##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Polymer Holdings LLC
  Delaware
    
    20-0411521(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation)700 Milam Street, 13thFloor, North Tower
    
    832-204-5400Houston, TX 77002
    
    (Registrants telephone number, including area code)(Address of principal executive offices,including zip code)
 KRATON Polymers LLC
  Delaware
(State of incorporation)
    
    94-2805249
(I.R.S. Employer Identification No.)700 Milam Street, 13th Floor, North Tower
Houston, TX 77002
(Address of principal executive offices,
including zip code)
    
    832-204-5400
(Registrants telephone number, including area code)http://www.kraton.com
(Registrants url)
 Not applicable
  o þ
  o þ
 þ  ̈
  ̈ þ
  Large accelerated filer  ̈
    
    Accelerated filer  ̈
    
    Non-accelerated filer þ
  ̈ þ




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##### 



INDEX
 PAGEPART IItem 1.
    
    Business
    
    
    4Item 1A.
    
    Risk Factors
    
    
    16Item 1B.
    
    Unresolved Staff Comments
    
    
    25Item 2.
    
    Properties
    
    
    25Item 3.
    
    Legal Proceedings
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28PART IIItem 5.
    
    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    29Item 6.
    
    Selected Financial Data
    
    
    29Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 8.
    
    Financial Statements and Supplementary Data
    
    
    52Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    52Item 9A.
    
    Controls and Procedures
    
    
    52Item 9B.
    
    Other Information
    
    
    52PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    53Item 11.
    
    Executive Compensation
    
    
    57Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    63Item 13.
    
    Certain Relationships and Related Transactions
    
    
    65Item 14.
    
    Principal Accountant Fees and Services
    
    
    66PART IVItem 15.
    
    Exhibits and Financial Statements Schedules
    
    
    66Deed of NovationStatement re Computation of RatiosCertificaiton of CEO Pursuant to Rule 13a-14(a)Certificaiton of CFO Pursuant to Rule 13a-14(a)Certification of CEO & CFO Pursuant to Section 906
  2




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FORWARD LOOKING STATEMENTS
   PRESENTATION OF FINANCIAL STATEMENTS
  3




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PART I
  
 ITEM 1. BUSINESS
 General
  Corporate Background
     Competitive Strengths
 Leading Global SBC Market Position .
 4




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Superior Technical Expertise and Product Innovation.
 Strong Customer Relationships.
 Global Scale of Operations.
 Diversity Across Customers, End-Uses and Geography.
 Business Strategy
 Provide Superior Product Quality and Customer Service.
 Deliver Innovative New Products to the Marketplace.
 5




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Grow by Focusing on the Highest Growth Segments and Expanding into New Applications and
Regions.
  Focus on Operational Excellence and Drive Down Unit Costs.
 Optimize Cash Flow through Prudent Capital Spending and Working Capital Management.
 Products
   KRATON D (including KRATON IR and KRATON IR Latex).
 6




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KRATON G.
  End-Use Markets
  7




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##### Table of Contents



KRATONRevenueEnd-Use
    
    Mix(1)
    
    Selected Applications
    
    Selected ProductsPaving and Roofing
    
    
    32
    %
    
    
    
    Asphalt modification
    
    
    
    Roofing felts and shingles
    
    Roadways
    
    FootwearAdhesive, Sealants and Coatings
    
    
    32
    %
    
    
    
    Adhesives
    
    
    
    Packaging and specialty tapes
    
    Sealants
    
    
    
    Adhesive labels
    
    Do It Yourself sealantsCompounding Channels
    
    
    15
    %
    
    
    
    Soft touch and flexible materials
    
    
    
    Tool grips and bike handles
    
    Impact resistant plastics
    
    
    
    Automotive dashboard materials and engineered flexible parts
    
    Automotive componentsPackaging and Films
    
    
    7
    %
    
    
    
    Packaging films
    
    
    
    Plastic cups and plates
    
    Consumer disposables/durables
    
    
    
    Furniture
    
    Automotive components
    
    
    
    Food packaging
    
    Medical products
    
    
    
    Automobile panels
    
    Medical devicesPersonal Care
    
    
    7
    %
    
    
    
    Elastic film polymers
    
    
    
    Disposable infant and child care
    
    Personal care Compounds
    
    
    
    Skin care products and lotions
    
    Oil gels for skin care
 
 (1)
    
    Based on 2005 total revenues of $975.6 million. Percentages do not include other revenues,
which accounted for less than 4% of total 2005 revenue and may not add up to 100%.
 Paving and Roofing.
    Adhesives, Sealants and Coatings.
  8




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Compounding Channels.
   Packaging and Films.
  Personal Care.
  Research, Development and Technology
    9




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Sales and Marketing
     Sources and Availability of Raw Materials
  10




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Styrene.
    Butadiene.
   11




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##### Table of Contents



Isoprene.
    Competition
   Product Substitution.
  12




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Leases, Operating and Other Agreements
 Leases of Manufacturing and Research Facilities.
    Operating Agreements.
  13




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Site Services, Utilities, Materials and Facilities Agreements with Shell Chemicals.
 Information Systems
  Patents, Trademarks, Copyrights and Other Intellectual Property Rights
    Employees
  14




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Environmental Regulation
         15




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Insurance
  Seasonality
  
 ITEM 1A. RISK FACTORS
 Shell Chemicals provides significant operating and other services under agreements that are
important to our business. The failure of Shell Chemicals to perform its obligations, or the
termination of these agreements, could adversely affect our operations.
  
    
    Operating agreements pursuant to which Shell Chemicals operates and
maintains our European manufacturing facilities and employs and provides almost all of
the staff for those facilities;
    
    Site services, utilities, materials and facilities agreements pursuant to
which Shell Chemicals provides utilities and site services to our European
manufacturing facilities and research and development facilities; and
    
    Lease agreements pursuant to which we lease our European manufacturing
facilities and some of our research and development facilities from Shell Chemicals.
  We obtain a significant amount of our styrene, butadiene and isoprene requirements in the
United States and Europe from Shell Chemicals.
   16




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The failure of Shell Chemicals to perform its obligations under these agreements, our
inability to replace or renew these agreements when they expire, could increase our cost for these
materials, interrupt production and otherwise adversely affect our results of operations.
  Increases in the costs of our raw materials could have an adverse effect on our financial
condition and results of operations if those costs cannot be passed onto our customers.
   17




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Fluctuations in the availability of our raw materials could have an adverse effect on our
financial condition and results of operations.
    18




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If we are not able to continue the technological innovation and successful commercial
introduction of new products, our financial condition and results of operations could be adversely
affected.
   The SBC industry and our end-use markets are highly competitive, and we must remain
competitive or our results of operations may be adversely affected.
   Competition from non-SBC products is intense and may reduce demand for our products.
  
    
    In the Paving and Roofing end-use market, SBC products primarily compete
with atactic polypropylene, styrene butadiene rubber and unmodified asphalts. The
choice between these materials is influenced by total end-product performance, cost and
ease of use.
    
    In the Adhesives, Sealants and Coatings end-use market, SBC products
primarily compete with acrylics, silicones, solvent-based rubber systems and
metallocene polyolefins. The choice between these materials is influenced by bond
strength, specific adhesion, consistent performance to specification, processing speed,
hot-melt application, resistance to water and total end-product cost.
    
    In the Compounding Channels end-use market, SBC products compete against a
wide variety of chemical and non-chemical alternatives, including thermoplastic
vulcanizates, ethylene propylene diene
 19




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monomers (EPDM), metallocene polyolefins and thermoplastic polyurethanes (TPUs). The
choice between these materials is influenced by performance characteristics, ease of
use, desired aesthetics and total end-product cost.
 
    
    In the Packaging and Films end-use market, SBC products primarily compete
with PVC polymers and compounds, polyolefins, polystyrene, PET, nylon, thermoplastic
vulcanizates, and polycarbonate, based on performance, ease of use, desired aesthetics
and total end-product cost.
    
    In the Personal Care end-use market, competing materials include spandex,
metallocene polyolefins and natural rubber.
 Hazards associated with chemical manufacturing may occur, which could adversely affect our
results of operations.
  
    
    pipeline and storage tank leaks and ruptures;
    
    explosions and fires;
    
    inclement weather and natural disasters;
    
    terrorist attacks;
    
    mechanical failure; and
    
    chemical spills and other discharges or releases of toxic or hazardous substances or gases.
  Compliance with extensive environmental, health and safety laws could require material
expenditures, changes in our operations or site remediation.
   20




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Regulatory changes applicable to us, or the products in our end-use markets, could adversely
affect our financial condition and results of operations.
  We are subject to customs, international trade, antitrust, zoning and occupancy and labor and
employment laws that could require us to modify our current business practices and incur increased
costs.
   We may not have appropriate procedures in place to eliminate financial reporting inaccuracies
or delays.
   21




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Our business relies on intellectual property and other proprietary information.
    22




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Our products may infringe the intellectual property rights of others, which may cause us to
incur unexpected costs or prevent us from selling our products.
  We may be liable for damages based on product liability claims brought against our customers
in our end-use markets.
  Regulation of our employees exposure to butadiene could require material expenditures or
changes in our operations.
  Our relationship with our employees could deteriorate, which could adversely impact our
operations.
  23




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Loss of key personnel or our inability to attract and retain new qualified personnel could
hurt our business and inhibit our ability to operate and grow successfully.
  As a global business, we are exposed to local business risks in different countries, which
could have a material adverse effect on our financial condition or results of operations.
  
    
    new and different legal and regulatory requirements in local jurisdictions;
    
    export duties or import quotas;
    
    domestic and foreign customs and tariffs or other trade barriers;
    
    potential staffing difficulties and labor disputes;
    
    managing and obtaining support and distribution for local operations;
    
    increased costs of transportation or shipping;
    
    credit risk and financial conditions of local customers and distributors;
    
    potential difficulties in protecting intellectual property;
    
    risk of nationalization of private enterprises by foreign governments;
    
    potential imposition of restrictions on investments;
    
    potentially adverse tax consequences, including imposition or increase of
withholding and other taxes on remittances and other payments by subsidiaries;
    
    foreign exchange restrictions and fluctuations; and
    
    local political and social conditions, including the possibility of
hyperinflationary conditions and political instability in certain countries.
  24




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Fluctuations in currency exchange rates may significantly impact our results of operations and
may significantly affect the comparability of our results between financial periods.
   Downturns in general economic conditions could adversely affect our profitability.
  We do not have long-term contracts with our customers and the loss of customers could
adversely affect our sales and profitability.
  Our insurance coverage may be inadequate to protect against potential losses.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  25




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Approximated
    
    
    
    Owned /Location
    
    Acres
    
    Square Footage
    
    Use
    
    LeasedBelpre, Ohio, USA
    
    
    350
    
    
    
    3,600,000
    
    
    Manufacturing
    
    Owned(1)Wesseling, Germany
    
    
    8.1
    
    
    
    354,000
    
    
    Manufacturing
    
    Leased(2)Berre, France
    
    
    9.0
    
    
    
    392,000
    
    
    Manufacturing
    
    Owned(3)Pernis, The Netherlands
    
    
    3.4
    
    
    
    146,000
    
    
    Manufacturing
    
    Owned(3)Paulinia, Brazil
    
    
    179
    
    
    
    2,220,000
    
    
    Manufacturing
    
    OwnedKashima, Japan
    
    
    11.6
    
    
    
    395,000
    
    
    Manufacturing
    
    Owned(4)Houston, Texas, USA
    
    
    N/A
    
    
    
    46,615
    
    
    R&D
    
    Leased(5)Amsterdam, The Netherlands
    
    
    N/A
    
    
    
    32,015
    
    
    R&D
    
    Leased(5)Louvain-la-Neuve, Belgium
    
    
    N/A
    
    
    
    12,875
    
    
    R&D
    
    Leased(5)Tsukuba, Japan
    
    
    4.5
    
    
    
    23,327
    
    
    R&D
    
    Owned
 
 (1)
    
    A portion of the HSBC capacity at the Belpre facility is owned by Infineum USA, a joint
venture between Shell Chemicals and ExxonMobil.(2)
    
    We lease the land and the manufacturing facility, but own the production equipment.(3)
    
    We lease the land, but own the manufacturing facility and production equipment.(4)
    
    The Japanese facility is owned by our 50%-50% joint venture with JSR.(5)
    
    We lease the facility, but own the equipment. Belpre, Ohio, USA
    Wesseling, Germany
   26




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Berre, France
   Pernis, The Netherlands
   Paulinia, Brazil
  Kashima, Japan
   Research and Development Facilities and Other Facilities
   27




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ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  28




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
 ITEM 6. SELECTED FINANCIAL DATA
     29




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ElastomersPredecessor
    
    
    BusinessPeriod from
    
    
    Period fromDecember 23
    
    
    January 1
    
    
    
    
    
    
    Ten Months
    
    
    Two MonthsYear Ended
    
    
    Year Ended
    
    
    through
    
    
    through
    
    
    Year Ended
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 22,
    
    
    December 31,
    
    
    December 31,
    
    
    February 28,2005
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2001(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)Statement of
Operations Data:RevenuesSales
    
    $
    952,921
    
    
    $
    791,226
    
    
    $
    9,532
    
    
    $
    680,263
    
    
    $
    620,065
    
    
    $
    512,436
    
    
    $
    92,000Other(1)
    
    
    22,670
    
    
    
    16,160
    
    
    
    328
    
    
    
    12,475
    
    
    
    8,853
    
    
    
    8,814
    
    
    
    4,000Total revenues
    
    
    975,591
    
    
    
    807,386
    
    
    
    9,860
    
    
    
    692,738
    
    
    
    628,918
    
    
    
    521,250
    
    
    
    96,000Cost of goods sold(2)
    
    
    766,012
    
    
    
    692,968
    
    
    
    9,796
    
    
    
    519,743
    
    
    
    424,978
    
    
    
    403,669
    
    
    
    73,000Gross profit
    
    
    209,579
    
    
    
    114,418
    
    
    
    64
    
    
    
    172,995
    
    
    
    203,940
    
    
    
    117,581
    
    
    
    23,000Research and
development expenses
    
    
    26,152
    
    
    
    23,178
    
    
    
    458
    
    
    
    23,310
    
    
    
    22,984
    
    
    
    17,501
    
    
    
    5,000Selling, general and
administrative
    
    
    72,731
    
    
    
    64,903
    
    
    
    1,624
    
    
    
    54,017
    
    
    
    65,563
    
    
    
    58,150
    
    
    
    11,000Depreciation and
amortization
    
    
    44,090
    
    
    
    42,630
    
    
    
    860
    
    
    
    25,876
    
    
    
    28,166
    
    
    
    24,295
    
    
    
    7,000Earnings in joint
venture(3)
    
    
    (1,516
    )
    
    
    (462
    )
    
    
    (28
    )
    
    
    (621
    )
    
    
    (1,171
    )
    
    
    (1,045
    )
    
    
    Interest expense,
net(4)
    
    
    33,943
    
    
    
    38,963
    
    
    
    556
    
    
    
    57,543
    
    
    
    36,066
    
    
    
    37,672
    
    
    
    1,000Income (loss) before
income taxes
    
    
    34,179
    
    
    
    (54,794
    )
    
    
    (3,406
    )
    
    
    12,870
    
    
    
    52,332
    
    
    
    (18,992
    )
    
    
    (1,000
    )Income tax
(provision)
benefit(5)
    
    
    (11,519
    )
    
    
    18,973
    
    
    
    1,347
    
    
    
    (3,007
    )
    
    
    (9,793
    )
    
    
    (900
    )
    
    
    (1,000
    )Net income (loss)
    
    $
    22,660
    
    
    $
    (35,821
    )
    
    $
    (2,059
    )
    
    $
    9,863
    
    
    $
    42,539
    
    
    $
    (19,892
    )
    
    $
    (2,000
    )
 PredecessorAs of
    
    
    As of
    
    
    As of
    
    
    As of
    
    
    As ofDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)Balance Sheet Data:Cash and cash
equivalents
    
    $
    100,934
    
    
    $
    46,357
    
    
    $
    17,500
    
    
    $
    14,305
    
    
    $
    24,190Total assets(6)
    
    
    964,813
    
    
    
    965,587
    
    
    
    941,056
    
    
    
    608,651
    
    
    
    589,296Total debt(7)
    
    
    462,663
    
    
    
    465,343
    
    
    
    560,000
    
    
    
    343,730
    
    
    
    385,450
 
 (1)
    
    Other revenues include the sale of by-products generated in the production of KRATON IR
and SIS.(2)
    
    In the year ended December 31, 2005 and 2004, the period from December 23 through December
31, 2003 and the ten months ended December 31, 2001, these amounts include $1,684, $35,225,
$1,525 and $44,200, respectively, of additional costs relating to the sale of inventory, the
carrying value of which had been increased to reflect the manufacturing profit in inventory as
part of the Acquisition and Separation, respectively.(3)
    
    Represents our 50% joint venture interest in KRATON JSR Elastomers KK, which is accounted for
using the equity method of accounting.(4)
    
    Interest expense net of interest income. In the period from January 1 through December 22,
2003, interest expense includes $10,200, related to the write-off of deferred financing costs
associated with indebtedness repaid in the Acquisition, $9,100 of prepayment penalty
associated with such indebtedness and $7,500 related to the remaining accretion of the value
of warrants of Ripplewood Chemical issued with such indebtedness.(5)
    
    Taxes reflected in the predecessor company represents the income tax provision related to our
foreign operations due to our U.S. operations being considered a limited liability company and
treated as a flow through entity for federal income tax purposes. Since the Acquisition, taxes
include all operations, including the U.S. operations.(6)
    
    At December 23, 2003, property, plant, and equipment was increased by $151,123 as a result of
purchase accounting.(7)
    
    The amounts as of December 31, 2003, 2004 and 2005, reflect the Acquisition. ElastomersPredecessor
    
    BusinessPeriod from
    
    Period fromDecember 23
    
    January 1
    
    
    
    
    
    Ten Months
    
    Two MonthsYear Ended
    
    Year Ended
    
    through
    
    through
    
    Year Ended
    
    Ended
    
    EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 23,
    
    December 31,
    
    December 31,
    
    February 28,2005
    
    2004
    
    2003
    
    2003
    
    2002
    
    2001
    
    2001Other Data:Ratio of Earnings
to Fixed Charges
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    2.3
    
    
    
    
    
    
    
    
  
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  30




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Recent Developments
 Supply Disruption Issues
      SIS Sales Allocations
  31




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New Polyisoprene Latex Plant, Paulinia, Brazil
  Changes in Executive Officers and Senior Staff
   New Products
  Exchange Offers
    32




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The Acquisition
  
    
    $200.0 million from the proceeds from the issuance of the 8.125% Notes;
    
    $360.0 million of borrowings under the term loan portion of the senior secured credit facility;
    
    an equity contribution to KRATON by Polymer Holdings of $250.0 million in cash; and
    
    $48.0 million of cash on KRATONs balance sheet.
   Critical Accounting Policies
  Revenue Recognition
   33




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Inventories
  Property, Plant and Equipment
   Pensions
     34




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##### Table of Contents



Income Taxes
   Factors Affecting Our Results of Operations
 Raw Materials
      35




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Seasonality
  Economic and Market Conditions
  International Operations and Currency Fluctuations
   U.S. $ per 10,000U.S. $ per Euro
    
    Japanese Yen
    
    U.S. $ per Brazilian RealAverage
    
    Period End
    
    Average
    
    Period End
    
    Average
    
    Period EndYear Ended
    
    
    2003
    
    
    
    1.129
    
    
    
    1.255
    
    
    
    86.22
    
    
    
    93.37
    
    
    
    0.321
    
    
    
    0.3442004
    
    
    
    1.242
    
    
    
    1.364
    
    
    
    92.45
    
    
    
    96.87
    
    
    
    0.342
    
    
    
    0.3782005
    
    
    
    1.243
    
    
    
    1.184
    
    
    
    90.81
    
    
    
    85.10
    
    
    
    0.411
    
    
    
    0.427
 36




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Results of Operations
  Predecessor
    
    
    Successor
    
    
    CombinedPeriod from
    
    
    Period fromJanuary 1
    
    
    December 23through
    
    
    through
    
    
    Year EndedDecember 22,
    
    
    December 31,
    
    
    December 31,2003
    
    
    2003
    
    
    2003(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)Revenues:Sales
    
    $
    680,263
    
    
    $
    9,532
    
    
    $
    689,795Other
    
    
    12,475
    
    
    
    328
    
    
    
    12,803Total revenues
    
    
    692,738
    
    
    
    9,860
    
    
    
    702,598Costs and expenses:Costs of goods sold
    
    
    519,743
    
    
    
    9,796
    
    
    
    529,539Gross profit
    
    
    172,995
    
    
    
    64
    
    
    
    173,059Research and development expenses
    
    
    23,310
    
    
    
    458
    
    
    
    23,768Selling, general and
administrative expenses
    
    
    54,017
    
    
    
    1,624
    
    
    
    55,641Depreciation and amortization
    
    
    25,876
    
    
    
    860
    
    
    
    26,736(Earnings) loss in joint venture
    
    
    (621
    )
    
    
    (28
    )
    
    
    (649
    )Interest expense
    
    
    57,543
    
    
    
    556
    
    
    
    58,099Income before income taxes
    
    
    12,870
    
    
    
    (3,406
    )
    
    
    9,464Income tax (provision) benefit
    
    
    (3,007
    )
    
    
    1,347
    
    
    
    (1,660
    )Net income (loss)
    
    $
    9,863
    
    
    $
    (2,059
    )
    
    $
    7,804
 37




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##### Table of Contents



Combined(1)
    
    

Successor
    
    

SuccessorYear Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2003
    
    
    2004
    
    
    2005(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)RevenuesSales
    
    $
    689,795
    
    
    $
    791,226
    
    
    $
    952,921Other
    
    
    12,803
    
    
    
    16,160
    
    
    
    22,670Total revenues
    
    
    702,598
    
    
    
    807,386
    
    
    
    975,591Costs and expensesCost of goods sold
    
    
    529,539
    
    
    
    692,968
    
    
    
    766,012Gross profit
    
    
    173,059
    
    
    
    114,418
    
    
    
    209,579Research and development expenses
    
    
    23,768
    
    
    
    23,178
    
    
    
    26,152Selling, general and
administrative expenses
    
    
    55,641
    
    
    
    64,903
    
    
    
    72,731Depreciation and amortization
    
    
    26,736
    
    
    
    42,630
    
    
    
    44,090Earnings in joint venture
    
    
    (649
    )
    
    
    (462
    )
    
    
    (1,516
    )Interest expense
    
    
    58,099
    
    
    
    38,963
    
    
    
    33,943Income (loss) before income taxes
    
    
    9,464
    
    
    
    (54,794
    )
    
    
    34,179Income tax (provision) benefit
    
    
    (1,660
    )
    
    
    18,973
    
    
    
    (11,519
    )Net income (loss)
    
    $
    7,804
    
    
    $
    (35,821
    )
    
    $
    22,660
 
 (1)
    
    As illustrated in the prior table, the results for the combined year ended December 31, 2003,
are based on the simple arithmetic addition of the historical results from the Predecessor
period January 1 through December 22, 2003 and the Successor period December 23 through
December 31, 2003.(2)
    
    The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax benefit (provision) and income (loss) were
$40.7 million, $19.6 million and $(36.9) million, respectively, for the year ended December
31, 2004 and $45.7 million, $(8.0) million and $14.4 million, respectively, for the year ended
December 31, 2005.  Combined
    
    
    Successor
    
    
    SuccessorYear Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2003
    
    
    2004
    
    
    2005RevenuesSales
    
    
    98.2
    %
    
    
    98.0
    %
    
    
    97.7
    %Other
    
    
    1.8
    
    
    
    2.0
    
    
    
    2.3Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expensesCost of goods sold
    
    
    75.4
    
    
    
    85.8
    
    
    
    78.5Gross profit
    
    
    24.6
    
    
    
    14.2
    
    
    
    21.5Research and development expenses
    
    
    3.4
    
    
    
    2.9
    
    
    
    2.7Selling, general and administrative expenses
    
    
    7.9
    
    
    
    8.0
    
    
    
    7.5Depreciation and amortization
    
    
    3.8
    
    
    
    5.3
    
    
    
    4.5Earnings in joint venture
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.2
    )Interest expense
    
    
    8.2
    
    
    
    4.8
    
    
    
    3.5Income (loss) before income taxes
    
    
    1.4
    
    
    
    (6.8
    )
    
    
    3.5Income tax (provision) benefit
    
    
    (0.3
    )
    
    
    2.4
    
    
    
    (1.2
    )Net income (loss)
    
    
    1.1
    %
    
    
    (4.4
    )%
    
    
    2.3
    %
 
 (1)
    
    The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax benefit (expense) and net income (loss)
were 5.0%, 2.4% and (4.6)%, respectively, for the year ended December 31, 2004 and 4.7%,
(0.8)% and 1.5%, respectively, for the year ended December 31, 2005. Year Ended December 31, 2005, Compared to Year Ended December 31, 2004
 Total Revenues
  38




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##### Table of Contents



Other revenue .
 Cost of Goods Sold
  Gross Profit
  39




---



##### Table of Contents



Operating Expenses
 Research and development expenses .
 Selling, general and administrative expenses .
 Depreciation and amortization of identifiable intangibles.
 Earnings in joint venture .
 Interest expense  Polymer Holdings.
 Interest expense  KRATON.
 Income Tax (Provision) Benefit
 Income tax (provision) benefit  Polymer Holdings.
 40




---



##### Table of Contents



Income tax (provision) benefit  KRATON.
 Net Income (Loss)
 Net Income (Loss)  Polymer Holdings.
 Net Income (Loss)  KRATON.
 Year Ended December 31, 2004, Compared to Combined Year Ended December 31, 2003
 Total Revenues
     41




---



##### 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.
 42




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##### Table of Contents



Earnings in joint venture .
 Interest expense  Polymer Holdings.
 Interest expense  KRATON.
 Income Tax (Provision) Benefit
 Income tax (provision) benefit  Polymer Holdings.
 Income tax (provision) benefit  KRATON.
 Net Income (Loss)
 Net Income (Loss)  Polymer Holdings.
 43




---



##### Table of Contents



Net Income (Loss)  KRATON.
 Liquidity and Capital Resources
  Operating
Activities.
   Investing
Activities.
   44




---



##### Table of Contents



Financing
Activities.
   Sources
of Liquidity.
    45




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##### Table of Contents



Capital
Expenditures.
  Contractual Commitments
  Payments Due by Period
 Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011 and afterLong-term debt(1)
    
    $
    612.8
    
    
    $
    30.6
    
    
    $
    2.7
    
    
    $
    2.7
    
    
    $
    2.7
    
    
    $
    224.0
    
    
    $
    350.1Estimated interest payments on
debt(1)
    
    
    303.7
    
    
    
    32.1
    
    
    
    30.5
    
    
    
    30.3
    
    
    
    39.1
    
    
    
    42.9
    
    
    
    128.8Operating leases
    
    
    38.3
    
    
    
    7.0
    
    
    
    6.3
    
    
    
    6.0
    
    
    
    5.8
    
    
    
    5.7
    
    
    
    7.5Purchase obligations(2)(3)
    
    
    213.6
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    8.2
    
    
    
    155.8Total contractual cash obligations
    
    $
    1,168.4
    
    
    $
    82.1
    
    
    $
    51.9
    
    
    $
    51.4
    
    
    $
    60.0
    
    
    $
    280.8
    
    
    $
    642.2
 
 (1)
    
    KRATONs contractual obligations exclude $150.1 million related to Polymer Holdings 12%
Discount Notes. KRATONs total long-term debt, estimated interest payments and cash
obligations subsequent to 2010 are $200.0 million,
$56.9 million and $235.2 million,
respectively.(2)
    
    Pursuant to the feedstock supply contracts with Shell Chemicals or its affiliates, we are
obligated to purchase minimum quantities of isoprene each year. We have two isoprene supply
contracts, which require us to purchase minimum quantities. If we do not meet these minimums,
we would be obligated to pay a penalty of approximately U.S. $300 per ton up to a maximum
aggregate penalty of approximately $4.2 million.(3)
    
    Pursuant to a production agreement with Basell Polyfine GMBH, we are obligated to pay a
minimum indirect service fee each year of approximately $8.2 million. Not included in this
table are future obligations arising under our Operating Agreements and Site Services,
Utilities, Materials and Facilities Agreements that do not specify fixed or minimum quantities
of goods or services to be purchased and do not contain fixed, minimum or variable price
provisions. Under such agreements, our obligations to third parties are based on costs
incurred by them in connection with the operation and maintenance of, and other services
provided to, our European facilities. For a description of these agreements, see
BusinessShell Chemicals Operating Agreements. The initial terms of these agreements range
between 20 years and 40 years and each agreement includes bilateral renewal rights. During the
years ended December 31, 2005, 2004 and 2003, we incurred costs aggregating $56.8 million,
$66.5 million and $55.9 million, respectively, under these agreements.  Description of Our Indebtedness
 Senior Secured Credit Facility
  46




---



##### Table of Contents



Structure.
  
    
    a senior secured term loan of $360.0 million, which we refer to as the Term
Facility, and
    
    a senior secured revolving credit facility of up to $60.0 million, which we
refer to as the Revolving Facility.
  Maturity, Amortization and Prepayment.
  Interest and Fees.
 Guarantees.
 Security.
 Covenants.
  47




---



##### Table of Contents



Events of Default.
 Amendment and Waiver under Senior Secured Credit Facility.
 KRATONs 8.125% Senior Subordinated Notes due 2014
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 Optional Redemption.
 Covenants.
   48




---



##### Table of Contents



Exchange
Offer.
  Polymer Holdings 12% Senior Discount Notes Due 2014
  Maturity Date.
 Accretion.
 Cash Interest Payment Dates.
 Guarantees.
 Holding Company Structure and Ranking.
 Optional Redemption.
 Covenants.
  49




---



##### Table of Contents



Exchange Offer.
  Other Contingencies
        50




---



##### Table of Contents



Off-Balance Sheet Transactions
  Market Risk
  Interest rate risk.
 Foreign currency risk .
 Commodity price risk .
 Recent Accounting Pronouncements
    51




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
    
 ITEM 9B. OTHER INFORMATION
  52




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
 Directors and Executive Officers
  Name
    
    Age
    
    PositionRichard Boyce
    
    51
    
    DirectorKelvin Davis
    
    42
    
    DirectorMichael MacDougall
    
    35
    
    DirectorTimothy Walsh
    
    42
    
    DirectorJohn Breckenridge
    
    44
    
    DirectorNathan Wright
    
    40
    
    DirectorStephan Oppenheimer
    
    38
    
    DirectorSteven J. Demetriou
    
    47
    
    DirectorJames R. Ball
    
    63
    
    DirectorGeorge B. Gregory
    
    43
    
    Director, Chief Executive Officer and PresidentRaymond K. Guba
    
    46
    
    Vice President and Chief Financial OfficerKevin M. Fogarty
    
    40
    
    Executive Vice President, Global Sales and MarketingRichard A. Ott
    
    51
    
    Vice President, Global Human Resources and CommunicationsDavid A. Bradley
    
    35
    
    Vice President, Global OperationsJoseph J. Waiter
    
    54
    
    Vice President, General Counsel and SecretaryEli Ben-Shoshan
    
    36
    
    Vice President, Business Development
 Richard Boyce.
 Kelvin Davis
 53




---



##### Table of Contents



Michael
MacDougall
 Nathan Wright
 Timothy Walsh
 John Breckenridge.
 Stephan Oppenheimer
 Steven J. Demetriou.
 James R. Ball.
 54




---



##### Table of Contents



George B. Gregory summa cum laude
 Raymond K. Guba.
 Kevin M. Fogarty.
 Richard A. Ott
 David A. Bradley.
 Joseph J. Waiter
 Eli Ben-Shoshan.
 55




---



##### Table of Contents



Board of Directors
  Audit
Committee.
  Compensation
Committee.
  Executive
Committee.
   56




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 Executive Compensation
  Summary Compensation Table
 Long-term CompensationAnnual Compensation
    
    Awards
    
    PayoutsOther
    
    
    
    
    
    SecuritiesAnnual
    
    
    
    
    
    Underlying
    
    
    
    
    
    All OtherName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Compensation
    
    Restricted Stock
    
    Options / SARs
    
    
    
    
    
    CompensationPrincipal Position
    
    Fiscal Year
    
    ($)
    
    ($)(1)
    
    ($)
    
    Award(s) (2)(3)
    
    (4)(5)
    
    LTIP Payouts ($)
    
    ($)(6)(7)(8)George B. Gregory
    
    
    2005
    
    
    
    450,000
    
    
    
    800,000
    
    
    
    
    
    
    
    400,000
    
    
    
    500,000
    
    
    
    
    
    
    
    Chief Executive Officer
    
    
    2004
    
    
    
    225,000
    
    
    
    300,000
    
    
    
    
    
    
    
    875,000
    
    
    
    3,375,000
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    David A. Bradley
    
    
    2005
    
    
    
    218,750
    
    
    
    400,000
    
    
    
    
    
    
    
    100,000
    
    
    
    375,000
    
    
    
    
    
    
    
    16,626Vice President
    
    
    2004
    
    
    
    150,000
    
    
    
    50,000
    
    
    
    
    
    
    
    200,000
    
    
    
    750,000
    
    
    
    
    
    
    
    41,538Corporate Operations
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kevin M. Fogarty
    
    
    2005
    
    
    
    171,836
    
    
    
    250,000
    
    
    
    
    
    
    
    300,000
    
    
    
    1,550,000
    
    
    
    
    
    
    
    141,827Executive Vice
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard A. Ott
    
    
    2005
    
    
    
    220,000
    
    
    
    165,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000Vice President,
    
    
    2004
    
    
    
    217,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,350,000
    
    
    
    
    
    
    
    23,433Global Human
    
    
    2003
    
    
    
    205,313
    
    
    
    67,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,981Resources and
CommunicationsJoseph J. Waiter
    
    
    2005
    
    
    
    198,750
    
    
    
    160,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,963Vice President,
    
    
    2004
    
    
    
    193,437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750,000
    
    
    
    
    
    
    
    5,422General Counsel and
    
    
    2003
    
    
    
    186,562
    
    
    
    60,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Secretary
 
 (1)
    
    Represents cash bonuses earned for the indicated fiscal years. In fiscal 2003, for
Messrs. Ott and Waiter, this amount includes a bonus of $50,000 each, for their role in the
Acquisition. The acquisition bonuses were paid by Tarrant Partners, a TPG controlled entity.
In fiscal 2004, for Mr. Gregory, this amount is a transition/signing bonus which covers the
first year bonus referenced in his employment agreement, as well as related consideration for
him joining the company.(2)
    
    In fiscal 2004, for Mr. Gregory and in fiscal 2005, for Mr. Fogarty, pursuant to their
respective employment agreements, Chemical Holdings granted a notional restricted unit award
with a fair value at the grant date of $875,000 and $300,000, respectively. These awards will
vest 20% on each of the first five anniversaries of the executives employment commencement
date (July 1, 2004), in the case of Mr. Gregory and the award grant date, in the case of Mr.
Fogarty (June 15, 2005).(3)
    
    In fiscal 2004, for Mr. Bradley, pursuant to his employment agreement, Chemical Holdings
granted a restricted unit award with a fair value at the grant date of $200,000. This award
will vest 20% on each of the first five anniversaries of Mr. Bradleys employment commencement
date (April 1, 2004). In fiscal 2005, for Messrs. Gregory and Bradley, granted restricted
unit awards with a fair value at the grant date of $400,000 and $100,000, respectively. Mr.
Gregorys award will vest 50% on February 1, 2008 and 50% on February 1, 2009. The award
granted to Mr. Bradley in fiscal 2005 will vest 20% on each of the first five anniversaries of
the grant date (February 1, 2005). We refer to Employment Agreements and Other Compensation
ArrangementsOther Equity Awards which contains a discussion of the awards. Other than
the aforementioned awards, no named executive officer holds any restricted units.(4)
    
    Of the aggregate amounts for fiscal 2004, 875,000, 125,000, 350,000 and 125,000 for Messrs.
Gregory, Bradley, Ott and Waiter and for fiscal 2005, 300,000 for Mr. Fogarty are grants of
profits units, which represent the right to receive a pro rata portion of the appreciation of
the value of the assets of Chemical Holdings above a certain Threshold Amount (the value of
such assets on the date of grant). In fiscal 2005, Mr. Gregory agreed to forfeit 218,750
profits units in exchange for the restricted unit award discussed above, as well as other
consideration. He now holds 656,250 profit units. We refer to Employment Agreements and
Other Compensation ArrangementsOther Equity Awards which contains a discussion of the
awards.(5)
    
    Of the aggregate amounts for fiscal 2004, 2,500,000, 625,000, 1,000,000 and 625,000 for
Messrs. Gregory, Bradley, Ott and Waiter and for fiscal 2005, 500,000, 375,000 and 1,250,000
for Messrs. Gregory, Bradley and Fogarty are grants of options to purchase membership units of
Chemical Holdings. All such options were granted pursuant to the Chemical Holdings 2004
Option Plan, have an exercise price of $1.00 per membership unit and vest ratably over five
years from the respective vesting commencement date. With respect to the awards granted in
fiscal 2004, the vesting commencement date is July 1, 2004 for Mr. Gregory, March 8, 2004 for
Mr. Bradley and January 1, 2004 for Messrs. Ott and Waiter. With respect to awards granted in
fiscal 2005, the vesting commencement date is February 1, 2005 for Mr. Gregory and June 15,
2005 for Mr. Fogarty.(6)
    
    Unless otherwise noted below, all amounts for fiscal 2005 represent the Companys
contribution to our retirement savings plans made on behalf of such executive officer.
Amounts to be contributed to our retirement savings plans related to bonus amounts earned in
2005 were not calculated as of the date of this filing. Subsequent filings will be updated to
reflect such amounts.(7)
    
    In fiscal 2004, Mr. Bradley received $41,538 for relocation expenses in accordance with
company policy. In fiscal 2005, Mr. Bradley received $14,250 to reimburse him for the loss he
incurred when selling his home in connection with his relocation and $2,376 for final
relocation expenses.(8)
    
    In fiscal 2005, Mr. Fogarty received $81,827 for relocation expenses in accordance with
company policy and a payment of $40,000 to reimburse him for the loss he incurred when selling
his home in connection with his relocation. In January 2006, Mr. Fogarty received an
additional $20,000 gross up payment in order to cover the taxes he accumulated in connection
with the $40,000 payment described in the preceding sentence. 57




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##### Table of Contents



Option /SAR Grants in Last Fiscal Year
 Individual GrantsPercent ofTotalOptions
    
    
    
    
    
    
    
    
    
    Potential Realizable Value at AssumedNumber of
    
    /SAR
    
    
    
    
    
    
    
    
    
    Annual Rates of Stock Price Appreciation forSecurities
    
    Granted to
    
    
    
    
    
    
    
    
    
    Option Term Or Alternative Grant Date PresentUnderlying
    
    Employees
    
    Exercise or
    
    
    
    
    
    Value $ (4) (5) (6)Option/SAR
    
    in Fiscal
    
    Base Price
    
    ExpirationName
    
    Granted (#)
    
    Year
    
    ($/sh)
    
    Date
    
    5%
    
    10%George B. Gregory
    
    
    500,000
    (1)
    
    
    5.9
    %
    
    $
    1.00
    
    
    
    (1
    )
    
    
    314,000
    (4)
    
    
    501,000
    (4)David A. Bradley
    
    
    375,000
    (1)
    
    
    4.4
    %
    
    $
    1.00
    
    
    
    (1
    )
    
    
    235,000
    (4)
    
    
    376,000
    (4)Kevin M. Fogarty
    
    
    1,250,000
    (1)
    
    
    14.7
    %
    
    $
    1.00
    
    
    
    (1
    )
    
    
    786,000
    (4)
    
    
    1,253,000
    (4)150,000
    (2)
    
    
    1.8
    %
    
    $
    1.00
    
    
    
    (3
    )
    
    
    94,000
    (5)
    
    
    150,000
    (5)150,000
    (2)
    
    
    1.8
    %
    
    $
    1.00
    
    
    
    (3
    )
    
    
    94,000
    (6)
    
    
    150,000
    (6)Richard A. Ott
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Joseph J. Waiter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    All options were granted pursuant to the Chemical Holdings 2004 Option Plan and relate to
the right to purchase membership units in Chemical Holdings. All options vest in 20% annual
increments, commencing on February 1, 2006, for Messrs. Gregory and Bradley and June 15, 2006
for Mr. Fogarty. Additionally, in the event that within the two-year period following a
change in control the option holders services are terminated without cause or for good
reason, the unvested portion of the option shall become immediately vested. Once vested,
options remain exercisable until the earlier of (a) termination of services for cause, (b) 90
days after termination of services for any reason other than cause, death or disability, (c)
one year after termination of services by reason of death or disability or (d) the tenth
anniversary of the date of grant. Options are not assignable or transferable other than by
will or by the laws of descent and distribution, except that the option holder may request
authorization to assign the option to a trust or custodianship, the beneficiaries of which may
include only the option holder, the option holders spouse or lineal descendants.(2)
    
    Profits units which represent the right to receive a pro rata portion of the
appreciation of the value of the assets of Chemical Holdings above a certain Threshold
Amount (the value of such assets on the date of grant), were granted on June 15, 2005, in
accordance with KRATON Management LLCs Operating Agreement. Fifty percent of the profits
units vest when the fair value of the assets equals or exceeds two times the Threshold Amount
(first tranche) and the remaining 50% of the profits units vest when the fair value of the
assets equals or exceeds three times the Threshold Amount (second tranche). If at the time
Chemical Holdings makes a determination as to whether Mr. Fogarty is entitled to any
appreciation with respect to the profits units, the value of the assets is more than two
times, but less than three times the Threshold Amount, a pro rata portion of the second
tranche will vest based on the appreciation above the two times Threshold Amount.
Additionally, 100% of the profits units shall vest upon the effective date of a disposition by
the initial investors of 51% or more of their aggregate interests in KRATON.(3)
    
    These are profits units, which do not have expiration dates, but only vest in limited
circumstances. See footnote 2 above.(4)
    
    There is no established public market for shares of Chemical Holdings LLC Membership
Units. Based on customary corporate valuation techniques, including the valuation of
comparable companies and current book value per share, the value of a share of common stock
was estimated to be $1 as of the option grant date.(5)
    
    This number represents the value of the profits units assuming 5% or 10% appreciation
over ten years, however, this is the first tranche of profits units which generally does not
vest until the fair value of the assets of Chemical Holdings equals or exceeds two times the
Threshold Amount. See footnote 2 above.(6)
    
    This number represents the value of the profits units assuming 5% or 10% appreciation
over ten years, however, this is the second tranche of profits units which generally does not
vest until the fair value of the assets of Chemical Holdings equals or exceeds three times the
Threshold Amount. See footnote 2 above. 58




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##### Table of Contents



Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
 Number of SecuritiesUnderlying Unexercised
    
    Value of Unexercised In-Shares
    
    
    
    
    
    Options/SARs At
    
    the-Money Options/SARsAcquired on
    
    Value
    
    Fiscal Year-End (#)
    
    At Fiscal Year-End ($)Name
    
    Exercise (#)
    
    Realized ($)
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableGeorge B. Gregory
    
    
    
    
    
    
    
    
    
    
    500,000/2,500,000
    (1)
    
    
    0/656,250
    (2)David A. Bradley
    
    
    
    
    
    
    
    
    
    
    125,000/875,000
    (1)
    
    
    0/125,000
    (2)Kevin M. Fogarty
    
    
    
    
    
    
    
    
    
    
    0/1,250,000
    (1)
    
    
    0/300,000
    (2)Richard A. Ott
    
    
    
    
    
    
    
    
    
    
    200,000/800,000
    (1)
    
    
    0/350,000
    (2)Joseph J. Waiter
    
    
    
    
    
    
    
    
    
    
    125,000/500,000
    (1)
    
    
    0/125,000
    (2)
 
 (1)
    
    All options were granted pursuant to the Chemical Holdings 2004 Option Plan and relate to
the right to purchase membership units of Chemical Holdings. We refer to Employment
Agreements and Other Compensation Awards which contains a discussion of the awards.(2)
    
    Profits units which represent the right to receive a pro rata portion of the appreciation of
the value of the assets of Chemical Holdings above a certain Threshold Amount (the value of
such assets on the date of grant), were granted in accordance with KRATON Management LLCs
Operating Agreement. We refer to Employment Agreements and Other Compensation Awards which
contains a discussion of the awards. Pension Plan
  Benefit Restoration Plans
  59




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Pension Plan Table
Years of Service
 Final 36-MonthAverage AnnualCompensation
    
    10
    
    15
    
    20
    
    25
    
    30
    
    35
    
    40
    
    45$100,000
    
    
    13,000
    
    
    
    19,000
    
    
    
    25,000
    
    
    
    32,000
    
    
    
    38,000
    
    
    
    45,000
    
    
    
    53,000
    
    
    
    61,000$200,000
    
    
    29,000
    
    
    
    43,000
    
    
    
    57,000
    
    
    
    72,000
    
    
    
    86,000
    
    
    
    101,000
    
    
    
    117,000
    
    
    
    133,000$300,000
    
    
    45,000
    
    
    
    67,000
    
    
    
    89,000
    
    
    
    112,000
    
    
    
    134,000
    
    
    
    157,000
    
    
    
    181,000
    
    
    
    205,000$400,000
    
    
    61,000
    
    
    
    91,000
    
    
    
    121,000
    
    
    
    152,000
    
    
    
    182,000
    
    
    
    213,000
    
    
    
    245,000
    
    
    
    277,000$500,000
    
    
    77,000
    
    
    
    115,000
    
    
    
    153,000
    
    
    
    192,000
    
    
    
    230,000
    
    
    
    269,000
    
    
    
    309,000
    
    
    
    349,000$600,000
    
    
    93,000
    
    
    
    139,000
    
    
    
    185,000
    
    
    
    232,000
    
    
    
    278,000
    
    
    
    325,000
    
    
    
    373,000
    
    
    
    421,000$700,000
    
    
    109,000
    
    
    
    163,000
    
    
    
    217,000
    
    
    
    272,000
    
    
    
    326,000
    
    
    
    381,000
    
    
    
    437,000
    
    
    
    493,000$800,000
    
    
    125,000
    
    
    
    187,000
    
    
    
    249,000
    
    
    
    312,000
    
    
    
    374,000
    
    
    
    437,000
    
    
    
    501,000
    
    
    
    565,000$900,000
    
    
    141,000
    
    
    
    211,000
    
    
    
    281,000
    
    
    
    352,000
    
    
    
    422,000
    
    
    
    493,000
    
    
    
    565,000
    
    
    
    637,000$1,000,000
    
    
    157,000
    
    
    
    235,000
    
    
    
    313,000
    
    
    
    392,000
    
    
    
    470,000
    
    
    
    549,000
    
    
    
    629,000
    
    
    
    709,000
 
 (1)
    
    Compensation covered by the Pension Plan includes regular salary or wages and any
salary deferrals that are made in accordance with Section 125 or 401(k) of the Code.
Compensation does not include overtime, extended work week pay, premium remuneration,
special bonuses, severance payments, gain sharing, retention payments, stock options,
phantom stock options, long-term performance units and other deferred or extra
compensation, house or living allowances, payments made at Separation from Service for
accumulated vacation not taken, Company contributions to any Company profit-sharing plan
and amounts credited under any other qualified or non-qualified plan of deferred
compensation, other than salary deferrals pursuant to a salary reduction agreement under
Section 401(k) of the Code.(2)
    
    The years of accredited service used to determine benefits under the Pension Plan and
the non-qualified defined benefit plan as of December 31, 2005, for persons named in the
Summary Compensation Table are: Mr. Gregory, 1.5 years; Mr. Bradley, 1.8 years; Mr.
Fogarty, .60 years; Mr. Ott, 30.3 years; and Mr. Waiter, 3.9 years. Each of Messrs.
Gregory, Bradley, Fogarty and Waiter elected to freeze their benefits under the Pension
Plan as of December 31, 2005 (see explanation above).(3)
    
    Benefits in the table above are payable as a straight life annuity at normal retirement
date. Normal retirement date is the last day of the month in which a Participant attains
his 65th birthday. In accordance with the pension plan formula, the amounts in
the table above were reduced by offsetting a percentage of the participants projected
social security benefits.(4)
    
    The current Pension Plan formula is as follows (note that final average earnings is a
36 month average): 
 
  Under the non-qualified defined benefit plan, the benefit formula is 1.6% x FAE x AS, less
amounts accrued under the Pension Plan (without social security benefit reductions). Compensation of Directors
  EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS
 Employment Agreements, Termination of Employment Arrangements
  60




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provided
   .
 61




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Equity Arrangements
 TJ Chemical Holdings LLC 2004 Option Plan
       Other Equity Awards
  62




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provided provided
 provided
  Compensation Committee Interlocks and Insider Participation
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  63




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##### Table of Contents



Percentage ofPercentage of
    
    Non-VotingCommon
    
    Voting Equity
    
    EquityName and Address of Beneficial Owner
    
    Units
    
    Interests
    
    InterestsTPG Advisors III, Inc.
    
    
    6
    
    
    
    30.0
    %(1)
    
    
    30.0
    %301 Commerce Street, Suite 3300
Fort Worth, Texas 76102TPG Advisors IV, Inc.
    
    
    6
    
    
    
    30.0
    %(1)
    
    
    29.3
    %301 Commerce Street, Suite 3300
Fort Worth, Texas 76102JPMP Capital Corp.
    
    
    8
    
    
    
    40.0
    %(2)
    
    
    39.5
    %(3)c/o J.P. Morgan Partners, LLC
1221 Avenue of the Americas, 39th Floor
New York, New York 10020
 
 (1)
    
    David Bonderman, James G. Coulter and William S. Price, III are directors, officers and
sole shareholders of TPG Advisors III, Inc. (TPG Advisors III), which is the general partner
of TPG GenPar III, L.P., which in turn is the sole general partner of each of TPG Partners
III, L.P. (Partners III), TPG Parallel III, L.P. (Parallel III), TPG Investors III, L.P.
(Investors III), FOF Partners III, L.P. (FOF) and FOF Partners III-B, L.P. (FOF B) and
the sole member of TPG GenPar Dutch, L.L.C., which is the general partner of TPG Dutch
Parallel III, C.V. (Dutch Parallel III). Partners III, Parallel III, Investors III, FOF, FOF
B and Dutch Parallel III are the members of TPG III Polymer Holdings LLC, which holds 30% of
the voting interests in TJ Chemical Holdings LLC. Mr. Bonderman, Mr. Coulter and Mr. Price are
also directors, officers and sole shareholders of TPG Advisors IV, Inc. (TPG Advisors IV),
which is the general partner of TPG GenPar IV, L.P., which in turn is the sole general partner
of TPG Partners IV, L.P. (Partners IV). Partners IV is the sole member of TPG IV Polymer
Holdings LLC, which holds 30% of the voting interests of Chemical Holdings. TPG Advisors III
and TPG Advisors IV may be deemed, pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended, to beneficially own all of the securities held by TPG III Polymer Holdings
LLC and TPG IV Polymer Holdings LLC, respectively. Mr. Bonderman, Mr. Coulter and Mr. Price,
by virtue of their positions with TPG Advisors III and TPG Advisors IV may be deemed to be the
beneficial owners of the equity securities held by TPG III Polymer Holdings LLC and TPG IV
Polymer Holdings LLC. Each of Mr. Bonderman, Mr. Coulter and Mr. Price disclaims beneficial
ownership of such securities.(2)
    
    Includes 28.9%, 5.4%, 0.8%, 2.3%, 0.3%, 0.9%, 1.0% and 0.4% indirectly owned by J.P. Morgan
Partners (BHCA), L.P., J.P. Morgan Partners Global Investors, L.P., JPMP Global Fund/KRATON A.
L.P., J.P. Morgan Partners Global Investors (Cayman), L.P., J.P. Morgan Partners Global
Investors (Cayman) II, L.P., J.P. Morgan Partners Global Investors (Selldown), L.P., JPMP
Global Fund/KRATON Selldown, L.P. and JPMP Global Fund/KRATON, L.P., respectively.(3)
    
    Includes 28.5%, 5.3%, 0.8%, 2.3%, 0.3%, 0.9%, 1.0% and 0.4% indirectly owned by J.P. Morgan
Partners (BHCA), L.P. (JPMP BHCA), J.P. Morgan Partners Global Investors, L.P., JPMP Global
Fund/KRATON A. L.P., J.P. Morgan Partners Global Investors (Cayman), L.P., J.P. Morgan
Partners Global Investors (Cayman) II, L.P., J.P. Morgan Partners Global (Selldown), L.P.,
JPMP Global Fund/KRATON Selldown, L.P. and JPMP Global Fund/KRATON, L.P. (collectively, the
Global Investor Funds), respectively. The general partner of JPMP BHCA is JPMP Master Fund
Manager, L.P. (JPMP MFM). The general partner of each of the Global Investor Funds is JPMP
Global Investors, L.P. (JPMP Global). JPMP Capital Corp., a wholly-owned subsidiary of
JPMorgan Chase & Co., a publicly traded company, is the general partner of each of JPMP MFM
and JPMP Global. JPMP Capital Corp. and each of the foregoing entities has an address c/o J.P.
Morgan Partners, LLC, 1221 Avenue of the Americas, 39th Floor, New York, New York 10020.
Jeffrey Walker is President, and Timothy Walsh and John Breckenridge are
Managing Directors, of JPMP Capital Corp. JPMP Capital Corp. may be deemed, pursuant to Rule
13d-3 under the Exchange Act, to beneficially own all of the securities held by the Global
Investor Funds and JPMP BHCA. Mr. Walker, Mr. Walsh and Mr. Breckenridge, by virtue
of their positions and responsibilities with JPMP Capital Corp., may be deemed to be the
beneficial owners of the equity securities held by JPMP BHCA and the
Global Investor Funds. The foregoing is not an
admission that such persons are the beneficial owners of the securities held by JPMP BHCA and
the Global Investor Funds and each disclaims any such beneficial ownership except to the
extent of such persons pecuniary interest therein, if any. 64




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Title of
    
    Name and Address
    
    Percent of Voting
    
    Percent of Non-VotingClass
    
    of Beneficial Owner
    
    Interests
    
    InterestsUnits
    
    Kelvin Davis
    
    
    60.0
    %(1)
    
    
    59.3
    %(1)Units
    
    Timothy Walsh
    
    
    40.0
    %(1)
    
    
    39.5
    %(1)Units
    
    John Breckenridge
    
    
    40.0
    %(1)
    
    
    39.5
    %(1)Units
    
    George B. Gregory
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    Kevin M. Fogarty
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    David A. Bradley
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    Richard A. Ott
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    Joseph J. Waiter
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    All directors and executive officers as a group
    
    
    100.0
    %(1)(2)
    
    
    100.0
    %(1)(2)
 
 (1)
    
    Includes interests beneficially owned by TPG Advisors III, Inc., TPG Advisors IV,
Inc and JPMP Capital Corp. Davis is an officer, director and/or equity owner of TPG Advisors
III, Inc. and TPG Advisors IV, Inc. Messrs. Walsh and Breckenridge are Managing Directors of
JPMP Capital Corp. Messrs. Walsh and Breckenridge disclaim beneficial ownership of these
interests.(2)
    
    Consists of non-voting equity interests in TJ Chemical Holdings LLC owned indirectly by the
indicated persons through ownership of interests in KRATON Management LLC. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Agreements
 Chemical Holdings Limited Liability Company Operating Agreement.
  Chemical Holdings Option .
 Registration Rights Agreement.
 65




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pro rata
  Management Services Agreement.
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2005
    
    
    2004(In Thousands)Audit fees
    
    $
    802
    
    
    $
    710Audit-related fees
    
    
    427
    
    
    
    436Tax fees
    
    
    325
    
    
    
    431Other fees
    
    
    
    
    
    
    Total fees
    
    $
    1,554
    
    
    $
    1,577
    
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    1. Financial Statements
 The following financial statements are included in Item 8:Polymer Holdings LLC
 (i)
    
    Report of KPMG LLP, Independent Registered Public Accounting
Firm(ii)
    
    Consolidated Balance Sheets as of December 31, 2005 and 2004(iii)
    
    Consolidated Statements of Operations  years ended December
31, 2005 and 2004, December 23 through December 31, 2003 and January 1 through
December 22, 2003(iv)
    
    Consolidated Statements of Changes in Members Equity
and Comprehensive Income (Loss) 
years ended December 31, 2005 and 2004, December 23 through December 31, 2003
and January 1 through December 22, 2003(v)
    
    Consolidated Statements of Cash Flows  years ended December
31, 2005 and 2004, December 23 through December 31, 2003 and January 1 through
December 22, 2003(vi)
    
    Notes to consolidated financial statements
 66




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##### Table of Contents

\

(vii)
    
    Report of KPMG LLP, Independent Registered Public Accounting Firm(viii)
    
    Consolidated Balance Sheets as of December 31, 2005 and 2004(ix)
    
    Consolidated Statements of Operations  years ended December
31, 2005 and 2004, December 23 through December 31, 2003 and January 1 through
December 22, 2003(x)
    
    Consolidated Statements of Changes in Members Equity
Comprehensive Income (Loss) 
years ended December 31, 2005 and 2004, December 23 through December 31, 2003
and January 1 through December 22, 2003(xi)
    
    Consolidated Statements of Cash Flows  years ended December
31, 2005 and 2004, December 23 through December 31, 2003 and January 1 through
December 22, 2003(xii)
    
    Notes to consolidated financial statements
 2.
    
    ExhibitsThe exhibits listed on the accompanying Exhibit Index are filed as part of this report and
are on file with us.
 (b)
    
    ExhibitsSee Item 15(a) 2 above.(c)
    
    Financial Statement SchedulesSee Schedule II.
 67




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##### Table of Contents



Signatures
  Date:
March 30, 2006
    
    Polymer Holdings LLCKRATON Polymers LLCBy: /s/ George B. GregoryChief Executive Officer
  Signature
    
    Title/s/ George B. Gregory
    
    Chief Executive Officer and a Director (Principal
Executive Officer)/s/ Raymond K. Guba
    
    Vice President and Chief Financial Officer
(Principal Financial Officer)/s/ Richard Boyce
    
    Director/s/ Kelvin Davis
    
    Director/s/ Michael MacDougall
    
    Director/s/ Timothy Walsh
    
    Director/s/ John Breckenridge
    
    Director/s/ Nathan Wright
    
    Director/s/ Stephan Oppenheimer
    
    Director/s/ Steven J. Demetriou
    
    Director/s/ James R. Ball
    
    Director
 68




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  PageAudited Consolidated Financial Statements for the Years
Ended December 31, 2005 and 2004, the Period from December 23
through December 31, 2003, and the Period from January 1
through December 22, 2003Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Operations for Years Ended December
31, 2005 and 2004, the Period from December 23 through December
31, 2003, and the Period from January 1 through December 22,
2003
    
    
    F-4Consolidated Statements of Changes in Members Equity and
Comprehensive Income (Loss) for the Period from January 1
through December 22, 2003
    
    
    F-5Consolidated Statements of Changes in Members Equity and
Comprehensive Income (Loss) for Years Ended December 31, 2005
and 2004, and the Period from December 23 through December 31,
2003
    
    
    F-6Consolidated Statements of Cash Flows for Years Ended December
31, 2005 and 2004, the Period from December 23 through December
31, 2003, and the Period from January 1 through December 22,
2003
    
    
    F-7Notes to the Consolidated Financial Statements
    
    
    F-8
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  PageAudited Consolidated Financial Statements for the Years
Ended December 31, 2005 and 2004, the Period from December 23
through December 31, 2003, and the Period from January 1
through December 22, 2003Report of Independent Registered Public Accounting Firm
    
    
    F-44Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-45Consolidated Statements of Operations for Years Ended December
31, 2005 and 2004, the Period from December 23 through December
31, 2003, and the Period from January 1 through December 22,
2003
    
    
    F-46Consolidated Statements of Changes in Members Equity and
Comprehensive Income (Loss) for the Period from January 1
through December 22, 2003
    
    
    F-47Consolidated Statements of Changes in Members Equity and
Comprehensive Income (Loss) for Years Ended December 31, 2005
and 2004, and the Period from December 23 through December 31,
2003
    
    
    F-48Consolidated Statements of Cash Flows for Years Ended December
31, 2005 and 2004, the Period from December 23 through December
31, 2003, and the Period from January 1 through December 22,
2003
    
    
    F-49Notes to the Consolidated Financial Statements
    
    
    F-50




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




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##### Table of Contents



Polymer Holdings LLC
 
 Consolidated Balance Sheets 
 December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    100,934
    
    
    $
    46,357Receivables, net of allowances of $1,013 and $750
    
    
    107,586
    
    
    
    120,596Inventories of products
    
    
    192,595
    
    
    
    211,076Inventories of materials and supplies
    
    
    9,336
    
    
    
    8,778Other current assets
    
    
    23,511
    
    
    
    10,381Deferred income taxes
    
    
    1,953
    
    
    
    Total current assets
    
    
    435,915
    
    
    
    397,188Property, plant, and equipment, less accumulated depreciation
    
    
    394,192
    
    
    
    424,333Identifiable intangible assets, less accumulated amortization
    
    
    101,848
    
    
    
    109,694Investment in joint venture
    
    
    10,542
    
    
    
    10,753Deferred financing costs
    
    
    14,399
    
    
    
    16,799Other long-term assets
    
    
    9,605
    
    
    
    8,646Total assets
    
    $
    966,501
    
    
    $
    967,413Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    30,570
    
    
    $
    2,680Accounts payabletrade
    
    
    64,345
    
    
    
    79,968Other payables and accruals
    
    
    48,758
    
    
    
    40,059Due to related parties
    
    
    13,119
    
    
    
    14,471Deferred income taxes
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    156,792
    
    
    
    138,418Long-term debt, net of current portion
    
    
    537,418
    
    
    
    556,335Deferred income taxes
    
    
    29,818
    
    
    
    24,513Long-term liabilities
    
    
    29,713
    
    
    
    25,629Total liabilities
    
    
    753,741
    
    
    
    744,895Commitments and contingencies (note 6)Members equity:Common equity
    
    
    215,452
    
    
    
    200,528Accumulated other comprehensive income
    
    
    (2,692
    )
    
    
    21,990Total members equity
    
    
    212,760
    
    
    
    222,518Total liabilities and members equity
    
    $
    966,501
    
    
    $
    967,413
  F-3




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Polymer Holdings LLC
 
 Consolidated Statements of Operations 
 PredecessorPeriod from
    
    
    Period fromYear Ended December 31,
    
    
    December 23 through
    
    
    January 1 through2005
    
    
    2004
    
    
    December 31, 2003
    
    
    December 22, 2003Revenues:Sales
    
    $
    952,921
    
    
    $
    791,226
    
    
    $
    9,532
    
    
    $
    680,263Other
    
    
    22,670
    
    
    
    16,160
    
    
    
    328
    
    
    
    12,475Total revenues
    
    
    975,591
    
    
    
    807,386
    
    
    
    9,860
    
    
    
    692,738Costs and expenses:Cost of goods sold
    
    
    766,012
    
    
    
    692,968
    
    
    
    9,796
    
    
    
    519,743Gross profit
    
    
    209,579
    
    
    
    114,418
    
    
    
    64
    
    
    
    172,995Research and development
expenses
    
    
    26,152
    
    
    
    23,178
    
    
    
    458
    
    
    
    23,310Selling, general, and
administrative expenses
    
    
    72,731
    
    
    
    64,903
    
    
    
    1,624
    
    
    
    54,017Depreciation and
amortization of
identifiable intangibles
    
    
    44,090
    
    
    
    42,630
    
    
    
    860
    
    
    
    25,876Earnings in joint venture
    
    
    (1,516
    )
    
    
    (462
    )
    
    
    (28
    )
    
    
    (621
    )Interest, net
    
    
    45,733
    
    
    
    40,747
    
    
    
    556
    
    
    
    57,543Income (loss)
before income
taxes
    
    
    22,389
    
    
    
    (56,578
    )
    
    
    (3,406
    )
    
    
    12,870Income tax (provision)
benefit
    
    
    (7,999
    )
    
    
    19,645
    
    
    
    1,347
    
    
    
    (3,007
    )Net
income
(loss)
    
    $
    14,390
    
    
    $
    (36,933
    )
    
    $
    (2,059
    )
    
    $
    9,863
  F-4




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##### Table of Contents



Polymer Holdings LLC
 
 Consolidated Statements of Changes in Members Equity and Comprehensive Income (loss)
Period from January 1 through December 22, 2003 
 PredecessorAccumulatedOtherCommon
    
    
    ComprehensiveEquity
    
    
    Income
    
    
    TotalBalance, December 31, 2002
    
    $
    168,970
    
    
    $
    9,602
    
    
    $
    178,572Comprehensive income:Net incomeperiod from January 1 through December 22, 2003
    
    
    9,863
    
    
    
    
    
    
    
    9,863Other comprehensive income:Foreign currency adjustments
    
    
    
    
    
    
    33,817
    
    
    
    33,817Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    43,680Capital contributions from parent
    
    
    150
    
    
    
    
    
    
    
    150Distribution to parent
    
    
    (3,930
    )
    
    
    
    
    
    
    (3,930
    )Balance, December 22, 2003
    
    $
    175,053
    
    
    $
    43,419
    
    
    $
    218,472
  F-5




---



##### Table of Contents



Polymer Holdings LLC
 
 Consolidated Statements of Changes in Members Equity and Comprehensive Income (Loss)
For the Years Ended December 31, 2005 and 2004, and the
Period from December 23 through December 31, 2003 
 AccumulatedOtherCommon
    
    
    ComprehensiveEquity
    
    

Income (Loss)
    
    
    TotalIssuance of common units, net of expenses
    
    $
    239,520
    
    
    $
    
    
    
    $
    239,520Comprehensive income:Net lossperiod from December 23
through December 31, 2003
    
    
    (2,059
    )
    
    
    
    
    
    
    (2,059
    )Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    1,364
    
    
    
    1,364Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (695
    )Balance, December 31, 2003
    
    
    237,461
    
    
    
    1,364
    
    
    
    238,825Comprehensive income:Net loss2004
    
    
    (36,933
    )
    
    
    
    
    
    
    (36,933
    )Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    19,596
    
    
    
    19,596Unrealized gain on interest rate swaps
    
    
    
    
    
    
    1,030
    
    
    
    1,030Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (16,307
    )Balance, December 31, 2004
    
    
    200,528
    
    
    
    21,990
    
    
    
    222,518Comprehensive income:Net income2005
    
    
    14,390
    
    
    
    
    
    
    
    14,390Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    (26,539
    )
    
    
    (26,539
    )Unrealized gain on interest rate swaps
    
    
    
    
    
    
    1,857
    
    
    
    1,857Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (10,292
    )Non-cash compensation related to equity awards
    
    
    534
    
    
    
    
    
    
    
    534Balance, December 31, 2005
    
    $
    215,452
    
    
    $
    (2,692
    )
    
    $
    212,760
  F-6




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##### Table of Contents



Polymer Holdings LLC
 
 Consolidated Statements of Cash Flows 
 PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Cash flows provided by (used in) operating activities:Net income (loss)
    
    $
    14,390
    
    
    $
    (36,933
    )
    
    $
    (2,059
    )
    
    $
    9,863Adjustments to reconcile income (loss) to net cash
provided by operating activities:Depreciation and amortization of identifiable
intangibles
    
    
    44,090
    
    
    
    42,630
    
    
    
    860
    
    
    
    25,876Amortization of deferred financing costs
    
    
    2,400
    
    
    
    5,563
    
    
    
    38
    
    
    
    13,370Accretion of debt discount
    
    
    11,653
    
    
    
    1,758
    
    
    
    
    
    
    
    8,505Loss on disposal of fixed assets
    
    
    709
    
    
    
    314
    
    
    
    
    
    
    
    194Change in fair value of interest rate swaps
    
    
    (149
    )
    
    
    1,739
    
    
    
    
    
    
    
    Undistributed earnings in joint venture
    
    
    (1,055
    )
    
    
    99
    
    
    
    (28
    )
    
    
    442Deferred tax provision (benefit)
    
    
    580
    
    
    
    (23,207
    )
    
    
    (396
    )
    
    
    (4,219
    )Non-cash compensation related to equity awards
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    Decrease (increase) in working capital:Accounts receivable
    
    
    1,205
    
    
    
    (16,905
    )
    
    
    11,504
    
    
    
    1,473Due (to) from related party
    
    
    (1,567
    )
    
    
    (695
    )
    
    
    
    
    
    
    8,724Inventories
    
    
    517
    
    
    
    51,273
    
    
    
    (1,271
    )
    
    
    (141
    )Other assets
    
    
    (11,886
    )
    
    
    (4,820
    )
    
    
    3,994
    
    
    
    1,650Accounts payable, other payables and
accruals, and long-term liabilities
    
    
    7,921
    
    
    
    52,346
    
    
    
    (18,958
    )
    
    
    27,816Net cash provided by (used in)
operating activities
    
    
    69,342
    
    
    
    73,162
    
    
    
    (6,316
    )
    
    
    93,553Cash flows used in investing activities:Purchase of business, including transaction costs
    
    
    
    
    
    
    
    
    
    
    (479,211
    )
    
    
    Purchase of property, plant and equipment
    
    
    (18,816
    )
    
    
    (34,733
    )
    
    
    (2,550
    )
    
    
    (13,485
    )Proceeds from sale of property, plant and equipment
    
    
    122
    
    
    
    89
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (18,694
    )
    
    
    (34,644
    )
    
    
    (481,761
    )
    
    
    (13,485
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    
    
    
    
    91,914
    
    
    
    560,000
    
    
    
    Repayment of debt
    
    
    (2,680
    )
    
    
    (94,657
    )
    
    
    (344,429
    )
    
    
    (16,949
    )Capital contribution from parent
    
    
    
    
    
    
    
    
    
    
    239,520
    
    
    
    Distributions to parent, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,780
    )Deferred financing costs
    
    
    
    
    
    
    (2,400
    )
    
    
    (20,000
    )
    
    
    Net cash provided by (used in)
financing activities
    
    
    (2,680
    )
    
    
    (5,143
    )
    
    
    435,091
    
    
    
    (20,729
    )Effect of exchange rate differences on cash
    
    
    6,609
    
    
    
    (4,518
    )
    
    
    (485
    )
    
    
    (2,673
    )Net increase (decrease) in cash and
cash equivalents
    
    
    54,577
    
    
    
    28,857
    
    
    
    (53,471
    )
    
    
    56,666Cash and cash equivalents, beginning of period
    
    
    46,357
    
    
    
    17,500
    
    
    
    70,971
    
    
    
    14,305Cash and cash equivalents, end of period
    
    $
    100,934
    
    
    $
    46,357
    
    
    $
    17,500
    
    
    $
    70,971Supplemental disclosure cash flow information:Cash paid during the period for income taxes
    
    $
    4,457
    
    
    $
    6,645
    
    
    $
    
    
    
    $
    3,611Cash paid during the period for interest
    
    
    33,006
    
    
    
    25,107
    
    
    
    6,222
    
    
    
    26,850
  F-7




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##### Table of Contents



Notes to the Consolidated Financial Statements Polymer Holdings LLC
 Notes to the Consolidated Financial Statements
 (1) Summary of Significant Accounting Policies
 (a) Organization, Acquisition, and Description of Business
    Corporate Background
  The Acquisition
  
    
    $200.0 million from the proceeds from the issuances by KRATON of 8.125%
senior subordinated notes due 2014, or the 8.125% Notes;
 
    
    $360.0 million of borrowings under the loan portion of a new senior secured
credit facility entered into
 F-8




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##### Table of Contents



by KRATON with Goldman Sachs Credit Partners L.P., UBS Securities LLC, UBS AG, Stamford
Branch, Credit Suisse First Boston, Morgan Stanley and General Electric Capital
Corporation, or the senior secured credit facility;
    
    An equity contribution to KRATON by Polymer Holdings of $250.0 million in cash; and
    
    $48.0 million from KRATONs cash balance.
   Sources:Term loans
    
    $
    360.0Notes
    
    
    200.0Capital contribution
    
    
    250.0Cash balance
    
    
    48.0Total sources
    
    $
    858.0Uses:Purchase of Business
    
    $
    464.3Purchase of Original Term Loan including accrued
interest and early payment premium
    
    
    227.1Purchase of Original Notes including accrued interest
and early payment premium
    
    
    123.6Fees and expenses
    
    
    43.0Total uses
    
    $
    858.0
   Current assets
    
    $
    393.1Property, plant, and equipment
    
    
    415.6Identifiable intangible assets
    
    
    117.7Other assets
    
    
    33.1Total assets
    
    $
    959.5Current liabilities
    
    $
    103.3Long-term debt
    
    
    556.4Other long-term liabilities
    
    
    60.3Members equity
    
    
    239.5Total
    
    $
    959.5
 (b) Principles of Consolidation
  F-9




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##### Table of Contents



(c) Cash Equivalents
  (d) Receivables
  (e) Inventories
  (f) 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
 (g) Identifiable Intangible Assets
  (h) Investment in Joint Venture
  F-10




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##### Table of Contents



(i) Impairment of Long-Lived Assets
 Accounting for the Impairment or
Disposal of Long-Lived Assets
  (j) Deferred Financing Costs
  (k) Income Taxes
   (l) Revenue Recognition
   (m) Research and Development Expenses
  F-11




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##### Table of Contents



(n) Foreign Currency Translation and Foreign Exchange
   (o) Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging
Activities
 (p) Environmental Costs
  (q) Disclosures about Fair Value of Financial Instruments
  (r) Financial Statement Estimates
  (s) Asset Retirement Obligations
 Accounting for Asset Retirement Obligations,
 F-12




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##### Table of Contents



(t) Stock-Based Compensation
   Year
Ended2005
    
    2004Risk-free interest rate
    
    
    3.95
    %
    
    
    3.52
    %Volatility factor
    
    
    0.98
    
    
    
    1.10Weighted-average expected life
    
    
    5.00
    
    
    
    5.00
  Year Ended2005
    
    
    2004Reported net income (loss)
    
    $
    14,390
    
    
    $
    (36,933
    )Add:
Stock-based employee compensation expense (1)
    
    
    
    
    
    
    Less: Total fair value computed stock-based
compensation, net of tax
    
    
    (l,010
    )
    
    
    (685
    )Pro forma net income (loss)
    
    $
    13,380
    
    
    $
    (37,618
    )
 
    F-13




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##### Table of Contents



(u) Recently Issued Accounting Standards
 Inventory Costs
    (2) Detail of Certain Balance Sheet Accounts
 December 31,2005
    
    
    2004Inventories:Finished products
    
    $
    167,454
    
    
    $
    185,609Work in progress
    
    
    2,615
    
    
    
    3,844Raw materials
    
    
    22,526
    
    
    
    21,623$
    192,595
    
    
    $
    211,076Property, plant, and equipment:Land
    
    $
    12,115
    
    
    $
    12,648Buildings
    
    
    27,516
    
    
    
    29,966Plant and equipment
    
    
    403,574
    
    
    
    409,422Construction in progress
    
    
    14,957
    
    
    
    10,383458,162
    
    
    
    462,419Less accumulated depreciation
    
    
    63,970
    
    
    
    38,086$
    394,192
    
    
    $
    424,333Other payables and accruals:Employee related
    
    $
    16,217
    
    
    $
    6,250Interest
    
    
    8,069
    
    
    
    8,143Property and other taxes
    
    
    5,095
    
    
    
    5,814Customer rebates
    
    
    4,382
    
    
    
    6,417Income taxes (receivable)
payable
    
    
    752
    
    
    
    174Other
    
    
    14,243
    
    
    
    13,261$
    48,758
    
    
    $
    40,059Identifiable intangible assets:Technology
    
    $
    52,576
    
    
    $
    52,576Customer relations
    
    
    39,260
    
    
    
    39,260Trademarks
    
    
    25,860
    
    
    
    25,860117,696
    
    
    
    117,696Less accumulated amortization
    
    
    15,848
    
    
    
    8,002$
    101,848
    
    
    $
    109,694
  F-14




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##### Table of Contents



(3) Long-Term Debt
  December 31,2005
    
    
    2004Senior Secured Credit Facilities:Term loans
    
    $
    262,663
    
    
    $
    265,343Revolver
    
    
    
    
    
    
    8.125% Notes
    
    
    200,000
    
    
    
    200,00012% Discount Notes
    
    
    105,325
    
    
    
    93,672Total debt
    
    
    567,988
    
    
    
    559,015Less current portion of long-term debt
    
    
    30,570
    
    
    
    2,680Total long-term debt
    
    $
    537,418
    
    
    $
    556,335
 (a) Senior Secured Credit Facilities
   (1)
    
    permit the issuance of the 12% Senior Discount Notes, or the 12% Discount Notes,
which generated aggregate gross proceeds of $91.9 million, which was then contributed to
us to prepay $76.2 million of Term Loans, with the remaining cash (net of fees and
expenses) used for general corporate purposes;(2)
    
    provide for more flexibility in the maximum permitted leverage ratio covenant and
minimum required interest coverage ratio covenant;(3)
    
    amend the maximum permitted capital expenditures covenant;(4)
    
    make certain modifications to the definition of Adjusted EBITDA, which is one of
the components utilized in calculating the leverage and interest coverage ratios; and(5)
    
    increase the interest rate with respect to the Term Loans by 0.25% per annum until,
after June 30, 2005, a specified senior leverage ratio is met or until certain ratings
are obtained.
 Maturity
  F-15




---



##### Table of Contents



Interest
   Mandatory Prepayments
   Covenants
    (b) Senior Subordinated Notes Due January 15, 2014
  Interest
  F-16




---



##### Table of Contents



Optional Redemption
  Covenants
    Exchange Offer
   (c) Senior Discount Notes Due July 15, 2014
  Interest
  Optional Redemption
  F-17




---



##### Table of Contents



Covenants
    Exchange Offer
   (d) Original Senior Secured Credit Facilities
  Interest
  F-18




---



##### Table of Contents



Mandatory Prepayments
  (e) Original Senior Subordinated Notes Due February 28, 2011
  Interest
  Warrants
   F-19




---



##### Table of Contents



(f) Debt Maturities
  PrincipalPaymentYear ending December 31:2006
    
    $
    30,5702007
    
    
    2,6802008
    
    
    2,6802009
    
    
    2,6802010
    
    
    224,053Thereafter
    
    
    350,114Total debt
    
    $
    612,777Less unaccreted value of 12% Discount Notes
    
    
    44,789Total Debt
    
    $
    567,988
 (4) Income Taxes
    PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Current tax provision:U.S.
    
    $
    
    
    
    $
    (158
    )
    
    $
    
    
    
    $
    Foreign
    
    
    (7,419
    )
    
    
    (3,404
    )
    
    
    951
    
    
    
    (7,226
    )Total
    
    
    (7,419
    )
    
    
    (3,562
    )
    
    $
    951
    
    
    $
    (7,226
    )Deferred tax provision:U.S.
    
    
    7,820
    
    
    
    18,609
    
    
    
    228
    
    
    
    Foreign
    
    
    (8,400
    )
    
    
    4,598
    
    
    
    168
    
    
    
    4,219Total
    
    
    (580
    )
    
    
    23,207
    
    
    
    396
    
    
    
    4,219Income tax (provision)
benefit
    
    $
    (7,999
    )
    
    $
    19,645
    
    
    $
    1,347
    
    
    $
    (3,007
    )
  F-20




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##### Table of Contents



December 31,2005
    
    
    2004Deferred tax liabilities:Property, plant, and equipment
    
    $
    (98,564
    )
    
    $
    (70,740
    )Identifiable intangibles
    
    
    (11,614
    )
    
    
    (16,674
    )Inventory
    
    
    (151
    )
    
    
    Interest rate swaps
    
    
    (1,555
    )
    
    
    (556
    )Other
    
    
    (483
    )
    
    
    Total deferred tax liabilities
    
    
    (112,367
    )
    
    
    (87,970
    )Deferred tax assets:Net operating loss carryforward
    
    
    91,703
    
    
    
    69,310Inventory
    
    
    884
    
    
    
    1,706Pension accrual
    
    
    1,036
    
    
    
    955Other
    
    
    2,218
    
    
    
    417Interest
    
    
    
    
    
    
    588Total deferred tax assets
    
    
    95,841
    
    
    
    72,976Valuation allowance for deferred tax assets
    
    
    (11,339
    )
    
    
    (10,759
    )Net deferred tax liabilities
    
    $
    (27,865
    )
    
    $
    (25,753
    )
  December 31,2005
    
    
    2004Current deferred tax assets
    
    $
    2,407
    
    
    $
    417Non-current deferred tax assets
    
    
    93,433
    
    
    
    61,800Current deferred tax liabilities
    
    
    (454
    )
    
    
    (1,657
    )Non-current deferred tax liabilities
    
    
    (123,251
    )
    
    
    (86,313
    )Net deferred tax liabilities
    
    $
    (27,865
    )
    
    $
    (25,753
    )
  PredecessorPeriod from
    
    
    Period fromYear Ended December 31,
    
    
    December 23 through
    
    
    January 1 through2005
    
    
    2004
    
    
    December 31, 2003
    
    
    December 22, 2003Income taxes at the statutory rate
    
    $
    (7,837
    )
    
    $
    19,802
    
    
    $
    1,192
    
    
    $
    (4,975
    )Foreign tax rate differential
    
    
    (729
    )
    
    
    285
    
    
    
    (13
    )
    
    
    (57
    )State tax rate differential
    
    
    (613
    )
    
    
    1,299
    
    
    
    
    
    
    
    Excess purchased tax basis
    
    
    1,814
    
    
    
    5,510
    
    
    
    168
    
    
    
    1,739Change in valuation allowance
    
    
    (580
    )
    
    
    (6,876
    )
    
    
    
    
    
    
    400Other
    
    
    (54
    )
    
    
    (375
    )
    
    
    
    
    
    
    (114
    )Income tax (provision) benefit
    
    $
    (7,999
    )
    
    $
    19,645
    
    
    $
    1,347
    
    
    $
    (3,007
    )
  F-21




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##### Table of Contents



(5) Employee Benefits
  (a) U.S. Retirement Benefit Plans
   December 31,2005
    
    
    2004Change in benefit obligation:Benefit obligation beginning of period
    
    $
    53,051
    
    
    $
    42,951Service cost
    
    
    3,545
    
    
    
    3,324Interest cost
    
    
    3,114
    
    
    
    2,777Benefits paid
    
    
    (301
    )
    
    
    (179
    )Actuarial (gain) loss
    
    
    2,136
    
    
    
    4,178Plan amendments
    
    
    (2,045
    )
    
    
    Benefit obligation at end of period
    
    $
    59,500
    
    
    $
    53,051Change in plan assets:Fair value at beginning of period
    
    $
    33,522
    
    
    $
    30,754Actual return on plan assets
    
    
    2,869
    
    
    
    2,947Employer contributions
    
    
    368
    
    
    
    Benefits paid
    
    
    (301
    )
    
    
    (179
    )Fair value at end of period
    
    $
    36,458
    
    
    $
    33,522
 December 31,2005
    
    
    2004Development of net amount recognized:Funded status
    
    $
    (23,043
    )
    
    $
    (19,529
    )Unrecognized net prior service cost
    
    
    
    
    
    
    Unrecognized actuarial loss
    
    
    4,129
    
    
    
    3,963Net amount recognized
    
    $
    (18,914
    )
    
    $
    (15,566
    )Amounts recognized in the statement of financial position:Accrued pension cost
    
    $
    (18,914
    )
    
    $
    (15,566
    )
  F-22




---



##### Table of Contents



PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Service cost benefits earned during the period
    
    $
    3,544
    
    
    $
    3,324
    
    
    $
    56
    
    
    $
    2,748Interest on prior years projected benefit obligation
    
    
    3,114
    
    
    
    2,777
    
    
    
    45
    
    
    
    2,231Expected return on plan assets
    
    
    (2,942
    )
    
    
    (2,731
    )
    
    
    (51
    )
    
    
    (2,505
    )Amortization of prior year service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Net pension costs
    
    $
    3,716
    
    
    $
    3,370
    
    
    $
    50
    
    
    $
    2,483
 December 31,2005
    
    2004Weighted average assumptions used to determine benefit obligations at December 31:Measure date
    
    12/31/2005
    
    12/31/2004Discount rate
    
    5.75%
    
    6.00%Rates of increase in salary compensation level
    
    4.00%
    
    4.00%Rates of increase in hourly compensation levels
    
    3.00%
    
    3.00%Expected long-term rate of return on plan assets
    
    9.00%
    
    9.00%Weighted average assumptions used to periodic benefit cost for years ended
December 31:Discount rate
    
    6.00%
    
    6.25%Rates of increase in salary compensation level
    
    4.00%
    
    4.00%Rates of increase in hourly compensation levels
    
    3.00%
    
    3.00%Expected long-term rate of return on plan assets
    
    9.00%
    
    9.00%
  Plan Assets
  Percentage ofPlan Assetsat December 31,Asset Category
    
    2005
    
    
    2004Equity Securities
    
    
    67.6
    %
    
    
    61.6
    %Debt Securities
    
    
    31.9
    %
    
    
    38.3
    %Other
    
    
    0.5
    %
    
    
    0.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 F-23




---



##### Table of Contents



Contributions
  Estimated Future Benefit Payments
  2006
    
    $
    3782007
    
    
    5012008
    
    
    6682009
    
    
    8682010
    
    
    1,151Years 2011-2014
    
    
    12,124
 (b) Other Retirement Benefit Plans
   (c) Postretirement Benefits Other Than Pensions
    F-24




---



##### Table of Contents



December 31,2005
    
    
    2004Change in benefit obligation:Benefit obligation beginning of period
    
    $
    9,909
    
    
    $
    7,921Service cost
    
    
    367
    
    
    
    427Interest cost
    
    
    475
    
    
    
    535Benefits paid
    
    
    (81
    )
    
    
    (53
    )Actuarial gain (loss)
    
    
    (1,703
    )
    
    
    1,079Plan amendments
    
    
    
    
    
    
    Benefit obligation at end of period
    
    $
    8,967
    
    
    $
    9,909Reconciliation of plan assets (1):Employer contributions
    
    $
    81
    
    
    $
    53Benefits paid
    
    
    (81
    )
    
    
    (53
    )$
    
    
    
    $
    
 
 (1)
    
    As part of the Ripplewood Transaction, Shell Chemicals has committed to a future cash
payment related to retiree medical expenses based on a specified dollar amount per employee,
if certain contractual commitments are met. As of December 31, 2005 and 2004, we have recorded
an asset of approximately $5.5 million and $5.0 million, respectively, as our estimate of the
present value of this commitment. December 31,
    
    
    December 31,2005
    
    
    2004Development of net amount recognized:Funded status
    
    $
    (8,967
    )
    
    $
    (9,909
    )Unrecognized cost:Actuarial gain (loss)
    
    
    (620
    )
    
    
    1,079Amount recognized in the
statement of financial
position
    
    $
    (9,587
    )
    
    $
    (8,830
    )
  PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Service cost
    
    $
    367
    
    
    $
    426
    
    
    $
    8
    
    
    $
    416Interest cost
    
    
    475
    
    
    
    535
    
    
    
    9
    
    
    
    455Recognized net actuarial gain
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Net plan costs
    
    $
    838
    
    
    $
    961
    
    
    $
    17
    
    
    $
    871
 December 31,2005
    
    2004Weighted average assumptions used to determine benefit obligations:Measurement date
    
    12/31/2005
    
    12/31/2004Discount rate
    
    5.75%
    
    6.00%Rates of increase in salary compensation level
    
    N/A
    
    N/AWeighted average assumptions used to net periodic benefit cost:Discount rate
    
    6.00%
    
    6.25%Rates of increase in salary compensation level
    
    N/A
    
    N/AExpected long-term rate of return on plan assets
    
    N/A
    
    N/AAssumed health care cost trend rates:Health care cost trend rate assumed for next year
    
    9.40%
    
    8.00%Rate to which the cost trend rate is assumed to declined (the ultimate trend rate)
    
    5.00%
    
    4.50%Year that the rate reaches the ultimate trend rate
    
    2012
    
    2010
 F-25




---



##### Table of Contents



1% Increase
    
    1% DecreaseEffect on total of service and interest cost components
    
    $
    55
    
    
    $
    (52
    )Effect on postretirement benefit obligation
    
    
    511
    
    
    
    (311
    )
 (d) KRATON Savings Plan
   (e) Membership Units
  (f) TJ Chemical Holdings LLC 2004 Option Plan
  F-26




---



##### Table of Contents



(g) Other Equity Awards
  F-27




---



##### Table of Contents



(h) KRATON Polymers LLC Executive Deferred Compensation Plan
  (i) 2006 Incentive Compensation Plan
  (j) Severance Cost
   (6) Commitments and Contingencies
 (a) Lease Commitments
  (b) Environmental and Safety Matters
  F-28




---



##### Table of Contents



(c) Legal Proceedings
  (d) Pernis, The Netherlands Manufacturing Facility Fire
   F-29




---



##### Table of Contents



(7) Financial Instruments
 (a) Interest Rate Swap Agreements
  (b) Fair Value of Financial Instruments
  2005Carrying Value
    
    Fair ValueTerm loans
    
    $
    262,663
    
    
    $
    262,6638.125% Notes
    
    
    200,000
    
    
    
    192,00012% Discount Notes
    
    
    105,325
    
    
    
    108,375
 2004Carrying Value
    
    Fair ValueTerm loans
    
    $
    265,343
    
    
    $
    265,3438.125% Notes
    
    
    200,000
    
    
    
    196,47412% Discount Notes
    
    
    93,672
    
    
    
    90,942
  (8) Significant Contracts
  (a) Leases with Shell Chemicals
   F-30




---



##### Table of Contents



(b) Operating Agreements with Shell Chemicals
     (c) Site Services, Utilities, Materials, and Original Facilities Agreements with Shell Chemicals
   (d) Raw Materials Agreements with Shell Chemicals
   F-31




---



##### Table of Contents



Styrene
   Isoprene
    Butadiene
  F-32




---



##### Table of Contents



(e) Infineum
  (9) Related Party Transactions
  (a) Related-Party Amounts
  PredecessorPeriod from
    
    Period fromDecember 23
    
    January 1through
    
    throughYear Ended December 31,
    
    December 31,
    
    December 22,2005
    
    2004
    
    2003
    
    2003Sales to related parties
    
    $
    2,327
    
    
    $
    3,753
    
    
    $
    71
    
    
    $
    36,792Purchases from related parties
    
    
    37,008
    
    
    
    39,511
    
    
    
    794
    
    
    
    236,957Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,233Selling, general, and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    962
  (b) Revenues
  (c) Cost of Goods Sold
  F-33




---



##### Table of Contents



(d) Research and Development Expenses
  (e) Other
    (10) Members Equity
   (11) Industry Segment and Foreign Operations
  F-34




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Net Revenues:United States
    
    $
    399,554
    
    
    $
    319,159
    
    
    $
    284,190Germany
    
    
    98,666
    
    
    
    90,654
    
    
    
    83,004Japan
    
    
    57,848
    
    
    
    60,020
    
    
    
    53,922Italy
    
    
    50,638
    
    
    
    38,819
    
    
    
    37,121The Netherlands
    
    
    42,586
    
    
    
    32,410
    
    
    
    26,644France
    
    
    39,333
    
    
    
    42,227
    
    
    
    31,813United Kingdom
    
    
    30,182
    
    
    
    24,200
    
    
    
    20,043Brazil
    
    
    27,001
    
    
    
    22,332
    
    
    
    14,768Canada
    
    
    25,605
    
    
    
    21,584
    
    
    
    19,959China
    
    
    19,691
    
    
    
    14,606
    
    
    
    12,957Taiwan
    
    
    16,436
    
    
    
    13,976
    
    
    
    11,649Poland
    
    
    15,553
    
    
    
    10,812
    
    
    
    9,387Argentina
    
    
    12,472
    
    
    
    6,002
    
    
    
    5,633All other countries
    
    
    140,026
    
    
    
    110,585
    
    
    
    91,508$
    975,591
    
    
    $
    807,386
    
    
    $
    702,598
 December 31,2005
    
    
    2004
    
    
    2003Long-lived Assets:United States
    
    $
    270,639
    
    
    $
    261,820
    
    
    $
    239,007France
    
    
    91,593
    
    
    
    101,137
    
    
    
    92,166Brazil
    
    
    30,008
    
    
    
    26,688
    
    
    
    24,741Germany
    
    
    26,011
    
    
    
    30,073
    
    
    
    25,739The Netherlands
    
    
    23,732
    
    
    
    24,042
    
    
    
    18,934Japan
    
    
    3,342
    
    
    
    5,143
    
    
    
    4,343All other countries
    
    
    12,837
    
    
    
    13,516
    
    
    
    8,012$
    458,162
    
    
    $
    462,419
    
    
    $
    412,942
  (12) Supplemental Guarantor Information
   F-35




---



##### Table of Contents



Balance Sheet
 As of December 31, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    54,941
    
    
    $
    45,993
    
    
    $
    
    
    
    $
    100,934Receivables, net
    
    
    
    
    
    
    
    
    
    
    45,048
    
    
    
    69,950
    
    
    
    (7,412
    )
    
    
    107,586Inventories of products
    
    
    
    
    
    
    
    
    
    
    109,691
    
    
    
    88,697
    
    
    
    (5,793
    )
    
    
    192,595Inventories of materials and supplies
    
    
    
    
    
    
    
    
    
    
    5,935
    
    
    
    3,401
    
    
    
    
    
    
    
    9,336Other current assets
    
    
    
    
    
    
    4,729
    
    
    
    9,565
    
    
    
    9,217
    
    
    
    
    
    
    
    23,511Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    6,027
    
    
    
    (4,074
    )
    
    
    
    
    
    
    1,953Total current assets
    
    
    
    
    
    
    4,729
    
    
    
    231,207
    
    
    
    213,184
    
    
    
    (13,205
    )
    
    
    435,915Property, plant, and equipment, less
accumulated depreciation
    
    
    
    
    
    
    127,589
    
    
    
    173,900
    
    
    
    92,703
    
    
    
    
    
    
    
    394,192Identifiable intangible assets
    
    
    
    
    
    
    53,037
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    101,848Investment in consolidated subsidiaries
    
    
    329,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (329,582
    )
    
    
    Investment in joint venture
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    9,729
    
    
    
    
    
    
    
    10,542Deferred financing costs
    
    
    1,688
    
    
    
    12,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,399Other long-term assets
    
    
    
    
    
    
    105,385
    
    
    
    290,963
    
    
    
    4,127
    
    
    
    (390,870
    )
    
    
    9,605Total assets
    
    $
    331,270
    
    
    $
    304,264
    
    
    $
    696,070
    
    
    $
    368,554
    
    
    $
    (733,657
    )
    
    $
    966,501Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    30,570
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30,570Accounts payabletrade
    
    
    
    
    
    
    2,900
    
    
    
    26,726
    
    
    
    34,719
    
    
    
    
    
    
    
    64,345Other payables and accruals
    
    
    
    
    
    
    8,069
    
    
    
    21,448
    
    
    
    19,241
    
    
    
    
    
    
    
    48,758Due to (from) related parties
    
    
    
    
    
    
    
    
    
    
    1,835
    
    
    
    18,696
    
    
    
    (7,412
    )
    
    
    13,119Total current liabilities
    
    
    
    
    
    
    41,539
    
    
    
    50,009
    
    
    
    72,656
    
    
    
    (7,412
    )
    
    
    156,792Long-term debt, net of current portion
    
    
    105,325
    
    
    
    432,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    537,418Deferred income taxes
    
    
    (4,192
    )
    
    
    (9,055
    )
    
    
    42,764
    
    
    
    301
    
    
    
    
    
    
    
    29,818Long-term liabilities
    
    
    
    
    
    
    285,485
    
    
    
    28,950
    
    
    
    106,148
    
    
    
    (390,870
    )
    
    
    29,713Total liabilities
    
    
    101,133
    
    
    
    750,062
    
    
    
    121,723
    
    
    
    179,105
    
    
    
    (398,282
    )
    
    
    753,741Commitments and contingencies (note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common equity
    
    
    230,137
    
    
    
    (448,685
    )
    
    
    574,347
    
    
    
    195,028
    
    
    
    (335,375
    )
    
    
    215,452Accumulated other comprehensive income
    
    
    
    
    
    
    2,887
    
    
    
    
    
    
    
    (5,579
    )
    
    
    
    
    
    
    (2,692
    )Total members equity
    
    
    230,137
    
    
    
    (445,798
    )
    
    
    574,347
    
    
    
    189,449
    
    
    
    (335,375
    )
    
    
    212,760Total liabilities and members equity
    
    $
    331,270
    
    
    $
    304,264
    
    
    $
    696,070
    
    
    $
    368,554
    
    
    $
    (733,657
    )
    
    $
    966,501
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not
believe that separate financial information concerning the issuers would provide information
that would be useful.(2)
    
    KRATON Polymers and KRATON Polymers Capital Corporation are the issuers of the 8.125% Notes.
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. F-36




---



##### Table of Contents



Balance Sheet
 As of December 31, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash
equivalents
    
    $
    
    
    
    $
    
    
    
    $
    15,981
    
    
    $
    30,376
    
    
    $
    
    
    
    $
    46,357Receivables, net
    
    
    
    
    
    
    454
    
    
    
    43,143
    
    
    
    84,467
    
    
    
    (7,468
    )
    
    
    120,596Inventories of
products
    
    
    
    
    
    
    1,684
    
    
    
    120,264
    
    
    
    91,666
    
    
    
    (2,538
    )
    
    
    211,076Inventories of
materials and
supplies
    
    
    
    
    
    
    
    
    
    
    5,673
    
    
    
    3,105
    
    
    
    
    
    
    
    8,778Other current
assets
    
    
    
    
    
    
    2,288
    
    
    
    577
    
    
    
    7,516
    
    
    
    
    
    
    
    10,381Total
current
assets
    
    
    
    
    
    
    4,426
    
    
    
    185,638
    
    
    
    217,130
    
    
    
    (10,006
    )
    
    
    397,188Property, plant, and
equipment, less
accumulated depreciation
    
    
    
    
    
    
    138,133
    
    
    
    181,292
    
    
    
    104,908
    
    
    
    
    
    
    
    424,333Identifiable intangible
assets
    
    
    
    
    
    
    60,883
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    109,694Investment in
consolidated
subsidiaries
    
    
    329,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (329,582
    )
    
    
    Investment in joint
venture
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    9,940
    
    
    
    
    
    
    
    10,753Deferred financing costs
    
    
    1,826
    
    
    
    14,973
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,799Other long-term assets
    
    
    
    
    
    
    118,127
    
    
    
    252,066
    
    
    
    3,529
    
    
    
    (365,076
    )
    
    
    8,646Total assets
    
    $
    331,408
    
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (704,664
    )
    
    $
    967,413Liabilities and Members
EquityCurrent liabilities:Current portion of
long-term debt
    
    $
    
    
    
    $
    2,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,680Accounts
payabletrade
    
    
    
    
    
    
    2,900
    
    
    
    29,977
    
    
    
    47,091
    
    
    
    
    
    
    
    79,968Other payables and
accruals
    
    
    
    
    
    
    8,143
    
    
    
    16,199
    
    
    
    15,717
    
    
    
    
    
    
    
    40,059Due to (from)
related parties
    
    
    
    
    
    
    
    
    
    
    456
    
    
    
    21,483
    
    
    
    (7,468
    )
    
    
    14,471Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (417
    )
    
    
    1,657
    
    
    
    
    
    
    
    1,240Total current
liabilities
    
    
    
    
    
    
    13,723
    
    
    
    46,215
    
    
    
    85,948
    
    
    
    (7,468
    )
    
    
    138,418Long-term debt, net of
current portion
    
    
    93,672
    
    
    
    462,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    556,335Deferred income taxes
    
    
    (671
    )
    
    
    12,344
    
    
    
    19,053
    
    
    
    (6,213
    )
    
    
    
    
    
    
    24,513Long-term liabilities
    
    
    
    
    
    
    261,950
    
    
    
    12,865
    
    
    
    115,890
    
    
    
    (365,076
    )
    
    
    25,629Total liabilities
    
    
    93,001
    
    
    
    750,680
    
    
    
    78,133
    
    
    
    195,625
    
    
    
    (372,544
    )
    
    
    744,895Commitments and
contingencies (note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    238,407
    
    
    
    (414,355
    )
    
    
    540,863
    
    
    
    167,733
    
    
    
    (332,120
    )
    
    
    200,528Accumulated other
comprehensive income
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    20,960
    
    
    
    
    
    
    
    21,990Total members
equity
    
    
    238,407
    
    
    
    (413,325
    )
    
    
    540,863
    
    
    
    188,693
    
    
    
    (332,120
    )
    
    
    222,518Total liabilities and
members equity
    
    $
    331,408
    
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (704,664
    )
    
    $
    967,413
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not
believe that separate financial information concerning the issuers would provide information
that would be useful.(2)
    
    KRATON Polymers and KRATON Polymers Capital Corporation are the issuers of the 8.125% Notes.
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. F-37




---



##### Table of Contents



Statement of Operations
 Year ended December 31, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    523,567
    
    
    $
    562,740
    
    
    $
    (133,386
    )
    
    $
    952,921Other
    
    
    
    
    
    
    
    
    
    
    425
    
    
    
    22,245
    
    
    
    
    
    
    
    22,670Total revenues
    
    
    
    
    
    
    
    
    
    
    523,992
    
    
    
    584,985
    
    
    
    (133,386
    )
    
    
    975,591Costs and expenses:Cost of goods sold
    
    
    
    
    
    
    4,939
    
    
    
    404,664
    
    
    
    489,795
    
    
    
    (133,386
    )
    
    
    766,012Gross profit
    
    
    
    
    
    
    (4,939
    )
    
    
    119,328
    
    
    
    95,190
    
    
    
    
    
    
    
    209,579Research and development expenses
    
    
    
    
    
    
    
    
    
    
    12,933
    
    
    
    13,219
    
    
    
    
    
    
    
    26,152Selling, general, and administrative expenses
    
    
    
    
    
    
    
    
    
    
    44,571
    
    
    
    28,160
    
    
    
    
    
    
    
    72,731Depreciation and amortization
    
    
    
    
    
    
    18,390
    
    
    
    18,396
    
    
    
    7,304
    
    
    
    
    
    
    
    44,090Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,516
    )
    
    
    
    
    
    
    (1,516
    )Interest expense (income)
    
    
    11,790
    
    
    
    36,657
    
    
    
    (7,624
    )
    
    
    4,910
    
    
    
    
    
    
    
    45,733Income (loss) before income taxes
    
    
    (11,790
    )
    
    
    (59,986
    )
    
    
    51,052
    
    
    
    43,113
    
    
    
    
    
    
    
    22,389Income tax (provision) benefit
    
    
    3,520
    
    
    
    22,401
    
    
    
    (18,101
    )
    
    
    (15,819
    )
    
    
    
    
    
    
    (7,999
    )Net income (loss)
    
    $
    (8,270
    )
    
    $
    (37,585
    )
    
    $
    32,951
    
    
    $
    27,294
    
    
    $
    
    
    
    $
    14,390
 Year ended December 31, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHolding (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    426,346
    
    
    $
    462,677
    
    
    $
    (97,797
    )
    
    $
    791,226Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,160
    
    
    
    
    
    
    
    16,160Total revenues
    
    
    
    
    
    
    
    
    
    
    426,346
    
    
    
    478,837
    
    
    
    (97,797
    )
    
    
    807,386Costs and expenses:Cost of goods sold
    
    
    
    
    
    
    33,054
    
    
    
    325,602
    
    
    
    432,109
    
    
    
    (97,797
    )
    
    
    692,968Gross profit
    
    
    
    
    
    
    (33,054
    )
    
    
    100,744
    
    
    
    46,728
    
    
    
    
    
    
    
    114,418Research and development expenses
    
    
    
    
    
    
    
    
    
    
    10,845
    
    
    
    12,333
    
    
    
    
    
    
    
    23,178Selling, general, and administrative expenses
    
    
    
    
    
    
    
    
    
    
    38,792
    
    
    
    26,111
    
    
    
    
    
    
    
    64,903Depreciation and amortization
    
    
    
    
    
    
    17,012
    
    
    
    18,311
    
    
    
    7,307
    
    
    
    
    
    
    
    42,630Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    
    
    
    
    (462
    )Interest expense (income)
    
    
    1,784
    
    
    
    40,265
    
    
    
    (6,124
    )
    
    
    4,822
    
    
    
    
    
    
    
    40,747Income (loss) before income taxes
    
    
    (1,784
    )
    
    
    (90,331
    )
    
    
    38,920
    
    
    
    (3,383
    )
    
    
    
    
    
    
    (56,578
    )Income tax
(provision) benefit
    
    
    673
    
    
    
    34,206
    
    
    
    (19,022
    )
    
    
    3,788
    
    
    
    
    
    
    
    19,645Net income (loss)
    
    $
    (1,111
    )
    
    $
    (56,125
    )
    
    $
    19,898
    
    
    $
    405
    
    
    $
    
    
    
    $
    (36,933
    )
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not
believe that separate financial information concerning the issuers would provide information
that would be useful.(2)
    
    KRATON Polymers and KRATON Polymers Capital Corporation are the issuers of the 8.125% Notes.
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. F-38




---



##### Table of Contents



Statement of Operations
 Period from December 23 through December 31, 2003Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    
    
    
    $
    7,313
    
    
    $
    3,676
    
    
    $
    (1,457
    )
    
    $
    9,532Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    328Total revenues
    
    
    
    
    
    
    
    
    
    
    7,313
    
    
    
    4,004
    
    
    
    (1,457
    )
    
    
    9,860Costs and expenses:Cost of goods sold
    
    
    
    
    
    
    1,525
    
    
    
    4,428
    
    
    
    5,300
    
    
    
    (1,457
    )
    
    
    9,796Gross profit
    
    
    
    
    
    
    (1,525
    )
    
    
    2,885
    
    
    
    (1,296
    )
    
    
    
    
    
    
    64Research and development
expenses
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    244
    
    
    
    
    
    
    
    458Selling, general, and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    523
    
    
    
    1,101
    
    
    
    
    
    
    
    1,624Depreciation and amortization
    
    
    
    
    
    
    342
    
    
    
    372
    
    
    
    146
    
    
    
    
    
    
    
    860Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Interest expense (income)
    
    
    
    
    
    
    677
    
    
    
    (106
    )
    
    
    (15
    )
    
    
    
    
    
    
    556Income (loss) before income taxes
    
    
    
    
    
    
    (2,544
    )
    
    
    1,882
    
    
    
    (2,744
    )
    
    
    
    
    
    
    (3,406
    )Income tax benefit
    
    
    
    
    
    
    168
    
    
    
    228
    
    
    
    951
    
    
    
    
    
    
    
    1,347Net income (loss)
    
    $
    
    
    
    $
    (2,376
    )
    
    $
    2,110
    
    
    $
    (1,793
    )
    
    $
    
    
    
    $
    (2,059
    )
 PredecessorPeriod from January 1 through December 22, 2003Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    366,663
    
    
    $
    387,904
    
    
    $
    (74,304
    )
    
    $
    680,263Other
    
    
    
    
    
    
    
    
    
    
    12,475
    
    
    
    
    
    
    
    12,475Total revenues
    
    
    
    
    
    
    366,663
    
    
    
    400,379
    
    
    
    (74,304
    )
    
    
    692,738Costs and expenses:Cost of goods sold
    
    
    (1,415
    )
    
    
    257,523
    
    
    
    337,939
    
    
    
    (74,304
    )
    
    
    519,743Gross profit
    
    
    1,415
    
    
    
    109,140
    
    
    
    62,440
    
    
    
    
    
    
    
    172,995Research and development
expenses
    
    
    
    
    
    
    10,978
    
    
    
    12,332
    
    
    
    
    
    
    
    23,310Selling, general, and
administrative expenses
    
    
    
    
    
    
    28,398
    
    
    
    25,619
    
    
    
    
    
    
    
    54,017Depreciation
    
    
    (396
    )
    
    
    20,468
    
    
    
    5,804
    
    
    
    
    
    
    
    25,876Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (621
    )
    
    
    
    
    
    
    (621
    )Interest expense (income)
    
    
    56,854
    
    
    
    (4,403
    )
    
    
    5,092
    
    
    
    
    
    
    
    57,543Income (loss) before income taxes
    
    
    (55,043
    )
    
    
    53,699
    
    
    
    14,214
    
    
    
    
    
    
    
    12,870Income tax provision
    
    
    (2,000
    )
    
    
    
    
    
    
    (1,007
    )
    
    
    
    
    
    
    (3,007
    )Net income (loss)
    
    $
    (57,043
    )
    
    $
    53,699
    
    
    $
    13,207
    
    
    $
    
    
    
    $
    9,863
 
 (1)
    
    KRATON Polymers and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. 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. F-39




---



##### Table of Contents



Statements of Cash Flows
 Year ended December 31, 2005Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by
(used in) operating
activities
    
    $
    
    
    
    $
    (42,419
    )
    
    $
    86,408
    
    
    $
    25,353
    
    
    $
    
    
    
    $
    69,342Cash flows used in
investing activities:Purchase of plant
and equipment, net
of proceeds from
sales of equipment
    
    
    
    
    
    
    
    
    
    
    (12,091
    )
    
    
    (6,603
    )
    
    
    
    
    
    
    (18,694
    )Net cash used in
investing activities
    
    
    
    
    
    
    
    
    
    
    (12,091
    )
    
    
    (6,603
    )
    
    
    
    
    
    
    (18,694
    )Cash flows provided by
(used in) financing
activities:Proceeds from debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayment of debt
    
    
    
    
    
    
    (2,680
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,680
    )Equity contribution
(from parent) to
subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from (payments
on) intercompany loans
    
    
    
    
    
    
    45,099
    
    
    
    (35,357
    )
    
    
    (9,742
    )
    
    
    
    
    
    
    Net cash provided by
(used in) financing
activities
    
    
    
    
    
    
    42,419
    
    
    
    (35,357
    )
    
    
    (9,742
    )
    
    
    
    
    
    
    (2,680
    )Effect of exchange rate
difference on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,609
    
    
    
    
    
    
    
    6,609Net increase
(decrease) in cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    38,960
    
    
    
    15,617
    
    
    
    
    
    
    
    54,577Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    
    
    
    
    15,981
    
    
    
    30,376
    
    
    
    
    
    
    
    46,357Cash and cash
equivalents at end of
period
    
    $
    
    
    
    $
    
    
    
    $
    54,941
    
    
    $
    45,993
    
    
    $
    
    
    
    $
    100,934
 F-40




---



##### Table of Contents



Statements of Cash Flows
 Year ended December 31, 2004Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by
(used in) operating
activities
    
    $
    
    
    
    $
    (26,216
    )
    
    $
    73,042
    
    
    $
    26,336
    
    
    $
    
    
    
    $
    73,162Cash flows used in
investing activities:Purchase of plant
and equipment, net
of proceeds from
sales of equipment
    
    
    
    
    
    
    
    
    
    
    (24,605
    )
    
    
    (10,039
    )
    
    
    
    
    
    
    (34,644
    )Net cash used in
investing activities
    
    
    
    
    
    
    
    
    
    
    (24,605
    )
    
    
    (10,039
    )
    
    
    
    
    
    
    (34,644
    )Cash flows provided by
(used in) financing
activities:Proceeds from debt
    
    
    91,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,914Repayment of debt
    
    
    
    
    
    
    (94,657
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,657
    )Equity contribution
(from parent) to
subsidiary
    
    
    (90,063
    )
    
    
    90,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    (1,851
    )
    
    
    (549
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,400
    )Proceeds from (payments
on) intercompany loans
    
    
    
    
    
    
    31,340
    
    
    
    (32,274
    )
    
    
    934
    
    
    
    
    
    
    
    Net cash provided by
(used in) financing
activities
    
    
    
    
    
    
    26,197
    
    
    
    (32,274
    )
    
    
    934
    
    
    
    
    
    
    
    (5,143
    )Effect of exchange rate
difference on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,518
    )
    
    
    
    
    
    
    (4,518
    )Net increase
(decrease) in cash
and cash equivalents
    
    
    
    
    
    
    (19
    )
    
    
    16,163
    
    
    
    12,713
    
    
    
    
    
    
    
    28,857Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    19
    
    
    
    (182
    )
    
    
    17,663
    
    
    
    
    
    
    
    17,500Cash and cash
equivalents at end of
period
    
    $
    
    
    
    $
    
    
    
    $
    15,981
    
    
    $
    30,376
    
    
    $
    
    
    
    $
    46,357
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not
believe that separate financial information concerning the issuers would provide information
that would be useful.(2)
    
    KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. 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. F-41




---



##### Table of Contents



Statements of Cash Flows
 Period from December 23 through December 31, 2003Polymer
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorHoldings (1)
    
    
    KRATON (2)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used
in) operating activities
    
    $
    
    
    
    $
    4,717
    
    
    $
    (17,444
    )
    
    $
    6,411
    
    
    $
    
    
    
    $
    (6,316
    )Cash flows used in investing
activities:Purchase of business,
including transaction
costs
    
    
    
    
    
    
    (479,211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479,211
    )Purchase of plant and
equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,550
    )
    
    
    
    
    
    
    (2,550
    )Net cash used
in investing
activities
    
    
    
    
    
    
    (479,211
    )
    
    
    
    
    
    
    (2,550
    )
    
    
    
    
    
    
    (481,761
    )Cash flows provided by (used
in) financing activities:Proceeds from debt
    
    
    
    
    
    
    560,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    560,000Repayment of debt
    
    
    
    
    
    
    (344,429
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,429
    )Proceeds from issuance
of common equity
    
    
    239,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239,520Equity contribution
(from parent) to
subsidiary
    
    
    (239,520
    )
    
    
    239,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    (20,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Proceeds from (payments
on) intercompany loans
    
    
    
    
    
    
    39,403
    
    
    
    (36,846
    )
    
    
    (2,557
    )
    
    
    
    
    
    
    Net cash
provided by
(used in)
financing
activities
    
    
    
    
    
    
    474,494
    
    
    
    (36,846
    )
    
    
    (2,557
    )
    
    
    
    
    
    
    435,091Effect of exchange rate
difference on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    (485
    )Net increase
(decrease) in
cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    (54,290
    )
    
    
    819
    
    
    
    
    
    
    
    (53,471
    )Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    19
    
    
    
    54,108
    
    
    
    16,844
    
    
    
    
    
    
    
    70,971Cash and cash equivalents at
end of period
    
    $
    
    
    
    $
    19
    
    
    $
    (182
    )
    
    $
    17,663
    
    
    $
    
    
    
    $
    17,500
 
 (1)
    
    Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do not
believe that separate financial information concerning the issuers would provide information
that would be useful.(2)
    
    KRATON Polymers and KRATON Polymers Capital Corporation are the issuers of the 8.125% Notes.
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. F-42




---



##### Table of Contents



Statements of Cash Flows
 PredecessorPeriod from January 1 through December 22, 2003Guarantor
    
    
    Non-GuarantorKRATON (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in)
operating activities
    
    $
    (24,604
    )
    
    $
    88,717
    
    
    $
    29,440
    
    
    $
    
    
    
    $
    93,553Cash flows used in investing activities:Purchase of plant and equipment
    
    
    
    
    
    
    (7,390
    )
    
    
    (6,095
    )
    
    
    
    
    
    
    (13,485
    )Net cash used in
investing activities
    
    
    
    
    
    
    (7,390
    )
    
    
    (6,095
    )
    
    
    
    
    
    
    (13,485
    )Cash flows provided by (used in)
financing activities:Repayment of debt
    
    
    (16,949
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,949
    )Cash contributions from
(distribution to) parent, net
    
    
    (3,780
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,780
    )Proceeds from (payments on)
intercompany loans
    
    
    45,315
    
    
    
    (28,253
    )
    
    
    (17,062
    )
    
    
    
    
    
    
    Net cash provided by
(used in) financing
activities
    
    
    24,586
    
    
    
    (28,253
    )
    
    
    (17,062
    )
    
    
    
    
    
    
    (20,729
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (2,673
    )
    
    
    
    
    
    
    (2,673
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (18
    )
    
    
    53,074
    
    
    
    3,610
    
    
    
    
    
    
    
    56,666Cash and cash equivalents at beginning of
period
    
    
    37
    
    
    
    1,034
    
    
    
    13,234
    
    
    
    
    
    
    
    14,305Cash and cash equivalents at end of period
    
    $
    19
    
    
    $
    54,108
    
    
    $
    16,844
    
    
    $
    
    
    
    $
    70,971
 
 (1)
    
    KRATON Polymers and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. 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. F-43




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
  F-44




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##### Table of Contents



KRATON Polymers LLC
 
 
 December 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    100,934
    
    
    $
    46,357Receivables, net of allowances of $1,013 and $750
    
    
    107,586
    
    
    
    120,596Inventories of products
    
    
    192,595
    
    
    
    211,076Inventories of materials and supplies
    
    
    9,336
    
    
    
    8,778Other current assets
    
    
    23,511
    
    
    
    10,381Deferred income taxes
    
    
    1,953
    
    
    
    Total current assets
    
    
    435,915
    
    
    
    397,188Property, plant, and equipment, less accumulated depreciation
    
    
    394,192
    
    
    
    424,333Identifiable intangible assets, less accumulated amortization
    
    
    101,848
    
    
    
    109,694Investment in joint venture
    
    
    10,542
    
    
    
    10,753Deferred financing costs
    
    
    12,711
    
    
    
    14,973Other long-term assets
    
    
    9,605
    
    
    
    8,646Total assets
    
    $
    964,813
    
    
    $
    965,587Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    30,570
    
    
    $
    2,680Accounts payabletrade
    
    
    64,345
    
    
    
    79,968Other payables and accruals
    
    
    48,758
    
    
    
    40,059Due to related parties
    
    
    13,119
    
    
    
    14,471Deferred income taxes
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    156,792
    
    
    
    138,418Long-term debt, net of current portion
    
    
    432,093
    
    
    
    462,663Deferred income taxes
    
    
    34,010
    
    
    
    25,184Long-term liabilities
    
    
    29,713
    
    
    
    25,629Total liabilities
    
    
    652,608
    
    
    
    651,894Commitments and contingencies (note 6)Members equity:Common equity
    
    
    314,897
    
    
    
    291,703Accumulated other comprehensive income
    
    
    (2,692
    )
    
    
    21,990Total members equity
    
    
    312,205
    
    
    
    313,693Total liabilities and members equity
    
    $
    964,813
    
    
    $
    965,587
  F-45




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##### Table of Contents



KRATON Polymers LLC
 
 Consolidated Statements of Operations
 PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Revenues:Sales
    
    $
    952,921
    
    
    $
    791,226
    
    
    $
    9,532
    
    
    $
    680,263Other
    
    
    22,670
    
    
    
    16,160
    
    
    
    328
    
    
    
    12,475Total revenues
    
    
    975,591
    
    
    
    807,386
    
    
    
    9,860
    
    
    
    692,738Costs and expenses:Cost of goods sold
    
    
    766,012
    
    
    
    692,968
    
    
    
    9,796
    
    
    
    519,743Gross profit
    
    
    209,579
    
    
    
    114,418
    
    
    
    64
    
    
    
    172,995Research and development expenses
    
    
    26,152
    
    
    
    23,178
    
    
    
    458
    
    
    
    23,310Selling, general, and administrative expenses
    
    
    72,731
    
    
    
    64,903
    
    
    
    1,624
    
    
    
    54,017Depreciation and amortization of identifiable
intangibles
    
    
    44,090
    
    
    
    42,630
    
    
    
    860
    
    
    
    25,876Earnings in joint venture
    
    
    (1,516
    )
    
    
    (462
    )
    
    
    (28
    )
    
    
    (621
    )Interest, net
    
    
    33,943
    
    
    
    38,963
    
    
    
    556
    
    
    
    57,543Income (loss) before income taxes
    
    
    34,179
    
    
    
    (54,794
    )
    
    
    (3,406
    )
    
    
    12,870Income tax (provision) benefit
    
    
    (11,519
    )
    
    
    18,973
    
    
    
    1,347
    
    
    
    (3,007
    )Net income (loss)
    
    $
    22,660
    
    
    $
    (35,821
    )
    
    $
    (2,059
    )
    
    $
    9,863
  F-46




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##### Table of Contents



KRATON Polymers LLC
 
 
 PredecessorAccumulatedOtherCommon
    
    
    ComprehensiveEquity
    
    
    Income
    
    
    TotalBalance, December 31, 2002
    
    $
    168,970
    
    
    $
    9,602
    
    
    $
    178,572Comprehensive income:Net incomeperiod from January 1
through December 22, 2003
    
    
    9,863
    
    
    
    
    
    
    
    9,863Other comprehensive income:Foreign currency adjustments
    
    
    
    
    
    
    33,817
    
    
    
    33,817Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    43,680Capital contributions from parent
    
    
    150
    
    
    
    
    
    
    
    150Distribution to parent
    
    
    (3,930
    )
    
    
    
    
    
    
    (3,930
    )Balance, December 22, 2003
    
    $
    175,053
    
    
    $
    43,419
    
    
    $
    218,472
  F-47




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##### Table of Contents



KRATON Polymers LLC
 
 
 AccumulatedOtherCommon
    
    
    ComprehensiveEquity
    
    

Income
(Loss)
    
    
    TotalIssuance of common units, net of expenses
    
    $
    239,520
    
    
    $
    
    
    
    $
    239,520Comprehensive income:Net lossperiod from December 23 through
December 31, 2003
    
    
    (2,059
    )
    
    
    
    
    
    
    (2,059
    )Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    1,364
    
    
    
    1,364Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (695
    )Balance, December 31, 2003
    
    
    237,461
    
    
    $
    1,364
    
    
    
    238,825Capital contributions from parent
    
    
    90,063
    
    
    
    
    
    
    
    90,063Comprehensive income:Net loss2004
    
    
    (35,821
    )
    
    
    
    
    
    
    (35,821
    )Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    19,596
    
    
    
    19,596Unrealized gain on interest rate swaps
    
    
    
    
    
    
    1,030
    
    
    
    1,030Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (15,195
    )Balance, December 31, 2004
    
    
    291,703
    
    
    $
    21,990
    
    
    
    313,693Comprehensive income:Net income2005
    
    
    22,660
    
    
    
    
    
    
    
    22,660Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    (26,539
    )
    
    
    (26,539
    )Unrealized gain on interest rate swaps
    
    
    
    
    
    
    1,857
    
    
    
    1,857Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (2,022
    )Non-cash compensation related to equity awards
    
    
    534
    
    
    
    
    
    
    
    534Balance, December 31, 2005
    
    $
    314,897
    
    
    $
    (2,692
    )
    
    $
    312,205
  F-48




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##### Table of Contents



KRATON Polymers LLC
 
 
 PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    

    December 31,
    
    
    December 22,2005
    
    2004
    
    2003
    
    
    2003Cash flows provided by (used in) operating activities:Net income (loss)
    
    $
    22,660
    
    
    $
    (35,821
    )
    
    $
    (2,059
    )
    
    $
    9,863Adjustments to reconcile income (loss) to net
cash provided by operating activities:Depreciation and amortization of identifiable
intangibles
    
    
    44,090
    
    
    
    42,630
    
    
    
    860
    
    
    
    25,876Amortization of deferred financing costs
    
    
    2,262
    
    
    
    5,538
    
    
    
    38
    
    
    
    13,370Accretion of debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,505Loss on disposal of fixed assets
    
    
    709
    
    
    
    314
    
    
    
    
    
    
    
    194Change in fair value at interest rate swaps
    
    
    (149
    )
    
    
    1,739
    
    
    
    
    
    
    
    Undistributed earnings in joint venture
    
    
    (1,055
    )
    
    
    99
    
    
    
    (28
    )
    
    
    442Deferred tax provision (benefit)
    
    
    4,101
    
    
    
    (22,536
    )
    
    
    (396
    )
    
    
    (4,219
    )Non-cash compensation related to equity awards
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    Decrease (increase) in working capital:Accounts receivable
    
    
    1,205
    
    
    
    (16,905
    )
    
    
    11,504
    
    
    
    1,473Due (to) from related party
    
    
    (1,567
    )
    
    
    (695
    )
    
    
    
    
    
    
    8,724Inventories
    
    
    517
    
    
    
    51,273
    
    
    
    (1,271
    )
    
    
    (141
    )Other assets
    
    
    (11,886
    )
    
    
    (4,820
    )
    
    
    3,994
    
    
    
    1,650Accounts payable, other payables and
accruals, and long-term liabilities
    
    
    7,921
    
    
    
    52,346
    
    
    
    (18,958
    )
    
    
    27,816Net cash provided by (used in)
operating activities
    
    
    69,342
    
    
    
    73,162
    
    
    
    (6,316
    )
    
    
    93,553Cash flows used in investing activities:Purchase of business, including transaction costs
    
    
    
    
    
    
    
    
    
    
    (479,211
    )
    
    
    Purchase of property, plant and equipment
    
    
    (18,816
    )
    
    
    (34,733
    )
    
    
    (2,550
    )
    
    
    (13,485
    )Proceeds from sale of property, plant and equipment
    
    
    122
    
    
    
    89
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (18,694
    )
    
    
    (34,644
    )
    
    
    (481,761
    )
    
    
    (13,485
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    
    
    
    
    
    
    
    
    560,000
    
    
    
    Repayment of debt
    
    
    (2,680
    )
    
    
    (94,657
    )
    
    
    (344,429
    )
    
    
    (16,949
    )Capital contribution from parent
    
    
    
    
    
    
    90,063
    
    
    
    239,520
    
    
    
    Distributions to parent, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,780
    )Deferred financing costs
    
    
    
    
    
    
    (549
    )
    
    
    (20,000
    )
    
    
    Net cash provided by (used in)
financing activities
    
    
    (2,680
    )
    
    
    (5,143
    )
    
    
    435,091
    
    
    
    (20,729
    )Effect of exchange rate differences on cash
    
    
    6,609
    
    
    
    (4,518
    )
    
    
    (485
    )
    
    
    (2,673
    )Net increase (decrease) in cash and
cash equivalents
    
    
    54,577
    
    
    
    28,857
    
    
    
    (53,471
    )
    
    
    56,666Cash and cash equivalents, beginning of period
    
    
    46,357
    
    
    
    17,500
    
    
    
    70,971
    
    
    
    14,305Cash and cash equivalents, end of period
    
    $
    100,934
    
    
    $
    46,357
    
    
    $
    17,500
    
    
    $
    70,971Supplemental disclosure cash flow information:Cash paid during the period for income taxes
    
    $
    4,457
    
    
    $
    6,645
    
    
    $
    
    
    
    $
    3,611Cash paid during the period for interest
    
    
    33,006
    
    
    
    25,107
    
    
    
    6,222
    
    
    
    26,850
  F-49




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##### Table of Contents



KRATON Polymers LLC
 
 Notes to the Consolidated Financial Statements
 (1) Summary of Significant Accounting Policies
 (a) Organization, Acquisition and Description of Business
    Corporate Background
  The Acquisition
  
    
    $200.0 million from the proceeds from the issuances by KRATON of 8.125% senior
subordinated notes due 2014, or the 8.125% Notes;
 
    
    $360.0 million of borrowings under the loan portion of a new senior secured credit
facility entered into by KRATON with Goldman Sachs Credit Partners L.P., UBS Securities
LLC, UBS AG, Stamford Branch, Credit Suisse First Boston, Morgan Stanley and General
Electric Capital Corporation, or the senior secured credit facility;
 F-50




---



##### Table of Contents




    
    an equity contribution to KRATON by Polymer Holdings of $250.0 million in cash; and
 
    
    $48.0 million from KRATONs cash balance.
   Sources:Term loans
    
    $
    360.0Notes
    
    
    200.0Capital contribution
    
    
    250.0Cash balance
    
    
    48.0Total sources
    
    $
    858.0Uses:Purchase of Business
    
    $
    464.3Purchase of Original Term Loan including accrued interest and early payment premium
    
    
    227.1Purchase of Original Notes including accrued interest and early payment premium
    
    
    123.6Fees and expenses
    
    
    43.0Total uses
    
    $
    858.0
   Current assets
    
    $
    393.1Property, plant, and equipment
    
    
    415.6Identifiable intangible assets
    
    
    117.7Other assets
    
    
    33.1Total assets
    
    $
    959.5Current liabilities
    
    $
    103.3Long-term debt
    
    
    556.4Other long-term liabilities
    
    
    60.3Members equity
    
    
    239.5Total
    
    $
    959.5
 (b) Principles of Consolidation
  (c) Cash Equivalents
  F-51




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##### Table of Contents



(d) Receivables
  (e) Inventories
  (f) 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
 (g) Identifiable Intangible Assets
  (h) Investment in Joint Venture
  (i) Impairment of Long-Lived Assets
 Accounting for the Impairment or
Disposal of Long-Lived Assets
 F-52




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##### Table of Contents



(j) Deferred Financing Costs
  (k) Income Taxes
   (l) Revenue Recognition
   (m) Research and Development Expenses
  (n) Foreign Currency Translation and Foreign Exchange
  F-53




---



##### Table of Contents



(o) Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging
Activities
 (p) Environmental Costs
  (q) Disclosures about Fair Value of Financial Instruments
  (r) Financial Statement Estimates
  (s) Asset Retirement Obligations
 Accounting for Asset Retirement Obligations
  F-54




---



##### Table of Contents



(t) Stock-Based Compensation
   Year Ended2005
    
    
    2004Risk-free interest rate
    
    
    3.95
    %
    
    
    3.52
    %Volatility factor
    
    
    0.98
    
    
    
    1.10Weighted-average expected life
    
    
    5.00
    
    
    
    5.00
  Year Ended2005
    
    
    2004Reported net income (loss)
    
    $
    22,660
    
    
    $
    (35,821
    )Add: Stock-based employee compensation expense(1)
    
    
    
    
    
    
    Less: Total fair value computed stock-based
compensation, net of tax
    
    
    (1,010
    )
    
    
    (685
    )Pro forma net income (loss)
    
    $
    21,650
    
    
    $
    (36,506
    )
 
    (u) Recently Issued Accounting Standards
 Inventory Costs
 Share-Based Payment
 F-55




---



##### Table of Contents



(2) Detail of Certain Balance Sheet Accounts
 December 31, 2005
    
    
    December 31, 2004(In thousands)
    
    (In thousands)Inventories:Finished products
    
    $
    167,454
    
    
    $
    185,609Work in progress
    
    
    2,615
    
    
    
    3,844Raw materials
    
    
    22,526
    
    
    
    21,623$
    192,595
    
    
    $
    211,076Property, plant, and equipment:Land
    
    $
    12,115
    
    
    $
    12,648Buildings
    
    
    27,516
    
    
    
    29,966Plant and equipment
    
    
    403,574
    
    
    
    409,422Construction in progress
    
    
    14,957
    
    
    
    10,383458,162
    
    
    
    462,419Less accumulated depreciation
    
    
    63,970
    
    
    
    38,086$
    394,192
    
    
    $
    424,333Other payables and accruals:Employee related
    
    $
    16,217
    
    
    $
    6,250Interest
    
    
    8,069
    
    
    
    8,143Property and other taxes
    
    
    5,095
    
    
    
    5,814Customer rebates
    
    
    4,382
    
    
    
    6,417Income taxes (receivable) payable
    
    
    752
    
    
    
    174Other
    
    
    14,243
    
    
    
    13,261$
    48,758
    
    
    $
    40,059Identifiable intangible assets:Technology
    
    $
    52,576
    
    
    $
    52,576Customer relations
    
    
    39,260
    
    
    
    39,260Trademarks
    
    
    25,860
    
    
    
    25,860117,696
    
    
    
    117,696Less accumulated amortization
    
    
    15,848
    
    
    
    8,002$
    101,848
    
    
    $
    109,694
  F-56




---



##### Table of Contents



(3) Long-Term Debt
  December 31,
    
    
    December 31,2005
    
    
    2004Senior Secured Credit Facilities:Term loans
    
    $
    262,663
    
    
    $
    265,343Revolver
    
    
    
    
    
    
    8.125% Notes
    
    
    200,000
    
    
    
    200,000Total debt
    
    
    462,663
    
    
    
    465,343Less current portion of long-term debt
    
    
    30,570
    
    
    
    2,680Total long-term debt
    
    $
    432,093
    
    
    $
    462,663
 (a) Senior Secured Credit Facilities
   (1)
    
    Permit the issuance of the Polymer Holdings 12% Senior Discount Notes, or the 12%
Discount Notes, which generated aggregate gross proceeds of $91.9 million, which was then
contributed to us to prepay $76.2 million of Term Loans, with the remaining cash (net of
fees and expenses) expected to be used for general corporate purposes;(2)
    
    Provide for more flexibility in the maximum permitted leverage ratio covenant and
minimum required interest coverage ratio covenant;(3)
    
    Amend the maximum permitted capital expenditures covenant;(4)
    
    Make certain modifications to the definition of Adjusted EBITDA, which is one of
the components utilized in calculating the leverage and interest coverage ratios; and(5)
    
    Increase the interest rate with respect to the Term Loans by 0.25% per annum until,
after June 30, 2005, a specified senior leverage ratio is met or until certain ratings
are obtained.
 Maturity
  F-57




---



##### Table of Contents



Interest
   Mandatory Prepayments
   Covenants
    (b) Senior Subordinated Notes Due January 15, 2014
  Interest
  F-58




---



##### Table of Contents



Optional Redemption
  Covenants
    Exchange Offer
   (c) Original Senior Secured Credit Facilities
  Interest
  F-59




---



##### Table of Contents



Mandatory Prepayments
  (d) Original Senior Subordinated Notes Due February 28, 2011
  Interest
  Warrants
   F-60




---



##### Table of Contents



(e) Debt Maturities
  PrincipalPaymentsYear ending December 31:2006
    
    $
    30,5702007
    
    
    2,6802008
    
    
    2,6802009
    
    
    2,6802010
    
    
    224,053Thereafter
    
    
    200,000Total debt
    
    $
    462,663
 (4) Income Taxes
    PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Current tax provision:U.S.
    
    $
    
    
    
    $
    (158
    )
    
    $
    
    
    
    $
    Foreign
    
    
    (7,419
    )
    
    
    (3,404
    )
    
    
    951
    
    
    
    (7,226
    )Total
    
    
    (7,419
    )
    
    
    (3,562
    )
    
    
    951
    
    
    
    (7,226
    )Deferred tax provision:U.S.
    
    
    4,300
    
    
    
    17,936
    
    
    
    228
    
    
    
    Foreign
    
    
    (8,400
    )
    
    
    4,599
    
    
    
    168
    
    
    
    4,219Total
    
    
    (4,100
    )
    
    
    22,535
    
    
    
    396
    
    
    
    4,219Income tax (provision) benefit
    
    $
    (11,519
    )
    
    $
    18,973
    
    
    $
    1,347
    
    
    $
    (3,007
    )
 F-61




---



##### Table of Contents



December 31,2005
    
    
    2004Deferred tax liabilities:Property, plant, and equipment
    
    $
    (98,564
    )
    
    $
    (70,740
    )Identifiable intangibles
    
    
    (11,614
    )
    
    
    (16,674
    )Inventory
    
    
    (151
    )
    
    
    Interest rate swaps
    
    
    (1,555
    )
    
    
    (556
    )Other
    
    
    (483
    )
    
    
    Total deferred tax liabilities
    
    
    (112,367
    )
    
    
    (87,970
    )Deferred tax assets:Net operating loss carryforward
    
    
    87,511
    
    
    
    69,227Inventory
    
    
    884
    
    
    
    1,706Pension accrual
    
    
    1,036
    
    
    
    955Other
    
    
    2,218
    
    
    
    417Total deferred tax assets
    
    
    91,649
    
    
    
    72,305Valuation allowance for deferred tax assets
    
    
    (11,339
    )
    
    
    (10,759
    )Net deferred tax liabilities
    
    $
    (32,057
    )
    
    $
    (26,424
    )
  December 31,2005
    
    
    2004Current deferred tax assets
    
    $
    2,407
    
    
    $
    417Non-current deferred tax assets
    
    
    89,241
    
    
    
    61,129Current deferred tax liabilities
    
    
    (454
    )
    
    
    (1,657
    )Non-current deferred tax liabilities
    
    
    (123,251
    )
    
    
    (86,313
    )Net deferred tax liabilities
    
    $
    (32,057
    )
    
    $
    (26,424
    )
  PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Income taxes at the statutory rate
    
    $
    (11,963
    )
    
    $
    19,177
    
    
    $
    1,192
    
    
    $
    (4,975
    )Foreign tax rate differential
    
    
    (729
    )
    
    
    283
    
    
    
    (13
    )
    
    
    (57
    )State tax rate differential
    
    
    (603
    )
    
    
    1,254
    
    
    
    
    
    
    
    Excess purchased tax basis
    
    
    1,814
    
    
    
    5,510
    
    
    
    168
    
    
    
    1,739Change in valuation allowance
    
    
    (580
    )
    
    
    (6,876
    )
    
    
    
    
    
    
    400Other
    
    
    542
    
    
    
    (375
    )
    
    
    
    
    
    
    (114
    )Income tax (provision) benefit
    
    $
    (11,519
    )
    
    $
    18,973
    
    
    $
    1,347
    
    
    $
    (3,007
    )
 F-62




---



##### Table of Contents



(5) Employee Benefits
  (a) U.S. Retirement Benefit Plans
   December 31,2005
    
    
    2004Change in benefit obligation:Benefit obligation beginning of period
    
    $
    53,051
    
    
    $
    42,951Service cost
    
    
    3,545
    
    
    
    3,324Interest cost
    
    
    3,114
    
    
    
    2,777Benefits paid
    
    
    (301
    )
    
    
    (179
    )Actuarial (gain) loss
    
    
    2,136
    
    
    
    4,178Plan amendments
    
    
    (2,045
    )
    
    
    Benefit obligation at end of period
    
    $
    59,500
    
    
    $
    53,051Change in plan assets:Fair value at beginning of period
    
    $
    33,522
    
    
    $
    30,754Actual return on plan assets
    
    
    2,869
    
    
    
    2,947Employer contributions
    
    
    368
    
    
    
    Benefits paid
    
    
    (301
    )
    
    
    (179
    )Fair value at end of period
    
    $
    36,458
    
    
    $
    33,522
 December 31,2005
    
    
    2004Development of net amount recognized:Funded status
    
    $
    (23,043
    )
    
    $
    (19,529
    )Unrecognized net prior service cost
    
    
    
    
    
    
    Unrecognized actuarial loss
    
    
    4,129
    
    
    
    3,963Net amount recognized
    
    $
    (18,914
    )
    
    $
    (15,566
    )Amounts recognized in the statement of financial position:Accrued pension cost
    
    $
    (18,914
    )
    
    $
    (15,566
    )
 F-63




---



##### Table of Contents



PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,

    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Service cost benefits earned during the period
    
    $
    3,544
    
    
    $
    3,324
    
    
    $
    56
    
    
    $
    2,748Interest on prior years projected benefit obligation
    
    
    3,114
    
    
    
    2,777
    
    
    
    45
    
    
    
    2,231Expected return on plan assets
    
    
    (2,942
    )
    
    
    (2,731
    )
    
    
    (51
    )
    
    
    (2,505
    )Amortization of prior year service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Net pension costs
    
    $
    3,716
    
    
    $
    3,370
    
    
    $
    50
    
    
    $
    2,483
 December 31,2005
    
    2004Weighted average assumptions used to
determine benefit obligations at December 31:Measure date
    
    
    12/31/2005
    
    
    
    12/31/2004Discount rate
    
    
    5.75
    %
    
    
    6.00
    %Rates of increase in salary compensation level
    
    
    4.00
    %
    
    
    4.00
    %Rates of increase in hourly compensation levels
    
    
    3.00
    %
    
    
    3.00
    %Expected long-term rate of return on plan assets
    
    
    9.00
    %
    
    
    9.00
    %Weighted average assumptions used to periodic
benefit cost for years ended December 31:Discount rate
    
    
    6.00
    %
    
    
    6.25
    %Rates of increase in salary compensation level
    
    
    4.00
    %
    
    
    4.00
    %Rates of increase in hourly compensation levels
    
    
    3.00
    %
    
    
    3.00
    %Expected long-term rate of return on plan assets
    
    
    9.00
    %
    
    
    9.00
    %
  Plan Assets
  Percentage of Plan Assets at December 31Asset Category
    
    2005
    
    
    2004Equity Securities
    
    
    67.6
    %
    
    
    61.6
    %Debt Securities
    
    
    31.9
    %
    
    
    38.3
    %Other
    
    
    0.5
    %
    
    
    0.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 F-64




---



##### Table of Contents



Contributions
  Estimated Future Benefit Payments
  2006
    
    $
    3782007
    
    
    5012008
    
    
    6682009
    
    
    8682010
    
    
    1,151Years 2011-2014
    
    
    12,124
 (b) Other Retirement Benefit Plans
   (c) Postretirement Benefits Other Than Pensions
     F-65




---



##### Table of Contents



December 31,2005
    
    
    2004Change in benefit obligation:Benefit obligation beginning of period
    
    $
    9,909
    
    
    $
    7,921Service cost
    
    
    367
    
    
    
    427Interest cost
    
    
    475
    
    
    
    535Benefits paid
    
    
    (81
    )
    
    
    (53
    )Actuarial gain (loss)
    
    
    (1,703
    )
    
    
    1,079Plan amendments
    
    
    
    
    
    
    Benefit obligation at end of period
    
    $
    8,967
    
    
    $
    9,909Reconciliation of plan assets (1):Employer contributions
    
    $
    81
    
    
    $
    53Benefits paid
    
    
    (81
    )
    
    
    (53
    )$
    
    
    
    $
    
 
 (1)
    
    As part of the Ripplewood Transaction, Shell Chemicals has committed to a future cash
payment related to retiree medical expenses based on a specified dollar amount per employee,
if certain contractual commitments are met. As of December 31, 2005, and 2004, we have
recorded an asset of approximately $5.5 million and $5.0 million, respectively, as our
estimate of the present value of this commitment. December 31,2005
    
    
    2004Development of net amount recognized:Funded status
    
    $
    (8,967
    )
    
    $
    (9,909
    )Unrecognized cost:Actuarial gain
    
    
    (620
    )
    
    
    1,079Amount recognized in the statement of financial position
    
    $
    (9,587
    )
    
    $
    (8,830
    )
  PredecessorPeriod from
    
    
    Period fromDecember 23 through
    
    
    January 1 throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Service cost
    
    $
    367
    
    
    $
    426
    
    
    $
    8
    
    
    $
    416Interest cost
    
    
    475
    
    
    
    535
    
    
    
    9
    
    
    
    455Recognized net actuarial gain
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Net plan costs
    
    $
    838
    
    
    $
    961
    
    
    $
    17
    
    
    $
    871
 December 31,2005
    
    2004Weighted average assumptions used to determine benefit obligations:Measurement date
    
    
    12/31/2005
    
    
    
    12/31/2004Discount rate
    
    
    5.75
    %
    
    
    6.00
    %Rates of increase in salary compensation level
    
    
    N/A
    
    
    
    N/AWeighted average assumptions used to net periodic benefit cost:Discount rate
    
    
    6.00
    %
    
    
    6.25
    %Rates of increase in salary compensation level
    
    
    N/A
    
    
    
    N/AExpected long-term rate of return on plan assets
    
    
    N/A
    
    
    
    N/AAssumed health care cost trend rates:Health care cost trend rate assumed for next year
    
    
    9.40
    %
    
    
    8.00
    %Rate to which the cost trend rate is assumed to declined (the ultimate trend rate)
    
    
    5.00
    %
    
    
    4.50
    %Year that the rate reaches the ultimate trend rate
    
    
    2012
    
    
    
    2010
 F-66




---



##### Table of Contents



1% Increase
    
    
    1% DecreaseEffect on total of service and interest cost components
    
    $
    55
    
    
    $
    (52
    )Effect on postretirement benefit obligation
    
    
    511
    
    
    
    (311
    )
 (d) KRATON Savings Plan
   (e) Membership Units
  (f) TJ Chemical Holdings LLC 2004 Option Plan
  F-67




---



##### Table of Contents



(g) Other Equity Awards
  F-68




---



##### Table of Contents



(h) KRATON Polymers LLC Executive Deferred Compensation Plan
  (i) 2006 Incentive Compensation Plan
  (j) Severance Cost
   (6) Commitments and Contingencies
 (a) Lease Commitments
  (b) Environmental and Safety Matters
  F-69




---



##### Table of Contents



(c) Legal Proceedings
  (d) Pernis, The Netherlands Manufacturing Facility Fire
   F-70




---



##### Table of Contents



(7) Financial Instruments
 (a) Interest Rate Swap Agreements
  (b) Fair Value of Financial Instruments
  2005CarryingValue
    
    
    Fair ValueTerm loans
    
    $
    262,663
    
    
    $
    262,6638.125% Notes
    
    
    200,000
    
    
    
    192,000
 2004CarryingValue
    
    
    Fair ValueTerm loans
    
    $
    265,343
    
    
    $
    265,3438.125% Notes
    
    
    200,000
    
    
    
    196,474
  (8) Significant Contracts
  F-71




---



##### Table of Contents



(a) Leases with Shell Chemicals
    (b) Operating Agreements with Shell Chemicals
     (c) Site Services, Utilities, Materials and Original Facilities Agreements with Shell Chemicals
  F-72




---



##### Table of Contents



(d) Raw Materials Agreements with Shell Chemicals
   Styrene
   Isoprene
   F-73




---



##### Table of Contents



Butadiene
   F-74




---



##### Table of Contents



(e) Infineum
  (9) Related Party Transactions
  (a) Related-Party Amounts
  PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1through
    
    
    throughYear Ended December 31,
    
    
    December 31,
    
    
    December 22,2005
    
    
    2004
    
    
    2003
    
    
    2003Sales to related parties
    
    $
    2,327
    
    
    $
    3,753
    
    
    $
    71
    
    
    $
    36,792Purchases from related parties
    
    
    37,008
    
    
    
    39,511
    
    
    
    794
    
    
    
    236,957Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,233Selling, general, and administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    962
  (b) Revenues
  (c) Cost of Goods Sold
  F-75




---



##### Table of Contents



(d) Research and Development Expenses
  (e) Other
    (10) Members Equity
  (11) Industry Segment and Foreign Operations
  F-76




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Net Revenues:United States
    
    $
    399,554
    
    
    $
    319,159
    
    
    $
    284,190Germany
    
    
    98,666
    
    
    
    90,654
    
    
    
    83,004Japan
    
    
    57,848
    
    
    
    60,020
    
    
    
    53,922Italy
    
    
    50,638
    
    
    
    38,819
    
    
    
    37,121The Netherlands
    
    
    42,586
    
    
    
    32,410
    
    
    
    26,644France
    
    
    39,333
    
    
    
    42,227
    
    
    
    31,813United Kingdom
    
    
    30,182
    
    
    
    24,200
    
    
    
    20,043Brazil
    
    
    27,001
    
    
    
    22,332
    
    
    
    14,768Canada
    
    
    25,605
    
    
    
    21,584
    
    
    
    19,959China
    
    
    19,691
    
    
    
    14,606
    
    
    
    12,957Taiwan
    
    
    16,436
    
    
    
    13,976
    
    
    
    11,649Poland
    
    
    15,553
    
    
    
    10,812
    
    
    
    9,387Argentina
    
    
    12,472
    
    
    
    6,002
    
    
    
    5,633All other countries
    
    
    140,026
    
    
    
    110,585
    
    
    
    91,508$
    975,591
    
    
    $
    807,386
    
    
    $
    702,598
 December 31,2005
    
    
    2004
    
    
    2003Long-lived Assets:United States
    
    $
    270,639
    
    
    $
    261,820
    
    
    $
    239,007France
    
    
    91,593
    
    
    
    101,137
    
    
    
    92,166Brazil
    
    
    30,008
    
    
    
    26,688
    
    
    
    24,741Germany
    
    
    26,011
    
    
    
    30,073
    
    
    
    25,739The Netherlands
    
    
    23,732
    
    
    
    24,042
    
    
    
    18,934Japan
    
    
    3,342
    
    
    
    5,143
    
    
    
    4,343All other countries
    
    
    12,837
    
    
    
    13,516
    
    
    
    8,012$
    458,162
    
    
    $
    462,419
    
    
    $
    412,942
  (12) Supplemental Guarantor Information
  F-77




---



##### Table of Contents



Balance Sheet
 As of December 31, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    54,941
    
    
    $
    45,993
    
    
    $
    
    
    
    $
    100,934Receivables, net
    
    
    
    
    
    
    45,048
    
    
    
    69,950
    
    
    
    (7,412
    )
    
    
    107,586Inventories of products
    
    
    
    
    
    
    109,691
    
    
    
    88,697
    
    
    
    (5,793
    )
    
    
    192,595Inventories of materials and supplies
    
    
    
    
    
    
    5,935
    
    
    
    3,401
    
    
    
    
    
    
    
    9,336Other current assets
    
    
    4,729
    
    
    
    9,565
    
    
    
    9,217
    
    
    
    
    
    
    
    23,511Deferred income taxes
    
    
    
    
    
    
    6,027
    
    
    
    (4,074
    )
    
    
    
    
    
    
    1,953Total current assets
    
    
    4,729
    
    
    
    231,207
    
    
    
    213,184
    
    
    
    (13,205
    )
    
    
    435,915Property, plant, and equipment, less
accumulated depreciation
    
    
    127,589
    
    
    
    173,900
    
    
    
    92,703
    
    
    
    
    
    
    
    394,192Identifiable intangible assets
    
    
    53,037
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    101,848Investment in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    9,729
    
    
    
    
    
    
    
    10,542Deferred financing costs
    
    
    12,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,711Other long-term assets
    
    
    105,385
    
    
    
    290,963
    
    
    
    4,127
    
    
    
    (390,870
    )
    
    
    9,605Total assets
    
    $
    304,264
    
    
    $
    696,070
    
    
    $
    368,554
    
    
    $
    (404,075
    )
    
    $
    964,813Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    30,570
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30,570Accounts payabletrade
    
    
    2,900
    
    
    
    26,726
    
    
    
    34,719
    
    
    
    
    
    
    
    64,345Other payables and accruals
    
    
    8,069
    
    
    
    21,448
    
    
    
    19,241
    
    
    
    
    
    
    
    48,758Due to (from) related parties
    
    
    
    
    
    
    1,835
    
    
    
    18,696
    
    
    
    (7,412
    )
    
    
    13,119Total current liabilities
    
    
    41,539
    
    
    
    50,009
    
    
    
    72,656
    
    
    
    (7,412
    )
    
    
    156,792Long-term debt, net of current portion
    
    
    432,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    432,093Deferred income taxes
    
    
    (9,055
    )
    
    
    42,764
    
    
    
    301
    
    
    
    
    
    
    
    34,010Long-term liabilities
    
    
    285,485
    
    
    
    28,950
    
    
    
    106,148
    
    
    
    (390,870
    )
    
    
    29,713Total liabilities
    
    
    750,062
    
    
    
    121,723
    
    
    
    179,105
    
    
    
    (398,282
    )
    
    
    652,608Commitments and contingencies (note
6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common equity
    
    
    (448,685
    )
    
    
    574,347
    
    
    
    195,028
    
    
    
    (5,793
    )
    
    
    314,897Accumulated other comprehensive income
    
    
    2,887
    
    
    
    
    
    
    
    (5,579
    )
    
    
    
    
    
    
    (2,692
    )Total members equity
    
    
    (445,798
    )
    
    
    574,347
    
    
    
    189,449
    
    
    
    (5,793
    )
    
    
    312,205Total liabilities and members equity
    
    $
    304,264
    
    
    $
    696,070
    
    
    $
    368,554
    
    
    $
    (404,075
    )
    
    $
    964,813
 
 (1)
    
    KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. F-78




---



##### Table of Contents



Balance Sheet
 As of December 31, 2004Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    15,981
    
    
    $
    30,376
    
    
    $
    
    
    
    $
    46,357Receivables, net
    
    
    454
    
    
    
    43,143
    
    
    
    84,467
    
    
    
    (7,468
    )
    
    
    120,596Inventories of products
    
    
    1,684
    
    
    
    120,264
    
    
    
    91,666
    
    
    
    (2,538
    )
    
    
    211,076Inventories of materials and
supplies
    
    
    
    
    
    
    5,673
    
    
    
    3,105
    
    
    
    
    
    
    
    8,778Other current assets
    
    
    2,288
    
    
    
    577
    
    
    
    7,516
    
    
    
    
    
    
    
    10,381Total current assets
    
    
    4,426
    
    
    
    185,638
    
    
    
    217,130
    
    
    
    (10,006
    )
    
    
    397,188Property, plant, and equipment, less accumulated
depreciation
    
    
    138,133
    
    
    
    181,292
    
    
    
    104,908
    
    
    
    
    
    
    
    424,333Identifiable intangible assets
    
    
    60,883
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    109,694Investment in joint venture
    
    
    813
    
    
    
    
    
    
    
    9,940
    
    
    
    
    
    
    
    10,753Deferred financing costs
    
    
    14,973
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,973Other long-term assets
    
    
    118,127
    
    
    
    252,066
    
    
    
    3,529
    
    
    
    (365,076
    )
    
    
    8,646Total assets
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (375,082
    )
    
    $
    965,587Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    2,680
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,680Accounts payabletrade
    
    
    2,900
    
    
    
    29,977
    
    
    
    47,091
    
    
    
    
    
    
    
    79,968Other payables and accruals
    
    
    8,143
    
    
    
    16,199
    
    
    
    15,717
    
    
    
    
    
    
    
    40,059Due to (from) related parties
    
    
    
    
    
    
    456
    
    
    
    21,483
    
    
    
    (7,468
    )
    
    
    14,471Deferred income taxes
    
    
    
    
    
    
    (417
    )
    
    
    1,657
    
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    13,723
    
    
    
    46,215
    
    
    
    85,948
    
    
    
    (7,468
    )
    
    
    138,418Long-term debt, net of current portion
    
    
    462,663
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462,663Deferred income taxes
    
    
    12,344
    
    
    
    19,053
    
    
    
    (6,213
    )
    
    
    
    
    
    
    25,184Long-term liabilities
    
    
    261,950
    
    
    
    12,865
    
    
    
    115,890
    
    
    
    (365,076
    )
    
    
    25,629Total liabilities
    
    
    750,680
    
    
    
    78,133
    
    
    
    195,625
    
    
    
    (372,544
    )
    
    
    651,894Commitments and contingencies (note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Members equity:Common equity
    
    
    (414,355
    )
    
    
    540,863
    
    
    
    167,733
    
    
    
    (2,538
    )
    
    
    291,703Accumulated other comprehensive income
    
    
    1,030
    
    
    
    
    
    
    
    20,960
    
    
    
    
    
    
    
    21,990Total members equity
    
    
    (413,325
    )
    
    
    540,863
    
    
    
    188,693
    
    
    
    (2,538
    )
    
    
    313,693Total liabilities and members equity
    
    $
    337,355
    
    
    $
    618,996
    
    
    $
    384,318
    
    
    $
    (375,082
    )
    
    $
    965,587
 
 (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. F-79




---



##### Table of Contents



Statement of Operations
 Year ended December 31, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    523,567
    
    
    $
    562,740
    
    
    $
    (133,386
    )
    
    $
    952,921Other
    
    
    
    
    
    
    425
    
    
    
    22,245
    
    
    
    
    
    
    
    22,670Total revenues
    
    
    
    
    
    
    523,992
    
    
    
    584,985
    
    
    
    (133,386
    )
    
    
    975,591Costs and expenses:Cost of goods sold
    
    
    4,939
    
    
    
    404,664
    
    
    
    489,795
    
    
    
    (133,386
    )
    
    
    766,012Gross profit
    
    
    (4,939
    )
    
    
    119,328
    
    
    
    95,190
    
    
    
    
    
    
    
    209,579Research and development expenses
    
    
    
    
    
    
    12,933
    
    
    
    13,219
    
    
    
    
    
    
    
    26,152Selling, general, and administrative expenses
    
    
    
    
    
    
    44,571
    
    
    
    28,160
    
    
    
    
    
    
    
    72,731Depreciation and amortization
    
    
    18,390
    
    
    
    18,396
    
    
    
    7,304
    
    
    
    
    
    
    
    44,090Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (1,516
    )
    
    
    
    
    
    
    (1,516
    )Interest expense (income)
    
    
    36,657
    
    
    
    (7,624
    )
    
    
    4,910
    
    
    
    
    
    
    
    33,943Income (loss) before income taxes
    
    
    (59,986
    )
    
    
    51,052
    
    
    
    43,113
    
    
    
    
    
    
    
    34,179Income tax (provision) benefit
    
    
    22,401
    
    
    
    (18,101
    )
    
    
    (15,819
    )
    
    
    
    
    
    
    (11,519
    )Net income (loss)
    
    $
    (37,585
    )
    
    $
    32,951
    
    
    $
    27,294
    
    
    $
    
    
    
    $
    22,660
 Year ended December 31, 2004Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    426,346
    
    
    $
    462,677
    
    
    $
    (97,797
    )
    
    $
    791,226Other
    
    
    
    
    
    
    
    
    
    
    16,160
    
    
    
    
    
    
    
    16,160Total revenues
    
    
    
    
    
    
    426,346
    
    
    
    478,837
    
    
    
    (97,797
    )
    
    
    807,386Costs and expenses:Cost of goods sold
    
    
    33,054
    
    
    
    325,602
    
    
    
    432,109
    
    
    
    (97,797
    )
    
    
    692,968Gross profit
    
    
    (33,054
    )
    
    
    100,744
    
    
    
    46,728
    
    
    
    
    
    
    
    114,418Research and development expenses
    
    
    
    
    
    
    10,845
    
    
    
    12,333
    
    
    
    
    
    
    
    23,178Selling, general, and administrative expenses
    
    
    
    
    
    
    38,792
    
    
    
    26,111
    
    
    
    
    
    
    
    64,903Depreciation and amortization
    
    
    17,012
    
    
    
    18,311
    
    
    
    7,307
    
    
    
    
    
    
    
    42,630Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    
    
    
    
    (462
    )Interest expense (income)
    
    
    40,265
    
    
    
    (6,124
    )
    
    
    4,822
    
    
    
    
    
    
    
    38,963Income (loss) before income taxes
    
    
    (90,331
    )
    
    
    38,920
    
    
    
    (3,383
    )
    
    
    
    
    
    
    (54,794
    )Income tax (provision) benefit
    
    
    34,207
    
    
    
    (19,022
    )
    
    
    3,788
    
    
    
    
    
    
    
    18,973Net income (loss)
    
    $
    (56,124
    )
    
    $
    19,898
    
    
    $
    405
    
    
    $
    
    
    
    $
    (35,821
    )
 Period from December 23 through December 31, 2003Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    7,313
    
    
    $
    3,676
    
    
    $
    (1,457
    )
    
    $
    9,532Other
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    328Total revenues
    
    
    
    
    
    
    7,313
    
    
    
    4,004
    
    
    
    (1,457
    )
    
    
    9,860Costs and expenses:Cost of goods sold
    
    
    1,525
    
    
    
    4,428
    
    
    
    5,300
    
    
    
    (1,457
    )
    
    
    9,796Gross profit
    
    
    (1,525
    )
    
    
    2,885
    
    
    
    (1,296
    )
    
    
    
    
    
    
    64Research and development expenses
    
    
    
    
    
    
    214
    
    
    
    244
    
    
    
    
    
    
    
    458Selling, general, and administrative expenses
    
    
    
    
    
    
    523
    
    
    
    1,101
    
    
    
    
    
    
    
    1,624Depreciation
    
    
    342
    
    
    
    372
    
    
    
    146
    
    
    
    
    
    
    
    860Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Interest expense (income)
    
    
    677
    
    
    
    (106
    )
    
    
    (15
    )
    
    
    
    
    
    
    556Income (loss) before income taxes
    
    
    (2,544
    )
    
    
    1,882
    
    
    
    (2,744
    )
    
    
    
    
    
    
    (3,406
    )Income tax benefit
    
    
    168
    
    
    
    228
    
    
    
    951
    
    
    
    
    
    
    
    1,347Net income (loss)
    
    $
    (2,376
    )
    
    $
    2,110
    
    
    $
    (1,793
    )
    
    $
    
    
    
    $
    (2,059
    )
 F-80




---



##### Table of Contents



PredecessorPeriod from January 1 through December 22, 2003Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    366,663
    
    
    $
    387,904
    
    
    $
    (74,304
    )
    
    $
    680,263Other
    
    
    
    
    
    
    
    
    
    
    12,475
    
    
    
    
    
    
    
    12,475Total revenues
    
    
    
    
    
    
    366,663
    
    
    
    400,379
    
    
    
    (74,304
    )
    
    
    692,738Costs and expenses:Cost of goods sold
    
    
    (1,415
    )
    
    
    257,523
    
    
    
    337,939
    
    
    
    (74,304
    )
    
    
    519,743Gross profit
    
    
    1,415
    
    
    
    109,140
    
    
    
    62,440
    
    
    
    
    
    
    
    172,995Research and development expenses
    
    
    
    
    
    
    10,978
    
    
    
    12,332
    
    
    
    
    
    
    
    23,310Selling, general, and administrative expenses
    
    
    
    
    
    
    28,398
    
    
    
    25,619
    
    
    
    
    
    
    
    54,017Depreciation
    
    
    (396
    )
    
    
    20,468
    
    
    
    5,804
    
    
    
    
    
    
    
    25,876Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (621
    )
    
    
    
    
    
    
    (621
    )Interest expense (income)
    
    
    56,854
    
    
    
    (4,403
    )
    
    
    5,092
    
    
    
    
    
    
    
    57,543Income (loss) before income taxes
    
    
    (55,043
    )
    
    
    53,699
    
    
    
    14,214
    
    
    
    
    
    
    
    12,870Income tax provision
    
    
    (2,000
    )
    
    
    
    
    
    
    (1,007
    )
    
    
    
    
    
    
    (3,007
    )Net income (loss)
    
    $
    (57,043
    )
    
    $
    53,699
    
    
    $
    13,207
    
    
    $
    
    
    
    $
    9,863
 
 (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. F-81




---



##### Table of Contents



Statements of Cash Flows
 Year Ended December 31, 2005Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    (42,419
    )
    
    $
    86,408
    
    
    $
    25,353
    
    
    $
    
    
    
    $
    69,342Cash flows used in investing activities:Purchase of plant and equipment, net of
proceeds from sales of equipment
    
    
    
    
    
    
    (12,091
    )
    
    
    (6,603
    )
    
    
    
    
    
    
    (18,694
    )Net cash used in investing activities
    
    
    
    
    
    
    (12,091
    )
    
    
    (6,603
    )
    
    
    
    
    
    
    (18,694
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (2,680
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,680
    )Proceeds from issuance of common equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from (payments on) intercompany loans
    
    
    45,099
    
    
    
    (35,357
    )
    
    
    (9,742
    )
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    42,419
    
    
    
    (35,357
    )
    
    
    (9,742
    )
    
    
    
    
    
    
    (2,680
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    6,609
    
    
    
    
    
    
    
    6,609Net increase (decrease) in cash and
cash equivalents
    
    
    
    
    
    
    38,960
    
    
    
    15,617
    
    
    
    
    
    
    
    54,577Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    15,981
    
    
    
    30,376
    
    
    
    
    
    
    
    46,357Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    54,941
    
    
    $
    45,993
    
    
    $
    
    
    
    $
    100,934
 Year Ended December 31, 2004Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    (26,216
    )
    
    $
    73,042
    
    
    $
    26,336
    
    
    $
    
    
    
    $
    73,162Cash flows used in investing activities:Purchase of plant and equipment, net of
proceeds from sales of equipment
    
    
    
    
    
    
    (24,605
    )
    
    
    (10,039
    )
    
    
    
    
    
    
    (34,644
    )Net cash used in investing activities
    
    
    
    
    
    
    (24,605
    )
    
    
    (10,039
    )
    
    
    
    
    
    
    (34,644
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (94,657
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,657
    )Proceeds from issuance of common equity
    
    
    90,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,063Deferred financing costs
    
    
    (549
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (549
    )Proceeds from (payments on) intercompany loans
    
    
    31,340
    
    
    
    (32,274
    )
    
    
    934
    
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    26,197
    
    
    
    (32,274
    )
    
    
    934
    
    
    
    
    
    
    
    (5,143
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (4,518
    )
    
    
    
    
    
    
    (4,518
    )Net increase (decrease) in cash and
cash equivalents
    
    
    (19
    )
    
    
    16,163
    
    
    
    12,713
    
    
    
    
    
    
    
    28,857Cash and cash equivalents at beginning of period
    
    
    19
    
    
    
    (182
    )
    
    
    17,663
    
    
    
    
    
    
    
    17,500Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    15,981
    
    
    $
    30,376
    
    
    $
    
    
    
    $
    46,357
 
 (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. F-82




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##### Table of Contents



Statements of Cash Flows
 Period from December 23 through December 31, 2003Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows provided by (used in) operating activities
    
    $
    4,717
    
    
    $
    (17,444
    )
    
    $
    6,411
    
    
    $
    
    
    
    $
    (6,316
    )Cash flows used in investing activities:Purchase of business, including transaction costs
    
    
    (479,211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479,211
    )Purchase of plant and equipment
    
    
    
    
    
    
    
    
    
    
    (2,550
    )
    
    
    
    
    
    
    (2,550
    )Net cash used for investing activities
    
    
    (479,211
    )
    
    
    
    
    
    
    (2,550
    )
    
    
    
    
    
    
    (481,761
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    560,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    560,000Repayment of debt
    
    
    (344,429
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,429
    )Proceeds from issuance of common equity
    
    
    239,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239,520Deferred financing costs
    
    
    (20,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Proceeds from (payments on) intercompany loans
    
    
    39,403
    
    
    
    (36,846
    )
    
    
    (2,557
    )
    
    
    
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    474,494
    
    
    
    (36,846
    )
    
    
    (2,557
    )
    
    
    
    
    
    
    435,091Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    (485
    )Net increase (decrease) in cash and
cash equivalents
    
    
    
    
    
    
    (54,290
    )
    
    
    819
    
    
    
    
    
    
    
    (53,471
    )Cash and cash equivalents at beginning of period
    
    
    19
    
    
    
    54,108
    
    
    
    16,844
    
    
    
    
    
    
    
    70,971Cash and cash equivalents at end of period
    
    $
    19
    
    
    $
    (182
    )
    
    $
    17,663
    
    
    $
    
    
    
    $
    17,500
 PredecessorPeriod from January 1 through December 22, 2003Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (24,604
    )
    
    $
    88,717
    
    
    $
    29,440
    
    
    $
    
    
    
    $
    93,553Cash flows used in investing activities:Purchase of plant and equipment
    
    
    
    
    
    
    (7,390
    )
    
    
    (6,095
    )
    
    
    
    
    
    
    (13,485
    )Net cash used in investing activities
    
    
    
    
    
    
    (7,390
    )
    
    
    (6,095
    )
    
    
    
    
    
    
    (13,485
    )Cash flows provided by (used in) financing activities:Repayment of debt
    
    
    (16,949
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,949
    )Cash contributions from (distribution to) parent, net
    
    
    (3,780
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,780
    )Proceeds from (payments on) intercompany loans
    
    
    45,315
    
    
    
    (28,253
    )
    
    
    (17,062
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    24,586
    
    
    
    (28,253
    )
    
    
    (17,062
    )
    
    
    
    
    
    
    (20,729
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (2,673
    )
    
    
    
    
    
    
    (2,673
    )Net increase (decrease) in cash and cash equivalents
    
    
    (18
    )
    
    
    53,074
    
    
    
    3,610
    
    
    
    
    
    
    
    56,666Cash and cash equivalents at beginning of period
    
    
    37
    
    
    
    1,034
    
    
    
    13,234
    
    
    
    
    
    
    
    14,305Cash and cash equivalents at end of period
    
    $
    19
    
    
    $
    54,108
    
    
    $
    16,844
    
    
    $
    
    
    
    $
    70,971
 
 (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. F-83




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




---



##### Table of Contents



Schedule II
 Polymer Holdings LLC
 Valuation Accounts
Period from January 1 through December 22, 2003,
Period from December 23 through December 31, 2003,
For the Year Ended December 31, 2004, and
For the Year Ended December 31, 2005
(In thousands)
 Balance
    
    
    Charged to
    
    
    
    
    
    
    Balanceat beginning
    
    
    costs and
    
    
    
    
    
    
    at end ofof period
    
    
    expenses
    
    
    Deductions
    
    
    periodAllowance for Doubtful AccountsPeriod from January 1 through December 22, 2003
    
    $
    2,066
    
    
    $
    (63
    )
    
    $
    205
    
    
    $
    2,208Period from December 23 through December 31, 2003(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended December 31, 2004
    
    
    
    
    
    
    835
    
    
    
    (85
    )
    
    
    750Year ended December 31, 2005
    
    
    750
    
    
    
    936
    
    
    
    (673
    )
    
    
    1,013
 Balance
    
    
    Charged to
    
    
    
    
    
    
    Balanceat beginning
    
    
    costs and
    
    
    
    
    
    
    at end ofof period
    
    
    expenses
    
    
    Deductions
    
    
    periodInventory ReservesPeriod from January 1 through December 22, 2003
    
    $
    9,653
    
    
    $
    4,519
    
    
    $
    (8,139
    )
    
    $
    6,033Period from December 23 through December 31, 2003(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended December 31, 2004
    
    
    
    
    
    
    14,301
    
    
    
    (12,284
    )
    
    
    2,017Year ended December 31, 2005
    
    
    2,017
    
    
    
    7,773
    
    
    
    (4,764
    )
    
    
    5,026
 
 (1)
    
    In connection with the Acquisition all assets and liabilities were recorded at their fair
value and accordingly, the valuation accounts were set to zero at December 23, 2003.




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




---



##### Table of Contents



Schedule II
 KRATON Polymers LLC
 Valuation Accounts
Period from January 1 through December 22, 2003,
Period from December 23 through December 31, 2003,
For the Year Ended December 31, 2004, and
For the Year Ended December 31, 2005
(In thousands)
 Balance
    
    
    Charged to
    
    
    
    
    
    
    Balanceat beginning
    
    
    costs and
    
    
    
    
    
    
    at end ofof period
    
    
    expenses
    
    
    Deductions
    
    
    periodAllowance for Doubtful AccountsPeriod from January 1 through December 22, 2003
    
    $
    2,066
    
    
    $
    (63
    )
    
    $
    205
    
    
    $
    2,208Period from December 23 through December 31, 2003(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended December 31, 2004
    
    
    
    
    
    
    835
    
    
    
    (85
    )
    
    
    750Year ended December 31, 2005
    
    
    750
    
    
    
    936
    
    
    
    (673
    )
    
    
    1,013
 Balance
    
    
    Charged to
    
    
    
    
    
    
    Balanceat beginning
    
    
    costs and
    
    
    
    
    
    
    at end ofof period
    
    
    expenses
    
    
    Deductions
    
    
    periodInventory ReservesPeriod from January 1 through December 22, 2003
    
    $
    9,653
    
    
    $
    4,519
    
    
    $
    (8,139
    )
    
    $
    6,033Period from December 23 through December 31, 2003(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended December 31, 2004
    
    
    
    
    
    
    14,301
    
    
    
    (12,284
    )
    
    
    2,017Year ended December 31, 2005
    
    
    2,017
    
    
    
    7,773
    
    
    
    (4,764
    )
    
    
    5,026
 
 (1)
    
    In connection with the Acquisition all assets and liabilities were recorded at their fair
value and accordingly, the valuation accounts were set to zero at December 23, 2003.




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##### Table of Contents



EXHIBIT INDEX
 Item 15. Exhibits.
  ExhibitNo.
    
    Description of Exhibits2.1
    
    Amended and Restated Agreement and Plan of Merger dated November 5, 2003, among
Ripplewood Chemical Holding LLC, KRATON Polymers LLC, Polymer Holdings LLC and
Polymer Acquisition LLC (portions of this exhibit have been omitted pursuant to
a request for confidential treatment) (incorporated by reference from Exhibit
2.1 to Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed with
the Commission on July 15, 2005)3.1
    
    Certificate of Formation of Ripplewood Chemical Acquisition LLC dated August 24,
2000 (incorporated by reference from Exhibit 3.1 to KRATONs Registration
Statement on Form S-4 filed with the Commission on April 1, 2005)3.2
    
    Certificate of Amendment to the Certificate of Formation of Ripplewood Chemical
Acquisition LLC dated December 11, 2000, changing the name to RK Polymers LLC
(incorporated by reference from Exhibit 3.2 to KRATONs Registration Statement
on Form S-4 filed with the Commission on April 1, 2005)3.3
    
    Certificate of Amendment to Certificate of Formation of RK Polymers LLC dated
February 28, 2001, changing the name to KRATON Polymers LLC (incorporated by
reference from Exhibit 3.3 to KRATONs Registration Statement on Form S-4 filed
with the Commission on April 1, 2005)3.4
    
    Second Amended and Restated Limited Liability Company Agreement of KRATON
Polymers LLC dated March 31, 2004 (incorporated by reference from Exhibit 3.4 to
KRATONs Registration Statement on Form S-4 filed with the Commission on April
1, 2005)3.5
    
    Certificate of Formation of TPG Polymer Holdings, LLC dated October 28, 2003
(incorporated by reference from Exhibit 3.1 to Polymer Holdings Registration
Statement on Form S-4 filed with the Commission on April 1, 2005)3.6
    
    Amended and Restated Certificate of Formation of TPG Polymer Holdings, LLC dated
November 24, 2003 changing name to Polymer Holdings LLC (incorporated by
reference from Exhibit 3.2 to Polymer Holdings Registration Statement on Form
S-4 filed with the Commission on April 1, 2005)3.7
    
    Amended and Restated Limited Liability Company Agreement of Polymer Holdings
LLC, dated December 23, 2003 (incorporated by reference from Exhibit 3.3 to
Polymer Holdings Registration Statement on Form S-4 filed with the Commission
on April 1, 2005)4.1
    
    Indenture dated as of December 23, 2003, among KRATON Polymers LLC, KRATON
Polymers Capital Corporation, the Guarantors named therein and Wells Fargo Bank
Minnesota, N.A., as trustee, relating to the 8.125% Senior Subordinated Notes
due 2014 (incorporated by reference from Exhibit 4.1 to KRATONs Registration
Statement on Form S-4 filed with the Commission on April 1, 2005)4.2
    
    Form of 8.125% Senior Subordinated Notes due 2014 of KRATON Polymers LLC and
KRATON Polymers Capital Corporation (included as Exhibit A1 to the Indenture
filed as Exhibit 4.1) (1)4.3
    
    Exchange and Registration Rights Agreement dated December 23, 2003, among KRATON
Polymers LLC, KRATON Polymers Capital Corporation, the Guarantors named therein,
Goldman, Sachs & Co. and UBS Securities LLC (incorporated by reference from
Exhibit 4.3 to KRATONs Registration Statement on Form S-4 filed with the
Commission on April 1, 2005) (incorporated by reference from Exhibit 4.1 to
Polymer Holdings Registration Statement on Form S-4 filed with the Commission
on April 1, 2005)4.4
    
    Indenture, dated as of November 2, 2004, among Polymer Holdings LLC, Polymer
Holdings Capital Corporation, and Wells Fargo Bank, N.A., as trustee, relating
to the 12.000% Senior Discount Notes due 2014 (incorporated by reference from
Exhibit 4.2 to Polymer Holdings Registration Statement on Form S-4 filed with
the Commission on April 1, 2005)4.5
    
    Form of 12.000% Senior Discount Notes due 2014 of Polymer Holdings LLC and
Polymer Holdings Capital Corporation (included as Exhibit A1 to the Indenture
filed as Exhibit 4.1 herein)4.6
    
    Exchange and Registration Rights Agreement, dated November 2, 2004, among
Polymer Holdings LLC, Polymer Holdings Capital Corporation, Goldman, Sachs & Co.
and UBS Securities LLC (incorporated by reference from Exhibit 4.3 to Polymer
Holdings Registration Statement on Form S-4 filed with the Commission on April
1, 2005)4.7
    
    Pledge and Security Agreement dated December 23, 2003, among KRATON Polymers LLC,
Polymer Holdings LLC, KRATON Polymers Capital Corporation, Elastomers Holdings
LLC, KRATON Polymers U.S. LLC, as Grantors and UBS AG, Stanford Branch, as
Collateral Agent (incorporated by reference from Exhibit 4.4 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)4.8
    
    Credit and Guaranty Agreement dated December 23, 2003, among KRATON Polymers
LLC, as Borrower, Polymer Holdings LLC, certain subsidiaries of KRATON Polymers
LLC, as Guarantors, various lenders, Goldman Sachs Credit Partners L.P. and UBS
Securities LLC, as Lead Arrangers, Goldman Sachs Credit Partners L.P., as
Syndication Agent, UBS AG, Stanford Branch, as Administrative Agent and
Collateral Agent, and Morgan Stanley Senior Funding Inc., Credit Suisse First
Boston, acting through its Cayman Islands Branch and General Electric Capital
Corporation, as Documentation Agents (incorporated by reference from Exhibit
4.5(a) to KRATONs Registration Statement on Form S-4 filed with the Commission
on April 1, 2005)4.9
    
    Amendment No. 1 to the Credit and Guaranty Agreement dated as of March 4, 2004
(incorporated by reference from Exhibit 4.5(b) to KRATONs Registration
Statement on Form S-4 filed with the Commission on April 1, 2005)4.10
    
    Amendment No. 2 to the Credit and Guaranty Agreement dated as of October 21,
2004 (incorporated by reference from Exhibit 4.5(c) to KRATONs Registration
Statement on Form S-4 filed with the Commission on April 1, 2005)10.1
    
    Employment Agreement dated November 1, 2004, between George Gregory and KRATON Polymers LLC (incorporated by reference




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##### Table of Contents



from Exhibit 10.5 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.2
    
    Notional Unit Award Grant Agreement dated September 10, 2004, between George
Gregory and KRATON Polymers LLC (incorporated by reference from Exhibit 10.6 to
KRATONs Registration Statement on Form S-4 filed with the Commission on April
1, 2005)10.3
    
    Profits Unit Award Agreement dated September 10, 2004, between George Gregory
and KRATON Polymers LLC (incorporated by reference from Exhibit 10.7 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.4
    
    Letter Agreement dated March 17, 2005, between KRATON Management LLC and George
Gregory (incorporated by reference from Exhibit 10.08(b) to Amendment No. 1 to
KRATONs Registration Statement on Form S-4 filed with the Commission on June 9,
2005)10.5
    
    Employment Agreement dated April 12, 2004, between Richard A. Ott and KRATON
Polymers LLC (incorporated by reference from Exhibit 10.20 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.6
    
    Profits Unit Award Agreement dated September 10, 2004, between Richard Ott and
KRATON Polymers LLC (incorporated by reference from Exhibit 10.22 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.7
    
    Employment Agreement dated April 12, 2004, between Joseph J. Waiter, and KRATON
Polymers LLC (incorporated by reference from Exhibit 10.23 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.8
    
    Profits Unit Award Agreement dated September 10, 2004, between Joseph Waiter and
KRATON Polymers LLC (incorporated by reference from Exhibit 10.25 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.9
    
    Employment Agreement dated March 8, 2004, between Dave Bradley and KRATON
Polymers LLC (incorporated by reference from Exhibit 10.26 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.10
    
    Profits Unit Award Agreement dated September 10, 2004, between Dave Bradley and
KRATON Polymers LLC (incorporated by reference from Exhibit 10.28 to KRATONs
Registration Statement on Form S-4 filed with the Commission on April 1, 2005)10.11
    
    Restricted Unit Award Grant Agreement dated September 10, 2004, between Dave
Bradley and KRATON Polymers LLC (incorporated by reference from Exhibit 10.29 to
KRATONs Registration Statement on Form S-4 filed with the Commission on April
1, 2005)10.12
    
    Restricted Unit Award Grant Agreement dated as of March 17, 2005, between KRATON
Polymers LLC and David Bradley (incorporated by reference from Exhibit 10.29(a)
to Amendment No. 1 to KRATONs Registration Statement on Form S-4 filed with the
Commission on June 9, 2005)10.13
    
    Employment Agreement dated as of March 2, 2005, between KRATON Polymers LLC and
Eli Ben-Shoshan (incorporated by reference from Exhibit 10.52 to Amendment No. 1
to KRATONs Registration Statement on Form S-4 filed with the Commission on June
9, 2005)10.14
    
    Notional Unit Award Grant Agreement dated as of March 17, 2005, between KRATON
Polymers LLC and Eli Ben-Shoshan (incorporated by reference from Exhibit 10.53
to Amendment No. 1 to KRATONs Registration Statement on Form S-4 filed with the
Commission on June 9, 2005)10.15
    
    Profits Unit Award Agreement dated as of March 17, 2005, between KRATON Polymers
LLC and Eli Ben-Shoshan (incorporated by reference from Exhibit 10.55 to
Amendment No. 1 to KRATONs Registration Statement on Form S-4 filed with the
Commission on June 9, 2005)10.16
    
    Employment Agreement dated November 9, 2005, between KRATON and Kevin M. Fogarty
(incorporated by reference from Exhibit 10.3 to KRATONs Quarterly Report on
Form 10-Q filed with the Commission on November 14, 2005)10.17
    
    Notional Unit Award Grant Agreement dated July 15, 2005, between Kevin Fogarty
and KRATON Polymers LLC (incorporated by reference from Exhibit 10.56 to
Amendment No. 3 to KRATONs Registration Statement on Form S-4 filed with the
Commission on August 29, 2005)10.18
    
    Profits Unit Award Agreement dated July 15, 2005, between Kevin Fogarty and
KRATON Management LLC (incorporated by reference from Exhibit 10.58 to Amendment
No. 3 to KRATONs Registration Statement on Form S-4 filed with the Commission
on August 29, 2005)10.19
    
    Employment Agreement dated as of December 15, 2005, between KRATON Polymers LLC
and Raymond Guba (incorporated by reference from Exhibit 10.1 to KRATONs
Current Report on Form 8-K filed with the Commission on December 16, 2005)10.20
    
    Profit Unit Award Agreement Dated October 24, 2005, between KRATON Management
LLC and Raymond K. Guba (incorporated by reference from Exhibit 10.5 to KRATONs
Quarterly Report on Form 10-Q filed with the Commission on November 14, 2005)10.21
    
    Notional Unit Award Grant Agreement dated October 24, 2005, between KRATON
Polymers LLC and Raymond K. Guba (incorporated by reference from Exhibit 10.6 to
KRATONs Quarterly Report on Form 10-Q filed with the Commission on November 14,
2005)10.22
    
    KRATON Polymers LLC Executive Deferred Compensation Plan (incorporated by
reference from Exhibit 10.30 to KRATONs Registration Statement on Form S-4
filed with the Commission on April 1, 2005)10.23
    
    TJ Chemical Holdings LLC 2004 Option Plan and Form of Option Grant Agreement
(incorporated by reference from Exhibit 10.31 to KRATONs Registration Statement
on Form S-4 filed with the Commission on April 1, 2005)




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##### Table of Contents



10.24
    
    First Amended and Restated Site Services, Utilities, Materials and Facilities
Agreement dated February 28, 2001, between KRATON Polymers Nederland B.V. and
Shell Nederland Raffinaderij B.V. (Pernis) (portions of this exhibit have been
omitted pursuant to a request for confidential treatment) (incorporated by
reference from Exhibit 10.32 to Amendment No. 2 to KRATONs Registration
Statement on Form S-4 filed with the Commission on July 15, 2005)10.25
    
    First Amended and Restated Site Services, Utilities, Materials and Facilities
Agreement dated February 28, 2001, between KRATON Polymers Nederland B.V. and
Shell Nederland Chemie B.V. (Pernis) (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment) (incorporated by
reference from Exhibit 10.33 to Amendment No. 2 to KRATONs Registration
Statement on Form S-4 filed with the Commission on July 15, 2005)10.26
    
    First Amended and Restated Site Services, Utilities, Materials and Facilities
Agreement dated February 28, 2001, between Shell Chimie S.A. and KRATON Polymers
France S.A.S. (Berre) (portions of this exhibit have been omitted pursuant to a
request for confidential treatment) (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (incorporated by reference
from Exhibit 10.34 to Amendment No. 2 to KRATONs Registration Statement on Form
S-4 filed with the Commission on July 15, 2005)10.27
    
    First Amended and Restated Operations and Maintenance Services Agreement dated
February 28, 2001, between KRATON Polymers Nederland B.V. and Shell Nederland
Chemie B.V. (Pernis) (portions of this exhibit have been omitted pursuant to a
request for confidential treatment) (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (incorporated by reference
from Exhibit 10.35 to Amendment No. 2 to KRATONs Registration Statement on Form
S-4 filed with the Commission on July 15, 2005)10.28
    
    First Amended and Restated Operations and Maintenance Services Agreement dated
February 28, 2001, between KRATON Polymers France S.A.S. and Shell Chimie S.A.
(Berre) (portions of this exhibit have been omitted pursuant to a request for
confidential treatment) (portions of this exhibit have been omitted pursuant to
a request for confidential treatment) (incorporated by reference from Exhibit
10.36 to Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed
with the Commission on July 15, 2005)10.29
    
    Production Agreement dated March 31, 2000, between Elenac GmbH and KRATON
Polymers GmbH (Wesseling) (portions of this exhibit have been omitted pursuant
to a request for confidential treatment) (portions of this exhibit have been
omitted pursuant to a request for confidential treatment) (incorporated by
reference from Exhibit 10.37 to Amendment No. 2 to KRATONs Registration
Statement on Form S-4 filed with the Commission on July 15, 2005)10.30
    
    Amended and Restated Belpre Facility Sharing and Operating Agreement dated July
1, 1999, among Infineum USA LP, Shell Oil Company and Shell Elastomers LLC
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment) (portions of this exhibit have been omitted pursuant to
a request for confidential treatment) (incorporated by reference from Exhibit
10.38 to Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed
with the Commission on July 15, 2005)10.31
    
    Styrene Sales Contract dated August 30, 1999, between Shell Chemical Company and
Shell Elastomers LLC (portions of this exhibit have been omitted pursuant to a
request for confidential treatment) (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (incorporated by reference
from Exhibit 10.39 to Amendment No. 2 to KRATONs Registration Statement on Form
S-4 filed with the Commission on July 15, 2005)10.32
    
    Agreement dated January 31, 2000, between Shell Hydrocarbures et Derives S.A.S.
and KRATON Polymers France S.A.S. for common reception and storage of Styrene
Monomer (portions of this exhibit have been omitted pursuant to a request for
confidential treatment) (portions of this exhibit have been omitted pursuant to
a request for confidential treatment) (incorporated by reference from Exhibit
10.40 to Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed
with the Commission on July 15, 2005)10.33
    
    Multi-Site Agreement for the supply of Styrene Monomer dated February 28, 2001,
among Shell Nederland Chemie B.V., Shell Chimie S.A. and KRATON Polymers
Nederland BV (portions of this exhibit have been omitted pursuant to a request
for confidential treatment) (portions of this exhibit have been omitted pursuant
to a request for confidential treatment) (incorporated by reference from Exhibit
10.41 to Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed
with the Commission on July 15, 2005)10.34
    
    Butadiene Sales Contract dated September 11, 1999, between Shell Chemical
Company and Shell Elastomers LLC (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment) (incorporated by
reference from Exhibit 10.42 to Amendment No. 2 to KRATONs Registration
Statement on Form S-4 filed with the Commission on July 15, 2005)10.35
    
    1,3-Butadiene Agreement dated October 1, 1999, between Shell Chimie S.A. and
KRATON Polymers France S.A.S. (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment) (incorporated by
reference from Exhibit 10.43 to Amendment No. 2 to KRATONs Registration
Statement on Form S-4 filed with the Commission on July 15, 2005)10.36
    
    Deed of Novation dated December 20, 2005, between Shell Chemical Europe B.V.,
Shell Pétrochimie Méditerranée S.A.S., Basell Polyoléfines France S.A.S. and
KRATON Polymers France S.A.S*10.37
    
    1,3-Butadiene Agreement dated December 1, 1999, between Deutsche Shell Chemie
GmbH and MWW Achtundzwanzigste Vermoegensverwaltungs GmbH (portions of this
exhibit have been omitted pursuant to a request for confidential treatment)
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment) (incorporated by reference from Exhibit 10.44 to
Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed with the
Commission on July 15, 2005)10.38
    
    Sales Contract dated September 11, 1999, between Shell Chemical Company and
Shell Elastomers LLC (portions of this exhibit have been omitted pursuant to a
request for confidential treatment) (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (incorporated by reference
from Exhibit 10.45 to Amendment No. 2 to KRATONs Registration Statement on




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##### Table of Contents



Form S-4 filed with the Commission on July 15, 2005)10.39
    
    Agreement dated February 28, 2001, between Shell Nederland Chemie B.V. and
KRATON Polymers Nederland B.V. for the supply of Isoprene Monomer (portions of
this exhibit have been omitted pursuant to a request for confidential treatment)
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment) (incorporated by reference from Exhibit 10.46 to
Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed with the
Commission on July 15, 2005)10.40
    
    Manufacturing Facility Lease dated August 24, 2000, between Shell Chemie and
Kravis (BerreKRATON D) (incorporated by reference from Exhibit 10.47 to
KRATONs Registration Statement on Form S-4 filed with the Commission on April
1, 2005)10.41
    
    Manufacturing Facility Lease dated August 24, 2000, between Shell Chimie and
KRATON Polymers France SAS (BerreKRATON G) (incorporated by reference from
Exhibit 10.48 to KRATONs Registration Statement on Form S-4 filed with the
Commission on April 1, 2005)10.42
    
    Business Lease dated March 31, 2000, between Elenac GmbH and KRATON Polymers
GmbH (Wesseling) (portions of this exhibit have been omitted pursuant to a
request for confidential treatment) (incorporated by reference from Exhibit
10.49 to KRATONs Registration Statement on Form S-4 filed with the Commission
on April 1, 2005)10.43
    
    Amendment to the Business Lease dated March 31, 2000, between Bassell
Polyolefine GmbH (previously Elenac GmbH) and KRATON Polymers GmbH (incorporated
by reference from Exhibit 10.49(a) to KRATONs Registration Statement on Form
S-4 filed with the Commission on April 1, 2005)10.44
    
    Contribution Agreement dated February 28, 2001, between Shell Oil Company and
Shell Elastomers (portions of this exhibit have been omitted pursuant to a
request for confidential treatment) (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (incorporated by reference
from Exhibit 10.50 to Amendment No. 2 to KRATONs Registration Statement on Form
S-4 filed with the Commission on July 15, 2005)10.45
    
    Contribution Agreement dated February 28, 2001, between Shell Internationale
Research Maatschappil B.V. and KRATON Polymers Research B.V. (portions of this
exhibit have been omitted pursuant to a request for confidential treatment)
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment) (incorporated by reference from Exhibit 10.51 to
Amendment No. 2 to KRATONs Registration Statement on Form S-4 filed with the
Commission on July 15, 2005)12.1
    
    Statement re Computation of Ratios*21.1
    
    List of Significant Subsidiaries (incorporated by reference from Exhibit 21.1 to
KRATONs Registration Statement on Form S-4 filed with the Commission on April
1, 2005)31.1
    
    Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*31.2
    
    Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*32.1
    
    Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*