    1.9Exercisable options:
    
    $
    1.00
    
    
    
    3,583
    
    
    $
    1.00
 (3) Restructuring Activities
    Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006Cost of goods sold
    
    $
    1,459
    
    
    $
    6,468Research and development
    
    $
    
    
    
    $
    585Selling, general and administrative
    
    $
    380
    
    
    $
    1,437
  Severance
    
    
    Exit ActivityCosts
    
    
    Costs
    
    
    TotalRestructuring charges incurred during 2006
    
    $
    4,280
    
    
    $
    965
    
    
    $
    5,245Cash Payments
    
    
    (1,559
    )
    
    $
    
    
    
    $
    (1,559
    )Reserve balance at September 30, 2006
    
    $
    2,721
    
    
    $
    965
    
    
    $
    3,686
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(4) Detail of Certain Balance Sheet Accounts
  September 30, 2006
    
    

December 31, 2005Inventories:Finished products
    
    $
    223,022
    
    
    $
    167,454Work in progress
    
    
    4,177
    
    
    
    2,615Raw materials
    
    
    39,376
    
    
    
    22,526$
    266,575
    
    
    $
    192,595Other payables and accruals:Employee related
    
    $
    15,741
    
    
    $
    16,217Interest
    
    
    3,464
    
    
    
    8,069Property and other taxes
    
    
    5,012
    
    
    
    5,095Customer rebates
    
    
    4,658
    
    
    
    4,382Income taxes payable
    
    
    3,026
    
    
    
    752Other
    
    
    12,456
    
    
    
    14,243$
    44,357
    
    
    $
    48,758
 (5) Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    11,635
    
    
    $
    3,382
    
    
    $
    21,554
    
    
    $
    24,556Foreign currency adjustments
    
    
    4,712
    
    
    
    1,157
    
    
    
    16,983
    
    
    
    (20,925
    )Unrealized (loss) gain on interest rate swaps
    
    
    (699
    )
    
    
    818
    
    
    
    (532
    )
    
    
    1,676Total comprehensive income
    
    $
    15,648
    
    
    $
    5,357
    
    
    $
    38,005
    
    
    $
    5,307
  September 30, 2006
    
    
    December 31, 2005Foreign currency adjustments
    
    $
    11,404
    
    
    $
    (5,579
    )Unrealized gain on interest rate swaps
    
    
    2,355
    
    
    
    2,887Total accumulated other comprehensive income (loss)
    
    $
    13,759
    
    
    $
    (2,692
    )
 (6) Long-term Debt
  September 30, 2006
    
    
    December 31, 2005Senior Secured Credit Facility:Term Loans
    
    $
    383,075
    
    
    $
    262,663Revolving Loans
    
    
    
    
    
    
    8.125% Senior Subordinated Notes
    
    
    200,000
    
    
    
    200,000Total long-term debt
    
    
    583,075
    
    
    
    462,663Less current portion of long-term debt
    
    
    3,850
    
    
    
    30,570Total
    
    $
    579,225
    
    
    $
    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
  September 30, 2006Carrying Value
    
    Fair ValueTerm Loans
    
    $
    383,075
    
    
    $
    383,0758.125% Notes
    
    
    200,000
    
    
    
    193,500
 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
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(c) Other Equity Awards
  (d) Kraton Polymers LLC Executive Deferred Compensation Plan
  15




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##### Table of Contents



(e) 2006 Incentive Compensation Plan
  (f) Retirement Plans
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    563
    
    
    $
    886
    
    
    $
    2,157
    
    
    $
    2,658Interest cost
    
    
    907
    
    
    
    779
    
    
    
    2,605
    
    
    
    2,337Expected return on plan assets
    
    
    (893
    )
    
    
    (736
    )
    
    
    (2,491
    )
    
    
    (2,208
    )Restructuring costs (See Note 3)
    
    
    (148
    )
    
    
    
    
    
    
    624
    
    
    
    Net periodic benefit cost
    
    $
    429
    
    
    $
    929
    
    
    $
    2,895
    
    
    $
    2,787
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    90
    
    
    $
    91
    
    
    $
    296
    
    
    $
    275Interest cost
    
    
    187
    
    
    
    119
    
    
    
    461
    
    
    
    357Recognized actuarial gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Restructuring costs (See Note 3)
    
    
    499
    
    
    
    
    
    
    
    1,900
    
    
    
    Net periodic benefit cost
    
    $
    776
    
    
    $
    210
    
    
    $
    2,657
    
    
    $
    629
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(11) Industry and Foreign Operations
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Revenues:United States
    
    $
    104,887
    
    
    $
    109,208
    
    
    $
    295,886
    
    
    $
    307,902Germany
    
    
    36,096
    
    
    
    28,847
    
    
    
    90,491
    
    
    
    76,161Japan
    
    
    14,175
    
    
    
    13,724
    
    
    
    45,323
    
    
    
    41,417Netherlands
    
    
    15,235
    
    
    
    13,141
    
    
    
    43,898
    
    
    
    36,213Italy
    
    
    13,083
    
    
    
    12,310
    
    
    
    41,587
    
    
    
    37,841China
    
    
    13,645
    
    
    
    8,299
    
    
    
    34,767
    
    
    
    18,584United Kingdom
    
    
    8,059
    
    
    
    11,539
    
    
    
    31,164
    
    
    
    34,756Brazil
    
    
    8,961
    
    
    
    7,381
    
    
    
    23,283
    
    
    
    19,239Canada
    
    
    7,160
    
    
    
    7,233
    
    
    
    20,286
    
    
    
    19,918France
    
    
    7,007
    
    
    
    6,018
    
    
    
    19,730
    
    
    
    22,709Taiwan
    
    
    3,710
    
    
    
    4,983
    
    
    
    11,930
    
    
    
    13,102Thailand
    
    
    3,148
    
    
    
    2,856
    
    
    
    11,530
    
    
    
    8,740Turkey
    
    
    2,250
    
    
    
    3,057
    
    
    
    10,924
    
    
    
    8,127Poland
    
    
    6,746
    
    
    
    7,015
    
    
    
    10,891
    
    
    
    12,484Belgium
    
    
    2,813
    
    
    
    1,714
    
    
    
    10,480
    
    
    
    4,726All other countries
    
    
    41,179
    
    
    
    39,149
    
    
    
    100,661
    
    
    
    90,706$
    288,154
    
    
    $
    276,474
    
    
    $
    802,831
    
    
    $
    752,625
 September 30,
    
    
    December 31,2006
    
    
    2005Long-lived Assets:United States
    
    $
    279,195
    
    
    $
    270,639France
    
    
    96,849
    
    
    
    91,593Brazil
    
    
    46,323
    
    
    
    30,008Germany
    
    
    29,378
    
    
    
    26,011Netherlands
    
    
    26,412
    
    
    
    23,732Japan
    
    
    3,324
    
    
    
    3,342All other countries
    
    
    13,343
    
    
    
    12,837$
    494,824
    
    
    
    458,162Less accumulated depreciation
    
    
    (94,200
    )
    
    
    (63,970
    )$
    400,624
    
    
    $
    394,192
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##### Table of Contents



(12) Supplemental Guarantor Information
  Balance Sheet
 As of September 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    (571
    )
    
    $
    29,286
    
    
    $
    
    
    
    $
    28,715Receivables, net
    
    
    434
    
    
    
    59,090
    
    
    
    103,738
    
    
    
    (8,280
    )
    
    
    154,982Inventories of products
    
    
    
    
    
    
    146,058
    
    
    
    125,849
    
    
    
    (5,332
    )
    
    
    266,575Inventories of materials and supplies
    
    
    
    
    
    
    6,579
    
    
    
    3,712
    
    
    
    
    
    
    
    10,291Other current assets
    
    
    5,724
    
    
    
    609
    
    
    
    11,572
    
    
    
    
    
    
    
    17,905Deferred income taxes
    
    
    
    
    
    
    6,027
    
    
    
    (4,074
    )
    
    
    
    
    
    
    1,953Total current assets
    
    
    6,158
    
    
    
    217,792
    
    
    
    270,083
    
    
    
    (13,612
    )
    
    
    480,421Property, plant, and equipment, less
accumulated depreciation
    
    
    120,036
    
    
    
    170,107
    
    
    
    110,481
    
    
    
    
    
    
    
    400,624Identifiable intangible assets, less
accumulated amortization
    
    
    47,152
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    95,963Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    8,693
    
    
    
    
    
    
    
    9,506Deferred financing costs
    
    
    13,588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,588Other long-term assets
    
    
    111,025
    
    
    
    342,835
    
    
    
    5,759
    
    
    
    (446,983
    )
    
    
    12,636Total assets
    
    $
    298,772
    
    
    $
    730,734
    
    
    $
    443,827
    
    
    $
    (460,595
    )
    
    $
    1,012,738Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,850Accounts payable  trade
    
    
    2,900
    
    
    
    31,371
    
    
    
    47,682
    
    
    
    
    
    
    
    81,953Other payables and accruals
    
    
    3,714
    
    
    
    17,538
    
    
    
    23,105
    
    
    
    
    
    
    
    44,357Due to (from) related parties
    
    
    
    
    
    
    1,342
    
    
    
    18,232
    
    
    
    (8,280
    )
    
    
    11,294Insurance note payable
    
    
    2,957
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,957Total current liabilities
    
    
    13,421
    
    
    
    50,251
    
    
    
    89,019
    
    
    
    (8,280
    )
    
    
    144,411Long-term debt, net of current portion
    
    
    579,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579,225Deferred income taxes
    
    
    (20,297
    )
    
    
    49,974
    
    
    
    4,867
    
    
    
    
    
    
    
    34,544Long-term liabilities
    
    
    337,382
    
    
    
    31,515
    
    
    
    110,084
    
    
    
    (446,983
    )
    
    
    31,998Total liabilities
    
    
    909,731
    
    
    
    131,740
    
    
    
    203,970
    
    
    
    (455,263
    )
    
    
    790,178Commitments and contingencies (See Note 9)Members equity:Common equity
    
    
    (613,314
    )
    
    
    598,994
    
    
    
    228,453
    
    
    
    (5,332
    )
    
    
    208,801Accumulated other comprehensive income
    
    
    2,355
    
    
    
    
    
    
    
    11,404
    
    
    
    
    
    
    
    13,759Total members equity
    
    
    (610,959
    )
    
    
    598,994
    
    
    
    239,857
    
    
    
    (5,332
    )
    
    
    222,560Total liabilities and members equity
    
    $
    298,772
    
    
    $
    730,734
    
    
    $
    443,827
    
    
    $
    (460,595
    )
    
    $
    1,012,738
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. Kraton does 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. Kraton does 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 September 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    142,454
    
    
    $
    170,368
    
    
    $
    (34,413
    )
    
    $
    278,409Other
    
    
    
    
    
    
    50
    
    
    
    9,695
    
    
    
    
    
    
    
    9,745Total revenues
    
    
    
    
    
    
    142,504
    
    
    
    180,063
    
    
    
    (34,413
    )
    
    
    288,154Costs and expenses:Cost of goods sold
    
    
    (2,567
    )
    
    
    112,903
    
    
    
    149,897
    
    
    
    (34,413
    )
    
    
    225,820Gross profit
    
    
    2,567
    
    
    
    29,601
    
    
    
    30,166
    
    
    
    
    
    
    
    62,334Research and development expenses
    
    
    
    
    
    
    3,980
    
    
    
    2,104
    
    
    
    
    
    
    
    6,084Selling, general, and administrative expenses
    
    
    
    
    
    
    10,718
    
    
    
    8,166
    
    
    
    
    
    
    
    18,884Depreciation and amortization
    
    
    4,479
    
    
    
    4,739
    
    
    
    1,969
    
    
    
    
    
    
    
    11,187Loss in joint venture
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    208Interest expense (income)
    
    
    11,917
    
    
    
    (2,220
    )
    
    
    1,235
    
    
    
    
    
    
    
    10,932Income (loss) before income taxes
    
    
    (13,829
    )
    
    
    12,384
    
    
    
    16,484
    
    
    
    
    
    
    
    15,039Income tax (provision) benefit
    
    
    2,609
    
    
    
    (2,575
    )
    
    
    (3,438
    )
    
    
    
    
    
    
    (3,404
    )Net income (loss)
    
    $
    (11,220
    )
    
    $
    9,809
    
    
    $
    13,046
    
    
    $
    
    
    
    $
    11,635
 Three Months Ended September 30, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    143,409
    
    
    $
    154,784
    
    
    $
    (29,176
    )
    
    $
    269,017Other
    
    
    
    
    
    
    
    
    
    
    7,457
    
    
    
    
    
    
    
    7,457Total revenues
    
    
    
    
    
    
    143,409
    
    
    
    162,241
    
    
    
    (29,176
    )
    
    
    276,474Costs and expenses:Cost of goods sold
    
    
    438
    
    
    
    115,689
    
    
    
    138,994
    
    
    
    (29,176
    )
    
    
    225,945Gross profit
    
    
    (438
    )
    
    
    27,720
    
    
    
    23,247
    
    
    
    
    
    
    
    50,529Research and development expenses
    
    
    
    
    
    
    3,437
    
    
    
    3,263
    
    
    
    
    
    
    
    6,700Selling, general, and administrative expenses
    
    
    
    
    
    
    10,252
    
    
    
    8,878
    
    
    
    
    
    
    
    19,130Depreciation and amortization
    
    
    4,953
    
    
    
    4,572
    
    
    
    2,023
    
    
    
    
    
    
    
    11,548(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (182
    )
    
    
    
    
    
    
    (182
    )Interest expense (income)
    
    
    9,284
    
    
    
    (1,885
    )
    
    
    1,284
    
    
    
    
    
    
    
    8,683Income (loss) before income taxes
    
    
    (14,675
    )
    
    
    11,344
    
    
    
    7,981
    
    
    
    
    
    
    
    4,650Income tax (provision) benefit
    
    
    3,998
    
    
    
    (3,091
    )
    
    
    (2,175
    )
    
    
    
    
    
    
    (1,268
    )Net income (loss)
    
    $
    (10,677
    )
    
    $
    8,253
    
    
    $
    5,806
    
    
    $
    
    
    
    $
    3,382
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. Kraton does not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. 20




---



##### Table of Contents



Statement of Operations
 Nine Months Ended September 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    408,199
    
    
    $
    496,817
    
    
    $
    (129,824
    )
    
    $
    775,192Other
    
    
    
    
    
    
    185
    
    
    
    27,454
    
    
    
    
    
    
    
    27,639Total revenues
    
    
    
    
    
    
    408,384
    
    
    
    524,271
    
    
    
    (129,824
    )
    
    
    802,831Costs and expenses:Cost of goods sold
    
    
    (461
    )
    
    
    326,794
    
    
    
    439,043
    
    
    
    (129,824
    )
    
    
    635,552Gross profit
    
    
    461
    
    
    
    81,590
    
    
    
    85,228
    
    
    
    
    
    
    
    167,279Research and development expenses
    
    
    
    
    
    
    10,595
    
    
    
    8,555
    
    
    
    
    
    
    
    19,150Selling, general, and administrative expenses
    
    
    
    
    
    
    33,961
    
    
    
    22,911
    
    
    
    
    
    
    
    56,872Depreciation and amortization
    
    
    13,437
    
    
    
    13,849
    
    
    
    5,915
    
    
    
    
    
    
    
    33,201(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (232
    )
    
    
    
    
    
    
    (232
    )Interest expense (income)
    
    
    32,624
    
    
    
    (6,790
    )
    
    
    3,667
    
    
    
    
    
    
    
    29,501Income (loss) before income taxes
    
    
    (45,600
    )
    
    
    29,975
    
    
    
    44,412
    
    
    
    
    
    
    
    28,787Income tax (provision) benefit
    
    
    10,963
    
    
    
    (7,210
    )
    
    
    (10,986
    )
    
    
    
    
    
    
    (7,233
    )Net income (loss)
    
    $
    (34,637
    )
    
    $
    22,765
    
    
    $
    33,426
    
    
    $
    
    
    
    $
    21,554
 Nine Months Ended September 30, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    399,119
    
    
    $
    441,788
    
    
    $
    (108,569
    )
    
    $
    732,338Other
    
    
    
    
    
    
    
    
    
    
    20,287
    
    
    
    
    
    
    
    20,287Total revenues
    
    
    
    
    
    
    399,119
    
    
    
    462,075
    
    
    
    (108,569
    )
    
    
    752,625Costs and expenses:Cost of goods sold
    
    
    6,384
    
    
    
    304,790
    
    
    
    383,540
    
    
    
    (108,569
    )
    
    
    586,145Gross profit
    
    
    (6,384
    )
    
    
    94,329
    
    
    
    78,535
    
    
    
    
    
    
    
    166,480Research and development expenses
    
    
    
    
    
    
    9,783
    
    
    
    9,717
    
    
    
    
    
    
    
    19,500Selling, general, and administrative expenses
    
    
    
    
    
    
    32,825
    
    
    
    21,867
    
    
    
    
    
    
    
    54,692Depreciation and amortization
    
    
    13,911
    
    
    
    13,814
    
    
    
    6,035
    
    
    
    
    
    
    
    33,760(Earnings) in joint venture
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    
    
    
    
    (1,050
    )Interest expense (income)
    
    
    27,258
    
    
    
    (5,286
    )
    
    
    3,861
    
    
    
    
    
    
    
    25,833Income (loss) before income taxes
    
    
    (47,553
    )
    
    
    43,193
    
    
    
    38,105
    
    
    
    
    
    
    
    33,745Income tax (provision) benefit
    
    
    12,949
    
    
    
    (11,762
    )
    
    
    (10,376
    )
    
    
    
    
    
    
    (9,189
    )Net income (loss)
    
    $
    (34,604
    )
    
    $
    31,431
    
    
    $
    27,729
    
    
    $
    
    
    
    $
    24,556
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. Kraton does 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
 Nine Months Ended September 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (47,273
    )
    
    $
    6,713
    
    
    $
    9,179
    
    
    $
    
    
    
    $
    (31,381
    )Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds
from sales of equipment
    
    
    
    
    
    
    (10,328
    )
    
    
    (17,667
    )
    
    
    
    
    
    
    (27,995
    )Net cash used in investing activities
    
    
    
    
    
    
    (10,328
    )
    
    
    (17,667
    )
    
    
    
    
    
    
    (27,995
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,008Repayment of debt
    
    
    (2,596
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,596
    )Cash dividend to parent
    
    
    (129,531
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129,531
    )Deferred financing costs
    
    
    (2,678
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,678
    )Net proceeds from insurance note payable
    
    
    2,957
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,957Proceeds from (payments on) intercompany loans
    
    
    56,113
    
    
    
    (51,897
    )
    
    
    (4,216
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    47,273
    
    
    
    (51,897
    )
    
    
    (4,216
    )
    
    
    
    
    
    
    (8,840
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (4,003
    )
    
    
    
    
    
    
    (4,003
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (55,512
    )
    
    
    (16,707
    )
    
    
    
    
    
    
    (72,219
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    54,941
    
    
    
    45,993
    
    
    
    
    
    
    
    100,934Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    (571
    )
    
    $
    29,286
    
    
    $
    
    
    
    $
    28,715
 Nine Months Ended September 30, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (30,332
    )
    
    $
    43,542
    
    
    $
    15,954
    
    
    $
    
    
    
    $
    29,164Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds
from sales of equipment
    
    
    
    
    
    
    (5,860
    )
    
    
    (2,622
    )
    
    
    
    
    
    
    (8,482
    )Net cash used in investing activities
    
    
    
    
    
    
    (5,860
    )
    
    
    (2,622
    )
    
    
    
    
    
    
    (8,482
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (2,010
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,010
    )Net proceeds from insurance note payable
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,380Proceeds from (payments on) intercompany loans
    
    
    30,962
    
    
    
    (20,816)
    )
    
    
    (10,146
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    30,332
    
    
    
    (20,816
    )
    
    
    (10,146
    )
    
    
    
    
    
    
    (630
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    5,141
    
    
    
    
    
    
    
    5,141Net decrease in cash and cash equivalents
    
    
    
    
    
    
    16,866
    
    
    
    8,327
    
    
    
    
    
    
    
    25,193Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    15,981
    
    
    
    30,376
    
    
    
    
    
    
    
    46,357Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    32,847
    
    
    $
    38,703
    
    
    $
    
    
    
    $
    71,550
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. Kraton does 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 are restructuring our work processes at our Belpre, Ohio facility to improve quality,
capacity and productivity. As a result, we have reduced the number of employees through a
voluntary separation program. We are also reducing our spending with outside contractors at
the site. We recorded expenses associated with this restructuring during the three months
and nine months ended September 30, 2006 of approximately $1.5 million and $6.5 million,
respectively.
    
    We closed our business office in London, United Kingdom shifting responsibilities to
personnel in other locations. Accordingly, we recorded a charge of approximately $0.4
million during the three months ended September 30, 2006, related to the closure of office
in London, United Kingdom. Restructuring expenses related to this activity total $0.5
million for the nine month period ended September, 30, 2006.
 23




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##### Table of Contents




    
    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. Customers should see no
impact from this change. Restructuring costs associated with this project total
approximately $0.6 million for the nine month period ended September 30, 2006.
  New Polyisoprene Latex Plant, Paulinia, Brazil
  Asia Pacific Expansion Plans
    New Innovations
  
    
    In our Packaging and Films end-use market, we announced in October 2006 new developments
in functionalized hydrogenated styrenic block copolymers for use as tie layers in high
performance barrier packaging applications. This new tie layer technology specifically
targets high performance barrier packaging, such as stand up pouches and/or clear retortable
packaging, and brings new capabilities to the industry while providing more efficient
processing methods.
 European Capacity Expansions
  24




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##### Table of Contents



Resignation of Executive Officers
  Appointment of Executive Officers
   Changes in Board of Directors
  Staff
   Critical Accounting Policies
  Revenue Recognition
   25




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##### Table of Contents



Inventories
  Property, Plant and Equipment
   Income Taxes
  Factors Affecting our Results of Operations
 Raw Materials
  26




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##### Table of Contents



Seasonality
  Economic and Market Conditions
  International Operations and Currency Fluctuations
  27




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##### Table of Contents



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 September 30, 2005
    
    
    1.220
    
    
    
    1.204
    
    
    
    89.93
    
    
    
    88.35
    
    
    
    0.426
    
    
    
    0.450Quarter Ended September 30, 2006
    
    
    1.275
    
    
    
    1.269
    
    
    
    86.10
    
    
    
    84.82
    
    
    
    0.459
    
    
    
    0.460Nine Months Ended September 30, 2005
    
    
    1.263
    
    
    
    1.204
    
    
    
    92.84
    
    
    
    88.35
    
    
    
    0.400
    
    
    
    0.450Nine Months Ended September 30, 2006
    
    
    1.243
    
    
    
    1.269
    
    
    
    86.30
    
    
    
    84.82
    
    
    
    0.459
    
    
    
    0.460
   Results of Operations
 Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Revenues:Sales
    
    $
    278,409
    
    
    $
    269,017Other
    
    
    9,745
    
    
    
    7,457Total revenues
    
    
    288,154
    
    
    
    276,474Costs and expenses:Cost of goods sold
    
    
    225,820
    
    
    
    225,945Gross profit
    
    
    62,334
    
    
    
    50,529Research and development expenses
    
    
    6,084
    
    
    
    6,700Selling, general and administrative expenses
    
    
    18,884
    
    
    
    19,130Depreciation and amortization of identifiable intangibles
    
    
    11,187
    
    
    
    11,548Loss (earnings) in joint venture
    
    
    208
    
    
    
    (182
    )Interest, net
    
    
    10,932
    
    
    
    8,683Income before income taxes
    
    
    15,039
    
    
    
    4,650Income tax provision
    
    
    (3,404
    )
    
    
    (1,268
    )Net income
    
    $
    11,635
    
    
    $
    3,382
 28




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##### Table of Contents



Three Months Ended
    
    Three Months EndedSeptember 30, 2006
    
    September 30, 2005Revenues:Sales
    
    
    96.6
    %
    
    
    97.3
    %Other
    
    
    3.4
    
    
    
    2.7Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    78.4
    
    
    
    81.7Gross profit
    
    
    21.6
    
    
    
    18.3Research and development expenses
    
    
    2.1
    
    
    
    2.4Selling, general and administrative expenses
    
    
    6.6
    
    
    
    6.9Depreciation and amortization of identifiable intangibles
    
    
    3.8
    
    
    
    4.2Loss (earnings) in joint venture
    
    
    0.1
    
    
    
    (0.1
    )Interest, net
    
    
    3.8
    
    
    
    3.1Income before income taxes
    
    
    5.2
    
    
    
    1.7Income tax provision
    
    
    (1.2
    )
    
    
    (0.5
    )Net income
    
    
    4.0
    %
    
    
    1.2
    %
 Total Revenues
  Sales .
   Other revenue .
 29




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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
  30




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##### Table of Contents



Net Income
  Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Revenues:Sales
    
    $
    775,192
    
    
    $
    732,338Other
    
    
    27,639
    
    
    
    20,287Total revenues
    
    
    802,831
    
    
    
    752,625Costs and expenses:Cost of goods sold
    
    
    635,552
    
    
    
    586,145Gross profit
    
    
    167,279
    
    
    
    166,480Research and development expenses
    
    
    19,150
    
    
    
    19,500Selling, general and administrative expenses
    
    
    56,872
    
    
    
    54,692Depreciation and amortization of identifiable intangibles
    
    
    33,201
    
    
    
    33,760(Earnings) in joint venture
    
    
    (232
    )
    
    
    (1,050
    )Interest, net
    
    
    29,501
    
    
    
    25,833Income before income taxes
    
    
    28,787
    
    
    
    33,745Income tax provision
    
    
    (7,233
    )
    
    
    (9,189
    )Net income
    
    $
    21,554
    
    
    $
    24,556
  Nine Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2005Revenues:Sales
    
    
    96.6
    %
    
    
    97.3
    %Other
    
    
    3.4
    
    
    
    2.7Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    79.2
    
    
    
    77.9Gross profit
    
    
    20.8
    
    
    
    22.1Research and development expenses
    
    
    2.4
    
    
    
    2.6Selling, general and administrative expenses
    
    
    7.1
    
    
    
    7.3Depreciation and amortization of identifiable intangibles
    
    
    4.1
    
    
    
    4.5(Earnings) in joint venture
    
    
    (0.0
    )
    
    
    (0.1
    )Interest, net
    
    
    3.7
    
    
    
    3.4Income before income taxes
    
    
    3.6
    
    
    
    4.5Income tax provision
    
    
    (0.9
    )
    
    
    (1.2
    )Net income
    
    
    2.7
    %
    
    
    3.3
    %
 31




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##### Table of Contents



Total Revenues
  Sales .
   Other revenue .
 Cost of Goods Sold
  Gross Profit
  32




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##### Table of Contents



Operating Expenses
 Research and development expenses .
 Selling, general and administrative expenses .
 Depreciation and amortization of identifiable intangibles.
 Earnings in joint venture .
 Interest expense.
 Income Tax Provision
  Net Income
  Liquidity and Capital Resources
 Operating activities .
 Investing activities .
 33




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##### Table of Contents



Financing activities.
 Sources of liquidity.
   Capital expenditures.
  Description of Our Indebtedness
 Senior Secured Credit Facility
  34




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##### Table of Contents



Maturity.
 Interest.
 Mandatory Prepayments.
 Covenants.
   35




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##### Table of Contents



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 .
 Commodity price risk .
 37




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE AND DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    38




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   ITEM 1A.
  
 ITEM 2. UNRESTRICTED SALES OF 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
 10.1
    
    Separation Agreement and General Release and Waiver dated October 26, 2006, between Kraton
and Raymond K. Guba. (incorporated by reference from Exhibit 10.1 to Kratons Current Report
on Form 8-K/A filed with the Commission on October 27, 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: November 13, 2006
    
    /s/ George B. GregoryGeorge B. GregoryChief Executive Officer and President/s/ Nicholas G. Dekker

Nicholas G. DekkerChief Financial Officer and Vice President
 41




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##### Table of Contents



Exhibit Index
 10.1
    
    Separation Agreement and General Release and Waiver dated October 26, 2006, between Kraton
and Raymond K. Guba. (incorporated by reference from Exhibit 10.1 to Kratons Current Report
on Form 8-K/A filed with the Commission on October 27, 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