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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
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Kraton Polymers LLC
  Delaware
    
    94-2805249(State of incorporation)
    
    (I.R.S. Employer Identification No.)15710 John F. Kennedy Blvd, Suite 300
    
    281-504-4700Houston, TX 77032
    
    (Registrants telephone number, including area code)(Address of principal executive offices,
    
    http://www.Kraton.comincluding zip code)
    
    (Registrants url)
 Not applicable
  o þ
  o þ
 o þ
 o þ
  o o þ
 o þ




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##### 



INDEX
 PAGEPART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    14Item 1B.
    
    Unresolved Staff Comments
    
    
    23Item 2.
    
    Properties
    
    
    23Item 3.
    
    Legal Proceedings
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    27Item 6.
    
    Selected Financial Data
    
    
    27Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 8.
    
    Financial Statements and Supplementary Data
    
    
    45Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    45Item 9A.
    
    Controls and Procedures
    
    
    45Item 9B.
    
    Other Information
    
    
    45PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    46Item 11.
    
    Executive Compensation
    
    
    49Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    70Item 13.
    
    Certain Relationships and Related Transactions
    
    
    72Item 14.
    
    Principal Accountant Fees and Services
    
    
    73PART IVItem 15.
    
    Exhibits and Financial Statements Schedules
    
    
    74Amendment No. 2 to Employment Agreement - George B. GregoryAmendment No. 2 to Employment Agreement - Richard A. OttAmendment No. 3 to Employment Agreement - David A. BradleyAmendment No. 2 to Employment Agreement - Kevin M. FogartyEmployment Agreement - Nicholas G. DekkerTripartite Agreement - Nicholas G. DekkerStatement re Computation of RatiosCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906




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FORWARD LOOKING STATEMENTS
   PRESENTATION OF FINANCIAL STATEMENTS




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PART I
 
 ITEM 1. BUSINESS
 General
    Corporate Background
    1




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Competitive Strengths
 Leading Global SBC Market Position .
 Product Innovation and Superior Technical Expertise.
  
    
    In our Packaging and Film end-use market we announced: (1) the availability of two
additional grades of HSBCs which provide an alternative to plasticized PVC for numerous
film-based, medical and packaging applications; and (2) new developments in functionalized
HSBCs for use as tie layers in high performance barrier packaging applications.
    
    In our Adhesives, Sealants and Coatings end-use market we announced: (1) the
availability of two additional grades of HSBCs suitable for pressure sensitive adhesive
films that enable the key features of both coextruded and adhesive-coated protective films
to be combined; (2) the availability of new technology created for hot melt butyl sealant
manufacturers which allows for an increase in the range of product service temperatures, as
well as the potential for expanded use into new markets, including insulated glass windows
for warmer climates; and (3) the successful introduction of highly reactive adhesive
polymers that can be cross-linked with UV radiation, and subsequently expanded into low
density foamed adhesive systems.
    
    In our Compounding Channels end-use market we announced two additional grades of HSBCs
which allow compounders to formulate compounds with higher flow, better transparency,
enhanced overmold adhesion, yet retain the same strength and service temperature as
compounds made with the industry standard Kraton G1651 polymer.
    
    In our Personal Care end-use market we announced a new innovation in bicomponent fiber
technology. Our advancement in bicomponent fiber enables for the first time the combination
of elastic spunbond grades offering biaxial stretch, with the well-known and expected
strength of a Kraton SBC. These spunbond grades require no additional drying, offer
excellent process stability, and can be spun at world-class speeds.
 Strong Customer Relationships.
 2




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Global Scale of Operations.
 Diversity Across Customers, End-Uses and Geography.
 Business Strategy
 Deliver New Innovative Products to the Marketplace.
 Focus on the Highest Growth Segments.
 Provide Superior Product Quality and Customer Service.
 Expanding into New Applications and Regions. .
 3




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Focus on Operational Excellence and Reduce Unit Costs.
 Products
   USBC.
  HSBC.
  4




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IR
 IR Latex
 Compounds
 5




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End-Use Markets
   RevenueEnd-Use Markets and Other
    
    Mix(1)
    
    Selected Applications/ProductsAdhesives, Sealants and Coatings
    
    
    33
    %
    
    
    
    Tapes and Labels
    
    Non-woven and Industrial
AdhesivesPaving and Roofing
    
    
    30
    %
    
    
    
    Asphalt modificationo Roadwayso Roofing felts and shinglesCompounding Channels
    
    
    19
    %
    
    
    
    Soft touch and flexible
materials (i.e., tool and bicycle
grips)
    
    Impact resistant plastics
    
    Automotive componentsPersonal Care
    
    
    6
    %
    
    
    
    Elastic films (i.e.,
disposable infant and child care)
    
    Compounds and Oil Gels
(i.e., skin care products and
lotions)Packaging and Films
    
    
    4
    %
    
    
    
    Disposable Food Packaging
    
    Medical Films for Bags and
PouchesEmerging Businesses
    
    
    2
    %
    
    
    
    Surgical glovesOther Markets
    
    
    6
    %
    
    
    
    Footwear
    
    Lubricant and fuel additive
    
    High Styrenics
 
 (1)
    
    Based on 2006 total product sales of $1,015.8 million (excludes by-product sales which are
reported as Other revenues). Adhesives, Sealants and Coatings.
  6




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Paving and Roofing.
   Compounding Channels.
   Personal Care.
   Packaging and Films.
  7




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Emerging Business.
 Other Markets.
 Research, Development and Technology
     Sales and Marketing
   8




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Sources and Availability of Raw Materials
   Styrene.
    9




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Butadiene.
   Isoprene.
     10




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Competition
 SBC Industry
 Product Substitution.
      Leases, Operating and Other Agreements
 Leases of Manufacturing and Research Facilities.
    Operating Agreements.
 11




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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
  12




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Environmental Regulation
         13




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Insurance
  Seasonality
  
 ITEM 1A. RISK FACTORS
 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.
   If the availability of isoprene is limited, we may be unable to produce some of our products
in quantities demanded by our customers, which could have an adverse effect on our sales of
products requiring isoprene.
   14




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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.
  The
failure of our suppliers to perform their
obligations under long-term supply agreements, or our inability to replace or renew these agreements when they
expire, could increase our cost for these materials, interrupt production or otherwise adversely
affect our results of operations.
   15




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If we are not able to continue the technological innovation and successful commercial
introduction of new products, our customers may turn to other producers to meet their requirements.
   Our end-use markets are highly competitive, and we may lose market share to other SBC
producers or to producers of non-SBC products that can be substituted for our products.
    
    
    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 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 Compounding Channels end-use market, SBC products compete against a wide variety
of chemical and non-chemical alternatives, including thermoplastic vulcanizates, ethylene
propylene diene 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 Personal Care end-use market, competing materials include spandex, metallocene
polyolefins and natural rubber.
    
    In the Packaging and Films end-use market, SBC products primarily compete with PVC
polymers and compounds, polyolefins, PET, nylon, thermoplastic vulcanizates and
polycarbonate, based on performance, ease of use, desired aesthetics and total end-product
cost.
 16




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Chemical manufacturing is inherently hazardous, which could result in accidents that disrupt
our operations or expose us to significant losses or liabilities.
  
    
    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.
  Regulation of our employees exposure to butadiene could require material expenditures or
changes in our operations.
  Compliance with extensive environmental, health and safety laws could require material
expenditures, changes in our operations or site remediation.
   17




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We may be subject to losses due to lawsuits arising out of environmental damage or personal
injuries associated with chemical manufacturing.
    Regulatory changes applicable to us or our customers 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.
  18




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Our business relies on intellectual property and other proprietary information and our failure
to protect our rights could harm our competitive advantages with respect to the manufacturing of
some of our products.
      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.
  19




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We may be liable for damages based on product liability claims brought against our customers
in our end-use markets.
  Our relationship with our employees could deteriorate, which could adversely affect our
operations.
  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;
 20




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
    
    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.
  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.
  21




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We generally do not have long-term contracts with our customers and the loss of customers
could adversely affect our sales and profitability.
  Our substantial level of indebtedness could adversely affect our financial condition and
prevent us from fulfilling our obligations under our senior secured credit facility and the 8.125%
Notes.
   
    
    our ability to obtain additional financing for working capital, capital expenditures,
debt service requirements or other general corporate purposes may be impaired;
    
    we must use a substantial portion of our cash flow to pay principal of and interest on
our indebtedness which will reduce the funds available to us for other purposes;
    
    we are more vulnerable to economic downturns and adverse industry conditions;
    
    our ability to capitalize on business opportunities and to
react to competitive pressures, as compared to our competitors, may be compromised due to our high level of indebtedness;
and
    
    our ability to borrow additional funds or to refinance indebtedness may be limited.
  Our debt instruments, including the senior secured credit facility and the indenture governing
the 8.125% Notes impose significant operating and financial restrictions on us.
  
    
    incur additional indebtedness;
    
    pay dividends or make certain other restricted payments;
    
    create liens or other encumbrances; and
    
    transfer or sell certain assets or merge or consolidate with another entity.
 22




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ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
    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)Tsukuba, Japan
    
    
    4.5
    
    
    
    23,327
    
    
    
    R&D
    
    
    OwnedShanghai, China
    
    
    N/A
    
    
    
    20,000
    
    
    Distribution
    
    Leased(5)
 
 (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. 23




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Belpre, Ohio, USA
    Wesseling, Germany
   Berre, France
   Pernis, The Netherlands
  24




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Paulinia, Brazil
  Kashima, Japan
   Research and Development Facilities and Other Facilities
    
 ITEM 3. LEGAL PROCEEDINGS
  25




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  26




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
 ITEM 6. SELECTED FINANCIAL DATA
    27




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PredecessorPeriod from
    
    
    Period fromDecember 23
    
    
    January 1Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    through
    
    
    through
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 22,
    
    
    December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)
    
    
    (In thousands)Statement of Operations
Data:RevenuesSales
    
    $
    1,015,766
    
    
    $
    952,921
    
    
    $
    791,226
    
    
    $
    9,532
    
    
    $
    680,263
    
    
    $
    620,065Other(1)
    
    
    32,355
    
    
    
    22,670
    
    
    
    16,160
    
    
    
    328
    
    
    
    12,475
    
    
    
    8,853Total revenues
    
    
    1,048,121
    
    
    
    975,591
    
    
    
    807,386
    
    
    
    9,860
    
    
    
    692,738
    
    
    
    628,918Cost of goods sold(2)
    
    
    843,726
    
    
    
    766,012
    
    
    
    692,968
    
    
    
    9,796
    
    
    
    519,743
    
    
    
    424,978Gross profit
    
    
    204,395
    
    
    
    209,579
    
    
    
    114,418
    
    
    
    64
    
    
    
    172,995
    
    
    
    203,940Research and development
expenses
    
    
    24,598
    
    
    
    26,152
    
    
    
    23,178
    
    
    
    458
    
    
    
    23,310
    
    
    
    22,984Selling, general and
administrative
    
    
    73,776
    
    
    
    72,731
    
    
    
    64,903
    
    
    
    1,624
    
    
    
    54,017
    
    
    
    65,563Depreciation and
amortization
    
    
    43,574
    
    
    
    44,090
    
    
    
    42,630
    
    
    
    860
    
    
    
    25,876
    
    
    
    28,166Earnings in joint venture(3)
    
    
    (168
    )
    
    
    (1,516
    )
    
    
    (462
    )
    
    
    (28
    )
    
    
    (621
    )
    
    
    (1,171
    )Interest expense, net(4)
    
    
    40,547
    
    
    
    33,943
    
    
    
    38,963
    
    
    
    556
    
    
    
    57,543
    
    
    
    36,066Income (loss) before income
taxes
    
    
    22,068
    
    
    
    34,179
    
    
    
    (54,794
    )
    
    
    (3,406
    )
    
    
    12,870
    
    
    
    52,332Income tax (provision)
benefit(5)
    
    
    (25,626
    )
    
    
    (11,519
    )
    
    
    18,973
    
    
    
    1,347
    
    
    
    (3,007
    )
    
    
    (9,793
    )Net (loss) income
    
    $
    (3,558
    )
    
    $
    22,660
    
    
    $
    (35,821
    )
    
    $
    (2,059
    )
    
    $
    9,863
    
    
    $
    42,539
 PredecessorAs of
    
    As of
    
    As of
    
    As of
    
    As ofDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(In thousands)
    
    (In thousands)
    
    (In thousands)
    
    (In thousands)
    
    (In thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    43,601
    
    
    $
    100,934
    
    
    $
    46,357
    
    
    $
    17,500
    
    
    $
    14,305Total assets(6)
    
    
    989,153
    
    
    
    964,813
    
    
    
    965,587
    
    
    
    941,056
    
    
    
    608,651Total debt
    
    
    582,113
    
    
    
    462,663
    
    
    
    465,343
    
    
    
    560,000
    
    
    
    343,730
 
 (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, and the period from December 23 through
December 31, 2003, these amounts include $1,684, $35,225 and $1,525, 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. PredecessorPeriod from
    
    Period fromDecember 23
    
    January 1Year Ended
    
    Year Ended
    
    Year Ended
    
    through
    
    through
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 23,
    
    December 31,2006
    
    2005
    
    2004
    
    2003
    
    2003
    
    2002Other Data:Ratio of Earnings
to Fixed Charges
    
    
    1.5
    
    
    
    1.9
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    2.3
  28




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
   Recent Developments
 Asia Pacific Expansion Plans
  New Innovations
  
    
    In our Packaging and Films end-use market, we announced in October 2006 new developments
in functionalized hydrogenated styrenic block copolymers for use as tie layers in high
performance barrier packaging applications. This new tie layer technology specifically
targets high performance barrier packaging, such as stand up pouches and/or clear retortable
packaging, and brings new capabilities to the industry while providing more efficient
processing methods.
    
    In our Adhesives, Sealants and Coating end-use market, we announced in December 2006 the
successful introduction of highly reactive adhesive polymers that can be cross-linked with
UV radiation and subsequently expanded into low density foamed adhesive systems. This new
innovation has been catalyzed by a highly cross-linkable SBS grade, allowing for new
application development and market opportunities.
    
    In our Adhesives, Sealants and Coating end-use market, we announced in March 2007 the
commercial availability of a new Kraton SIBS product, for use in hot melt adhesive labels.
This new polymer has been designed specifically for label applications and offers economic
and performance advantages over other conventional products. This unique polymer exhibits
outstanding adhesive properties with an excellent balance of tack, peel, shear, adhesion and
resistance to flagging in even the most demanding label applications.
 European Capacity Expansions
  29




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Appointment of Executive Officers
   Critical Accounting Policies
  Revenue Recognition
   Inventories
  Property, Plant and Equipment
   30




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Pensions
 Employers Accounting for Pensions
    Income Taxes
  Factors Affecting Our Results of Operations
 Raw Materials
  31




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Seasonality
  Economic and Market Conditions
  32




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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
    
    
    2004
    
    
    
    1.242
    
    
    
    1.364
    
    
    
    92.45
    
    
    
    96.87
    
    
    
    0.342
    
    
    
    0.3782005
    
    
    
    1.243
    
    
    
    1.184
    
    
    
    90.81
    
    
    
    85.10
    
    
    
    0.411
    
    
    
    0.4272006
    
    
    
    1.254
    
    
    
    1.319
    
    
    
    85.95
    
    
    
    84.09
    
    
    
    0.459
    
    
    
    0.468
   Results of Operations
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004(In thousands)
    
    
    (In thousands)
    
    
    (In thousands)RevenuesSales
    
    $
    1,015,766
    
    
    $
    952,921
    
    
    $
    791,226Other
    
    
    32,355
    
    
    
    22,670
    
    
    
    16,160Total revenues
    
    
    1,048,121
    
    
    
    975,591
    
    
    
    807,386Costs and expensesCost of goods sold
    
    
    843,726
    
    
    
    766,012
    
    
    
    692,968Gross profit
    
    
    204,395
    
    
    
    209,579
    
    
    
    114,418Research and development expenses
    
    
    24,598
    
    
    
    26,152
    
    
    
    23,178Selling, general and administrative expenses
    
    
    73,776
    
    
    
    72,731
    
    
    
    64,903Depreciation and amortization
    
    
    43,574
    
    
    
    44,090
    
    
    
    42,630Earnings in joint venture
    
    
    (168
    )
    
    
    (1,516
    )
    
    
    (462
    )Interest expense
    
    
    40,547
    
    
    
    33,943
    
    
    
    38,963Income (loss) before income taxes
    
    
    22,068
    
    
    
    34,179
    
    
    
    (54,794
    )Income tax (provision) benefit
    
    
    (25,626
    )
    
    
    (11,519
    )
    
    
    18,973Net (loss) income
    
    $
    (3,558
    )
    
    $
    22,660
    
    
    $
    (35,821
    )
 33




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##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004RevenuesSales
    
    
    96.9
    %
    
    
    97.7
    %
    
    
    98.0
    %Other
    
    
    3.1
    
    
    
    2.3
    
    
    
    2.0Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expensesCost of goods sold
    
    
    80.5
    
    
    
    78.5
    
    
    
    85.8Gross profit
    
    
    19.5
    
    
    
    21.5
    
    
    
    14.2Research and development expenses
    
    
    2.3
    
    
    
    2.7
    
    
    
    2.9Selling, general and administrative expenses
    
    
    7.0
    
    
    
    7.5
    
    
    
    8.0Depreciation and amortization
    
    
    4.2
    
    
    
    4.5
    
    
    
    5.3Earnings in joint venture
    
    
    
    
    
    
    (0.2
    )
    
    
    Interest expense
    
    
    3.9
    
    
    
    3.5
    
    
    
    4.8Income (loss) before income taxes
    
    
    2.1
    
    
    
    3.5
    
    
    
    (6.8
    )Income tax (provision) benefit
    
    
    (2.4
    )
    
    
    (1.2
    )
    
    
    2.4Net income (loss)
    
    
    (0.3
    )%
    
    
    2.3
    %
    
    
    (4.4
    )%
 Year Ended December 31, 2006, Compared to Year Ended December 31, 2005
 Total Revenues
  Sales .
  
    
    SIS availability and acrylic tape substitution in our North American Adhesive,
Sealants and Coatings end-use market;
    
    Paving market volume reductions, as a result of increased asphalt prices in our North
American Paving and Roofing end-use market;
    
    Competitive circumstances in our North American Personal Care end-use market; and
    
    Our continued focus on our core end-use markets resulted in decreased volumes in the other market category.
  
    
    Strong market growth in Europe and Asia Pacific region in our Compounding Channels end-use market;
    
    Significant growth in the European region in our Personal Care end-use market; and
    
    Strong growth in Europe in our Paving and Roofing end-use market.
 34




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##### 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.
 Earnings in joint venture .
 Interest expense.
 35




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##### Table of Contents



Income Tax Provision
 Income
tax provision.
 Net (Loss) Income
 Net
(Loss) Income.
 36




---



##### Table of Contents



Year Ended December 31, 2005, Compared to Year Ended December 31, 2004
 Total Revenues
  Sales
   
    
    Decreased monomer availability, increased competition and product substitution in our
Adhesives, Sealants and Coatings end-use market;
    
    Increased prices for our products as we focused our efforts to improve margins
resulting in increased competition and volume loss in our North American Compounding
Channels and Packaging and Films end-use markets; and
    
    Reduced customer consumption due to changing market needs and a strategic customers
reduction in volumes in our Personal Care end-use market.
  Other revenue .
 Cost of Goods Sold
  37




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##### Table of Contents



Gross Profit
  Operating Expenses
 Research and development expenses .
 Selling, general and administrative expenses .
 Depreciation and amortization of identifiable intangibles.
 Earnings in joint venture .
 Interest expense.
 Income Tax (Provision) Benefit
 Income tax (provision) benefit.
 Net Income (Loss)
 Net Income (Loss).
 38




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##### Table of Contents



Liquidity and Capital Resources
  Operating
Activities.
  Investing Activities.
  Financing
Activities.
  Sources of Liquidity.
 39




---



##### Table of Contents



Capital Expenditures.
  Contractual Commitments
  Payments Due by Period
 Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012 and afterLong-term debt
    
    $
    582.1
    
    
    $
    3.8
    
    
    $
    3.8
    
    
    $
    3.8
    
    
    $
    3.9
    
    
    $
    3.9
    
    
    $
    562.9Estimated interest payments on debt
    
    
    289.4
    
    
    
    44.3
    
    
    
    44.0
    
    
    
    43.8
    
    
    
    43.5
    
    
    
    43.2
    
    
    
    70.6Operating leases
    
    
    38.2
    
    
    
    8.3
    
    
    
    6.9
    
    
    
    6.5
    
    
    
    6.3
    
    
    
    3.1
    
    
    
    7.1Purchase obligations(1)(2)
    
    
    201.2
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    12.4
    
    
    
    8.2
    
    
    
    8.2
    
    
    
    147.6Total contractual cash obligations
    
    $
    1,110.9
    
    
    $
    68.8
    
    
    $
    67.1
    
    
    $
    66.5
    
    
    $
    61.9
    
    
    $
    58.4
    
    
    $
    788.2
 
 (1)
    
    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 $300 per ton up to a maximum aggregate
penalty of approximately $4.2 million. Pursuant to the styrene and butadiene feedstock supply
contracts with Shell Chemicals and its affiliates, Basell and others for our European
operations, we are obligated to purchase minimum quantities. The contracts do not contain a
stated penalty for failure to purchase the minimum quantities. However, if we do not purchase
the minimum requirements, it is required under the terms of the contracts to meet with Shell
Chemicals in an effort to determine a resolution equitable to both parties. 40




---



##### Table of Contents



(2)
    
    Pursuant to a production agreement with Basell, 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 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, 2006, 2005 and 2004, we incurred
costs aggregating $58.4 million, $56.8 million and $66.5 million, respectively, under these
agreements. Description of Our Indebtedness
 Senior Secured Credit Facility
    Maturity.
 Interest.
 41




---



##### Table of Contents



Mandatory Prepayments.
 Covenants.
   Kratons 8.125% Senior Subordinated Notes due 2014
  Maturity Date.
 Interest Payment Dates.
 Guarantees.
 Security and Ranking.
 Optional Redemption.
 Covenants.
 42




---



##### Table of Contents



Other Contingencies
        Off-Balance Sheet Transactions
  43




---



##### Table of Contents



Market Risk
  Interest rate risk.
 Foreign currency risk .
 Commodity price risk .
 Recent Accounting Pronouncements
 Accounting
for Uncertainty in Income Taxes Accounting for Income Taxes
 Fair
Value Measurements
 Employers Accounting for Defined Benefit and
Other Post Retirement Plans
 44




---



##### 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
   45




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Directors and Executive Officers
  Name
    
    Age
    
    
    PositionKelvin Davis
    
    
    43
    
    
    Chairman of the Board of DirectorsMichael MacDougall
    
    
    36
    
    
    DirectorNathan Wright
    
    
    41
    
    
    DirectorTimothy Walsh
    
    
    43
    
    
    DirectorJohn Breckenridge
    
    
    45
    
    
    DirectorStephan Oppenheimer
    
    
    39
    
    
    DirectorSteven J. Demetriou
    
    
    48
    
    
    DirectorJames R. Ball
    
    
    64
    
    
    DirectorGeorge B. Gregory
    
    
    44
    
    
    Director, Chief Executive Officer and PresidentNicholas G. Dekker
    
    
    42
    
    
    Chief Financial Officer and Vice PresidentKevin M. Fogarty
    
    
    41
    
    
    Executive Vice President, Global Sales and MarketingRichard A. Ott
    
    
    52
    
    
    Vice President, Global Human Resources and CommunicationsDavid A. Bradley
    
    
    36
    
    
    Vice President, Global OperationsJoseph J. Waiter
    
    
    55
    
    
    Vice President, General Counsel and SecretaryEli Ben-Shoshan
    
    
    37
    
    
    Vice President, Business Development
 Kelvin Davis .
 Michael MacDougall.
 Nathan Wright .
 Timothy Walsh .
 46




---



##### Table of Contents



John Breckenridge .
 Stephan Oppenheimer .
 Steven J. Demetriou .
 James R. Ball.
 George B. Gregory . summa cum laude
 Nicholas G. Dekker.
 47




---



##### Table of Contents



Kevin M. Fogarty.
 Richard A. Ott .
 David A. Bradley.
 Joseph J. Waiter .
 Eli Ben-Shoshan.
 COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
   Audit Committee.
 48




---



##### Table of Contents



Compensation Committee.
  Executive Committee.
  
 ITEM 11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
  Compensation Philosophy and Objectives
  Role of the Compensation Committee
 http://www.kraton.com/content/released/Compensation_Committee.pdf
  49




---



##### Table of Contents



Components of Direct Compensation
 Base Salary
    Annual Bonus: Incentive Compensation Plan
    50




---



##### Table of Contents



Equity
 (a) Options
     51




---



##### Table of Contents



(b) Profits Units of Kraton Management LLC (Management LLC)
  (c) Restricted Units and Notional Units of Management LLC
  (d) Membership Units of Management LLC
  Fringe
Benefits / Perquisites
   Components of Post-Employment Compensation
 (a) Employment Agreements and Severance Benefits
  52




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##### Table of Contents



(b) U.S. 401K Plan
  (c) U.S. Defined Benefit Pension Plan
  (d) U.S. Savings Restoration Plan and Pension Restoration Plan
  (e) Other Pension Plans
  (f) Executive Deferred Compensation Plan
  (g) Retiree Medical Benefits
  Policies Regarding Equity Awards
  53




---



##### Table of Contents



Summary Compensation Table
 Change in PensionValue andNonqualifiedDeferredStock
    
    Option
    
    Non-Equity
    
    Compensation
    
    All OtherName and
    
    
    
    
    
    Salary
    
    Awards
    
    Awards
    
    Incentive Plan
    
    Earnings
    
    Compensation
    
    TotalPrincipal Position
    
    Year
    
    ($)
    
    ($)(3)(4)
    
    ($)(3)(5)
    
    Compensation (6)
    
    ($)(7)
    
    ($)(8)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)George B. Gregory
Chief Executive
Officer and President
    
    
    2006
    
    
    
    450,000
    
    
    
    275,000
    
    
    
    386,886
    
    
    
    400,000
    
    
    
    7,164
    
    
    
    51,997
    
    
    
    1,563,883Nicholas G. Dekker Chief
Financial Officer and Vice President
(1)
    
    
    2006
    
    
    
    188,310
    
    
    
    7,500
    
    
    
    83,256
    
    
    
    50,000
    
    
    
    0
    
    
    
    22,623
    
    
    
    351,689David A. Bradley
Vice President,
Global
Operations
    
    
    2006
    
    
    
    251,250
    
    
    
    60,000
    
    
    
    128,299
    
    
    
    150,000
    
    
    
    3,096
    
    
    
    31,700
    
    
    
    621,249Kevin M. Fogarty
Executive Vice
President, Global
Sales and Marketing
    
    
    2006
    
    
    
    315,000
    
    
    
    60,000
    
    
    
    160,913
    
    
    
    150,000
    
    
    
    895
    
    
    
    42,138
    
    
    
    728,051Richard A. Ott Vice
President, Global
Human Resources and
Communications
    
    
    2006
    
    
    
    220,000
    
    
    
    
    
    
    
    127,643
    
    
    
    90,000
    
    
    
    47,786
    
    
    
    38,278
    
    
    
    475,921Raymond K. Guba
Former Vice
President, Chief
Financial Officer
(2)
    
    
    2006
    
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    142
    
    
    
    123,515
    
    
    
    373,515
  
 (1)
    
    Mr. Dekker has served as Chief Financial Officer and Vice President since October 6, 2006.
Payments to Mr. Dekker in connection with his position at Kraton
Polymers France SAS were made in
Euros. For purposes of this table, we have assumed an exchange rate of 1.26 U.S. Dollars to
Euros, based on the average exchange rate over fiscal year 2006, as reported on
http://www.oanda.com.(2)
    
    Mr. Gubas employment was terminated on October 6, 2006. 54




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##### Table of Contents



(3)
    
    Amounts set forth in the Stock Awards and Option Awards columns represent the amounts
recognized as compensation expense for financial statement reporting purposes in fiscal year
2006 by the Company with respect to Restricted Unit Awards, Notional
Unit Awards (but not Profits Unit Awards as no compensation expense is required to be taken with
respect to such awards) and Option Awards, in accordance with the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R)
(disregarding the estimate of forfeitures related to service-based vesting conditions). A
discussion of the assumptions used in this valuation with respect to awards made in fiscal year
2006 may be found in Note (2) in the Companys consolidated financial statements and
accompanying footnotes. A discussion of the assumptions used in this valuation with respect to
awards made in fiscal years prior to fiscal year 2006 may be found in the corresponding sections
of the Companys financial statements and accompanying footnotes for the fiscal year in which
the award was made.(4)
    
    This column consists of awards of Restricted Unit Awards and Notional Unit Awards. However,
Profits Unit Awards are not included as no compensation expense is required to be taken with
respect to such awards.(5)
    
    This column consists of awards of options to purchase membership units of TJ Chemical issued
pursuant to the TJ Chemical 2004 Option Plan.(6)
    
    This column consists of bonuses paid pursuant to the Companys 2006 Incentive Compensation
Plan. Pursuant to the Executive Deferred Compensation Plan, the Named Executive Officers
elected to defer a portion of their 2006 annual bonus as follows: Gregory ($100,000); Dekker
($25,000); Bradley ($75,000); Fogarty ($75,000); and Ott ($22,500).(7)
    
    Amounts shown in this column are not included in the Total column in this table. All amounts
in this column reflect the aggregate change in the present value of the Named Executive
Officers accounts into the Pension Plan and the Deferred Compensation and Restoration Plan in
accordance with Item 402(c)(2)(viii)(A).(8)
    
    Amounts in this column consist of (a) Company contributions to the Savings Plan on behalf of
Messrs. Gregory, Bradley, Fogarty, Ott and Guba in the amount of $8,288, $12,069, $6,600,
$22,000, and $6,600, respectively; (b) Company contributions to the Deferred Compensation and
Restoration Plan on behalf of Messrs. Gregory, Bradley, Fogarty and Ott in the amount of
$43,709, $19,631, $15,538, and $16,278, respectively; (c) Company payment for relocation
expenses of Messrs. Fogarty and Guba in the amount of $20,000 and $59,620, respectively; (d)
for Mr. Guba, $57,295 in connection with his termination of employment (see Termination and
Change In Control Payments below); and (e) for Mr. Dekker, employer contributions to a
defined contribution plan maintained by Kraton Polymers France in the
amount of $18,329, and
$4,294 relating to spouse trips associated with Mr. Dekkers business functions or his
temporary assignment. 55




---



##### Table of Contents



Grants of Plan-Based Awards in Fiscal Year 2006
 All Other
    
    All OtherEstimated Future Payouts
    
    Estimated Future Payouts
    
    Stock
    
    Option
    
    
    
    
    
    GrantUnder Non-Equity
    
    Under Equity Incentive Plan
    
    Awards:
    
    Awards:
    
    Exercise
    
    Date FairIncentive Plan Awards (1)
    
    Awards (2)
    
    Number
    
    Number of
    
    or Base
    
    Value ofThres-
    
    
    
    
    
    Maxi-
    
    Thres-
    
    
    
    
    
    Maxi-
    
    of Shares
    
    Securities
    
    Price of
    
    Stock andGrant
    
    hold
    
    Target
    
    mum
    
    hold
    
    Target
    
    mum
    
    of Stock or Units
    
    Underlying
    
    Option
    
    OptionName
    
    Date
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    Options (#)
    
    Awards ($/Sh)
    
    Awards(a)
    
    (b)

    (c)

    (d)

    (e)

    (f)

    (g)

    (h)

    (i)(3)

    (j)(4)

    (k)

    (l)George B. Gregory
    
    
    
    
    
    
    164,700
    
    
    
    450,000
    
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nicholas G. Dekker (5)
    
    
    10/06/06
    
    
    
    26,353
    
    
    
    72,003
    
    
    
    144,006
    
    
    
    
    
    
    
    125,00010/06/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    148,50010/06/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375,000
    
    
    
    1.00David A. Bradley
    
    
    
    
    
    
    57,096
    
    
    
    156,000
    
    
    
    312,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kevin M. Fogarty
    
    
    
    
    
    
    69,174
    
    
    
    189,000
    
    
    
    378,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard A. Ott
    
    
    
    
    
    
    40,260
    
    
    
    110,000
    
    
    
    220,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Raymond K. Guba
    
    
    
    
    
    
    54,900
    
    
    
    150,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    These columns provide information on potential payouts under the 2006 Incentive Compensation
Plan. For information on amounts actually earned, see the Summary Compensation Table.(2)
    
    These columns provide information on potential payouts pursuant to Profits Unit Awards (See
Equity Arrangements  Other Equity Awards for more information).(3)
    
    This is an award of Notional Units which vests in five equal installments on each anniversary
of the date of grant (October 6, 2006), provided that Mr. Dekker remains employed through the
applicable vesting date (See Equity Arrangements  Other Equity Awards for more
information).(4)
    
    This is an option to purchase membership units of TJ Chemical, granted pursuant to the TJ
Chemical 2004 Option Plan. The Option vests in five equal installments commencing on October
6, 2007. (See Equity Arrangements  TJ Chemical Holdings LLC 2004 Option Plan for more
information).(5)
    
    Mr. Dekkers target bonus was determined by weight-averaging his initial salary and bonus
target factor in 2006 with his increased salary and target bonus factor effective as of
October 6, 2006.(6)
    
    Mr. Otts employment agreement refers to a target of up to 50% of his annual base salary
and does not mention a maximum bonus amount. However, the practice has been to apply a
maximum similar to that which applies to the other Named Executive Officers of two times the
executives target bonus. Employment Agreements
   56




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##### Table of Contents



Equity Arrangements
 TJ Chemical Holdings LLC 2004 Option Plan
  Other Equity Awards
 provided
  57




---



##### Table of Contents



.
 Outstanding Equity Awards at End of Fiscal Year 2006
 Option Awards
    
    Stock AwardsEquity IncentivePlanEquity
    
    Awards:Incentive
    
    Market orEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    PayoutIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Value ofNumber
    
    Number of
    
    Plan Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Number of
    
    Unearnedof
    
    Securities
    
    Number of
    
    
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    Unearned
    
    Shares,Securities
    
    Underlying
    
    Securities
    
    
    
    
    
    
    
    
    
    Shares or
    
    Shares or
    
    Shares, Units
    
    Units orUnderlying
    
    Unexercised
    
    Underlying
    
    
    
    
    
    
    
    
    
    Units of
    
    Units of
    
    or Other
    
    OtherUnexercised
    
    Options
    
    Unexercised
    
    Option
    
    
    
    
    
    Stock That
    
    Stock That
    
    Rights That
    
    Rights ThatOptions
    
    (#)
    
    Unearned
    
    Exercise
    
    Option
    
    Have Not
    
    Have Not
    
    Have Not
    
    Have Not(#)
    
    Unexercisable
    
    Options
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    Exercisable
    
    (1)
    
    (#)
    
    ($)
    
    Date
    
    (#)
    
    ($)(2)
    
    (#)
    
    ($)(2)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)George B. Gregory
    
    
    1,000,000
    
    
    
    1,500,000
    
    
    
    
    
    
    
    1.00
    
    
    
    7/1/2014100,000
    
    
    
    400,000
    
    
    
    
    
    
    
    1.00
    
    
    
    3/1/2015
    
    
    
    400,000
    (3)
    
    
    396,000
    (3)525,000
    (4)
    
    
    519,750
    (4)
    
    
    656,250
    (5)Nicholas G. Dekker
    
    
    15,000
    
    
    
    22,500
    
    
    
    
    
    
    
    1.00
    
    
    
    1/1/2014212,500
    
    
    
    
    
    
    
    1.00
    
    
    
    4/1/2016375,000
    
    
    
    
    
    
    
    1.00
    
    
    
    10/6/2016
    
    
    
    150,000
    (4)
    
    
    148,500
    (4)
    
    
    125,000
    (5)David A. Bradley
    
    
    250,000
    
    
    
    375,000
    
    
    
    
    
    
    
    1.00
    
    
    
    3/8/2014
    
    
    
    120,000
    (3)
    
    
    118,800
    (3)75,000
    
    
    
    300,000
    
    
    
    
    
    
    
    1.00
    
    
    
    2/1/2015
    
    
    
    80,000
    (3)
    
    
    79,200
    (3)
    
    
    125,000
    (5)Kevin M. Fogarty
    
    
    250,000
    
    
    
    1,000,000
    
    
    
    
    
    
    
    1.00
    
    
    
    6/15/2015
    
    
    
    240,000
    
    
    
    237,600
    
    
    
    300,000
    (5)Richard A. Ott.
    
    
    400,000
    
    
    
    600,000
    
    
    
    
    
    
    
    1.00
    
    
    
    1/1/2014
    
    
    
    
    
    
    
    
    
    
    
    350,000
    (5)Raymond K. Guba(6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    All options were granted pursuant to the TJ Chemical 2004 Option Plan and relate to the right
to purchase membership units in TJ Chemical. All options vest in 20% annual increments from
the date of grant. The date of grant for Options granted to Mr. Gregory is June 1, 2004 with
respect to 2,500,000 Options and March 1, 2005 with respect to 500,000 Options; for Mr.
Dekker is January 1, 2004 with respect to 37,500 Options, April 1, 2006 with respect to
212,500 Options and October 6, 2006 with respect to 375,000 Options; for Mr. Bradley is March
8, 2004 with respect to 625,000 Options and February 1, 2005 with respect to 375,000 Options;
for Mr. Fogarty is June 15, 2005 and for Mr. Ott is January 1, 2004.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. 58




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##### Table of Contents



(2)
    
    There is no established public market for membership units of TJ Chemical. The Company
engaged an independent valuation and financial consultant, Corporate Valuation Advisors, Inc.,
to perform a valuation of the total equity of TJ Chemical Holdings LLC in January 2006 and
again in January of 2007. In valuing the equity of TJ Chemical, the consultant relied upon
our historical financial statements. In valuing the total equity of TJ Chemical, the
consultant utilized the Market Approach. The Market Approach is a valuation technique in which
estimated market value is based on market prices in actual transactions. The market approach
compared the Company with similar companies that are publicly traded. The technique consists
of collecting
selling prices for comparable assets. After studying the selling prices, value adjustments are
made for comparability differences. This process is essentially one of comparison and
correlation. In applying the Market Approach, market and financial data on publicly traded
guideline companies was analyzed and relevant valuation multiples were formulated. The
consultant considered the outlook of the economy and the current market for publicly traded
guideline companies engaged in the same industry or an industry similar in which we compete.
The fair value of a membership unit was estimated at $0.99 as of December 31, 2006. A similar
valuation was calculated to value the membership units as of December 31, 2006 and yielded the
estimation of the value of a membership unit as of such date to be $0.89. Due to the fact that
TJ Chemicals assets consist solely of the assets of Management LLC and its subsidiaries, the
Company has concluded that it is reasonable to assume that membership units of Management LLC
have the same value as membership units of TJ Chemical on any given date.(3)
    
    These are awards of Restricted Units. (See Equity Arrangements  Other Equity Awards for
more information.)(4)
    
    These are awards of Notional Units. (See Equity Arrangements  Other Equity Awards for more
information.)(5)
    
    Profits Units vest 50 percent if the assets of TJ Chemical double and an additional 50
percent if such assets triple in value from the date of grant of the Profits Units (the
Threshold Amount), or 100 percent upon a change in control. Due to the complexity of the
calculations involved in determining how the assets above the Threshold Amount for each
Profits Unit would be allocated among all holders of Profits Units (especially as Threshold
Amounts may vary from award to award) and due to the fact that the value of TJ chemicals
assets has not increased significantly since the initial grant of Profits Units, the Company
believes that the Profits Units have no discernable market value as of December 31, 2006.(6)
    
    In connection with his termination of employment on October 6, 2006, Mr. Guba forfeited his
unvested option to purchase 1,000,000 membership units which had an exercise price of $1.00
per membership unit. Mr. Guba did not possess any vested options on the date of his
termination of employment. Mr. Guba also forfeited 300,000 Profits Units and 150,000 Notional
Units in connection with his termination of employment. 59




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##### Table of Contents



Option Exercises and Stock Vested in Fiscal Year 2006
 Option Awards
    
    Stock AwardsNumber of Shares
    
    
    
    
    
    Number of SharesAcquired on
    
    Value Realized on
    
    Acquired on
    
    Value Realized onExercise
    
    Exercise
    
    Vesting
    
    VestingName
    
    (#)
    
    ($)
    
    (#)
    
    ($)(3)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)George B. Gregory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nicholas G. Dekker
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    David A. Bradley
    
    
    
    
    
    
    
    
    
    
    20,000
    (1)
    
    
    17,80040,000
    (2)
    
    
    35,600Kevin M. Fogarty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard A. Ott
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Raymond K. Guba
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    This relates to an award of Restricted Units granted on March 8, 2004. The award vests
20% on each of the first five anniversaries of the grant date, assuming Mr. Bradley is still
employed as of each such date.(2)
    
    This relates to an award of Restricted Units granted on February 1, 2005. The award vests
20% on each of the first five anniversaries of the grant date, assuming Mr. Bradley is still
employed as of each such date.(3)
    
    Membership units were valued at $.89 per unit on each of the vesting dates for Mr. Bradley in
fiscal 2006. See footnote 2 to the Outstanding Equity Awards at End of Fiscal Year 2006 Table
for more information on the valuation of membership units. 60




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##### Table of Contents



Pension Benefits in Fiscal Year 2006
 Number of Years Credited
    
    Present Value of
    
    Payments during Last FiscalName
    
    Plan Name
    
    Service (#)
    
    Accumulated Benefit ($)
    
    Year ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)George B. Gregory
    
    Pension Plan
    
    
    1.51
    
    
    
    12,624.39
    
    
    
    0Pension Benefit Restoration Plan
    
    
    1.51
    
    
    
    15,905.23
    
    
    
    0Nicholas G. Dekker
    
    
    
    
    
    
    
    
    
    
    
    
    0David A. Bradley
    
    Pension Plan
    
    
    1.76
    
    
    
    9,101.60
    
    
    
    0Pension Benefit Restoration Plan
    
    
    1.76
    
    
    
    240.31
    
    
    
    0Kevin M. Fogarty
    
    Pension Plan
    
    
    .60
    
    
    
    4,315.82
    
    
    
    0Pension Benefit Restoration Plan
    
    
    .60
    
    
    
    1,887.42
    
    
    
    0Richard A. Ott
    
    Pension Plan
    
    
    31.26
    
    
    
    750,558.44
    
    
    
    0Pension Benefit Restoration Plan
    
    
    31.26
    
    
    
    156,271.19
    
    
    
    0Raymond K. Guba (1)
    
    Pension Plan
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/APension Benefit Restoration Plan
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    In connection with his termination of employment, Mr. Guba was never eligible to
participate in the Pension Plan. 61




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##### Table of Contents



Pension Plan
  Benefit Restoration Plan
   Nonqualified Deferred Compensation During Fiscal Year 2006
 Executive
    
    Registrant
    
    Aggregate
    
    AggregateContributions in
    
    Contributions in
    
    Earnings in Last
    
    Withdrawals andLast FY
    
    Last FY
    
    FY
    
    Distributions in
    
    Aggregate BalanceName
    
    
    
    ($)
    
    ($)
    
    ($)
    
    Last FY ($)
    
    at Last FYE(a)
    
    Plan
    
    (b)
    
    (c)(4)
    
    (d)(3)
    
    (f)
    
    (g)George B. Gregory
    
    Deferred
Compensation and
Restoration Plan
    
    
    23,625
    
    
    
    43,709
    
    
    
    7,501
    
    
    
    0
    
    
    
    74,835Nicholas G. Dekker(1)David A. Bradley
    
    Deferred
Compensation and
Restoration Plan
    
    
    13,388
    
    
    
    19,631
    
    
    
    3,390
    
    
    
    0
    
    
    
    36,409Kevin M. Fogarty
    
    Deferred
Compensation and
Restoration Plan
    
    
    16,406
    
    
    
    15,538
    
    
    
    1,008
    
    
    
    0
    
    
    
    32,952Richard A. Ott
    
    Deferred
Compensation and
Restoration Plan
    
    
    8,100
    
    
    
    16,278
    
    
    
    2,432
    
    
    
    0
    
    
    
    29,326Raymond K. Guba(2)
    
    Deferred
Compensation and
Restoration Plan
    
    
    1,373
    
    
    
    0
    
    
    
    142
    
    
    
    0
    
    
    
    1,515
 
 (1)
    
    Mr. Dekker did not participate in the Deferred Compensation and Restoration Plan in Fiscal
Year 2006.(2)
    
    The balance of Mr. Gubas account will be distributed to him, as soon as administratively
possible, in connection with his termination of employment.(3)
    
    Participants in the Deferred Compensation and Restoration Plan direct the investment of their
account balance in the plan in the same manner that they direct their account in the Companys
Savings Plan. In 2006, the Named Executive Officers invested in the following funds with the
following annual rates of return: Fidelity Diversified International (22.52%); Fidelity
Freedom Income Fund (6.37%); Baron Growth (15.5%); Fidelity Fund
(13.67%); Spartan U.S. Equity
Index (15.72%); Fidelity Freedom 2025 (11.84%); Fidelity International Real Estate (42.87%);
DWS Global Opps S (22.01%); Mutual Discovery A (23.02%); Fidelity Leveraged Co. Stock
(17.57%); Diversified International (22.52%); Fidelity Emerging Markets (33.39%).(4)
    
    Amounts in this column are included in the All Other Compensation column of the Summary
Compensation Table. 
 62




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##### Table of Contents



Executive Deferred Compensation Plan
   TERMINATION AND CHANGE IN CONTROL PAYMENTS
  George
B. Gregory
 Cash-Out Value ofEquity-Based Awards thatVest as a Result of a
    
    Value of BenefitTriggering Event
    
    Severance Payment
    
    Triggering Event
    
    ContinuationTermination of EmploymentPrior to a change in
control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $675,000
    
    $0
    
    $22,588Following a change
in control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $675,000
    
    $396,000 (Restricted Units)
$519,750 (Notional Units)
    
    $22,588$0 (1,900,000 Options)Disability
    
    $400,000(1)
    
    $0
    
    $0Death
    
    $400,000(1)
    
    $0
    
    $0Voluntary Termination
    
    $0
    
    $0
    
    $0Change in Control
    
    $0
    
    $0 (656,250 profits units)
    
    $0
 63




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##### Table of Contents



Nicholas
G. Dekker *
 Cash-Out Value ofEquity-Based Awards thatVest as a Result of a
    
    Value of BenefitTriggering Event
    
    Severance Payment
    
    Triggering Event
    
    ContinuationTermination of EmploymentPrior to a change in
control without
Cause; or for Good
Reason or following
the expiration of
the Term and
Kratons failure to
offer a Position
    
    $266,000
    
    $0
    
    $0Following a change
in control without
Cause; or for Good
Reason or following
the expiration of
the Term and
Kratons failure to
offer a Position
    
    $266,000
    
    $148,500 (Notional Units)
$0 (610,000 Options)
    
    $0Disability
    
    $50,000(1)
    
    $0
    
    $0Death
    
    $50,000(1)
    
    $0
    
    $0Voluntary Termination
    
    $0
    
    $0
    
    $0Change in Control
    
    $0
    
    $0 (125,000 profits units)
    
    $0
 
 *
    
    The information for Mr. Dekker is calculated assuming his employment agreement, described
below, was in effect as of December 31, 2006. David A. Bradley
 Cash-Out Value ofEquity-Based Awards thatVest as a Result of a
    
    Value of BenefitTriggering Event
    
    Severance Payment
    
    Triggering Event
    
    ContinuationTermination of EmploymentPrior to a change in
control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $130,000-260,000
    
    $0
    
    $15,059Following a change
in control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $130,000-260,000
    
    $198,000 (Restricted Units)
$0 (675,000 Options)
    
    $15,059Disability
    
    $150,000(1)
    
    $0
    
    $0Death
    
    $150,000(1)
    
    $0
    
    $0Voluntary Termination
    
    $0
    
    $0
    
    $0Change in Control
    
    $0
    
    $0 (125,000 profits units)
    
    $0
 Kevin M. Fogarty
 Cash-Out Value ofEquity-Based Awards thatVest as a Result of a
    
    Value of BenefitTriggering Event
    
    Severance Payment
    
    Triggering Event
    
    ContinuationTermination of EmploymentPrior to a change in
control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $157,500-315,000
    
    $0
    
    $15,059Following a change
in control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $157,500-315,000
    
    $237,600 (Notional Units)
$0 (1,000,000 Options)]
    
    $15,059Disability
    
    $150,000(1)
    
    $0
    
    $0Death
    
    $150,000(1)
    
    $0
    
    $0Voluntary Termination
    
    $0
    
    $0
    
    $0Change in Control
    
    $0
    
    $0 (300,000 profits units)
    
    $0
 64




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##### Table of Contents



Richard A. Ott
 Cash-Out Value ofEquity-Based Awards thatvest as a result of a
    
    Value of BenefitTriggering Event
    
    Severance Payment
    
    Triggering Event
    
    ContinuationTermination of EmploymentPrior to a change in
control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $110,000-220,000
    
    $0
    
    $16,886Following a change
in control without
Cause; or pursuant
to Kratons election
not to extend the
term, or
for Good Reason
    
    $110,000-220,000
    
    $0 (600,000 Options)
    
    $16,886Disability
    
    $90,000(1)
    
    $0
    
    $0Death
    
    $90,000(1)
    
    $0
    
    $0Voluntary Termination
    
    $0
    
    $0
    
    $0Change in Control
    
    $0
    
    $0 (350,000 profits units)
    
    $0
 
 (1)
    
    Disability and Death Severance Payments are pro-rated through the date of termination of
employment; the tables assume a December 31, 2006 termination, therefore, the Named Executive
Officer would be entitled to receive the entire bonus amount earned in fiscal year 2006 as if
his employment continued. Employment Agreements, Termination of Employment Arrangements
 provided
   65




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##### Table of Contents



Equity Arrangements
 Options
   Notional Units
 provided provided
 66




---



##### Table of Contents



Profits Units
 provided
 Restricted Units
  67




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##### Table of Contents



Director Compensation During Fiscal Year 2006
 Fees Earned or
    
    
    
    
    
    
    
    
    
    All OtherPaid in Cash
    
    Stock Awards
    
    Option Awards
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)(1)(2)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (g)
    
    (h)Richard BoyceKelvin DavisMichael MacDougallTimothy WalshJohn BreckenridgeNathan WrightStephan OppenheimerSteven J. Demetriou
    
    $
    25,000
    
    
    
    
    
    
    $
    9,926
    
    
    
    
    
    
    $
    34,926James R. Ball
    
    $
    40,000
    
    
    
    
    
    
    $
    9,926
    
    
    
    
    
    
    $
    49,926
 
 (1)
    
    Amounts set forth in the Option Awards column represent the amounts recognized as
compensation expense for financial statement reporting purposes in fiscal year 2006 by the
Company with respect to option awards in accordance with SFAS No. 123R (disregarding the
estimate of forfeitures related to service-based vesting conditions). A discussion of the
assumptions used in this valuation with respect to awards made in fiscal year 2006 may be
found in Note (2) in the Companys consolidated financial statements and accompanying
footnotes. A discussion of the assumptions used in this valuation with respect to awards made
in fiscal years prior to fiscal year 2006 may be found in the corresponding sections of the
Companys consolidated financial statements and accompanying footnotes for the fiscal year in
which the award was made.(2)
    
    As of December 31, 2006, Messrs. Demetriou and Ball each held an aggregate of 75,000 Options.
All Options vest 50% on the first and second anniversaries of the grant date. Directors do
not receive stock awards from the Company.  68




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##### Table of Contents



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
  COMPENSATION COMMITTEE REPORT 1
  Kraton Compensation CommitteeTimothy Walsh, ChairmanKelvin DavisNathan WrightJohn Breckenridge
 
 1
    
    The material in this report is not
solicitation material, is not deemed filed with the Commission,
and is not incorporated by reference in any filing of the Company under the
Securities Act of 1933 or the Exchange Act, whether made before or after the
date hereof and irrespective of any general incorporation language in any
filing. 69




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
   Percentage ofPercentage of
    
    Non-VotingCommon
    
    Voting Equity
    
    EquityName and Address of Beneficial Owner
    
    Units
    
    Interests
    
    InterestsTPG Advisors III, Inc.
301 Commerce Street, Suite 3300
Fort Worth, Texas 76102
    
    
    6
    
    
    
    30.0
    %(1)
    
    
    30.0
    %TPG Advisors IV, Inc.
301 Commerce Street, Suite 3300
Fort Worth, Texas 76102
    
    
    6
    
    
    
    30.0
    %(1)
    
    
    29.3
    %JPMP Capital Corp.
c/o J.P. Morgan Partners, LLC
270 Park Avenue, 39th Floor
New York, New York 10017
    
    
    8
    
    
    
    40.0
    %(2)
    
    
    39.5
    %(3)
 
 (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 22.6%, 5.4%, 0.8%, 2.3%, 0.3%, 0.4%, 0.9%, 0.9%, 6.0% 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., JPMP Global Fund/Kraton, L.P., J.P. Morgan
Partners 70




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##### Table of Contents



Global Investors (Selldown), L.P., JPMP Selldown Fund/Kraton, L.P., J.P. Morgan Partners Global
Investors (Selldown) II, L.P., and J.P. Morgan Partners Global
Investors (Selldown) II-B, L.P.,
respectively. Voting and disposition decisions at JPMP Capital Corp.
are made by three or more of its officers, and therefore no
individual officer of JPMP Capital Corp. is the beneficial owner of
the securities. The address for each of these entities is
270 Park Avenue, New York, New York 10020, except that the
address of each Cayman Global Fund Entity is c/o Walkers SPV Limited,
PO Box 908 GT, Walker House, George Town, Grand Cayman, Cayman
Islands.(3)
    
    Includes 22.3%, 5.3%, 0.8%, 2.3%, 0.3%, 0.4%, 0.9%, 0.9%, 5.9% 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., JPMP Global Fund/Kraton, L.P., J.P. Morgan
Partners Global Investors (Selldown), L.P., JPMP Selldown Fund/Kraton, L. P., J.P. Morgan
Partners Global Investors (Selldown) II-B, L.P., and J.P. Morgan Partners Global Investors
(Selldown) II-B, 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. Voting and disposition decisions at JPMP
Capital Corp. are made by three or more of its officers, and therefore no individual officer
of JPMP Capital Corp. is the beneficial owner of the securities. The address for each of
these entities is 270 Park Avenue, New York, New York 10020, except that the address of each
Cayman Global Fund Entity is c/o Walkers SPV Limited, PO Box 908 GT, Walker House, George
Town, Grand Cayman, Cayman Islands.  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
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    John Breckenridge
    
    
    
    %(2)
    
    
    
    %(2)Units
    
    Stephan Oppenheimer
    
    
    
    %(2)
    
    
    
    %(3)Units
    
    George B. Gregory
    
    
    
    %(3)
    
    
    
    %(3)Units
    
    Kevin M. Fogarty
    
    
    
    %(3)
    
    
    
    %(3)Units
    
    David A. Bradley
    
    
    
    %(3)
    
    
    
    %(3)Units
    
    Richard A. Ott
    
    
    
    %(3)
    
    
    
    %(3)Units
    
    Joseph J. Waiter
    
    
    
    %(3)
    
    
    
    %(3)Units
    
    All directors and executive officers as a group
    
    
    60
    %(1)(2)(3)
    
    
    59.3
    %(1)(2)(3)
 
 (1)
    
    Includes interests beneficially owned by TPG Advisors III,
Inc., and TPG Advisors IV, Inc. Davis is an officer, director and/or equity owner of TPG Advisors III, Inc.
and TPG Advisors IV, Inc.(2)
    
    Mr. Walsh and Mr. Breckenridge are Managing Directors, and Mr. Oppenheimer is a Principal, of
CCMP Capital Advisors, LLC (CCMP Capital), a private equity firm comprised of the former
buyout/growth equity professionals of J.P. Morgan Partners, LLC (JPMP) who separated from
JPMorgan Chase in August 2006 to form an independent private equity platform. Mr. Walsh, Mr.
Breckenridge and Mr. Oppenheimer are serving as directors at the request of JPMP and its
affiliates. Mr. Walsh, Mr. Breckenridge and Mr. Oppenheimer each disclaims any beneficial
ownership of any shares beneficially owned by JPMP Capital Corp. or its affiliates, except to
the extent of their respective pecuniary interest therein, if any.(3)
    
    Consists of non-voting equity interests of less than 1% in TJ Chemical Holdings LLC owned
indirectly by the indicated persons through ownership of interests in Kraton Management LLC. 
 71




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##### Table of Contents



ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
 Certain
Relationships and Related Transactions
 TJ
Chemical Limited Liability Company Operating Agreement.
  TJ
Chemicals Option.
 Registration
Rights Agreement. pro rata
  Management
Services Agreement.
 72




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##### Table of Contents



Related
Transactions.
 Director Independence
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2006

    
    2005(In Thousands)Audit fees
    
    $
    985
    
    
    $
    802Audit-related fees
    
    254
    
    
    
    427Tax fees
    
    243
    
    
    
    325Other fees
    
    
    
    
    
    
    Total fees
    
    $
    1,482
    
    
    $
    1,554
    73




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
   (i)
    
    Report of KPMG LLP, Independent Registered Public Accounting Firm(ii)
    
    Consolidated Balance Sheets as of December 31, 2006 and 2005(iii)
    
    Consolidated Statements of Operationsyears ended December 31, 2006, 2005 and
2004(iv)
    
    Consolidated Statements of Changes in Members Equity and Comprehensive Income
(Loss)years ended December 31, 2006, 2005 and 2004(v)
    
    Consolidated Statements of Cash Flowsyears ended December 31, 2006, 2005 and
2004(vi)
    
    Notes to consolidated financial statements
       74




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##### Table of Contents



Signatures
   Kraton Polymers LLCBy:
    /s/ George B. GregoryChief Executive Officer  Signature
    
    Title/s/ George B. Gregory
    
    Chief Executive Officer and a Director (Principal
Executive Officer)/s/ Nicholas G. Dekker
    
    Chief Financial Officer and Vice President and
(Principal Financial Officer)/s/ Kelvin Davis
    
    Chairman of the Board of Directors/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
 75




---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  
 PageAudited Consolidated Financial Statements for the Years Ended December 31, 2006, 2005 and 2004Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations for Years Ended December 31, 2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Changes in Members Equity and Comprehensive Income (Loss) for Years
Ended December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for Years Ended December 31, 2006, 2005 and 2004
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




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##### Table of Contents



Kraton Polymers LLC
 
 Consolidated Balance Sheets
December 31, 2006 and 2005
(In thousands of U.S. dollars)
 December 31,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    43,601
    
    
    $
    100,934Receivables, net of allowances of $2,157 and $1,013
    
    
    135,937
    
    
    
    107,586Inventories of products, net
    
    
    256,785
    
    
    
    192,595Inventories of materials and supplies, net
    
    
    10,903
    
    
    
    9,336Other current assets
    
    
    13,308
    
    
    
    23,511Deferred income taxes
    
    
    1,931
    
    
    
    1,953Total current assets
    
    
    462,465
    
    
    
    435,915Property, plant and equipment, less accumulated depreciation
    
    
    403,743
    
    
    
    394,192Identifiable intangible assets, less accumulated amortization
    
    
    86,631
    
    
    
    101,848Investment in unconsolidated joint venture
    
    
    9,376
    
    
    
    10,542Deferred financing costs
    
    
    13,038
    
    
    
    12,711Other long-term assets
    
    
    13,900
    
    
    
    9,605Total assets
    
    $
    989,153
    
    
    $
    964,813Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    30,570Accounts payable-trade
    
    
    68,940
    
    
    
    64,345Other payables and accruals
    
    
    53,130
    
    
    
    48,758Due to related parties
    
    
    9,351
    
    
    
    13,119Insurance note payable
    
    
    739
    
    
    
    Total current liabilities
    
    
    136,010
    
    
    
    156,792Long-term debt, net of current portion
    
    
    578,263
    
    
    
    432,093Deferred income taxes
    
    
    40,107
    
    
    
    34,010Long-term liabilities
    
    
    35,032
    
    
    
    29,713Total liabilities
    
    
    789,412
    
    
    
    652,608Commitments and contingencies (note 8)Members equity:Common equity
    
    
    184,111
    
    
    
    314,897Accumulated other comprehensive income (loss)
    
    
    15,630
    
    
    
    (2,692
    )Total members equity
    
    
    199,741
    
    
    
    312,205Total liabilities and members equity
    
    $
    989,153
    
    
    $
    964,813
  F-3




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##### Table of Contents



Kraton Polymers LLC
 
 Consolidated Statements of Operations
for the Years ended December 31, 2006, 2005 and 2004
(In thousands of U.S. dollars)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Sales
    
    $
    1,015,766
    
    
    $
    952,921
    
    
    $
    791,226Other
    
    
    32,355
    
    
    
    22,670
    
    
    
    16,160Total revenues
    
    
    1,048,121
    
    
    
    975,591
    
    
    
    807,386Costs and expenses:Cost of goods sold
    
    
    843,726
    
    
    
    766,012
    
    
    
    692,968Gross profit
    
    
    204,395
    
    
    
    209,579
    
    
    
    114,418Research and development expenses
    
    
    24,598
    
    
    
    26,152
    
    
    
    23,178Selling, general and administrative expenses
    
    
    73,776
    
    
    
    72,731
    
    
    
    64,903Depreciation and amortization of identifiable intangibles
    
    
    43,574
    
    
    
    44,090
    
    
    
    42,630Earnings in unconsolidated joint venture
    
    
    (168
    )
    
    
    (1,516
    )
    
    
    (462
    )Interest, net
    
    
    40,547
    
    
    
    33,943
    
    
    
    38,963Income (loss) before income taxes
    
    
    22,068
    
    
    
    34,179
    
    
    
    (54,794
    )Income tax (provision) benefit
    
    
    (25,626
    )
    
    
    (11,519
    )
    
    
    18,973Net (loss) income
    
    $
    (3,558
    )
    
    $
    22,660
    
    
    $
    (35,821
    )
  F-4




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##### Table of Contents



Kraton Polymers LLC
 
 Consolidated Statements of Changes in Members Equity and Comprehensive Income (Loss)
for the Years ended December 31, 2006, 2005 and 2004
(In thousands of U.S. dollars)
 AccumulatedOtherCommon
    
    
    ComprehensiveEquity
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2003
    
    $
    237,461
    
    
    $
    1,364
    
    
    $
    238,825Capital contributions from parent
    
    
    90,063
    
    
    
    
    
    
    
    90,063Comprehensive income (loss):Net loss-2004
    
    
    (35,821
    )
    
    
    
    
    
    
    (35,821
    )Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    19,596
    
    
    
    19,596Unrealized
gain on interest rate swaps, net of tax
    
    
    
    
    
    
    1,030
    
    
    
    1,030Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (15,195
    )Balance, December 31, 2004
    
    
    291,703
    
    
    
    21,990
    
    
    
    313,693Comprehensive income (loss):Net income-2005
    
    
    22,660
    
    
    
    
    
    
    
    22,660Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    (26,539
    )
    
    
    (26,539
    )Unrealized
gain on interest rate swaps, net of tax
    
    
    
    
    
    
    1,857
    
    
    
    1,857Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (2,022
    )Non-cash compensation related to equity awards
    
    
    534
    
    
    
    
    
    
    
    534Balance, December 31, 2005
    
    
    314,897
    
    
    
    (2,692
    )
    
    
    312,205Comprehensive income (loss):Net loss - 2006
    
    
    (3,558
    )
    
    
    
    
    
    
    (3,558
    )Other comprehensive income (loss):Foreign currency adjustments
    
    
    
    
    
    
    20,468
    
    
    
    20,468Unrealized
(loss) on interest rate swaps, net of tax
    
    
    
    
    
    
    (951
    )
    
    
    (951
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    15,959Cash distribution to parent
    
    
    (129,533
    )
    
    
    
    
    
    
    (129,533
    )Adoption of SFAS 158 net of deferred tax benefit of $730
    
    
    
    
    
    
    (1,195
    )
    
    
    (1,195
    )Non-cash compensation related to equity awards
    
    
    2,305
    
    
    
    
    
    
    
    2,305Balance, December 31, 2006
    
    $
    184,111
    
    
    $
    15,630
    
    
    $
    199,741
  F-5




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##### Table of Contents



Kraton Polymers LLC
 
 Consolidated Statements of Cash Flows
for the Years ended December 31, 2006, 2005 and 2004
(In thousands of U.S. dollars)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows provided by (used in) operating activities:Net (loss) income
    
    $
    (3,558
    )
    
    $
    22,660
    
    
    $
    (35,821
    )Adjustments to reconcile income (loss) to net cash (used in) provided by
operating activities:Depreciation and amortization of identifiable intangibles
    
    
    43,574
    
    
    
    44,090
    
    
    
    42,630Amortization of deferred financing costs
    
    
    2,351
    
    
    
    2,262
    
    
    
    5,538Loss on disposal of fixed assets
    
    
    262
    
    
    
    709
    
    
    
    314Change in fair value of interest rate swaps
    
    
    (20
    )
    
    
    (149
    )
    
    
    1,739Net distributed (undistributed) earnings in unconsolidated
joint venture
    
    
    1,097
    
    
    
    (1,055
    )
    
    
    99Deferred tax provision (benefit)
    
    
    9,073
    
    
    
    4,100
    
    
    
    (22,535
    )Non-cash compensation related to equity awards
    
    
    2,305
    
    
    
    534
    
    
    
    Decrease (increase) in working capital:Accounts receivable
    
    
    (13,575
    )
    
    
    1,205
    
    
    
    (16,905
    )Due (to) from related party
    
    
    (6,508
    )
    
    
    (1,567
    )
    
    
    (695
    )Inventories
    
    
    (53,126
    )
    
    
    517
    
    
    
    51,273Other assets
    
    
    5,713
    
    
    
    (11,886
    )
    
    
    (4,820
    )Accounts payable, other payables and accruals, and
long-term liabilities
    
    
    11,135
    
    
    
    7,922
    
    
    
    52,345Net cash (used in) provided by operating activities
    
    
    (1,277
    )
    
    
    69,342
    
    
    
    73,162Cash flows used in investing activities:Purchase of property, plant and equipment
    
    
    (38,032
    )
    
    
    (18,816
    )
    
    
    (34,733
    )Proceeds from sale of property, plant and equipment
    
    
    151
    
    
    
    122
    
    
    
    89Net cash used in investing activities
    
    
    (37,881
    )
    
    
    (18,694
    )
    
    
    (34,644
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    
    
    
    
    Repayment of debt
    
    
    (3,558
    )
    
    
    (2,680
    )
    
    
    (94,657
    )Capital contribution from parent
    
    
    
    
    
    
    
    
    
    
    90,063Net proceeds
from insurance note payable
    
    
    739
    
    
    
    
    
    
    
    Cash dividend to parent
    
    
    (129,533
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    (2,678
    )
    
    
    
    
    
    
    (549
    )Net cash used in financing activities
    
    
    (12,022
    )
    
    
    (2,680
    )
    
    
    (5,143
    )Effect of exchange rate differences on cash
    
    
    (6,153
    )
    
    
    6,609
    
    
    
    (4,518
    )Net (decrease) increase in cash and cash equivalents
    
    
    (57,333
    )
    
    
    54,577
    
    
    
    28,857Cash and cash equivalents, beginning of period
    
    
    100,934
    
    
    
    46,357
    
    
    
    17,500Cash and cash equivalents, end of period
    
    $
    43,601
    
    
    $
    100,934
    
    
    $
    46,357Supplemental disclosure cash flow information:Cash paid during the period for income taxes
    
    $
    7,623
    
    
    $
    4,457
    
    
    $
    6,645Cash paid during the period for interest
    
    
    39,844
    
    
    
    33,006
    
    
    
    25,107
  F-6




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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
   (b) Principles of Consolidation
  (c) Cash Equivalents
  (d) Receivables
  (e) Inventories
  F-7




---



##### Table of Contents



(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 Unconsolidated Joint Venture
   (i) Impairment of Long-Lived Assets
 Accounting for the Impairment or
Disposal of Long-Lived Assets
  (j) Deferred Financing Costs
  F-8




---



##### Table of Contents



(k) Income Taxes
    (l) Revenue Recognition
   (m) Research and Development Expenses
  (n) Leases
  (o) Foreign Currency Translation and Foreign Exchange
   (p) Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging
Activities
 F-9




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##### Table of Contents



(q) Environmental Costs
  (r) Disclosures about Fair Value of Financial Instruments
  (s) Financial Statement Estimates
  (t) Asset Retirement Obligations
 Accounting for Asset Retirement Obligations Accounting for Conditional Asset
Retirement Obligations Interpretation
of FASB Statement No. 143
  F-10




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##### Table of Contents



(u) Share-Based Compensation
 Share Based Payment
 (v) Recently Issued Accounting Standards
 Accounting
for Uncertainty in Income Taxes Accounting for Income Taxes
 Fair
Value Measurements
 Employers Accounting for Defined Benefit and
Other Postretirement Plans
  (2) Share-Based Compensation
 Share-Based Payment,
   F-11




---



##### Table of Contents



Year EndedDecember 31,
    
    Amount2007
    
    $
    2.52008
    
    
    2.42009
    
    
    1.52010
    
    
    0.62011
    
    
    0.1
  Year Ended
    
    Year Ended
    
    Year Ended2006
    
    2005
    
    2004Risk-free interest
rate
    
    4.41%
    
    3.95%
    
    3.7%Expected dividend
yield
    
    0.0%
    
    0.0%
    
    0.0%Expected
volatility
    
    0.90
    
    0.98
    
    1.02Expected term (in
years)
    
    5.0
    
    5.0
    
    5.0
   2005
    
    
    2004Reported net income
(loss)
    
    $
    22,660
    
    
    $
    (35,821
    )Add: Stock based employee
compensation expense (1)
    
    
    
    
    
    
    Less: Total fair value computed share-based
compensation, net of
tax
    
    
    (1,010
    )
    
    
    (685
    )Pro forma net income (loss)
    
    $
    21,650
    
    
    $
    (36,506
    )
 
 (1)
    
    Amount does not include share-based compensation of $534 and $0 for the year ended
December 31, 2005 and 2004, respectively, related to the
Companys restricted membership units, as
these amounts are included in reported net income (loss).
 F-12




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##### Table of Contents



Weighted
    
    
    WeightedNumber
    
    
    Average
    
    
    Average
    
    
    Aggregateof
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    Value (1)Outstanding-beginning of year
    
    
    14,835
    
    
    $
    1.00
    
    
    
    
    
    
    
    Granted
    
    
    2,343
    
    
    
    1.00
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    1.00
    
    
    
    
    
    
    
    Cancelled
    
    
    1,810
    
    
    
    1.00
    
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    15,368
    
    
    $
    1.00
    
    
    
    8.0
    
    
    
    Exercisable at December 31, 2006
    
    
    3,625
    
    
    $
    1.00
    
    
    
    7.5
    
    
    
    
 
 (1)
    
    The intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option. As the fair value of our stock was
estimated to be $0.99 at December 31, 2006 and all outstanding
options have an exercise
price of $1.00, there is no intrinsic value for the options.
   Weighted
    
    
    WeightedRange of
    
    
    Number of
    
    
    Average
    
    
    AverageExercise Prices
    
    
    Options
    
    
    Exercise Price
    
    
    Remaining LifeOutstanding options
    
    $
    1.00
    
    
    
    15,368
    
    
    $
    1.00
    
    
    
    8.0Exercisable options
    
    $
    1.00
    
    
    
    3,625
    
    
    $
    1.00
    
    
    
    7.5
  Number of SharesRestricted
and Notional Units
    
    (in thousands)
    
    Fair Value per ShareNon-vested shares at January 1, 2006
    
    
    2,160
    
    
    $
    1.00Granted
    
    
    150
    
    
    $
    1.00Vested
    
    
    (415
    )
    
    $
    1.00Forfeited
    
    
    (200
    )
    
    $
    1.00Non-vested shares at December 31, 2006
    
    
    1,695
    
    
    $
    1.00
 (3) Restructuring Activities
  F-13




---



##### Table of Contents



Cost of goods sold
    
    $
    6,679Research and development
    
    $
    1,341Selling, general and administrative
    
    $
    1,661
  Severance
    
    
    Exit ActivityCosts (1)
    
    
    Costs
    
    
    TotalRestructuring
charges incurred
during
2006
    
    $
    6,220
    
    
    $
    1,189
    
    
    $
    7,409Cash
payments
    
    
    (4,178
    )
    
    
    (254
    )
    
    
    (4,432
    )Reserve balance at
December 31,
2006
    
    $
    2,042
    
    
    $
    935
    
    
    $
    2,977
 
 (1)
    
    Excludes additional pension and other postretirement
benefits expense of approximately $2.3 million.
 F-14




---



##### Table of Contents



(4) Detail of Certain Balance Sheet Accounts
 December 31, 2006
    
    
    December 31, 2005Inventories:Finished products
    
    $
    215,623
    
    
    $
    167,454Work in progress
    
    
    4,098
    
    
    
    2,615Raw materials
    
    
    37,064
    
    
    
    22,526$
    256,785
    
    
    $
    192,595Property, plant and equipment:Land
    
    $
    12,144
    
    
    $
    12,115Buildings
    
    
    32,910
    
    
    
    27,516Plant and equipment
    
    
    451,794
    
    
    
    403,574Construction in progress
    
    
    12,114
    
    
    
    14,957508,962
    
    
    
    458,162Less accumulated depreciation
    
    
    105,219
    
    
    
    63,970$
    403,743
    
    
    $
    394,192Identifiable intangible assets:Technology
    
    $
    48,517
    
    
    $
    52,576Customer relations
    
    
    36,229
    
    
    
    39,260Trademarks
    
    
    23,863
    
    
    
    25,860108,609
    
    
    
    117,696Less accumulated amortization
    
    
    21,978
    
    
    
    15,848$
    86,631
    
    
    $
    101,848Other payables and accruals:Employee related
    
    $
    14,979
    
    
    $
    16,217Interest
    
    
    7,604
    
    
    
    8,069Property and other taxes
    
    
    4,102
    
    
    
    5,095Customer rebates
    
    
    3,089
    
    
    
    4,382Income taxes payable
    
    
    8,504
    
    
    
    752Other
    
    
    14,852
    
    
    
    14,243$
    53,130
    
    
    $
    48,758
   (5) Long-Term Debt
  December 31,
    
    
    December 31,2006
    
    
    2005Senior Secured Credit Facilities:Term loans
    
    $
    382,113
    
    
    $
    262,663Revolver
    
    
    
    
    
    
    8.125% Notes
    
    
    200,000
    
    
    
    200,000Total debt
    
    
    582,113
    
    
    
    462,663Less current portion of long-term debt
    
    
    3,850
    
    
    
    30,570Total long-term debt
    
    $
    578,263
    
    
    $
    432,093
 (a) Senior Secured Credit Facilities
   F-15




---



##### Table of Contents



Maturity
  Interest
  Mandatory Prepayments
  Covenants
   F-16




---



##### Table of Contents



(b) Senior Subordinated Notes Due January 15, 2014
  Interest
  Optional Redemption
   Covenants
    F-17




---



##### Table of Contents



(c) Debt Maturities
  PrincipalPaymentsYear ending December 31:2007
    
    $
    3,8502008
    
    
    3,8502009
    
    
    3,8502010
    
    
    3,8502011
    
    
    3,850Thereafter
    
    
    562,863Total debt
    
    $
    582,113
 (6) Income Taxes
   Year Ended December 31,2006
    
    
    2005
    
    
    2004Current tax provision:U.S.
    
    $
    
    
    
    $
    
    
    
    $
    (158
    )Foreign
    
    
    (16,553
    )
    
    
    (7,419
    )
    
    
    (3,404
    )Total
    
    
    (16,553
    )
    
    
    (7,419
    )
    
    
    (3,562
    )Deferred tax provision:U.S.
    
    
    (5,699
    )
    
    
    4,300
    
    
    
    17,936Foreign
    
    
    (3,374
    )
    
    
    (8,400
    )
    
    
    4,599Total
    
    
    (9,073
    )
    
    
    (4,100
    )
    
    
    22,535Income tax (provision) benefit
    
    $
    (25,626
    )
    
    $
    (11,519
    )
    
    $
    18,973
   Year Ended December 31,2006
    
    
    2005
    
    
    2004Income
(loss) before income taxes:U.S.
    
    $
    (23,701
    )
    
    $
    (8,934
    )
    
    $
    (51,411
    )Foreign
    
    
    45,769
    
    
    
    43,113
    
    
    
    (3,383
    )Total
    
    $
    22,068
    
    
    $
    34,179
    
    
    $
    (54,794
    )
 F-18




---



##### Table of Contents



December 31,2006
    
    
    2005Deferred tax liabilities:Property, plant and equipment
    
    $
    (97,106
    )
    
    $
    (98,564
    )Identifiable intangibles
    
    
    (13,825
    )
    
    
    (11,614
    )Inventory
    
    
    (173
    )
    
    
    (151
    )Interest rate swaps
    
    
    (1,116
    )
    
    
    (1,555
    )Other
    
    
    (6,222
    )
    
    
    (483
    )Total deferred tax liabilities
    
    
    (118,442
    )
    
    
    (112,367
    )Deferred tax assets:Net operating loss carryforward
    
    
    93,503
    
    
    
    87,511Inventory
    
    
    1,439
    
    
    
    884Pension accrual
    
    
    6,034
    
    
    
    1,036Other
    
    
    3,779
    
    
    
    2,218Total deferred tax assets
    
    
    104,755
    
    
    
    91,649Valuation allowance for deferred tax assets
    
    
    (24,489
    )
    
    
    (11,339
    )Net deferred tax liabilities
    
    $
    (38,176
    )
    
    $
    (32,057
    )
  December 312006
    
    
    2005Current deferred tax assets
    
    $
    8,326
    
    
    $
    2,407Non-current deferred tax assets
    
    
    71,940
    
    
    
    89,241Current deferred tax liabilities
    
    
    (6,395
    )
    
    
    (454
    )Non-current deferred tax liabilities
    
    
    (112,047
    )
    
    
    (123,251
    )Net deferred tax liabilities
    
    $
    (38,176
    )
    
    $
    (32,057
    )
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Income taxes at the statutory rate
    
    $
    (7,723
    )
    
    $
    (11,963
    )
    
    $
    19,177Foreign tax rate differential
    
    
    369
    
    
    
    (729
    )
    
    
    550State tax rate differential
    
    
    650
    
    
    
    1,167
    
    
    
    1,254Change in valuation allowance and reserves
    
    
    (18,831
    )
    
    
    (580
    )
    
    
    (3,637
    )ETI exclusion benefit
    
    
    377
    
    
    
    374
    
    
    
    563Other
    
    
    (468
    )
    
    
    212
    
    
    
    1,066Income tax (provision) benefit
    
    $
    (25,626
    )
    
    $
    (11,519
    )
    
    $
    18,973
    Accounting for Contingencies
 F-19




---



##### Table of Contents



(7) Employee Benefits
  (a) U.S. Retirement Benefit Plans
  Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 Employers Accounting for Pensions
  F-20




---



##### Table of Contents



December 31,2006
    
    
    2005Change in benefit obligation:Benefit obligation at beginning of period
    
    $
    59,500
    
    
    $
    53,051Service cost
    
    
    2,737
    
    
    
    3,545Interest cost
    
    
    3,494
    
    
    
    3,114Benefits paid
    
    
    (782
    )
    
    
    (301
    )Actuarial (gain) loss
    
    
    (1,336
    )
    
    
    2,136Plan amendments
    
    
    49
    
    
    
    (2,045
    )Benefit obligation at end of period
    
    $
    63,662
    
    
    $
    59,500Change in plan assets:Fair value at beginning of period
    
    $
    36,458
    
    
    $
    33,522Actual return on plan assets
    
    
    4,144
    
    
    
    2,869Employer contributions
    
    
    2,927
    
    
    
    368Benefits paid
    
    
    (782
    )
    
    
    (301
    )Fair value at end of period
    
    $
    42,747
    
    
    $
    36,458
 December 31,2006
    
    
    2005Development of net amount recognized:Funded status
    
    $
    (20,915
    )
    
    $
    (23,042
    )Unrecognized net prior service cost
    
    
    
    
    
    
    Unrecognized actuarial loss
    
    
    
    
    
    
    4,128Net amount recognized
    
    $
    (20,915
    )
    
    $
    (18,914
    )Amounts recognized in the statement of financial position:Accrued pension cost
    
    $
    (20,915
    )
    
    $
    (18,914
    )
  F-21




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004Service cost benefits earned during the period
    
    $
    2,737
    
    
    $
    3,545
    
    
    $
    3,324Interest on prior years projected benefit obligation
    
    
    3,494
    
    
    
    3,114
    
    
    
    2,777Expected return on plan assets
    
    
    (3,338
    )
    
    
    (2,943
    )
    
    
    (2,731
    )Amortization of prior year service cost
    
    
    
    
    
    
    
    
    
    
    Recognized curtailment loss
    
    
    576
    
    
    
    
    
    
    
    Recognized loss due to special term benefits
    
    
    48
    
    
    
    
    
    
    
    Net pension costs
    
    $
    3,517
    
    
    $
    3,716
    
    
    $
    3,370
  December 31,2006
    
    2005Weighted average assumptions used to determine benefit obligations at December 31:Measure date
    
    
    12/31/2006
    
    
    
    12/31/2005Discount rate
    
    
    6.00
    %
    
    
    5.75
    %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
    
    
    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
    %
  Plan Assets
  Percentage of Plan Assets at December 31Asset Category
    
    2006
    
    2005Equity Securities
    
    
    66.6
    %
    
    
    67.6
    %Debt Securities
    
    
    33.1
    %
    
    
    31.9
    %Other
    
    
    0.3
    %
    
    
    0.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Contributions
  F-22




---



##### Table of Contents



Estimated Future Benefit Payments
  2007
    
    $
    1,4112008
    
    
    1,4982009
    
    
    1,6152010
    
    
    1,7752011
    
    
    1,987Years 2012-2016
    
    
    14,869$
    23,155
 (b) Other Retirement Benefit Plans
     (c) Postretirement Benefits Other Than Pensions
    Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 Employers Accounting for Pensions
  F-23




---



##### Table of Contents



December 31,2006
    
    
    2005Change in benefit obligation:Benefit obligation at beginning of period
    
    $
    8,967
    
    
    $
    9,909Service cost
    
    
    379
    
    
    
    367Interest cost
    
    
    644
    
    
    
    475Benefits paid
    
    
    (251
    )
    
    
    (81
    )Actuarial gain (loss)
    
    
    3,095
    
    
    
    (1,703
    )Plan amendments
    
    
    
    
    
    
    Benefit obligation at end of period
    
    $
    12,834
    
    
    $
    8,967Reconciliation of plan assets (1):Employer contributions
    
    $
    251
    
    
    $
    81Benefits paid
    
    
    (251
    )
    
    
    (81
    )$
    
    
    
    $
    
 
 (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, 2006 and 2005, we have recorded an
asset of approximately $5.5 million as our estimate of the present value of this commitment,
respectively. December 31,2006
    
    
    2005Development of net amount recognized:Funded status
    
    $
    (12,834
    )
    
    $
    (8,967
    )Unrecognized cost:Actuarial gain
    
    
    
    
    
    
    (620
    )Amount recognized in the statement of financial position
    
    $
    (12,834
    )
    
    $
    (9,587
    )
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Service cost
    
    $
    379
    
    
    $
    367
    
    
    $
    426Interest cost
    
    
    644
    
    
    
    475
    
    
    
    535Recognized net actuarial gain
    
    
    
    
    
    
    (4
    )
    
    
    Restructuring costs
    
    
    1,949
    
    
    
    
    
    
    
    Net plan costs
    
    $
    2,972
    
    
    $
    838
    
    
    $
    961
 December 312006
    
    2005Weighted average assumptions used to determine benefit obligations:Measurement date
    
    
    12/31/2006
    
    
    
    12/31/2005Discount rate
    
    
    6.0
    %
    
    
    5.75
    %Rates of increase in salary compensation level
    
    
    N/A
    
    
    
    N/AWeighted average assumptions used to net periodic benefit cost:Discount rate
    
    
    5.75
    %
    
    
    6.00
    %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
    
    
    8.40
    %
    
    
    9.40
    %Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
    
    
    5.00
    %
    
    
    5.00
    %Year that the rate reaches the ultimate trend rate
    
    
    2012
    
    
    
    2012
   1% Increase
    
    1% DecreaseEffect on total of service and interest cost components
    
    $
    52
    
    
    $
    (30
    )Effect on postretirement benefit obligation
    
    
    618
    
    
    
    (325
    )
 F-24




---



##### Table of Contents



December 31, 2006Before
    
    
    
    
    
    
    AfterApplication of
    
    
    
    
    
    
    Application ofSFAS No. 158
    
    
    Adjustments
    
    
    SFAS No. 158(Millions of dollars)Noncurrent deferred income tax assets
    
    $
    5.3
    
    
    $
    0.7
    
    
    $
    6.0Employee compensation and benefits
    
    
    32.3
    
    
    
    1.9
    
    
    
    34.2Accumulated other comprehensive income
    
    
    
    
    
    
    (1.9
    )
    
    
    (1.9
    )
  OtherPension
    
    
    PostretirementBenefits
    
    
    Benefits(Millions of dollars)Net actuarial loss
    
    $
    (1.4
    )
    
    $
    (0.5
    )Prior service benefit
    
    
    
    
    
    
    Total recognized in accumulated other comprehensive income
    
    $
    (1.4
    )
    
    $
    (0.5
    )
 (d) Kraton Savings Plan
   (e) Membership Units
  (f) TJ Chemical Holdings LLC 2004 Option Plan
  F-25




---



##### Table of Contents



(g) Other Equity Awards
  (h) Kraton Polymers LLC Executive Deferred Compensation Plan
  F-26




---



##### Table of Contents



(i) 2007 Incentive Compensation Plan
  (j) Severance Cost
   (8) Commitments and Contingencies
 (a) Lease Commitments
  (b) Environmental and Safety Matters
   F-27




---



##### Table of Contents



(c) Legal Proceedings
  (d) Pernis, The Netherlands Manufacturing Facility Fire
   (9) Financial Instruments
 (a) Interest Rate Swap Agreements
  F-28




---



##### Table of Contents



(b) Fair Value of Financial Instruments
  2006CarryingValue
    
    Fair ValueTerm loans
    
    $
    382,113
    
    
    $
    382,1138.125% Notes
    
    
    200,000
    
    
    
    200,000
 2005CarryingValue
    
    Fair ValueTerm loans
    
    $
    262,663
    
    
    $
    262,6638.125% Notes
    
    
    200,000
    
    
    
    192,000
  (10) Significant Contracts
  (a) Leases with Shell Chemicals
    (b) Operating Agreements with Shell Chemicals
    F-29




---



##### Table of Contents



(c) Site Services, Utilities, Materials and Original Facilities Agreements with Shell
Chemicals
   (d) Raw Materials Agreements
   Styrene
   F-30




---



##### Table of Contents



Isoprene
    Butadiene
   (e) Infineum
  (11) Related Party Transactions
 (a) Related-Party Amounts
  Year Ended December 31,2006
    
    2005
    
    2004Sales to related parties
    
    $
    1,117
    
    
    $
    2,327
    
    
    $
    3,753Purchases from related parties
    
    
    33,394
    
    
    
    37,008
    
    
    
    39,511
  F-31




---



##### Table of Contents



(b) Revenues
  (c) Cost of Goods Sold
  (d) Other
   (12) Members Equity
  (13) Industry Segment and Foreign Operations
 Disclosures About Segments of an Enterprise and Related
Information
 F-32




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004Net Revenues:United States
    
    $
    366,783
    
    
    $
    399,554
    
    
    $
    319,159Germany
    
    
    123,054
    
    
    
    98,666
    
    
    
    90,654Japan
    
    
    58,631
    
    
    
    57,848
    
    
    
    60,020Italy
    
    
    56,938
    
    
    
    50,638
    
    
    
    38,819The Netherlands
    
    
    55,013
    
    
    
    42,586
    
    
    
    32,410United Kingdom
    
    
    39,823
    
    
    
    30,182
    
    
    
    24,200China
    
    
    32,821
    
    
    
    19,691
    
    
    
    14,606Brazil
    
    
    31,920
    
    
    
    27,001
    
    
    
    22,332Belgium
    
    
    29,520
    
    
    
    6,039
    
    
    
    7,191France
    
    
    26,094
    
    
    
    39,333
    
    
    
    42,227Canada
    
    
    25,279
    
    
    
    25,605
    
    
    
    21,584Poland
    
    
    18,069
    
    
    
    15,553
    
    
    
    10,812Thailand
    
    
    15,192
    
    
    
    11,756
    
    
    
    8,838All other countries
    
    
    168,984
    
    
    
    151,139
    
    
    
    114,534$
    1,048,121
    
    
    $
    975,591
    
    
    $
    807,386
 December 31,2006
    
    
    2005
    
    
    2004Long-lived Assets:United States
    
    $
    283,171
    
    
    $
    270,639
    
    
    $
    261,820Germany
    
    
    32,506
    
    
    
    26,011
    
    
    
    30,073Japan
    
    
    3,225
    
    
    
    3,342
    
    
    
    5,143Italy
    
    
    25
    
    
    
    22
    
    
    
    23France
    
    
    100,476
    
    
    
    91,593
    
    
    
    101,137The Netherlands
    
    
    29,436
    
    
    
    23,732
    
    
    
    24,042Canada
    
    
    
    
    
    
    
    
    
    
    Brazil
    
    
    48,485
    
    
    
    30,008
    
    
    
    26,688United Kingdom
    
    
    133
    
    
    
    968
    
    
    
    969China
    
    
    54
    
    
    
    4
    
    
    
    All other countries
    
    
    11,451
    
    
    
    11,843
    
    
    
    12,524$
    508,962
    
    
    $
    458,162
    
    
    $
    462,419
  F-33




---



##### Table of Contents



(14) Supplemental Guarantor Information
  Balance Sheet
 As of December 31, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    13,850
    
    
    $
    29,751
    
    
    $
    
    
    
    $
    43,601Receivables, net
    
    
    3,509
    
    
    
    47,194
    
    
    
    97,259
    
    
    
    (12,025
    )
    
    
    135,937Inventories of products
    
    
    
    
    
    
    141,164
    
    
    
    119,514
    
    
    
    (3,893
    )
    
    
    256,785Inventories of materials and supplies
    
    
    
    
    
    
    6,615
    
    
    
    4,288
    
    
    
    
    
    
    
    10,903Other current assets
    
    
    3,659
    
    
    
    1,022
    
    
    
    8,627
    
    
    
    
    
    
    
    13,308Deferred income taxes
    
    
    
    
    
    
    8,665
    
    
    
    (6,734)
    
    
    
    
    
    
    
    1,931Total current assets
    
    
    7,168
    
    
    
    218,510
    
    
    
    252,705
    
    
    
    (15,918
    )
    
    
    462,465Property, plant and equipment, less accumulated depreciation
    117,519
    
    
    
    169,727
    
    
    
    116,497
    
    
    
    
    
    
    
    403,743Identifiable intangible assets
    
    
    37,820
    
    
    
    
    
    
    
    48,811
    
    
    
    
    
    
    
    86,631Investment in unconsolidated joint venture
    
    
    813
    
    
    
    
    
    
    
    8,563
    
    
    
    
    
    
    
    9,376Deferred financing costs
    
    
    13,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,038Other long-term assets
    
    
    97,657
    
    
    
    338,894
    
    
    
    7,314
    
    
    
    (429,965
    )
    
    
    13,900Total assets
    
    $
    274,015
    
    
    $
    727,131
    
    
    $
    433,890
    
    
    $
    (445,883
    )
    
    $
    989,153Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,850Accounts payable-trade
    
    
    2,900
    
    
    
    23,432
    
    
    
    42,608
    
    
    
    
    
    
    
    68,940Other payables and accruals
    
    
    7,605
    
    
    
    16,415
    
    
    
    29,110
    
    
    
    
    
    
    
    53,130Due to (from) related parties
    
    
    
    
    
    
    704
    
    
    
    20,672
    
    
    
    (12,025
    )
    
    
    9,351Insurance note payable
    
    
    739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    739Total current liabilities
    
    
    15,094
    
    
    
    40,551
    
    
    
    92,390
    
    
    
    (12,025
    )
    
    
    136,010Long-term debt, net of current portion
    
    
    578,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,263Deferred income taxes
    
    
    (43,583
    )
    
    
    72,164
    
    
    
    11,526
    
    
    
    
    
    
    
    40,107Long-term liabilities
    
    
    333,435
    
    
    
    34,158
    
    
    
    97,404
    
    
    
    (429,965
    )
    
    
    35,032Total liabilities
    
    
    883,209
    
    
    
    146,873
    
    
    
    201,320
    
    
    
    (441,990
    )
    
    
    789,412Commitments and contingencies (note 8)Members equity:Common equity
    
    
    (611,057
    )
    
    
    581,453
    
    
    
    217,608
    
    
    
    (3,893
    )
    
    
    184,111Accumulated other comprehensive income
    
    
    1,863
    
    
    
    (1,195
    )
    
    
    14,962
    
    
    
    
    
    
    
    15,630Total members equity
    
    
    (609,194
    )
    
    
    580,258
    
    
    
    232,570
    
    
    
    (3,893
    )
    
    
    199,741Total liabilities and members equity
    
    $
    274,015
    
    
    $
    727,131
    
    
    $
    433,890
    
    
    $
    (445,883
    )
    
    $
    989,153
 
 (1)
    
    Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. F-34




---



##### 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 unconsolidated 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 8)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-35




---



##### Table of Contents



Statement of Operations
 Year Ended December 31, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Sales
    
    $
    
    
    
    $
    514,994
    
    
    $
    654,155
    
    
    $
    (153,383
    )
    
    $
    1,015,766Other
    
    
    
    
    
    
    216
    
    
    
    32,139
    
    
    
    
    
    
    
    32,355Total revenues
    
    
    
    
    
    
    515,210
    
    
    
    686,294
    
    
    
    (153,383
    )
    
    
    1,048,121Costs and expenses:Cost of goods sold
    
    
    (1,900
    )
    
    
    415,837
    
    
    
    583,172
    
    
    
    (153,383
    )
    
    
    843,726Gross profit
    
    
    1,900
    
    
    
    99,373
    
    
    
    103,122
    
    
    
    
    
    
    
    204,395Research and development expenses
    
    
    
    
    
    
    14,153
    
    
    
    10,445
    
    
    
    
    
    
    
    24,598Selling, general and administrative expenses
    
    
    
    
    
    
    42,840
    
    
    
    30,936
    
    
    
    
    
    
    
    73,776Depreciation
    
    
    16,199
    
    
    
    19,202
    
    
    
    8,173
    
    
    
    
    
    
    
    43,574Earnings in joint venture
    
    
    
    
    
    
    
    
    
    
    (168
    )
    
    
    
    
    
    
    (168
    )Interest expense (income)
    
    
    41,643
    
    
    
    (9,063
    )
    
    
    7,967
    
    
    
    
    
    
    
    40,547Income (loss) before income taxes
    
    
    (55,942
    )
    
    
    32,241
    
    
    
    45,769
    
    
    
    
    
    
    
    22,068Income tax (provision) benefit
    
    
    21,772
    
    
    
    (27,471
    )
    
    
    (19,927
    )
    
    
    
    
    
    
    (25,626
    )Net income (loss)
    
    $
    (34,170
    )
    
    $
    4,770
    
    
    $
    25,842
    
    
    $
    
    
    
    $
    (3,558
    )
 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
 
 (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-36




---



##### Table of Contents



Statement of Operations
 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
    )
 
 (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-37




---



##### Table of Contents



Statements of Condensed Cash Flows
 Year Ended December 31, 2006Guarantor
    
    
    Non-GuarantorIssuers (1)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows provided by (used in) operating activities
    
    $
    (44,782
    )
    
    $
    22,183
    
    
    $
    21,322
    
    
    $
    
    
    
    $
    (1,277)Cash flows used in investing activities:Purchase of plant and equipment, net of proceeds from
sales of equipment
    
    
    
    
    
    
    (15,325
    )
    
    
    (22,556
    )
    
    
    
    
    
    
    (37,881
    )Net cash used in investing activities
    
    
    
    
    
    
    (15,325
    )
    
    
    (22,556
    )
    
    
    
    
    
    
    (37,881
    )Cash flows provided by (used in) financing activities:Proceeds from debt
    
    
    123,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,008Repayment of debt
    
    
    (3,558
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,558
    )Cash dividend to parent
    
    
    (129,533
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129,533
    )Deferred financing costs
    
    
    (2,678
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,678
    )Net proceeds
from insurance note payable
    
    
    739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    739Proceeds from (payments on) intercompany loans
    
    
    56,804
    
    
    
    (47,949
    )
    
    
    (8,855
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    44,782
    
    
    
    (47,949
    )
    
    
    (8,855
    )
    
    
    
    
    
    
    (12,022
    )Effect of exchange rate difference on cash
    
    
    
    
    
    
    
    
    
    
    (6,153
    )
    
    
    
    
    
    
    (6,153
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (41,091
    )
    
    
    (16,242
    )
    
    
    
    
    
    
    (57,333
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    54,941
    
    
    
    45,993
    
    
    
    
    
    
    
    100,934Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    13,850
    
    
    $
    29,751
    
    
    $
    
    
    
    $
    43,601
 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
 
 (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-38




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##### Table of Contents



Statements of Condensed Cash Flows
 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-39




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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##### Table of Contents



Schedule II
 Kraton Polymers LLC
 Valuation Accounts
For the Years Ended December 31, 2004 and 2005 and 2006
(In thousands)
 Balance
    
    Charged to
    
    
    
    
    
    Balanceat Beginning
    
    Costs and
    
    
    
    
    
    at End ofof Period
    
    Expenses
    
    Deductions
    
    PeriodAllowance for Doubtful AccountsYear ended December 31, 2004
    
    $
    
    
    
    $
    835
    
    
    $
    (85
    )
    
    $
    750Year ended December 31, 2005
    
    
    750
    
    
    
    936
    
    
    
    (673
    )
    
    
    1,013Year ended December 31, 2006
    
    
    1,013
    
    
    
    1,382
    
    
    
    (238
    )
    
    
    2,157
 Balance
    
    Charged to
    
    
    
    
    
    Balanceat Beginning
    
    Costs and
    
    
    
    
    
    at End ofof Period
    
    Expenses
    
    Deductions
    
    PeriodInventory ReservesYear ended December 31, 2004
    
    $
    
    
    
    $
    14,301
    
    
    $
    (12,284
    )
    
    $
    2,017Year ended December 31, 2005
    
    
    2,017
    
    
    
    7,773
    
    
    
    (4,764
    )
    
    
    5,026Year ended December 31, 2006
    
    
    5,026
    
    
    
    9,250
    
    
    
    (10,061
    )
    
    
    4,215




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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
    
    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)




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibits4.5
    
    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)4.6
    
    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)4.7
    
    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)4.8
    
    Amendment No. 3 to Credit and Guaranty Agreement dated as of
February 16, 2006, among Kraton, each of the Guarantors listed
on the signature pages attached thereto, the Lenders, and UBS
AG, Stamford Branch (incorporated by reference from Exhibit
10.1 to Kratons Quarterly Report on Form 10-Q filed with the
Commission on May 15, 2006)4.9
    
    Amendment No. 4 to Credit and Guaranty Agreement dated as of
May 12, 2006, by and among Kraton; Polymer Holdings and
certain subsidiary companies; Goldman Sachs Credit Partners
L.P.; UBS AG, Stamford Branch; Morgan Stanley Senior Funding
Inc.; Credit Suisse, Cayman Island Branch; and General
Electric Capital Corporation (incorporated by reference from
Exhibit 10.3 to Kratons Quarterly Report on Form 10-Q filed
with the Commission on May 15, 2006)4.10
    
    Amendment No. 5 to Credit and Guaranty Agreement dated
December 15, 2006, between the Company, the Guarantors, the
Administrative Agent and the Lenders (incorporated by
reference from Exhibit 10.1 to Kratons Current Report on Form
8-K filed with the Commission on December 21, 2006)4.11
    
    Joinder Agreement dated June 7, 2006, between the Lender, the
Company, the Guarantors and the Administrative Agent
(incorporated by reference from Exhibit 10.3 to Kratons
Current Report on Form 8-K filed with the Commission on June
7, 2006)10.1
    
    Employment Agreement dated November 1, 2004, between George
Gregory and Kraton Polymers LLC (incorporated by reference
from Exhibit 10.5 to Kratons Registration Statement on Form
S-4 filed with the Commission on April 1, 2005)10.1(a)
    
    Amendment No. 2 to Employment
Agreement dated April 9, 2007,
between George Gregory and Kraton Polymers LLC*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)10.5(a)
    
    Amendment No. 2 to Employment
Agreement dated April 9, 2007,
between Richard A. Ott and Kraton Polymers LLC*




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibits10.6
    
    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)10.9(a)
    
    Amendment No. 3 to Employment
Agreement dated April 9, 2007,
between David Bradley and Kraton Polymers LLC*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)10.16(a)
    
    Amendment No. 2 to Employment
Agreement dated April 9, 2007,
between Kevin M. Fogarty and Kraton Polymers LLC*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)




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibits10.19
    
    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)10.21(a)
    
    Separation Agreement and General Release and Waiver dated
October 26, 2006, between the Company and Raymond K. Guba
(incorporated by reference from Exhibit 10.1 to Kratons
Current Report on Form 8-K filed with the Commission on
October 26, 2006)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)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) (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) (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) (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) (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) (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) (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)




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibits10.31
    
    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) (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) (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)
(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) (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 (incorporated by reference from Exhibit 10.36 to
Kratons Annual Report on Form 10-K filed with the Commission
on March 30, 2006)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)
(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) (incorporated by reference from Exhibit 10.45 to Amendment No.
2 to Kratons Registration Statement on 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)
(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)




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibits10.43
    
    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) (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)
(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)10.46
    
    Sales Contract dated April 25, 2006, between Kraton Polymers
U.S. LLC and Shell Chemical LP. (incorporated by reference
from Exhibit 10.2 to Kratons Quarterly Report on Form 10-Q
filed with the Commission on May 15, 2006)10.47
    
    Employment Agreement dated
April 9, 2007, between Kraton Polymers LLC and Nicholas G. Dekker*10.48
    
    Tripartite Agreement dated
April 9, 2007, among Kraton Polymers LLC, Nicholas G. Dekker and Kraton
Polymers France SAS*10.49
    
    Notional Unit Award Grant Agreement dated November 30, 2005,
between the Company and Nicholas G. Dekker (incorporated by
reference from Exhibit 10.1 to Kratons Current Report on Form
8-K filed with the Commission on December 22, 2006)10.50
    
    Profit Unit Award Agreement dated October 6, 2006, between
Management LLC and Nicholas G. Dekker. (incorporated by
reference from Exhibit 10.2 to Kratons Current Report on Form
8-K filed with the Commission on December 22, 2006)10.51
    
    Form of Amendment No. 1 to the Employment Agreement of
Executive Officers (incorporated by reference from Exhibit
10.3 to Kratons Current Report on Form 8-K filed with the
Commission on December 22, 2006)10.52
    
    Form of Amendment No. 2 to the Employment Agreement of
Executive Officers (incorporated by reference from Exhibit
10.4 to Kratons Current Report on Form 8-K filed with the
Commission on December 22, 2006)10.53
    
    Form of Amendment No. 1 to the Profits Unit Award Agreement
(incorporated by reference from Exhibit 10.5 to Kratons
Current Report on Form 8-K filed with the Commission on
December 22, 2006)12.1
    
    Statement of Computation of Ratio
of Earnings to Fixed Charges*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*
 
 *
    
    Filed herewith.