##### 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 March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 333-123747
 Kraton Polymers LLC
 (Exact name of Register as specified in its Charter)
 Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    94-2805249
(I.R.S. Employer Identification No.)
 15710 John F. Kennedy Blvd. Suite 300, Houston, TX 77032
  
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPart I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  March 31, 2008 (Unaudited) and December 31, 2007
    
    
    4Consolidated Statements of Operations (Unaudited)  Three Months Ended March 31, 2008 and 2007
    
    
    5Consolidated Statements of Cash Flows (Unaudited)  Three Months Ended March 31, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31Part II  Other InformationItem 1. Legal Proceedings
    
    
    31Item 2. Changes in Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Securityholders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33Consulting AgreementSeparation AgreementRetention AgreementRetention AgreementRetention AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to 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
 
 Consolidated Balance Sheets
March 31, 2008 and December 31, 2007
(In thousands of U.S. dollars)
 March 31,
    
    December 31,2008
    
    2007(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,533
    
    
    $
    48,277Receivables, net of allowances of $1,539 and $1,542
    
    
    168,204
    
    
    
    140,321Inventories of products, net
    
    
    286,479
    
    
    
    256,323Inventories of materials and supplies, net
    
    
    12,821
    
    
    
    12,170Other current assets
    
    
    17,101
    
    
    
    12,404Total current assets
    
    
    492,138
    
    
    
    469,495Property, plant and equipment, less accumulated depreciation of $173,899 and $157,643
    
    
    400,607
    
    
    
    402,270Identifiable intangible assets, less accumulated amortization of $30,945 and $29,205
    
    
    74,617
    
    
    
    76,356Investment in unconsolidated joint venture
    
    
    10,999
    
    
    
    10,326Deferred financing costs
    
    
    9,822
    
    
    
    10,323Other long-term assets
    
    
    15,874
    
    
    
    16,124Total assets
    
    $
    1,004,057
    
    
    $
    984,894Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,445
    
    
    $
    3,445Accounts payable-trade
    
    
    112,842
    
    
    
    102,952Other payables and accruals
    
    
    47,183
    
    
    
    55,816Due to related party
    
    
    20,447
    
    
    
    24,505Deferred income taxes
    
    
    9,015
    
    
    
    9,827Insurance note payable
    
    
    4,301
    
    
    
    494Total current liabilities
    
    
    197,233
    
    
    
    197,039Long-term debt, net of current portion
    
    
    534,159
    
    
    
    535,020Deferred income taxes
    
    
    39,961
    
    
    
    39,443Long-term liabilities
    
    
    31,131
    
    
    
    30,682Total liabilities
    
    
    802,484
    
    
    
    802,184Commitments and contingencies (note 9)Members equity:Common equity
    
    
    144,509
    
    
    
    143,149Accumulated other comprehensive income
    
    
    57,064
    
    
    
    39,561Total members equity
    
    
    201,573
    
    
    
    182,710Total liabilities and members equity
    
    $
    1,004,057
    
    
    $
    984,894
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Kraton Polymers LLC
 
 Consolidated Statements of Operations
Three Months Ended March 31, 2008 and 2007
(In thousands of U.S. dollars)
(Unaudited)
 March 31, 2008
    
    
    March 31, 2007RevenuesSales
    
    $
    256,288
    
    
    $
    240,502Other
    
    
    10,573
    
    
    
    6,324Total revenues
    
    
    266,861
    
    
    
    246,826Costs of goods sold
    
    
    218,076
    
    
    
    214,501Gross profit
    
    
    48,785
    
    
    
    32,325Research and development expenses
    
    
    7,918
    
    
    
    6,523Selling, general, and administrative expenses
    
    
    25,455
    
    
    
    17,009Depreciation and amortization of identifiable intangibles
    
    
    14,652
    
    
    
    12,050Earnings in unconsolidated joint venture
    
    
    (61
    )
    
    
    (230
    )Interest expense, net
    
    
    10,385
    
    
    
    10,730Loss before income taxes
    
    
    (9,564
    )
    
    
    (13,757
    )Income tax benefit
    
    
    154
    
    
    
    561Net loss
    
    $
    (9,410
    )
    
    $
    (13,196
    )
  5




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Kraton Polymers LLC
 
 Consolidated Statements of Cash Flows
Three Months Ended March 31, 2008 and 2007
(In thousands of U.S. dollars)
(Unaudited)
 March 31,
    
    
    March 31,2008
    
    
    2007Cash flows provided by (used in) operating activities:Net loss
    
    $
    (9,410
    )
    
    $
    (13,196
    )Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization of identifiable intangibles
    
    
    14,652
    
    
    
    12,050Amortization of deferred financing costs
    
    
    501
    
    
    
    534Loss on disposal of fixed assets
    
    
    
    
    
    
    193(Undistributed) distributed earnings in joint venture
    
    
    980
    
    
    
    (230
    )Deferred tax expense (benefit)
    
    
    155
    
    
    
    (1,361
    )Non-cash compensation related to equity awards
    
    
    770
    
    
    
    620Decrease (increase) in working capital:Accounts receivable
    
    
    (22,505
    )
    
    
    (5,732
    )Due to related party
    
    
    (3,305
    )
    
    
    (335
    )Inventories of products, materials and supplies
    
    
    (23,775
    )
    
    
    (6,600
    )Other assets
    
    
    (4,141
    )
    
    
    (5,641
    )Accounts payable-trade, other payables and accruals, and long-term liabilities
    
    
    (4,223
    )
    
    
    26,133Net cash provided by (used in) operating activities
    
    
    (50,301
    )
    
    
    6,435Cash flows (used in) provided by investing activities:Purchase of property, plant and equipment
    
    
    (3,173
    )
    
    
    (4,704
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    17Net cash used in investing activities
    
    
    (3,173
    )
    
    
    (4,687
    )Cash flows provided by (used in) financing activities:Proceeds from borrowings under debt obligations
    
    
    55,000
    
    
    
    Repayment of debt obligations
    
    
    (55,861
    )
    
    
    (963
    )Net proceeds from insurance note payable
    
    
    3,807
    
    
    
    4,032Proceeds from cash contribution from member
    
    
    10,000
    
    
    
    Net cash provided by financing activities
    
    
    12,946
    
    
    
    3,069Effect of exchange rate differences on cash
    
    
    (216
    )
    
    
    (658
    )Net increase (decrease) in cash and cash equivalents
    
    
    (40,744
    )
    
    
    4,159Cash and cash equivalents, beginning of period
    
    
    48,277
    
    
    
    43,601Cash and cash equivalents, end of period
    
    $
    7,533
    
    
    $
    47,760Supplemental disclosure cash flow information:Cash paid during the period for income taxes, net of refunds received
    
    $
    3,070
    
    
    $
    1,177Cash paid during the period for interest
    
    $
    14,910
    
    
    $
    10,087
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Kraton Polymers LLC
 
 Notes to Consolidated Financial Statements
(Unaudited)
 (1) Summary of Significant Accounting Policies
 (a) Organization and Description of Business
   (b) Basis of Presentation
     (c) Recently Issued Accounting Standards
 Business Combinations
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The
Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB
Statement No. 115
 Disclosures about Derivative Instruments and Hedging Accounts  an Amendment of SFAS No. 133
 (2) Share-Based Compensation
 Share-Based Payment ,
   WeightedAverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding at December 31, 2007
    
    
    14,670
    
    
    $
    1.00Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (2,463
    )
    
    
    1.00Outstanding at March 31, 2008
    
    
    12,207
    
    
    $
    1.00
 (3) Restructuring Activities
    8




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Severance
    
    
    Exit ActivityCosts
    
    
    Costs
    
    
    TotalReserve balance at December 31, 2007
    
    $
    294
    
    
    $
    2,402
    
    
    $
    2,696Accruals
    
    
    1,700
    
    
    
    
    
    
    
    1,700Cash payments
    
    
    (90
    )
    
    
    (1,121
    )
    
    
    (1,211
    )Reserve balance at March 31, 2008
    
    $
    1,904
    
    
    $
    1,281
    
    
    $
    3,185
 (4) Detail of Certain Balance Sheet Accounts
  March 31,
    
    
    December 31,2008
    
    
    2007Inventories of products, net:Finished products
    
    $
    243,942
    
    
    $
    212,125Work in progress
    
    
    4,364
    
    
    
    3,858Raw materials
    
    
    38,173
    
    
    
    40,340$
    286,479
    
    
    $
    256,323Other payables and accruals:Employee related
    
    $
    15,714
    
    
    $
    12,178Interest
    
    
    9,399
    
    
    
    13,680Property and other taxes
    
    
    2,672
    
    
    
    3,735Customer rebates
    
    
    4,340
    
    
    
    6,561Income taxes payable
    
    
    185
    
    
    
    4,643Other
    
    
    14,873
    
    
    
    15,019$
    47,183
    
    
    $
    55,816
 (5) Comprehensive Income (Loss)
  Three Months EndedMarch 312008
    
    
    2007Net loss
    
    $
    (9,410
    )
    
    $
    (13,196
    )Foreign currency adjustments
    
    
    18,913
    
    
    
    3,639Unrealized loss on interest rate swaps, net of tax
    
    
    (1,410
    )
    
    
    (447
    )Total comprehensive (loss) income
    
    $
    8,093
    
    
    $
    (10,004
    )
  March 31,
    
    
    December 31,2008
    
    
    2007Foreign currency adjustments
    
    $
    53,264
    
    
    $
    34,351Unrealized loss on interest rate swaps, net of tax
    
    
    (1,410
    )
    
    
    Pension adjustment, net of tax
    
    
    5,210
    
    
    
    5,210Total accumulated other comprehensive income
    
    $
    57,064
    
    
    $
    39,561
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(6) Long-Term Debt
  March 31,
    
    
    December 31,2008
    
    
    2007Term loans
    
    $
    337,604
    
    
    $
    338,4658.125% Notes
    
    
    200,000
    
    
    
    200,000Total debt
    
    
    537,604
    
    
    
    538,465Less current portion of long-term debt
    
    
    3,445
    
    
    
    3,445Total long-term debt
    
    $
    534,159
    
    
    $
    535,020
 (a) Senior Secured Credit Facilities
    Maturity.
 Interest.
 Mandatory Prepayments.
 Covenants.
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(b) 8.125% Senior Subordinated Notes
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 Optional Redemption.
 Covenants.
 (7) Financial Instruments
 (a) Interest Rate Swap Agreement
  Fair Value Measurements
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Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor Identical
    
    Observable
    
    UnobservableMarch 31,
    
    Assets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Derivative liabilities
    
    $
    2,200
    
    
    $
    
    
    
    $
    2,200
    
    
    $
    
   (b) Fair Value of Financial Instruments
  March 31, 2008Carrying Value
    
    Fair ValueTerm loans
    
    $
    337,604
    
    
    $
    337,6048.125% Notes
    
    
    200,000
    
    
    
    165,250
 December 31, 2007Carrying Value
    
    Fair ValueTerm loans
    
    $
    338,465
    
    
    $
    338,4658.125% Notes
    
    
    200,000
    
    
    
    187,250
  (8) Income Taxes
   12




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




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(c) Profits Units of Kraton Management LLC (Management LLC)
   (d) Kraton Polymers LLC Executive Deferred Compensation Plan
   14




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(e) 2008 Incentive Compensation Plan
  (f) Retirement Plans
  Three Months EndedMarch 312008
    
    
    2007Components of net periodic benefit cost:Service cost
    
    $
    603
    
    
    $
    644Interest cost
    
    
    1,059
    
    
    
    969Expected return on plan assets
    
    
    (1,032
    )
    
    
    (908
    )Net periodic benefit cost
    
    $
    630
    
    
    $
    705
  Three Months EndedMarch 312008
    
    
    2007Components of net periodic benefit cost:Service cost
    
    $
    88
    
    
    $
    88Interest cost
    
    
    212
    
    
    
    187Net periodic benefit cost
    
    $
    300
    
    
    $
    275
 (11) Industry Segment and Foreign Operations
 Disclosures About Segments of
an Enterprise and Related Information
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Three
Months EndedMarch 31,2008
    
    
    2007Net Revenues:United States
    
    $
    81,721
    
    
    $
    86,581Germany
    
    
    34,849
    
    
    
    33,954Netherlands
    
    
    17,223
    
    
    
    11,942Japan
    
    
    15,381
    
    
    
    12,511Italy
    
    
    12,597
    
    
    
    11,915Belgium
    
    
    9,123
    
    
    
    7,540United Kingdom
    
    
    9,016
    
    
    
    9,362France
    
    
    8,153
    
    
    
    5,738Brazil
    
    
    7,939
    
    
    
    8,936Canada
    
    
    7,539
    
    
    
    4,746China
    
    
    7,486
    
    
    
    8,033Turkey
    
    
    5,484
    
    
    
    2,807Australia
    
    
    4,753
    
    
    
    2,475Taiwan
    
    
    4,618
    
    
    
    5,269Thailand
    
    
    3,426
    
    
    
    3,612Mexico
    
    
    3,114
    
    
    
    2,625Argentina
    
    
    3,078
    
    
    
    3,484Sweden
    
    
    3,026
    
    
    
    2,699Korea, Republic of
    
    
    2,543
    
    
    
    1,544Poland
    
    
    2,542
    
    
    
    1,913Denmark
    
    
    2,044
    
    
    
    2,608All other countries
    
    
    21,206
    
    
    
    16,532$
    266,861
    
    
    $
    246,826March 31,
    
    
    December 31,2008
    
    
    2007Long-lived Assets:United States
    
    $
    298,082
    
    
    $
    298,979Germany
    
    
    44,562
    
    
    
    40,406Japan
    
    
    5,427
    
    
    
    3,743France
    
    
    118,262
    
    
    
    111,441The Netherlands (Inc R&D)
    
    
    36,228
    
    
    
    34,454Brazil
    
    
    57,364
    
    
    
    56,721China
    
    
    2,215
    
    
    
    2,119All other countries
    
    
    12,366
    
    
    
    12,050$
    574,506
    
    
    $
    559,913
 (12) Supplemental Guarantor Information
  16




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Balance Sheets
 As of March 31, 2008Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    175
    
    
    $
    7,358
    
    
    $
    
    
    
    $
    7,533Receivables, net of allowances
    
    
    
    
    
    
    59,339
    
    
    
    108,865
    
    
    
    
    
    
    
    168,204Due from related parties
    
    
    3,944
    
    
    
    20,573
    
    
    
    11,855
    
    
    
    (36,372
    )
    
    
    Inventories of products, net
    
    
    
    
    
    
    141,790
    
    
    
    152,580
    
    
    
    (7,891
    )
    
    
    286,479Inventories of materials and supplies, net
    
    
    
    
    
    
    7,065
    
    
    
    5,756
    
    
    
    
    
    
    
    12,821Other current assets
    
    
    7,492
    
    
    
    1,099
    
    
    
    8,510
    
    
    
    
    
    
    
    17,101Total current assets
    
    
    11,436
    
    
    
    230,041
    
    
    
    294,924
    
    
    
    (44,263
    )
    
    
    492,138Property, plant and equipment, less accumulated
depreciation
    
    
    101,065
    
    
    
    164,083
    
    
    
    135,459
    
    
    
    
    
    
    
    400,607Identifiable intangible assets, less
accumulated amortization
    
    
    27,677
    
    
    
    
    
    
    
    46,940
    
    
    
    
    
    
    
    74,617Investment in consolidated subsidiaries
    
    
    782,300
    
    
    
    
    
    
    
    
    
    
    
    (782,300
    )
    
    
    Investment in unconsolidated joint venture
    
    
    813
    
    
    
    
    
    
    
    10,186
    
    
    
    
    
    
    
    10,999Deferred financing costs
    
    
    9,822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,822Other long-term assets
    
    
    111,893
    
    
    
    402,784
    
    
    
    10,966
    
    
    
    (509,769
    )
    
    
    15,874Total assets
    
    $
    1,045,006
    
    
    $
    796,908
    
    
    $
    498,475
    
    
    $
    (1,336,332
    )
    
    $
    1,004,057Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,445
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,445Accounts payable-trade
    
    
    2,700
    
    
    
    47,139
    
    
    
    63,003
    
    
    
    
    
    
    
    112,842Other payables and accruals
    
    
    10,850
    
    
    
    16,787
    
    
    
    19,546
    
    
    
    
    
    
    
    47,183Due to related party
    
    
    
    
    
    
    11,855
    
    
    
    44,964
    
    
    
    (36,372
    )
    
    
    20,447Insurance bond payable
    
    
    4,301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,301Deferred income taxes
    
    
    (812
    )
    
    
    
    
    
    
    9,827
    
    
    
    
    
    
    
    9,015Total current liabilities
    
    
    20,484
    
    
    
    75,781
    
    
    
    137,340
    
    
    
    (36,372
    )
    
    
    197,233Long-term debt, net of current portion
    
    
    534,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    534,159Deferred income taxes
    
    
    (52,977
    )
    
    
    84,417
    
    
    
    8,521
    
    
    
    
    
    
    
    39,961Long-term liabilities
    
    
    400,241
    
    
    
    23,307
    
    
    
    117,352
    
    
    
    (509,769
    )
    
    
    31,131Total liabilities
    
    
    901,907
    
    
    
    183,505
    
    
    
    263,213
    
    
    
    (546,141
    )
    
    
    802,484Commitments and contingencies (note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    144,509
    
    
    
    608,193
    
    
    
    181,998
    
    
    
    (790,191
    )
    
    
    144,509Accumulated other comprehensive income
    
    
    (1,410
    )
    
    
    5,210
    
    
    
    53,264
    
    
    
    
    
    
    
    57,064Total members equity
    
    
    143,099
    
    
    
    613,403
    
    
    
    235,262
    
    
    
    (790,191
    )
    
    
    201,573Total liabilities and members equity
    
    $
    1,045,006
    
    
    $
    796,908
    
    
    $
    498,475
    
    
    $
    (1,336,332
    )
    
    $
    1,004,057
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. 17




---



##### Table of Contents



As of December 31, 2007Guarantor
    
    Non-GuarantorIssuers (1)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    11,152
    
    
    $
    37,125
    
    
    $
    
    
    
    $
    48,277Receivables, net of allowances
    
    
    
    
    
    
    50,134
    
    
    
    90,187
    
    
    
    
    
    
    
    140,321Due from related parties
    
    
    1,873
    
    
    
    19,856
    
    
    
    6,291
    
    
    
    (28,020
    )
    
    
    Inventories of products, net
    
    
    
    
    
    
    124,052
    
    
    
    138,772
    
    
    
    (6,501
    )
    
    
    256,323Inventories of materials and supplies, net
    
    
    
    
    
    
    6,817
    
    
    
    5,353
    
    
    
    
    
    
    
    12,170Other current assets
    
    
    2,172
    
    
    
    1,671
    
    
    
    8,561
    
    
    
    
    
    
    
    12,404Total current assets
    
    
    4,045
    
    
    
    213,682
    
    
    
    286,289
    
    
    
    (34,521
    )
    
    
    469,495Property, plant and equipment, less
accumulated depreciation
    
    
    104,945
    
    
    
    166,948
    
    
    
    130,377
    
    
    
    
    
    
    
    402,270Identifiable intangible assets, less
accumulated amortization
    
    
    29,418
    
    
    
    
    
    
    
    46,938
    
    
    
    
    
    
    
    76,356Investment in consolidated subsidiaries
    
    
    807,543
    
    
    
    
    
    
    
    
    
    
    
    (807,543
    )
    
    
    Investment in unconsolidated joint venture
    
    
    813
    
    
    
    
    
    
    
    9,513
    
    
    
    
    
    
    
    10,326Deferred financing costs
    
    
    10,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,323Other long-term assets
    
    
    97,301
    
    
    
    400,861
    
    
    
    16,997
    
    
    
    (499,035
    )
    
    
    16,124Total assets
    
    $
    1,054,388
    
    
    $
    781,491
    
    
    $
    490,114
    
    
    $
    (1,341,099
    )
    
    $
    984,894Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,445
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,445Accounts payable-trade
    
    
    2,700
    
    
    
    48,030
    
    
    
    52,222
    
    
    
    
    
    
    
    102,952Other payables and accruals
    
    
    13,503
    
    
    
    17,988
    
    
    
    24,325
    
    
    
    
    
    
    
    55,816Due to related party
    
    
    
    
    
    
    6,291
    
    
    
    46,234
    
    
    
    (28,020
    )
    
    
    24,505Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    9,827
    
    
    
    
    
    
    
    9,827Insurance note payable
    
    
    494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494Total current liabilities
    
    
    20,142
    
    
    
    72,309
    
    
    
    132,608
    
    
    
    (28,020
    )
    
    
    197,039Long-term debt, net of current portion
    
    
    535,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535,020Deferred income taxes
    
    
    (52,048
    )
    
    
    84,417
    
    
    
    7,074
    
    
    
    
    
    
    
    39,443Long-term liabilities
    
    
    405,552
    
    
    
    22,980
    
    
    
    101,185
    
    
    
    (499,035
    )
    
    
    30,682Total liabilities
    
    
    908,666
    
    
    
    179,706
    
    
    
    240,867
    
    
    
    (527,055
    )
    
    
    802,184Commitments and contingencies (note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    145,722
    
    
    
    621,110
    
    
    
    190,361
    
    
    
    (814,044
    )
    
    
    143,149Accumulated other comprehensive
income
    
    
    
    
    
    
    (19,325
    )
    
    
    58,886
    
    
    
    
    
    
    
    39,561Total members equity
    
    
    145,722
    
    
    
    601,785
    
    
    
    249,247
    
    
    
    (814,044
    )
    
    
    182,710Total liabilities and members equity
    
    $
    1,054,388
    
    
    $
    781,491
    
    
    $
    490,114
    
    
    $
    (1,341,099
    )
    
    $
    984,894
 18




---



##### Table of Contents



Three Months Ended March 31, 2008Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Revenues:Sales
    
    $
    
    
    
    $
    130,968
    
    
    $
    168,203
    
    
    $
    (42,883
    )
    
    $
    256,288Other
    
    
    
    
    
    
    
    
    
    
    10,573
    
    
    
    
    
    
    
    10,573Total revenues
    
    
    
    
    
    
    130,968
    
    
    
    178,776
    
    
    
    (42,883
    )
    
    
    266,861Cost of goods sold
    
    
    1,390
    
    
    
    98,514
    
    
    
    161,055
    
    
    
    (42,883
    )
    
    
    218,076Gross profit (loss)
    
    
    (1,390
    )
    
    
    32,454
    
    
    
    17,721
    
    
    
    
    
    
    
    48,785Research and development expenses
    
    
    
    
    
    
    5,444
    
    
    
    2,474
    
    
    
    
    
    
    
    7,918Selling, general, and administrative expenses
    
    
    17
    
    
    
    15,547
    
    
    
    9,891
    
    
    
    
    
    
    
    25,455Depreciation and amortization
    
    
    5,621
    
    
    
    5,382
    
    
    
    3,649
    
    
    
    
    
    
    
    14,652Earnings in consolidated subsidiaries
    
    
    (7,654
    )
    
    
    
    
    
    
    
    
    
    
    7,654
    
    
    
    Earnings in unconsolidated joint venture
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    (61
    )Interest expense (income), net
    
    
    10,965
    
    
    
    (2,567
    )
    
    
    1,987
    
    
    
    
    
    
    
    10,385Income (loss) before income taxes
    
    
    (10,339
    )
    
    
    8,648
    
    
    
    (219
    )
    
    
    (7,654
    )
    
    
    (9,564
    )Income tax (expense) benefit
    
    
    929
    
    
    
    
    
    
    
    (775
    )
    
    
    
    
    
    
    154Net (loss) income
    
    $
    (9,410
    )
    
    $
    8,648
    
    
    $
    (994
    )
    
    $
    (7,654
    )
    
    $
    (9,410
    )
 
 (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. Statements of Operations
 Three Months Ended March 31, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    126,533
    
    
    $
    149,696
    
    
    $
    (35,727
    )
    
    $
    240,502Other
    
    
    
    
    
    
    41
    
    
    
    6,283
    
    
    
    
    
    
    
    6,324Total revenues
    
    
    
    
    
    
    126,574
    
    
    
    155,979
    
    
    
    (35,727
    )
    
    
    246,826Cost of goods sold
    
    
    239
    
    
    
    108,940
    
    
    
    141,049
    
    
    
    (35,727
    )
    
    
    214,501Gross profit (loss)
    
    
    (239
    )
    
    
    17,634
    
    
    
    14,930
    
    
    
    
    
    
    
    32,325Research and development expenses
    
    
    
    
    
    
    3,869
    
    
    
    2,654
    
    
    
    
    
    
    
    6,523Selling, general, and administrative expenses
    
    
    
    
    
    
    9,928
    
    
    
    7,081
    
    
    
    
    
    
    
    17,009Depreciation and amortization
    
    
    4,324
    
    
    
    5,149
    
    
    
    2,577
    
    
    
    
    
    
    
    12,050Loss in consolidated subsidiaries
    
    
    2,524
    
    
    
    
    
    
    
    
    
    
    
    (2,524
    )
    
    
    Earnings in unconsolidated joint venture
    
    
    
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    (230
    )Interest expense (income), net
    
    
    11,253
    
    
    
    (2,281
    )
    
    
    1,758
    
    
    
    
    
    
    
    10,730Income (loss) before income taxes
    
    
    (18,340
    )
    
    
    969
    
    
    
    1,090
    
    
    
    (2,524
    )
    
    
    (13,757
    )Income tax benefit (provision)
    
    
    5,144
    
    
    
    (5,144
    )
    
    
    561
    
    
    
    
    
    
    
    561Net (loss) income
    
    $
    (13,196
    )
    
    $
    (4,175
    )
    
    $
    1,651
    
    
    $
    (2,524
    )
    
    $
    (13,196
    )
 
 (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



Statements of Cash Flows
 Three Months Ended March 31, 2008Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Cash flows provided by (used in) operating activities
    
    $
    22,070
    
    
    $
    (13,773
    )
    
    $
    (58,598
    )
    
    $
    
    
    
    $
    (50,301
    )Cash flows used in investing activities:Purchase of plant and equipment, net of
proceeds from sales of equipment
    
    
    
    
    
    
    (2,516
    )
    
    
    (657
    )
    
    
    
    
    
    
    (3,173
    )Net cash used in investing activities
    
    
    
    
    
    
    (2,516
    )
    
    
    (657
    )
    
    
    
    
    
    
    (3,173
    )Cash flows provided by (used in) financing activities:Repayment of debt obligations
    
    
    (55,861
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55,861
    )Proceeds from borrowings under debt obligations
    
    
    55,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,000Proceeds from (payments on) intercompany loans
    
    
    (35,016
    )
    
    
    5,312
    
    
    
    29,704
    
    
    
    
    
    
    
    Proceeds from cash contribution from member
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Net proceeds from insurance note payable
    
    
    3,807
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,807Net cash provided by (used in) financing
activities
    
    
    (22,070
    )
    
    
    5,312
    
    
    
    29,704
    
    
    
    
    
    
    
    12,946Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (216
    )
    
    
    
    
    
    
    (216
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (10,977
    )
    
    
    (29,767
    )
    
    
    
    
    
    
    (40,744
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    11,152
    
    
    
    37,125
    
    
    
    
    
    
    
    48,277Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    175
    
    
    $
    7,358
    
    
    $
    
    
    
    $
    7,533
 Three Months Ended March 31, 2007Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Cash flows provided by (used in) operating activities
    
    $
    (16,288
    )
    
    $
    13,759
    
    
    $
    8,964
    
    
    $
    
    
    
    $
    6,435Cash flows used in investing activities:Purchase of plant and equipment, net of
proceeds from sales of equipment
    
    
    
    
    
    
    (1,085
    )
    
    
    (3,602
    )
    
    
    
    
    
    
    (4,687
    )Net cash used in investing activities
    
    
    
    
    
    
    (1,085
    )
    
    
    (3,602
    )
    
    
    
    
    
    
    (4,687
    )Cash flows provided by (used in) financing activities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt obligations
    
    
    (963
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (963
    )Proceeds from (payments on) intercompany loans
    
    
    13,219
    
    
    
    (13,219
    )
    
    
    
    
    
    
    
    
    
    
    Net proceeds from insurance note payable
    
    
    4,032
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,032Net cash provided by (used in) financing
activities
    
    
    16,288
    
    
    
    (13,219
    )
    
    
    
    
    
    
    
    
    
    
    3,069Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (658
    )
    
    
    
    
    
    
    (658
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (545
    )
    
    
    4,704
    
    
    
    
    
    
    
    4,159Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    13,850
    
    
    
    29,751
    
    
    
    
    
    
    
    43,601Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    13,305
    
    
    $
    34,455
    
    
    $
    
    
    
    $
    47,760
 
 (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



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   Recent Developments
 New Board Members
  Fire at Berre, France Facility
  Research and Technology
  21




---



##### Table of Contents



New Innovations
   Pricing
  Critical Accounting Policies
  Revenue Recognition
   Inventories
  22




---



##### Table of Contents



Property, Plant and Equipment
  Machinery and equipment
    
    20 yearsBuilding and land improvements
    
    20 yearsComputer hardware/information systems
    
    3 yearsOffice equipment
    
    5 yearsResearch equipment and facilities
    
    5 yearsVehicles
    
    5 years
 Impairment of Long-Lived Assets
  Benefit Plans
  Income Taxes
    23




---



##### Table of Contents



Factors Affecting Our Results of Operations
 Raw Materials
        Seasonality
  Economic and Market Conditions
  24




---



##### Table of Contents



International Operations and Currency Fluctuations
     Restructuring and restructuring-related costs
  Results of Operations
 Three Months Ended March 31, 2008, Compared to Three Months Ended March 31, 2007
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2008
    
    
    March 31, 2007Revenues:Sales
    
    $
    256,288
    
    
    $
    240,502Other
    
    
    10,573
    
    
    
    6,324Total revenues
    
    
    266,861
    
    
    
    246,826Cost of goods sold
    
    
    218,076
    
    
    
    214,501Gross profit
    
    
    48,785
    
    
    
    32,325Research and development expenses
    
    
    7,918
    
    
    
    6,523Selling, general and administrative expenses
    
    
    25,455
    
    
    
    17,009Depreciation and amortization of identifiable intangibles
    
    
    14,652
    
    
    
    12,050Earnings in unconsolidated joint venture
    
    
    (61
    )
    
    
    (230
    )Interest expense, net
    
    
    10,385
    
    
    
    10,730Loss before income taxes
    
    
    (9,564
    )
    
    
    (13,757
    )Income tax benefit
    
    
    154
    
    
    
    561Net loss
    
    $
    (9,410
    )
    
    $
    (13,196
    )
  25




---



##### Table of Contents



Three Months Ended
    
    Three Months EndedMarch 31, 2008
    
    March 31, 2007Revenues:Sales
    
    
    96.0
    %
    
    
    97.4
    %Other
    
    
    4.0
    
    
    
    2.6Total revenues
    
    
    100.0
    
    
    
    100.0Cost of goods sold
    
    
    81.7
    
    
    
    86.9Gross profit
    
    
    18.3
    
    
    
    13.1Research and development expenses
    
    
    3.0
    
    
    
    2.6Selling, general and administrative expenses
    
    
    9.5
    
    
    
    6.9Depreciation and amortization of identifiable intangibles
    
    
    5.5
    
    
    
    4.9Earnings in unconsolidated joint venture
    
    
    (0.0
    )
    
    
    (0.1
    )Interest expense, net
    
    
    3.9
    
    
    
    4.4Loss before income taxes
    
    
    (3.6
    )
    
    
    (5.6
    )Income tax benefit
    
    
    0.1
    
    
    
    0.2Net loss
    
    
    (3.5
    )%
    
    
    (5.4
    )%
 Total Revenues
  Sales
  Other revenue
 Cost of Goods Sold
  Gross Profit
  Operating Expenses
 Research and development expenses .
 26




---



##### Table of Contents



Selling, general and administrative expenses .
 Depreciation and amortization of identifiable intangibles.
 Earnings in unconsolidated joint venture .
 Interest expense, net.
 Income taxes.
 Net (loss).
 Liquidity and Capital Resources
   27




---



##### Table of Contents



Operating activities.
 Investing activities .
 Financing activities.
 Capital
Expenditures.
 Description of Our Indebtedness
 Senior Secured Credit Facility
    28




---



##### Table of Contents



Maturity.
 Interest.
 Mandatory Prepayments.
 Covenants.
   8.125% Senior Subordinated Notes
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 29




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##### Table of Contents



Optional Redemption.
 Covenants.
 Other Contingencies
       Off-Balance Sheet Transactions
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  30




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##### Table of Contents



Interest rate risk.
  Foreign currency risk .
 Commodity price risk .
 
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   ITEM 1A. RISK FACTORS
  31




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##### Table of Contents



ITEM 2. UNREGISTERED 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
  32




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##### Table of Contents



ITEM 6. EXHIBITS
 10.0(b)
    
    Consulting Agreement dated February 1, 2008 between George Gregory and Kraton Polymers LLC10.1(c)
    
    Separation Agreement dated January 24, 2008 between George Gregory and Kraton Polymers LLC10.5(b)
    
    Retention Agreement dated January 1, 2008, between Richard A. Ott and Kraton Polymers LLC10.9(b)
    
    Retention Agreement dated January 1, 2008, between David Bradley and Kraton Polymers LLC10.16(b)
    
    Retention Agreement dated January 1, 2008, between Kevin M. Fogarty and Kraton Polymers LLC31.1
    
    Certification of Chief Executive Officer under Section 302 of SarbanesOxley Act of 200231.2
    
    Certification of Chief Financial Officer under Section 302 of SarbanesOxley Act of 200232.1
    
    Certification Pursuant to Section 906 of SarbanesOxley Act of 2002
 33




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##### Table of Contents



Signatures
  Kraton Polymers LLCDate: May 13, 2008
    /s/ Kevin M. FogartyKevin M. FogartyPresident and Chief Executive Officer/s/ Stephen E. TremblayStephen E. TremblayVice President and Chief Financial Officer 34




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##### Table of Contents



10.0(b)
    
    Consulting Agreement dated February 1, 2008 between George Gregory and Kraton Polymers LLC10.1(c)
    
    Separation Agreement dated January 24, 2008 between George Gregory and Kraton Polymers LLC10.5(b)
    
    Retention Agreement dated January 1, 2008, between Richard A. Ott and Kraton Polymers LLC10.9(b)
    
    Retention Agreement dated January 1, 2008, between David Bradley and Kraton Polymers LLC10.16(b)
    
    Retention Agreement dated January 1, 2008, between Kevin M. Fogarty and Kraton Polymers LLC31.1
    
    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