##### 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 June 30, 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
    
    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)
 o þ
  o o þ
 o o




---



##### Table of Contents



TABLE OF CONTENTS
  
 PAGEPart I  Financial InformationItem 1. Financial Statements and Accompanying NotesKraton Polymers LLC:Consolidated Balance Sheets  June 30, 2007 (Unaudited) and December 31, 2006
    
    
    4Consolidated Statements of Operations (Unaudited)  Three Months Ended June 30, 2007 and 2006
    
    
    5Consolidated Statements of Operations (Unaudited)  Six Months Ended June 30, 2007 and 2006
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended June 30, 2007 and 2006
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37Part II  Other InformationItem 1. Legal Proceedings
    
    
    38Item 2. Changes in Securities and Use of Proceeds
    
    
    38Item 3. Defaults Upon Senior Securities
    
    
    38Item 4. Submission of Matters to a Vote of Securityholders
    
    
    38Item 5. Other Information
    
    
    38Item 6. Exhibits
    
    
    39Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
 2




---



##### Table of Contents



FORWARD LOOKING STATEMENTS
  3




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 Kraton Polymers LLC
 
 Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
(In thousands of U.S. dollars)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    56,952
    
    
    $
    43,601Receivables, net of allowances of $1,927 and $2,157
    
    
    156,622
    
    
    
    135,937Inventories of products, net
    
    
    265,569
    
    
    
    256,785Inventories of materials and supplies, net
    
    
    12,252
    
    
    
    10,903Other current assets
    
    
    16,663
    
    
    
    13,308Deferred income taxes
    
    
    1,931
    
    
    
    1,931Total current assets
    
    
    509,989
    
    
    
    462,465Property, plant and equipment, less accumulated depreciation of $126,924 and $105,219
    
    
    398,613
    
    
    
    403,743Identifiable intangible assets, less accumulated amortization of $25,593 and $21,978
    
    
    83,016
    
    
    
    86,631Investment in unconsolidated joint venture
    
    
    9,336
    
    
    
    9,376Deferred financing costs
    
    
    11,972
    
    
    
    13,038Other long-term assets
    
    
    16,236
    
    
    
    13,900Total assets
    
    $
    1,029,162
    
    
    $
    989,153Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    4,813
    
    
    $
    3,850Accounts payable-trade
    
    
    106,805
    
    
    
    68,940Other payables and accruals
    
    
    54,613
    
    
    
    53,130Due to related party
    
    
    8,683
    
    
    
    9,351Insurance note payable
    
    
    3,954
    
    
    
    739Total current liabilities
    
    
    178,868
    
    
    
    136,010Long-term debt, net of current portion
    
    
    576,337
    
    
    
    578,263Deferred income taxes
    
    
    38,034
    
    
    
    40,107Other long-term liabilities
    
    
    35,449
    
    
    
    35,032Total liabilities
    
    
    828,688
    
    
    
    789,412Commitments and contingencies (note 9)Members equity:Common equity
    
    
    178,698
    
    
    
    184,111Accumulated other comprehensive income
    
    
    21,776
    
    
    
    15,630Total members equity
    
    
    200,474
    
    
    
    199,741Total liabilities and members equity
    
    $
    1,029,162
    
    
    $
    989,153
  4




---



##### Table of Contents



Kraton Polymers LLC
 
 Consolidated Statements of Operations
Three Months Ended June 30, 2007 and 2006
(in thousands of U.S. dollars)
(Unaudited)
 June 30, 2007
    
    
    June 30, 2006RevenuesSales
    
    $
    287,326
    
    
    $
    275,997Other
    
    
    7,570
    
    
    
    9,291Total revenues
    
    
    294,896
    
    
    
    285,288Costs and expenses:Costs of goods sold
    
    
    243,460
    
    
    
    232,788Gross profit
    
    
    51,436
    
    
    
    52,500Research and development expenses
    
    
    6,529
    
    
    
    7,125Selling, general, and administrative expenses
    
    
    16,605
    
    
    
    20,084Depreciation and amortization of identifiable intangibles
    
    
    11,828
    
    
    
    10,974Earnings in joint venture
    
    
    (95
    )
    
    
    (134
    )Interest expense, net
    
    
    9,402
    
    
    
    10,144Income before income taxes
    
    
    7,167
    
    
    
    4,307Income tax provision
    
    
    (949
    )
    
    
    (883
    )Net income
    
    $
    6,218
    
    
    $
    3,424
  5




---



##### Table of Contents



Kraton Polymers LLC
 
 
 June 30, 2007
    
    
    June 30, 2006Revenues:Sales
    
    $
    527,828
    
    
    $
    496,783Other
    
    
    13,894
    
    
    
    17,894Total revenue
    
    
    541,722
    
    
    
    514,677Costs and expenses:Costs of goods sold
    
    
    457,961
    
    
    
    409,732Gross profit
    
    
    83,761
    
    
    
    104,945Research and development expenses
    
    
    13,052
    
    
    
    13,066Selling, general and administrative expenses
    
    
    33,614
    
    
    
    37,988Depreciation and amortization
    
    
    23,878
    
    
    
    22,014Earnings in joint venture
    
    
    (325
    )
    
    
    (440
    )Interest expense, net
    
    
    20,132
    
    
    
    18,569(Loss) income before income taxes
    
    
    (6,590
    )
    
    
    13,748Income tax provision
    
    
    (388
    )
    
    
    (3,829
    )Net (loss) income
    
    $
    (6,978
    )
    
    $
    9,919
  6




---



##### Table of Contents



Kraton Polymers LLC
 
 Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and 2006
(in thousands of U.S. dollars)
(Unaudited)
 June 30,
    
    
    June 30,2007
    
    
    2006Cash flows provided by (used in) operating activities:Net (loss) income
    
    $
    (6,978
    )
    
    $
    9,919Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of identifiable intangibles
    
    
    23,878
    
    
    
    22,014Amortization of deferred financing costs
    
    
    1,066
    
    
    
    1,271Loss on disposal of fixed assets
    
    
    201
    
    
    
    60(Undistributed) distributed earnings in joint venture
    
    
    (219
    )
    
    
    825Deferred tax (benefit) provision
    
    
    (1,010
    )
    
    
    585Non-cash compensation related to equity awards
    
    
    1,212
    
    
    
    1,249Gain on interest rate swaps
    
    
    (1,553
    )
    
    
    Decrease (increase) in working capital:Accounts receivable
    
    
    (16,609
    )
    
    
    (49,100
    )Due to related party
    
    
    (1,799
    )
    
    
    1,896Inventories of products, materials and supplies
    
    
    (6,433
    )
    
    
    (46,872
    )Other assets
    
    
    (6,673
    )
    
    
    3,323Accounts payable-trade, other payables and accruals, and other long-term liabilities
    
    
    38,031
    
    
    
    12,193Net cash provided by (used in) operating activities
    
    
    23,114
    
    
    
    (42,637
    )Cash flows (used in) provided by investing activities:Purchase of property, plant and equipment
    
    
    (11,033
    )
    
    
    (17,507
    )Proceeds from sale of property, plant and equipment
    
    
    20
    
    
    
    12Net cash used in investing activities
    
    
    (11,013
    )
    
    
    (17,495
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    
    
    
    
    123,008Repayment of debt
    
    
    (963
    )
    
    
    (1,633
    )Cash dividend to parent
    
    
    
    
    
    
    (129,503
    )Deferred financing cost
    
    
    
    
    
    
    (2,237
    )Net proceeds from insurance note payable
    
    
    3,215
    
    
    
    5,174Net cash provided by (used in) financing activities
    
    
    2,252
    
    
    
    (5,191
    )Effect of exchange rate differences on cash
    
    
    (1,002
    )
    
    
    (3,212
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,351
    
    
    
    (68,535
    )Cash and cash equivalents, beginning of period
    
    
    43,601
    
    
    
    100,934Cash and cash equivalents, end of period
    
    $
    56,952
    
    
    $
    32,399Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of refunds received
    
    $
    5,981
    
    
    $
    1,777Cash paid during the period for interest
    
    $
    14,130
    
    
    $
    18,746
  7




---



##### Table of Contents



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
 The Fair Value Option for Financial Assets and Financial Liabilities
 Including an Amendment of FASB Statement No. 115
 8




---



##### Table of Contents



Fair Value Measurements
 (2) Share-Based Compensation
 Share-Based Payment, ,
  WeightedNumber
    
    
    Averageof
    
    
    ExerciseOptions
    
    
    PriceOutstanding at December 31, 2006
    
    
    15,293
    
    
    $
    1.00Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (173
    )
    
    
    1.00Outstanding at June 30, 2007
    
    
    15,120
    
    
    $
    1.00
 (3) Restructuring Activities
   9




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2006Cost of goods sold
    
    $
    4,986
    
    
    $
    4,986Research and development
    
    $
    585
    
    
    $
    585Selling, general and administrative
    
    $
    477
    
    
    $
    956
  Severance
    
    
    Exit ActivityCosts (1)
    
    
    Costs
    
    
    TotalReserve balance at December 31, 2006
    
    $
    2,042
    
    
    $
    935
    
    
    $
    2,977Cash payments
    
    
    (1,766
    )
    
    
    (307
    )
    
    
    (2,073
    )Reserve balance at June 30, 2007
    
    $
    276
    
    
    $
    628
    
    
    $
    904
 
 (1)
    
    Excludes additional pension and other postretirement benefits expense of approximately $2.3
million. (4) Detail of Certain Balance Sheet Accounts
  June 30,
    
    
    December 31,2007
    
    
    2006Inventories of products, net:Finished products
    
    $
    218,770
    
    
    $
    211,120Work in progress
    
    
    4,135
    
    
    
    4,098Raw materials
    
    
    42,664
    
    
    
    41,567$
    265,569
    
    
    $
    256,785Other payables and accruals:Employee related
    
    $
    9,437
    
    
    $
    14,979Interest
    
    
    14,476
    
    
    
    7,604Property and other taxes
    
    
    5,387
    
    
    
    4,102Customer rebates
    
    
    5,403
    
    
    
    3,089Income taxes payable
    
    
    3,963
    
    
    
    8,504Other
    
    
    15,947
    
    
    
    14,852$
    54,613
    
    
    $
    53,130
 (5) Comprehensive Income (Loss)
  Three Month Ended
    
    
    Six Month EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    6,218
    
    
    $
    3,424
    
    
    $
    (6,978
    )
    
    $
    9,919Foreign currency adjustments
    
    
    4,369
    
    
    
    8,468
    
    
    
    8,009
    
    
    
    12,271Unrealized (loss) gain on
interest rate swaps
    
    
    (1,416
    )
    
    
    (38
    )
    
    
    (1,863
    )
    
    
    167Total comprehensive income (loss)
    
    $
    9,171
    
    
    $
    11,854
    
    
    $
    (832
    )
    
    $
    22,357
  June 30, 2007
    
    
    December 31, 2006Foreign currency adjustments
    
    $
    22,971
    
    
    $
    14,962Unrealized gain on interest rate swaps, net
of tax
    
    
    
    
    
    
    1,863Pension adjustment, net of tax
    
    
    (1,195
    )
    
    
    (1,195
    )Total accumulated other comprehensive income
    
    $
    21,776
    
    
    $
    15,630
 10




---



##### Table of Contents



(6) Long-Term Debt
  June 30,
    
    
    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
    
    
    4,813
    
    
    
    3,850Total long-term debt
    
    $
    576,337
    
    
    $
    578,263
 (a) Senior Secured Credit Facilities
    Maturity
  11




---



##### Table of Contents



Interest
  Mandatory Prepayments
  Covenants
    (b) Senior Subordinated Notes Due January 15, 2014
  Interest
  Optional Redemption
   12




---



##### Table of Contents



Covenants
    (7) Financial Instruments
 (a) Interest Rate Swap Agreements
  (b) Fair Value of Financial Instruments
  June 30, 2007Carrying Value
    
    Fair ValueTerm loans
    
    $
    381,150
    
    
    $
    381,1508.125% Notes
    
    
    200,000
    
    
    
    195,250
 December 31, 2006Carrying Value
    
    Fair ValueTerm loans
    
    $
    382,113
    
    
    $
    382,1138.125% Notes
    
    
    200,000
    
    
    
    200,000
  (8) Income Taxes
   13




---



##### Table of Contents



Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109
   Unrecognized
    
    InterestMillions of dollars
    
    Tax Benefits
    
    and PenaltiesBalance at January 1, 2007
    
    $
    2.4
    
    
    $
    0.3Increase (decrease) in prior year
tax positions
    
    
    (1.4
    )
    
    
    0.0Balance at June 30, 2007
    
    $
    1.0
    
    
    $
    0.3
 (9) Commitments and Contingencies
 Legal Proceedings
  (10) Employee Benefits
 (a) Investment in Kraton Management LLC
  (b) TJ Chemical Holdings LLC 2004 Option Plan
  14




---



##### Table of Contents



(c) Other Equity Awards
  15




---



##### Table of Contents



(d) Kraton Polymers LLC Executive Deferred Compensation Plan
  (e) 2007 Incentive Compensation Plan
  (f) Retirement Plans
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic benefit
cost:Service cost
    
    $
    644
    
    
    $
    797
    
    
    $
    1,288
    
    
    $
    1,594Interest cost
    
    
    969
    
    
    
    849
    
    
    
    1,938
    
    
    
    1,698Expected return on plan assets
    
    
    (908
    )
    
    
    (799
    )
    
    
    (1,816
    )
    
    
    (1,598
    )Restructuring costs (See Note 3)
    
    
    
    
    
    
    772
    
    
    
    
    
    
    
    772Net periodic benefit cost
    
    $
    705
    
    
    $
    1,619
    
    
    $
    1,410
    
    
    $
    2,466
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic benefit
cost:Service cost
    
    $
    88
    
    
    $
    103
    
    
    $
    176
    
    
    $
    206Interest cost
    
    
    187
    
    
    
    137
    
    
    
    374
    
    
    
    274Recognized actuarial gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring costs (See Note 3)
    
    
    
    
    
    
    1,401
    
    
    
    
    
    
    
    1,401Net periodic benefit cost
    
    $
    275
    
    
    $
    1,641
    
    
    $
    550
    
    
    $
    1,881
 16




---



##### Table of Contents



(11) Industry Segment and Foreign Operations
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net Revenues:United States
    
    $
    101,379
    
    
    $
    105,691
    
    
    $
    187,960
    
    
    $
    190,999Germany
    
    
    41,036
    
    
    
    30,102
    
    
    
    74,991
    
    
    
    54,395Netherlands
    
    
    15,501
    
    
    
    14,340
    
    
    
    27,443
    
    
    
    28,663Italy
    
    
    13,636
    
    
    
    15,216
    
    
    
    25,551
    
    
    
    28,505Japan
    
    
    12,117
    
    
    
    15,041
    
    
    
    24,629
    
    
    
    31,148China
    
    
    11,515
    
    
    
    12,199
    
    
    
    19,548
    
    
    
    21,122United Kingdom
    
    
    9,699
    
    
    
    13,779
    
    
    
    19,061
    
    
    
    23,105Brazil
    
    
    7,771
    
    
    
    7,089
    
    
    
    16,707
    
    
    
    14,322Belgium
    
    
    6,890
    
    
    
    5,668
    
    
    
    14,430
    
    
    
    7,667France
    
    
    8,226
    
    
    
    5,729
    
    
    
    13,964
    
    
    
    12,722Taiwan
    
    
    4,966
    
    
    
    4,586
    
    
    
    10,235
    
    
    
    8,220Canada
    
    
    5,380
    
    
    
    7,027
    
    
    
    10,125
    
    
    
    13,127Poland
    
    
    6,446
    
    
    
    3,164
    
    
    
    8,358
    
    
    
    4,144Thailand
    
    
    3,955
    
    
    
    4,704
    
    
    
    7,566
    
    
    
    8,383Turkey
    
    
    4,205
    
    
    
    5,896
    
    
    
    7,012
    
    
    
    8,673Argentina
    
    
    3,281
    
    
    
    3,032
    
    
    
    6,764
    
    
    
    6,157Sweden
    
    
    3,651
    
    
    
    2,686
    
    
    
    6,350
    
    
    
    4,810Denmark
    
    
    2,147
    
    
    
    1,847
    
    
    
    4,755
    
    
    
    3,158Mexico
    
    
    2,094
    
    
    
    2,489
    
    
    
    4,718
    
    
    
    4,457Austria
    
    
    2,708
    
    
    
    1,852
    
    
    
    4,216
    
    
    
    2,420United Arab Emirates
    
    
    3,689
    
    
    
    491
    
    
    
    4,045
    
    
    
    1,274All other countries
    
    
    24,604
    
    
    
    22,660
    
    
    
    43,294
    
    
    
    37,206$
    294,896
    
    
    $
    285,288
    
    
    $
    541,722
    
    
    $
    514,677
 June 30,
    
    
    December 31,2007
    
    
    2006Long-lived Assets:United States
    
    $
    288,834
    
    
    $
    283,171Germany
    
    
    35,160
    
    
    
    32,506Japan
    
    
    2,818
    
    
    
    3,225France
    
    
    103,297
    
    
    
    100,476Netherlands
    
    
    29,763
    
    
    
    29,436Brazil
    
    
    53,017
    
    
    
    48,485China
    
    
    801
    
    
    
    54All other countries
    
    
    11,847
    
    
    
    11,609$
    525,537
    
    
    $
    508,962
 17




---



##### Table of Contents



(12) Supplemental Guarantor Information
  Balance Sheet
 As of June 30, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    27,287
    
    
    $
    29,665
    
    
    $
    
    
    
    $
    56,952Receivables, net
    
    
    655
    
    
    
    71,874
    
    
    
    106,049
    
    
    
    (21,956
    )
    
    
    156,622Inventories of products, net
    
    
    
    
    
    
    135,556
    
    
    
    133,918
    
    
    
    (3,905
    )
    
    
    265,569Inventories of materials and supplies
    
    
    
    
    
    
    6,949
    
    
    
    5,303
    
    
    
    
    
    
    
    12,252Other current assets
    
    
    5,097
    
    
    
    990
    
    
    
    10,576
    
    
    
    
    
    
    
    16,663Deferred income taxes
    
    
    
    
    
    
    8,665
    
    
    
    (6,734
    )
    
    
    
    
    
    
    1,931Total current assets
    
    $
    5,752
    
    
    $
    251,321
    
    
    
    278,777
    
    
    
    (25,861
    )
    
    
    509,989Property, plant and equipment, less accumulated
depreciation
    
    
    112484
    
    
    
    164,647
    
    
    
    121,482
    
    
    
    
    
    
    
    398,613Identifiable intangible assets
    
    
    34,205
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    83,016Investment in unconsolidated joint venture
    
    
    813
    
    
    
    
    
    
    
    8,523
    
    
    
    
    
    
    
    9,336Deferred financing costs
    
    
    11,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,972Other long-term assets
    
    
    97,479
    
    
    
    351,158
    
    
    
    9,828
    
    
    
    (442,229
    )
    
    
    16,236Total assets
    
    $
    262,705
    
    
    $
    767,126
    
    
    $
    467,421
    
    
    $
    (468,090
    )
    
    $
    1,029,162Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    4,813
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,813Accounts payable-trade
    
    
    2,900
    
    
    
    42,709
    
    
    
    61,196
    
    
    
    
    
    
    
    106,805Other payables and accruals
    
    
    14,475
    
    
    
    14,641
    
    
    
    25,497
    
    
    
    
    
    
    
    54,613Due to (from) related parties
    
    
    
    
    
    
    4,652
    
    
    
    25,987
    
    
    
    (21,956
    )
    
    
    8,683Insurance note payable
    
    
    3,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,954Total current liabilities
    
    
    26,142
    
    
    
    62,002
    
    
    
    112,680
    
    
    
    (21,956
    )
    
    
    178,868Long-term debt, net of current portion
    
    
    576,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576,337Deferred income taxes
    
    
    (46,979
    )
    
    
    72,171
    
    
    
    12,842
    
    
    
    
    
    
    
    38,034Long-term liabilities
    
    
    345,699
    
    
    
    34,582
    
    
    
    97,397
    
    
    
    (442,229
    )
    
    
    35,449Total liabilities
    
    
    901,199
    
    
    
    168,755
    
    
    
    222,919
    
    
    
    (464,185
    )
    
    
    828,688Commitments and contingencies (note 9)Members equity:Common equity
    
    
    (638,494
    )
    
    
    599,566
    
    
    
    221,531
    
    
    
    (3,905
    )
    
    
    178,698Accumulated other comprehensive income
    
    
    
    
    
    
    (1,195
    )
    
    
    22,971
    
    
    
    
    
    
    
    21,776Total members equity
    
    
    (638,494
    )
    
    
    598,371
    
    
    
    244,502
    
    
    
    (3,905
    )
    
    
    200,474Total liabilities and members equity
    
    $
    262,705
    
    
    $
    767,126
    
    
    $
    467,421
    
    
    $
    (468,090
    )
    
    $
    1,029,162
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 18




---



##### Table of Contents



Balance Sheet
 As of December 31, 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. 19




---



##### Table of Contents



Statement of Operations
 Three Months Ended June 30, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    148,520
    
    
    $
    186,475
    
    
    $
    (47,669
    )
    
    $
    287,326Other
    
    
    
    
    
    
    67
    
    
    
    7,503
    
    
    
    
    
    
    
    7,570Total revenues
    
    
    
    
    
    
    148,587
    
    
    
    193,978
    
    
    
    (47,669
    )
    
    
    294,896Costs and expenses:Cost of goods sold
    
    
    (227
    )
    
    
    122,544
    
    
    
    168,812
    
    
    
    (47,669
    )
    
    
    243,460Gross profit
    
    
    227
    
    
    
    26,043
    
    
    
    25,166
    
    
    
    
    
    
    
    51,436Research and development expenses
    
    
    
    
    
    
    (1,138
    )
    
    
    7,667
    
    
    
    
    
    
    
    6,529Selling, general, and administrative expenses
    
    
    
    
    
    
    9,120
    
    
    
    7,485
    
    
    
    
    
    
    
    16,605Depreciation and amortization
    
    
    4,324
    
    
    
    4,838
    
    
    
    2,666
    
    
    
    
    
    
    
    11,828Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (95
    )
    
    
    
    
    
    
    (95
    )Interest expense (income), net
    
    
    9,814
    
    
    
    (2,362
    )
    
    
    1,950
    
    
    
    
    
    
    
    9,402Income (loss) before income taxes
    
    
    (13,911
    )
    
    
    15,585
    
    
    
    5,493
    
    
    
    
    
    
    
    7,167Income tax benefit (provision)
    
    
    (3,958
    )
    
    
    (5,144
    )
    
    
    (2,135
    )
    
    
    
    
    
    
    (949
    )Net (loss) income
    
    $
    (17,869
    )
    
    $
    20,729
    
    
    $
    3,358
    
    
    $
    
    
    
    $
    6,218
 Three Months Ended June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    144,231
    
    
    $
    179,173
    
    
    $
    (47,407
    )
    
    $
    275,997Other
    
    
    
    
    
    
    135
    
    
    
    9,156
    
    
    
    
    
    
    
    9,291Total revenues
    
    
    
    
    
    
    144,366
    
    
    
    188,329
    
    
    
    (47,407
    )
    
    
    285,288Costs and expenses:Cost of goods sold
    
    
    (324
    )
    
    
    122,256
    
    
    
    158,263
    
    
    
    (47,407
    )
    
    
    232,788Gross profit
    
    
    324
    
    
    
    22,110
    
    
    
    30,066
    
    
    
    
    
    
    
    52,500Research and development expenses
    
    
    
    
    
    
    3,445
    
    
    
    3,680
    
    
    
    
    
    
    
    7,125Selling, general, and administrative expenses
    
    
    
    
    
    
    12,636
    
    
    
    7,448
    
    
    
    
    
    
    
    20,084Depreciation and amortization
    
    
    4,479
    
    
    
    4,548
    
    
    
    1,947
    
    
    
    
    
    
    
    10,974Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )Interest expense (income), net
    
    
    11,070
    
    
    
    (2,260
    )
    
    
    1,334
    
    
    
    
    
    
    
    10,144Income (loss) before income taxes
    
    
    (15,225
    )
    
    
    3,741
    
    
    
    15,791
    
    
    
    
    
    
    
    4,307Income tax benefit (provision)
    
    
    3,781
    
    
    
    (807
    )
    
    
    (3,857
    )
    
    
    
    
    
    
    (883
    )Net (loss) income
    
    $
    (11,444
    )
    
    $
    2,934
    
    
    $
    11,934
    
    
    $
    
    
    
    $
    3,424
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 20




---



##### Table of Contents



Statement of Operations
 Six Months Ended June 30, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    275,053
    
    
    $
    336,171
    
    
    $
    (83,396
    )
    
    $
    527,828Other
    
    
    
    
    
    
    108
    
    
    
    13,786
    
    
    
    
    
    
    
    13,894Total revenues
    
    
    
    
    
    
    275,161
    
    
    
    349,957
    
    
    
    (83,396
    )
    
    
    541,722Costs and expenses:Cost of goods sold
    
    
    12
    
    
    
    231,484
    
    
    
    309,861
    
    
    
    (83,396
    )
    
    
    457,961Gross profit
    
    
    (12
    )
    
    
    43,677
    
    
    
    40,096
    
    
    
    
    
    
    
    83,761Research and development expenses
    
    
    
    
    
    
    2,731
    
    
    
    10,321
    
    
    
    
    
    
    
    13,052Selling, general, and administrative expenses
    
    
    
    
    
    
    19,048
    
    
    
    14,566
    
    
    
    
    
    
    
    33,614Depreciation and amortization
    
    
    8,648
    
    
    
    9,987
    
    
    
    5,243
    
    
    
    
    
    
    
    23,878Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    (325
    )Interest expense (income), net
    
    
    21,067
    
    
    
    (4,643
    )
    
    
    3,708
    
    
    
    
    
    
    
    20,132Income (loss) before income taxes
    
    
    (29,727
    )
    
    
    16,554
    
    
    
    6,583
    
    
    
    
    
    
    
    (6,590
    )Income tax (provision) benefit
    
    
    1,186
    
    
    
    
    
    
    
    (1,574
    )
    
    
    
    
    
    
    (388
    )Net (loss) income
    
    $
    (28,541
    )
    
    $
    16,554
    
    
    $
    5,009
    
    
    $
    
    
    
    $
    (6,978
    )
 Six Months Ended June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    265,745
    
    
    $
    326,449
    
    
    $
    (95,411
    )
    
    $
    496,783Other
    
    
    
    
    
    
    135
    
    
    
    17,759
    
    
    
    
    
    
    
    17,894Total revenues
    
    
    
    
    
    
    265,880
    
    
    
    344,208
    
    
    
    (95,411
    )
    
    
    514,677Costs and expenses:Cost of goods sold
    
    
    2,106
    
    
    
    213,891
    
    
    
    289,146
    
    
    
    (95,411
    )
    
    
    409,732Gross profit
    
    
    (2,106
    )
    
    
    51,989
    
    
    
    55,062
    
    
    
    
    
    
    
    104,945Research and development expenses
    
    
    
    
    
    
    6,615
    
    
    
    6,451
    
    
    
    
    
    
    
    13,066Selling, general, and administrative expenses
    
    
    
    
    
    
    23,243
    
    
    
    14,745
    
    
    
    
    
    
    
    37,988Depreciation and amortization
    
    
    8,958
    
    
    
    9,110
    
    
    
    3,946
    
    
    
    
    
    
    
    22,014Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (440
    )
    
    
    
    
    
    
    (440
    )Interest expense (income), net
    
    
    20,707
    
    
    
    (4,570
    )
    
    
    2,432
    
    
    
    
    
    
    
    18,569Income (loss) before income taxes
    
    
    (31,771
    )
    
    
    17,591
    
    
    
    27,928
    
    
    
    
    
    
    
    13,748Income tax (provision) benefit
    
    
    8,354
    
    
    
    (4,635
    )
    
    
    (7,548
    )
    
    
    
    
    
    
    (3,829
    )Net (loss) income
    
    $
    (23,417
    )
    
    $
    12,956
    
    
    $
    20,380
    
    
    $
    
    
    
    $
    9,919
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 21




---



##### Table of Contents



Statement of Cash Flows
 Six Months Ended June 30, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (14,516
    )
    
    $
    31,567
    
    
    $
    6,063
    
    
    $
    
    
    
    $
    23,114Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (5,866
    )
    
    
    (5,147
    )
    
    
    
    
    
    
    (11,013
    )Net cash used in investing activities
    
    
    
    
    
    
    (5,866
    )
    
    
    (5,147
    )
    
    
    
    
    
    
    (11,013
    )Cash flows provided by (used in) financing activities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    (963
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (963
    )Proceeds from (payments on) intercompany loans
    
    
    12,264
    
    
    
    (12,264
    )
    
    
    
    
    
    
    
    
    
    
    Net proceeds from insurance note payable
    
    
    3,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,215Net cash provided by (used in) financing activities
    
    
    14,516
    
    
    
    (12,264
    )
    
    
    
    
    
    
    
    
    
    
    2,252Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (1,002
    )
    
    
    
    
    
    
    (1,002
    )Net decrease in cash and cash equivalents
    
    
    (0
    )
    
    
    13,437
    
    
    
    (86
    )
    
    
    
    
    
    
    13,351Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    13,850
    
    
    
    29,751
    
    
    
    
    
    
    
    43,601Cash and cash equivalents at end of period
    
    $
    (0
    )
    
    $
    27,287
    
    
    $
    29,665
    
    
    $
    
    
    
    $
    56,952
 Six Months Ended June 30, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (45,651
    )
    
    $
    (7,841
    )
    
    $
    10,855
    
    
    $
    
    
    
    $
    (42,637
    )Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds
from sales of equipment
    
    
    
    
    
    
    (6,689
    )
    
    
    (10,806
    )
    
    
    
    
    
    
    (17,495
    )Net cash used in investing activities
    
    
    
    
    
    
    (6,689
    )
    
    
    (10,806
    )
    
    
    
    
    
    
    (17,495
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,008Repayment of debt
    
    
    (1,633
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,633
    )Cash dividend to parent
    
    
    (129,503
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129,503
    )Deferred financing costs
    
    
    (2,237
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,237
    )Net proceeds from insurance note payable
    
    
    5,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,174Proceeds from (payments on) intercompany loans
    
    
    50,842
    
    
    
    (40,546
    )
    
    
    (10,296
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    45,651
    
    
    
    (40,546
    )
    
    
    (10,296
    )
    
    
    
    
    
    
    (5,191
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (3,212
    )
    
    
    
    
    
    
    (3,212
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (55,076
    )
    
    
    (13,459
    )
    
    
    
    
    
    
    (68,535
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    54,941
    
    
    
    45,993
    
    
    
    
    
    
    
    100,934Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    (135
    )
    
    $
    32,534
    
    
    $
    
    
    
    $
    32,399
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 22




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
    Recent Developments
 Pernis, The Netherlands
   23




---



##### Table of Contents



Asia Pacific Expansion Plans
  New Innovations
  Change in Board of Directors
  Critical Accounting Policies
  Revenue Recognition
   Inventories
  24




---



##### Table of Contents



Property, Plant and Equipment
   Pensions
 Employers Accounting for Pensions Employers Accounting for Defined Benefit Pension and Other Post
Retirement Plans.
  Income Taxes
  Factors Affecting Our Results of Operations
 Raw Materials
   25




---



##### Table of Contents



Seasonality
  Economic and Market Conditions
  26




---



##### Table of Contents



International Operations and Currency Fluctuations
   U.S. $ per Euro
    
    U.S. $ per 10,000 Japanese Yen
    
    U.S. $ per Brazilian RealAverage
    
    Period End
    
    Average
    
    Period End
    
    Average
    
    Period EndQuarter Ended June 30, 2006
    
    
    1.255
    
    
    
    1.255
    
    
    
    87.33
    
    
    
    86.78
    
    
    
    0.457
    
    
    
    0.462Quarter Ended June 30, 2007
    
    
    1.348
    
    
    
    1.347
    
    
    
    82.79
    
    
    
    81.13
    
    
    
    0.505
    
    
    
    0.519Six Months Ended June 30, 2006
    
    
    1.228
    
    
    
    1.255
    
    
    
    86.41
    
    
    
    86.78
    
    
    
    0.456
    
    
    
    0.462Six Months Ended June 30, 2007
    
    
    1.329
    
    
    
    1.347
    
    
    
    83.20
    
    
    
    81.13
    
    
    
    0.489
    
    
    
    0.519
   27




---



##### Table of Contents



Results of Operations
 Three Months Ended June 30, 2007, Compared to Three Months Ended June 30, 2006
  Three Months Ended
    
    
    Three Months EndedJune 30, 2007
    
    
    June 30, 2006Revenues:Sales
    
    $
    287,326
    
    
    $
    275,997Other
    
    
    7,570
    
    
    
    9,291Total revenues
    
    
    294,896
    
    
    
    285,288Costs and expenses:Cost of goods sold
    
    
    243,460
    
    
    
    232,788Gross profit
    
    
    51,436
    
    
    
    52,500Research and development expenses
    
    
    6,529
    
    
    
    7,125Selling, general and administrative expenses
    
    
    16,605
    
    
    
    20,084Depreciation and amortization of
identifiable intangibles
    
    
    11,828
    
    
    
    10,974Earnings in joint venture
    
    
    (95
    )
    
    
    (134
    )Interest
expense, net
    
    
    9,402
    
    
    
    10,144Income before income taxes
    
    
    7,167
    
    
    
    4,307Income tax provision
    
    
    (949
    )
    
    
    (883
    )Net income
    
    $
    6,218
    
    
    $
    3,424
  Three Months Ended
    
    Three Months EndedJune 30, 2007
    
    June 30, 2006Revenues:Sales
    
    
    97.4
    %
    
    
    96.7
    %Other
    
    
    2.6
    
    
    
    3.3Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    82.6
    
    
    
    81.6Gross profit
    
    
    17.4
    
    
    
    18.4Research and development expenses
    
    
    2.2
    
    
    
    2.5Selling, general and administrative expenses
    
    
    5.6
    
    
    
    7.0Depreciation and amortization of
identifiable intangibles
    
    
    4.0
    
    
    
    3.8Earnings in joint venture
    
    
    (0.0
    )
    
    
    (0.0
    )Interest expense, net
    
    
    3.2
    
    
    
    3.6Income before income taxes
    
    
    2.4
    
    
    
    1.5Income tax provision
    
    
    (0.3
    )
    
    
    (0.3
    )Net income
    
    
    2.1
    %
    
    
    1.2
    %
 Total Revenues
  Sales
 28




---



##### Table of Contents



Other revenue
 Cost of Goods Sold
 (
 Gross Profit
  Operating Expenses
 Research and development expenses .
 Selling, general and administrative expenses .
 Depreciation and amortization of identifiable intangibles.
 29




---



##### Table of Contents



Earnings in joint venture .
 Interest expense,
net.
 Income tax
provision. .
 Net
income.
 Six Months Ended June 30, 2007, Compared to Six Months Ended June 30, 2006
  Six Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2006Revenues:Sales
    
    $
    527,828
    
    
    $
    496,783Other
    
    
    13,894
    
    
    
    17,894Total revenues
    
    
    541,722
    
    
    
    514,677Costs and expenses:Cost of goods sold
    
    
    457,961
    
    
    
    409,732Gross profit
    
    
    83,761
    
    
    
    104,945Research and development expenses
    
    
    13,052
    
    
    
    13,066Selling, general and administrative expenses
    
    
    33,614
    
    
    
    37,988Depreciation and amortization of
identifiable intangibles
    
    
    23,878
    
    
    
    22,014Earnings in joint venture
    
    
    (325
    )
    
    
    (440
    )Interest expense, net
    
    
    20,132
    
    
    
    18,569(Loss) income before income taxes
    
    
    (6,590
    )
    
    
    13,748Income tax provision
    
    
    (388
    )
    
    
    (3,829
    )Net (loss) income
    
    $
    (6,978
    )
    
    $
    9,919
 30




---



##### Table of Contents



Six Months Ended
    
    Six Months EndedJune 30, 2007
    
    June 30, 2006Revenues:Sales
    
    
    97.4
    %
    
    
    96.5
    %Other
    
    
    2.6
    
    
    
    3.5Total Revenues
    
    
    100.0
    
    
    
    100.0Costs and expenses:Cost of goods sold
    
    
    84.5
    
    
    
    79.6Gross profit
    
    
    15.5
    
    
    
    20.4Research and development expenses
    
    
    2.4
    
    
    
    2.5Selling, general and administrative expenses
    
    
    6.2
    
    
    
    7.4Depreciation and amortization of
identifiable intangibles
    
    
    4.4
    
    
    
    4.3Earnings in joint venture
    
    
    (0.0
    )
    
    
    (0.1
    )Interest expense, net
    
    
    3.7
    
    
    
    3.6(Loss) income before income taxes
    
    
    (1.2
    )
    
    
    2.7Income tax provision
    
    
    (0.1
    )
    
    
    (0.8
    )Net (loss) income
    
    
    (1.3
    )%
    
    
    1.9
    %
 Total Revenues
  Sales
   Other revenue.
 Cost of Goods Sold
  31




---



##### Table of Contents



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, net.
 Income tax provision. .
 Net (loss) income.
 32




---



##### Table of Contents



Liquidity and Capital Resources
 Operating activities.
 Investing activities .
 Financing activities.
 Sources of liquidity.
   Capital Expenditures.
  33




---



##### Table of Contents



Description of Our Indebtedness
 Senior Secured Credit Facility
    Maturity.
 Interest.
 Mandatory Prepayments.
 Covenants.
 34




---



##### 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
   35




---



##### Table of Contents



Off-Balance Sheet Transactions
  Market Risk
  Interest rate risk.
 Foreign currency risk .
 Commodity price risk .
 36




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   37




---



##### 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
  38




---



##### Table of Contents



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
 39




---



##### Table of Contents



Signatures
  Kraton Polymers LLCDate: August 14, 2007
    /s/ George B. GregoryGeorge B. GregoryChief Executive Officer and President/s/ Nicholas G. DekkerNicholas G. DekkerChief Financial Officer and Vice President 40




---



##### Table of Contents



EXHIBIT INDEX
 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