UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Polymer Holdings LLC

(Exact name of registrant as specified in its charter)

Delaware		20-0411521
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation)
700 Milam Street, 13th Floor, North Tower
Houston, TX 77002		832-204-5400
(Address of principal executive offices,		(Registrant’s telephone number, including area code)
including zip code)

KRATON Polymers LLC

(Exact name of registrant as specified in its charter)

Delaware		94-2805249
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
700 Milam Street, 13th Floor, North Tower
Houston, TX 77002		832-204-5400
(Address of principal executive offices,		(Registrant’s telephone number, including area code)
including zip code)

     Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES o NO þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

     Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. YES o NO þ

 

 

TABLE OF CONTENTS

		PAGE
Part I — Financial Information
Item 1. Financial Statements and Accompanying Notes
Polymer Holdings LLC:
Consolidated Balance Sheets (Unaudited) — September 30, 2005 and December 31, 2004			4
Consolidated Statements of Operations (Unaudited) — Three Months Ended September 30, 2005 and 2004			5
Consolidated Statements of Operations (Unaudited) — Nine Months Ended September 30, 2005 and 2004			5
Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended September 30, 2005 and 2004			6
KRATON Polymers LLC:
Consolidated Balance Sheets (Unaudited) — September 30, 2005 and December 31, 2004			7
Consolidated Statements of Operations (Unaudited) — Three Months Ended September 30, 2005 and 2004			8
Consolidated Statements of Operations (Unaudited) — Nine Months Ended September 30, 2005 and 2004			8
Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended September 30, 2005 and 2004			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			53
Part II — Other Information
Item 1. Legal Proceedings			54
Item 2. Changes in Securities and Use of Proceeds			54
Item 3. Defaults Upon Senior Securities			54
Item 4. Submission of Matters to a Vote of Securityholders			54
Item 5. Other Information			54
Item 6. Exhibits			54
Option Grant Agreement - TJ Chemical and Steven Demetriou
Option Grant Agreement - TJ Chemical and James Ball
Employment Agreement - KRATON and Kevin M. Fogarty
Option Grant Agreement - TJ Chemical and Raymond K. Guba
Profit Unit Award Agreement - KRATON Management LLC and Raymond K. Guba
Notional Unit Award Grant Agreement - KRATON and Raymond K. Guba
Certification of CEO pursuant to Section 302
Certification of Interim CFO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification of CEO and CFO pursuant to Section 906

FORWARD LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q includes “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements about our plans, strategies and prospects under the headings “Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We may also make written or oral forward-looking statements in our Annual Report on Form 10-K, periodic reports on Form 10-Q and current reports on Form 8-K, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, competitive pressures in the specialty chemicals industry, changes in prices of raw materials used in our business, changes in levels of consumer spending or preferences, overall economic conditions, the level of our indebtedness and exposure to interest rate fluctuations, governmental regulations and trade restrictions, acts of war or terrorism in the United States or worldwide, political or financial instability in the countries where our goods are manufactured and other risks and uncertainties described in this report and our other reports and documents. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

PRESENTATION OF FINANCIAL STATEMENTS

     This Form 10-Q includes financial statements and related notes that present (1) the consolidated financial position, results of operations and cash flows of Polymer Holdings LLC, which we refer to as Polymer Holdings, and its subsidiaries and (2) the consolidated financial position, results of operations and cash flows of KRATON Polymers LLC, which we refer to as KRATON, and its subsidiaries. Polymer Holdings is a holding company whose only material asset is its investment in KRATON, which is its wholly-owned subsidiary. KRATON and its subsidiaries own all of the consolidated operating assets.

PART I — Financial Information

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Polymer Holdings LLC

Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(in thousands of U.S. dollars)

		September 30,				December 31,
		2005				2004
		(Unaudited)				(Restated —
						See note 1(c))
Assets
Current assets:
Cash and cash equivalents		$	71,550			$	46,357
Receivables, net of allowances of $884 and $750			150,612				120,596
Inventories of products			191,303				211,076
Inventories of materials and supplies			9,412				8,778
Other current assets			17,495				10,381
Total current assets			440,372				397,188
Property, plant, and equipment, less accumulated depreciation of $57,654 and $38,086			395,453				424,333
Identifiable intangible assets, less accumulated amortization of $13,887 and $8,002			103,809				109,694
Investment in joint venture			10,539				10,753
Deferred financing costs			14,999				16,799
Other long-term assets			9,014				8,646
Total assets		$	974,186			$	967,413
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	2,680			$	2,680
Accounts payable—trade			64,853				79,968
Other payables and accruals			50,269				40,059
Due to related parties			11,937				14,471
Deferred income taxes			1,240				1,240
Insurance bond payable			1,380				—
Total current liabilities			132,359				138,418
Long-term debt, net of current portion			562,970				556,335
Deferred income taxes			27,020				24,513
Long-term liabilities			29,317				25,629
Total liabilities			751,666				744,895
Commitments and contingencies (note 5)
Member’s equity:
Common equity			219,779				200,528
Accumulated other comprehensive income			2,741				21,990
Total member’s equity			222,520				222,518
Total liabilities and member’s equity		$	974,186			$	967,413

See accompanying notes to consolidated financial statements.

Polymer Holdings LLC

Consolidated Statements of Operations
Three Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

		September 30,				September 30,
		2005				2004
						(Restated —
						See note 1(c))
Revenues
Sales		$	269,017			$	209,407
Other			7,457				1,840
Total revenues			276,474				211,247
Costs and expense
Costs of goods sold			225,945				179,186
Gross profit			50,529				32,061
Research and development expenses			6,700				5,530
Selling, general, and administrative expenses			19,130				16,467
Depreciation and amortization of identifiable intangibles			11,548				11,185
Earnings in joint venture			(182	)			11
Interest, net			11,746				11,722
Income (loss) before income taxes			1,587				(12,854	)
Income tax (provision) benefit			(633	)			6,848
Net income (loss)		$	954			$	(6,006	)

See accompanying notes to consolidated financial statements.

Polymer Holdings LLC

Consolidated Statements of Operations
Nine Months Ended September 30, 2005 and 2004
(in thousand of U.S. dollars)
(Unaudited)

		September 30,				September 30,
		2005				2004
						(Restated —
						See note 1(c))
Revenues
Sales		$	732,338			$	589,886
Other			20,287				8,738
Total revenues			752,625				598,624
Costs and expense
Costs of goods sold			586,145				514,692
Gross profit			166,480				83,932
Research and development expenses			19,500				17,246
Selling, general, and administrative expenses			54,692				46,503
Depreciation and amortization of identifiable intangibles			33,760				31,849
Earnings in joint venture			(1,050	)			(134	)
Interest, net			34,578				27,719
Income (loss) before income taxes			25,000				(39,251	)
Income tax (provision) benefit			(6,159	)			15,332
Net income (loss)		$	18,841			$	(23,919	)

See accompanying notes to consolidated financial statements.

Polymer Holdings LLC

Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

		September 30,				September 30,
		2005				2004
						(Restated —
						See note 1(c))
Cash flows provided by (used in) operating activities:
Net income (loss)		$	18,841			$	(23,919	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of identifiable intangibles			33,760				31,849
Amortization of deferred financing costs			1,800				2,522
Accretion of discount on senior subordinated notes			8,645				—
Change in the fair value of interest rate swaps			(128	)			1,669
Loss on disposal of fixed assets			55				637
(Undistributed) distributed earnings in joint venture			(589	)			427
Deferred tax provision (benefit)			483				(17,053	)
Non-cash compensation			410				—
Increase (decrease) in working capital:
Accounts receivable			(43,567	)			(27,426	)
Due from related party			351				—
Inventories			5,373				49,530
Other assets			(6,274	)			(6,330	)
Accounts payable, other payables and accruals, and long-term Liabilities			10,004				45,877
Net cash provided by operating activities			29,164				57,783
Cash flows (used in) provided by investing activities:
Purchase of property, plant and equipment			(8,604	)			(28,816	)
Proceeds from sale of property, plant and equipment			122				88
Net cash used in investing activities			(8,482	)			(28,728	)
Cash flows (used in) provided by financing activities:
Repayment of debt			(2,010	)			(17,787	)
Net proceeds from insurance bond			1,380				—
Net cash used in by financing activities			(630	)			(17,787	)
Effect of exchange rate differences on cash			5,141				138
Net increase in cash and cash equivalents			25,193				11,406
Cash and cash equivalents, beginning of period			46,357				17,500
Cash and cash equivalents, end of period		$	71,550			$	28,906
Supplemental disclosure cash flow information:
Cash paid during the period for income taxes, net of refunds received		$	1,058			$	4,547
Cash paid during the period for interest			28,821				20,910

See accompanying notes to consolidated financial statements.

KRATON Polymers LLC

Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(in thousands of U.S. dollars)

		September 30,				December 31,
		2005				2004
		(Unaudited)				(Restated —
						See note 1(c))
Assets
Current assets:
Cash and cash equivalents		$	71,550			$	46,357
Receivables, net of allowances of $884 and $750			150,612				120,596
Inventories of products			191,303				211,076
Inventories of materials and supplies			9,412				8,778
Other current assets			17,495				10,381
Total current assets			440,372				397,188
Property, plant, and equipment, less accumulated depreciation of $57,654 and $38,086			395,453				424,333
Identifiable intangible assets, less accumulated amortization of $13,887 and $8,002			103,809				109,694
Investment in joint venture			10,539				10,753
Deferred financing costs			13,275				14,973
Other long-term assets			9,014				8,646
Total assets		$	972,462			$	965,587
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	2,680			$	2,680
Accounts payable—trade			64,853				79,968
Other payables and accruals			50,269				40,059
Due to related parties			11,937				14,471
Deferred income taxes			1,240				1,240
Insurance bond payable			1,380				—
Total current liabilities			132,359				138,418
Long-term debt, net of current portion			460,653				462,663
Deferred income taxes			30,723				25,184
Long-term liabilities			29,317				25,629
Total liabilities			653,052				651,894
Commitments and contingencies (note 5)
Member’s equity:
Common equity			316,669				291,703
Accumulated other comprehensive income			2,741				21,990
Total member’s equity			319,410				313,693
Total liabilities and member’s equity		$	972,462			$	965,587

See accompanying notes to consolidated financial statements.

KRATON Polymers LLC

Consolidated Statements of Operations
Three Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

		September 30,				September 30,
		2005				2004
						(Restated —
						See note 1(c))
Revenues
Sales		$	269,017			$	209,407
Other			7,457				1,840
Total revenues			276,474				211,247
Costs and expense
Costs of goods sold			225,945				179,186
Gross profit			50,529				32,061
Research and development expenses			6,700				5,530
Selling, general, and administrative expenses			19,130				16,467
Depreciation and amortization of identifiable intangibles			11,548				11,185
Earnings in joint venture			(182	)			11
Interest, net			8,683				11,722
Income (loss) before income taxes			4,650				(12,854	)
Income tax (provision) benefit			(1,268	)			6,848
Net income (loss)		$	3,382			$	(6,006	)

See accompanying notes to consolidated financial statements.

KRATON Polymers LLC

Consolidated Statements of Operations
Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

		September 30,				September 30,
		2005				2004
						(Restated —
						See note 1(c))
Revenues
Sales		$	732,338			$	589,886
Other			20,287				8,738
Total revenues			752,625				598,624
Costs and expense
Costs of goods sold			586,145				514,692
Gross profit			166,480				83,932
Research and development expenses			19,500				17,246
Selling, general, and administrative expenses			54,692				46,503
Depreciation and amortization of identifiable intangibles			33,760				31,849
Earnings in joint venture			(1,050	)			(134	)
Interest, net			25,833				27,719
Income (loss) before income taxes			33,745				(39,251	)
Income tax (provision) benefit			(9,189	)			15,332
Net income (loss)		$	24,556			$	(23,919	)

See accompanying notes to consolidated financial statements.

KRATON Polymers LLC

Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

		September 30,				September 30,
		2005				2004
						(Restated —
						See note 1(c))
Cash flows provided by (used in) operating activities:
Net income (loss)		$	24,556			$	(23,919	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of identifiable intangibles			33,760				31,849
Amortization of deferred financing costs			1,698				2,522
Changes in the fair value of interest rate swaps			(128	)			1,669
Loss on disposal of fixed assets			55				637
(Undistributed) distributed earnings in joint venture			(589	)			427
Deferred tax provision (benefit)			3,515				(17,053	)
Non-cash compensation			410				—
Increase (decrease) in working capital:
Accounts receivable			(43,567	)			(27,426	)
Due from related party			351				—
Inventories			5,373				49,530
Other assets			(6,274	)			(6,330	)
Accounts payable, other payables and accruals, and long-term liabilities			10,004				45,877
Net cash provided by operating activities			29,164				57,783
Cash flows (used in) provided by investing activities:
Purchase of property, plant and equipment			(8,604	)			(28,816	)
Proceeds from sale of property, plant and equipment			122				88
Net cash used in investing activities			(8,482	)			(28,728	)
Cash flows (used in) provided by financing activities:
Repayment of debt			(2,010	)			(17,787	)
Net proceeds from insurance bond			1,380				—
Net cash used in financing activities			(630	)			(17,787	)
Effect of exchange rate differences on cash			5,141				138
Net increase in cash and cash equivalents			25,193				11,406
Cash and cash equivalents, beginning of period			46,357				17,500
Cash and cash equivalents, end of period		$	71,550			$	28,906
Supplemental disclosure cash flow information:
Cash paid during the period for income taxes, net of refunds received		$	1,058			$	4,547
Cash paid during the period for interest			28,821				20,910

See accompanying notes to consolidated financial statements.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

(1) Summary of Significant Accounting Policies

(a) Organization, Acquisition and Description of Business

     Polymer Holdings LLC together with its subsidiaries, unless otherwise indicated, are collectively referred to as “Polymer Holdings,” “we,” “our,” “ours,” and “us.” Polymer Holdings is a holding company whose only material asset is its investment in KRATON Polymers LLC, or KRATON. KRATON and its subsidiaries own substantially all of the consolidated operating assets. KRATON is the parent of Elastomers Holdings LLC (parent company of our United States operations), KRATON Polymers Holdings B.V. (parent company of non-U.S. operations) and KRATON Polymers Capital Corporation (a company with no operations). TJ Chemical Holdings LLC, or TJ Chemical, owns 100% of the equity interests of Polymer Holdings. TJ Chemical is indirectly owned by TPG Partners III, L.P., TPG Partners IV, L.P. and certain of their parallel investment entities, entities affiliated with or managed by J.P. Morgan Partners, LLC and its affiliates and KRATON Polymers Management LLC, or Management LLC.

     On December 23, 2003, Polymer Acquisition LLC, or Polymer Acquisition, a wholly owned subsidiary of Polymer Holdings, merged into KRATON, in a transaction we refer to as the Acquisition. Under the Merger Agreement dated as of November 5, 2003, as amended and restated on December 23, 2003, or the Merger Agreement, among Ripplewood Chemical, Polymer Holdings and Polymer Acquisition, Polymer Holdings acquired all of KRATON’s outstanding equity interests from Ripplewood Chemical Holding LLC, or Ripplewood Chemical, for consideration of $770.0 million for the business and $48.0 million for the excess cash on KRATON’s balance sheet immediately prior to closing.

     We manufacture styrenic block copolymers, or SBCs, at our manufacturing facilities in six countries: Belpre, Ohio; Wesseling, Germany; Berre, France; Pernis, The Netherlands; Paulinia, Brazil; and our joint venture in Kashima, Japan. SBCs are highly engineered synthetic elastomers, which are used in a wide variety of products to impart flexibility, resilience, strength, durability, and processability. We generally sell our products to customers for use in industrial and consumer applications. Based on our management approach, we believe that all material operations revolve around the manufacturing and sales of SBCs, and we currently report our operations, both internally and externally, as a single business segment.

(b) Basis of Presentation

     The consolidated financial statements presented herein are as follows:

	a.		Polymer Holdings and its wholly-owned subsidiaries, which include both Polymer Holdings and KRATON and its wholly-owned subsidiaries.
	b.		KRATON and its wholly-owned subsidiaries, which include only KRATON and its wholly-owned subsidiaries.

     The consolidated balance sheets, the consolidated statements of operations and the consolidated statements of cash flows for the periods presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. Operating results for the first nine months of 2005 are not necessarily indicative of results to be expected for the year ending December 31, 2005. All significant intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the tabulations in the notes to the consolidated financial statements are stated in thousands of dollars unless otherwise indicated. Certain amounts have been reclassified in the prior period to conform to the current period presentation.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires estimates and assumptions that affect the reported amounts as well as certain disclosures. Our financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.

     These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the prospectuses filed with the Securities and Exchange Commission , or the SEC, on September 2, 2005, pursuant to Rule 424(b)(3) under the Securities Act of 1933 for each of Polymer Holdings and KRATON.

     Unless specifically noted, these notes to consolidated financial statements apply to both Polymer Holdings and KRATON.

(c) Restatement of prior financial statements

     During the preparation of the interim financial statements for the period ended March 31, 2005, we discovered a computational error in the calculation of the additional cost of sales related to the inventory step up associated with the Acquisition. That step up was approximately $38.4 million and was being recorded to cost of sales as the related inventory items were sold. The error caused the reported amount of our cost of sales to be understated by approximately $2.3 million and $3.7 million for the three and nine months ended September 30, 2004, respectively, and $5.0 million for the year ended December 31, 2004, and decreased inventory by those same amounts.

     In addition, we have restated the December 31, 2004, balance sheet to record the unrealized gain on interest rate swaps included as a component of accumulated other comprehensive income on an after-tax basis, which has the effect of reducing member’s equity by approximately $0.6 million and increasing deferred income taxes by that same amount. This item was discovered in connection with a review of our financial statements undertaken in connection with the above item.

     As a result of these adjustments, on May 11, 2005, our audit committee decided to restate our financial statements for the year ended December 31, 2004, and the accompanying financial information reflects that restatement. Our audit committee has discussed these adjustments with our independent registered public accounting firm.

     These non-cash adjustments do not impact the calculation of any of the financial ratios in the senior secured credit facility for any period.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

     The following tables reflect the effects of the adjustments Polymer Holdings and KRATON made to their consolidated statement of operations for the three and nine months ended September 30, 2004, and their consolidated balance sheets as of December 31, 2004 (in thousands).

		Three months ended
		September 30, 2004 (1)
		As previously
		reported				As restated
Cost of goods sold		$	176,848			$	179,186
Gross profit			34,399				32,061
Loss before income taxes			(10,516	)			(12,854	)
Income tax benefit			5,940				6,848
Net loss			(4,576	)			(6,006	)

		Nine months ended
		September 30, 2004 (1)
		As previously
		reported				As restated
Cost of goods sold		$	510,984			$	514,692
Gross profit			87,640				83,932
Loss before income taxes			(35,543	)			(39,251	)
Income tax benefit			13,943				15,332
Net loss			(21,600	)			(23,919	)

		KRATON								Polymer Holdings
		December 31, 2004								December 31, 2004
		As previously								As previously
		reported				As restated				reported				As restated
Inventories of product		$	216,090			$	211,076			$	216,090			$	211,076
Total current assets			402,202				397,188				402,202				397,188
Total assets			970,601				965,587				972,427				967,413
Deferred income taxes — noncurrent			26,509				25,184				25,837				24,513
Total liabilities			653,219				651,894				746,219				744,895
Common equity			294,837				291,703				203,663				200,528
Accumulated other comprehensive income			22,545				21,990				22,545				21,990
Total member’s equity			317,382				313,693				226,208				222,518
Total liabilities and member’s equity			970,601				965,587				972,427				967,413

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

(d) Recently Issued Accounting Standards

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which supersedes SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123.” SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25 “Accounting for Stock Issued to Employees.” In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107. Among other things, SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. On April 14, 2005, the SEC issued Release No. 33-8568 which amends the compliance date of SFAS No. 123(R). As a result, SFAS No. 123(R) will be effective for the company as of the beginning of the first annual reporting period that begins after December 15, 2005. The company is currently evaluating the adoption method to be used upon the adoption of SFAS No. 123(R).

     FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143”, (FIN 47) clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Asset Retirement Obligations”, (Statement No. 143) refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the normal operation of the asset. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 is not expected to have a material impact to the Company.

(2) Detail of Certain Balance Sheet Accounts

		September 30,				December 31,
		2005				2004
		(in thousands)
Inventories:
Finished products		$	171,915			$	185,609
Work in progress			3,413				3,844
Raw materials			15,975				21,623
		$	191,303			$	211,076

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

		September 30,				December 31,
		2005				2004
		(in thousands)
Other payables and accruals:
Employee related		$	17,357			$	6,250
Interest			3,845				8,143
Property and other taxes			6,347				5,814
Customer rebates			6,238				6,417
Income taxes payable			2,131				174
Other			14,351				13,261
		$	50,269			$	40,059

(3) Comprehensive Income (Loss)

     The components of comprehensive income (loss) include the following (in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
Polymer Holdings
Net income (loss)		$	954			$	(6,006	)		$	18,841			$	(23,919	)
Foreign currency Adjustments			1,157				4,998				(20,925	)			(2,861	)
Unrealized gain on interest rate swaps			818				—				1,676				—
Total comprehensive income (loss)		$	2,929			$	(1,008	)		$	(408	)		$	(26,780	)
KRATON
Net income (loss)		$	3,382			$	(6,006	)		$	24,556			$	(23,919	)
Foreign currency Adjustments			1,157				4,998				(20,925	)			(2,861	)
Unrealized gain on interest rate swaps			818				—				1,676				—
Total comprehensive income (loss)		$	5,357			$	(1,008	)		$	5,307			$	(26,780	)

     Accumulated the comprehensive income consisted of the following for both Polymer Holdings and KRATON (in thousands):

		September 30, 2005				December 31, 2004
Foreign currency Adjustments		$	35			$	20,960
Unrealized gain on interest rate swaps			2,706				1,030
Total accumulated other comprehensive income		$	2,741			$	21,990

(4) Long-Term Debt

     Long-term debt consists of the following:

		September 30,				December 31,
		2005				2004
		(in thousands)
KRATON:
Senior Secured Credit Facility:
Term loans		$	263,333			$	265,343
Revolver			—				—
8.125% Senior Subordinated Notes			200,000				200,000
Total long-term debt			463,333				465,343
Less current portion of long-term debt			2,680				2,680
Total KRATON			460,653				462,663
Polymer Holdings:
12% Senior Discount Notes			102,317				93,672
Total Polymer Holdings		$	562,970			$	556,335

(a) Senior Secured Credit Facility

     In connection with the Acquisition, KRATON entered into a senior secured credit facility in the aggregate principal amount of $420 million. The senior secured credit facility consists of a $60 million revolving credit facility, or the Revolving Facility, and a $360 million term loan facility, or the Term Facility, and is subject to the terms and conditions of the credit agreement, dated as of December 23, 2003, or the Credit Agreement, among us, various lenders, Goldman Sachs Credit Partners L.P., UBS Securities LLC, UBS AG, Stamford Branch, Credit Suisse First Boston, Morgan Stanley Senior Funding Inc., and General Electric Capital Corporation. We refer to the loans made under the Revolving Facility as the Revolving Loans, and the loans made under the Term Facility as the Term Loans. Three of KRATON’s subsidiaries, KRATON Polymers U.S. LLC, Elastomers Holdings LLC, and KRATON Polymers Capital Corporation, and Polymer Holdings, have guaranteed the senior secured credit facility and we refer to these guarantors, together with KRATON as the Loan Parties. The senior secured credit facility is secured by a perfected first priority security interest in all of each Loan Party’s tangible and intangible assets, including intellectual property, real property, all of our capital stock and the capital stock of our domestic subsidiaries and 65% of the capital stock of the direct foreign subsidiaries of each Loan Party. As of September 30, 2005, and December 31, 2004, we had no outstanding borrowings under the Revolving Facility.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

     Maturity

          The Revolving Loans outstanding are payable in a single maturity on December 23, 2008. The Term Loans are payable in 24 consecutive equal quarterly installments, in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loans. The remaining balance is payable in four equal quarterly installments commencing on March 31, 2010, and ending on December 23, 2010.

     Interest

          KRATON’s Senior Leverage Ratio was less than 2.50:1.00 for the quarters ended March 31 and June 30, 2005. In accordance with Amendment No. 2, dated October 21, 2004, the Term Loan bear interest at the adjusted Eurodollar rate plus 2.50%, a decrease from 2.75%.

          Effective July 1, 2005, the Term Loans bear interest at a rate equal to the adjusted Eurodollar rate plus 2.50% per annum or, at our option, the base rate plus 1.50% per annum. Effective July 1, 2005, the Revolving Loans bear interest at a rate equal to the adjusted Eurodollar rate plus 2.50% per annum or at our option, the base rate plus 1.50% per annum. A commitment fee equal to 0.5% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears.

     Mandatory Prepayments

          The Term Facility will be subject to mandatory prepayment with, in general: (1) 100% of the net cash proceeds of certain asset sales, subject to certain reinvestment rights; (2) 100% of the net cash proceeds of certain insurance and condemnation payments, subject to certain reinvestment rights; (3) 50% of the net cash proceeds of equity offerings (declining to 25%, if a leverage ratio in met); (4) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted under the Credit Agreement); and (5) 50% of our excess cash flow, as defined in the Credit Agreement (declining to 25%, if a leverage ratio is met). Any such prepayment is applied first to the Term Facility and thereafter to the Revolving Facility.

          We were not required to make a prepayment related to excess cash flow generated during the year ended December 31, 2004.

     Covenants

          The Credit Agreement contains certain affirmative covenants including, among others, covenants to furnish the Lenders with financial statements and other financial information and to provide the Lenders notice of material events and information regarding collateral.

          The Credit Agreement contains certain negative covenants including limitation on indebtedness, limitation on liens, limitation on fundamental changes, limitation on investments, limitation on asset sales, limitation on sales and leasebacks, limitation on restricted payments, limitation on transactions with affiliates, and certain financial covenants.

          As of September 30, 2005, we were in compliance with all covenants under the Credit Agreement.

     (b) Senior Subordinated Notes Due January 15, 2014

          In connection with the Acquisition, KRATON and KRATON Polymers Capital Corporation issued the 8.125% Notes in an aggregate principal amount of $200.0 million. The 8.125% Notes are subject to the provisions for mandatory and optional prepayment and acceleration and are payable in full on January 15, 2014. Polymer

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

Holdings and each of KRATON Polymers U.S. LLC and Elastomers Holdings LLC, which we refer to collectively as the Subsidiary Guarantors, have guaranteed the 8.125% Notes. The amount of 8.125% Notes outstanding at September 30, 2005, and December 31, 2004, is $200.0 million.

     Interest

          The 8.125% Notes bear interest at a fixed rate of 8.125% per annum. Interest is payable (1) on January 15 and July 15 each year, with the first such payment to be made July 15, 2004, (2) upon any redemption or prepayment as described below, and (3) at maturity.

     Optional Redemption

          Generally, we cannot elect to redeem the 8.125% Notes until January 15, 2009. After such date, we may elect to redeem the 8.125% Notes at certain predetermined redemption prices, plus accrued, and unpaid interest.

Prior to January 15, 2009, we may redeem up to a maximum of 35% of the 8.125% Notes with the proceeds of certain permitted equity offerings at a redemption price equal to 108.125% of the principal amount of the 8.125% Notes being redeemed, plus accrued and unpaid interest.

     Covenants

          The 8.125% Notes contain certain affirmative covenants including, among others, covenants to furnish the holders of the 8.125% Notes with financial statements and other financial information and to provide the holders of the 8.125% Notes notice of material events.

          The 8.125% Notes contain certain negative covenants including limitation on indebtedness, limitation on restricted payments, limitation on restrictions on distributions from certain subsidiaries, limitation on lines of business, and mergers and consolidations.

          As of September 30, 2005, we are in compliance with all covenants under the 8.125% Notes.

     Exchange Offer

          On October 24, 2005, KRATON completed an offer to exchange all of its outstanding 8.125% Notes issued under an exemption from the registration requirement of the Securities Act for identical notes registered under the Securities Act. In this offer, 100% of the outstanding notes issued under the exemptions from registration were tendered and exchanged for registered notes. The registered notes are identical to the unregistered notes, except that the registered notes do not carry transfer restrictions.

(c) Senior Discount Notes Due July 15, 2014

          In connection with an amendment to KRATON’s senior secured credit facility, Polymer Holdings and Polymer Holdings Capital Corporation issued $150 million principal amount at maturity (from which $91.9 million of net cash proceeds were realized) of 12% Senior Discount Notes due 2014, or the 12% Discount Notes, on November 2, 2004. Neither KRATON nor any of its subsidiaries guarantee the 12% Discount Notes. The 12% Discount Notes had an initial accreted value of $612.76 per $1,000 in principal amount at maturity. The accreted value of each Note will increase on a daily basis from the date of issuance until January 15, 2009, at a rate of 12.000% per annum, reflecting the accrual of non-cash interest, such that the accreted value on January 15, 2009 will equal the principal amount at maturity. The amount of the 12% Discount Notes outstanding at September 30, 2005, was $150.0 million, with an accreted value of $102.3 million.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

     Interest

          No cash interest will accrue on the 12% Discount Notes prior to January 15, 2009. Thereafter, cash interest on the 12% Discount Notes will accrue and be payable semi-annually in arrears on January 15 and July 15 of each year, commencing on July 15, 2009, at a rate of 12.000% per annum. Interest is payable (1) on January 15 and July 15 each year, with the first such payment to be made July 15, 2009, (2) upon any redemption or prepayment as described below, and (3) at maturity.

     Optional Redemption

          At any time prior to January 15, 2007, we may elect to redeem up to 35% of the 12% Discount Notes at a redemption price of 112.000% of the accreted value thereof at the redemption date, with the net cash proceeds of one or more equity offerings by us or KRATON, to the extent the net proceeds are distributed by KRATON to us, or a contribution to the common equity of capital of us from the net proceeds of one or more equity offerings by a direct or indirect payment of us. On or after January 15, 2009, we may elect to redeem the 12% Discount Notes at certain predetermined redemption prices, plus accrued and unpaid interest.

     Covenants

          The 12% Discount Notes contain certain affirmative covenants including, among others, covenants to furnish the holders of Notes with financial statements and other financial information and to provide the holders of Notes notice of material events.

          The 12% Discount Notes contain certain negative covenants including limitation on indebtedness, limitation on restricted payments, limitation on restrictions on distributions from certain subsidiaries, limitation on lines of business, and mergers and consolidations.

          As of September 30, 2005, we were in compliance with all covenants under the 12% Discount Notes.

     Exchange Offer

          On October 20, 2005, Polymer Holdings completed an offer to exchange all of its outstanding 12% Discount Notes issued under an exemption from the registration requirement of the Securities Act, for identical notes registered under the Securities Act. In this offer, 100% of the outstanding notes issued under the exemptions from registration were tendered and exchanged for registered notes. The registered notes are identical to the unregistered notes, except that the registered notes do not carry transfer restrictions.

     (5) Income Taxes

          Income taxes are recorded utilizing an asset and liability approach. This method gives consideration to the future tax consequences associated with the differences between the financial accounting basis and tax basis of the assets and liabilities, and the ultimate realization of any deferred tax asset resulting from such differences. We consider all foreign earnings as being permanently invested in that country.

     (6) Commitments and Contingencies

     Legal Proceedings

          We, and certain of our subsidiaries, are parties to several legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on our financial position, results of operations or cash flows.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

     Pernis, The Netherlands Manufacturing Facility Fire

          On June 6, 2004, a fire occurred at our Pernis, The Netherlands manufacturing facility, which is operated for us by Shell Nederland Chemie, a subsidiary of Shell Chemicals, under an operating agreement. There were no known injuries or environmental damages and no claims have been made against us arising out of this incident. We currently do not believe we have any liability related to this incident. We currently estimate the damage to property to be approximately $4 million, which we expect will be covered by our property and casualty insurance, subject to a $1 million insurance deductible. The amount of the deductible was included as additional cost of goods sold during the three months ended June 30, 2004. To date, we have received $1.5 million of insurance proceeds and recorded a $0.5 million gain on disposal of assets related to the insurance proceeds in the three months ended March 31, 2005. We continue to negotiate with our insurance carrier to settle the remaining claim.

          We have business interruption insurance, which requires a minimum of 45 days of business interruption and satisfaction of a $2.5 million deductible before any benefit may be realized. We have received $0.9 million of insurance proceeds, representing full and final settlement of the business interruption insurance and recorded that amount as a gain in the three months ended June 30, 2005.

     (7) Employee Benefits

(a) Investment in KRATON Management LLC

          We provided certain key employees who held interests in us prior to the Acquisition the opportunity to roll over their interests into membership units of Management LLC, which owns a corresponding number of membership units in TJ Chemical. Additional employees have also been given the opportunity to purchase membership units in TJ Chemical through Management LLC at the original buy-in price and have been granted restricted and notional restricted membership units. The membership units are subject to customary tag-along and drag-along rights, as well as a call right in the event of termination of employment. On June 15, 2005, TJ Chemical granted Kevin M. Fogarty a notional restricted unit award with a fair value of $300,000. This award will vest 20% on each of the first five anniversaries of his employment commencement date (June 13, 2005), so long as Mr. Fogarty remains employed by us through the applicable vesting date. The actual membership units will not be distributed until the earlier of (1) a change in control or (2) the termination of Mr. Fogarty’s employment. In addition, David M. Davis forfeited 350,000 restricted shares in accordance with his separation agreement. As of September 30, 2005, there were 5,655,000 membership units of Management LLC issued and outstanding.

(b) TJ Chemical Holdings LLC 2004 Option Plan

          On September 9, 2004, TJ Chemical adopted an option plan, or the Option Plan, which allows for the grant to key employees, consultants, members and service providers of TJ Chemical and its affiliates, including KRATON, of non-qualified options to purchase TJ Chemical membership units in order to provide them with an appropriate incentive to encourage them to continue in the employ of or to perform services for, and to improve the growth and profitability of, TJ Chemical and its affiliates. The aggregate number of membership units with respect to which options may be granted under the Option Plan shall not exceed an amount representing 8% of the outstanding membership units and profits units of TJ Chemical on March 31, 2004, on a fully diluted basis. On June 15, 2005, TJ Chemical granted Mr. Fogarty 1,250,000 options. In addition, Mr. Davis forfeited 1,300,000 options in accordance with his separation agreement. As of September 30, 2005, there were 14,114,375 options granted and outstanding. All options granted in the period ended September 30, 2005, had an exercise price of $1 per membership unit, which is the same as the fair value of the membership unit on the date of grant.

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

          In general, the options vest and become exercisable in 20% increments annually on each of the first five anniversaries of the grant date, so long as the holder of the option is still an employee on the vesting date. The exercise price per membership unit shall equal the fair market value of a membership unit on the date of grant. Upon a change in control, the options will become 100% vested if the participant’s employment is terminated without cause or by the participant for good reason (as each term is defined in the Option Plan) within the 2-year period immediately following such change in control.

          A committee, or the Committee, of TJ Chemical’s board has been appointed to administer the Option Plan, including, without limitation, the determination of the individuals to whom grants will be made, the number of membership units subject to each grant and the various terms of such grants. The Committee will have the right to terminate all of the outstanding options at any time and pay the participants an amount equal to the excess, if any, of the fair market value of a membership unit as of such date over the exercise price with respect to such option, or the spread. Generally, in the event of a merger (except a merger where membership unit holders receive securities of another corporation), the options will pertain to and apply to the securities that the option holder would have received in the merger; and in the event of a dissolution, liquidation, sale of assets or any other merger, the Committee has the discretion to (1) provide for an “exchange” of the options for new options on all or some of the property for which the membership units are exchanged (as may be adjusted by the Committee), (2) cancel and cash out the options (whether or not then vested) at the spread or (3) provide for a combination of both. Generally, the Committee may make appropriate adjustments with respect to the number of membership units covered by outstanding options and the exercise price in the event of any increase or decrease in the number of membership units or any other corporate transaction not described in the preceding sentence.

          On a termination of a participant’s employment (other than without cause or by the participant for good reason within the 2-year period immediately following a change in control), unvested options automatically expire and vested options expire on the earlier of (1) the commencement of business on the date the employment is terminated for cause; (2) 90 days after the date employment is terminated for any reason other than cause, death or disability; (3) 1-year after the date employment is terminated by reason of death or disability; or (4) the 10th anniversary of the grant date for such option.

          Generally, pursuant to TJ Chemical’s operating agreement, membership units acquired pursuant to the Option Plan are subject to customary tag-along and drag-along rights for the 180-day period following the later of a termination of employment and 6 months and 1-day following the date that units were acquired pursuant to the exercise of the option, TJ Chemical has the right to repurchase each membership unit then owned by the participant at fair value, as determined in good faith by the Board of Directors of TJ Chemical.

     (c) Other Equity Awards

          We provided certain key employees with a grant of profits units (subject to the 8% pool limitation described above). Profits units are economically equivalent to an option, except that they provide the recipient/employee with an opportunity to recognize capital gains in the appreciation of TJ Chemicals and its affiliates and TJ Chemicals and its affiliates do not receive any deduction at the time of grant or disposition of the profits unit by the employee. Generally, 50% of the profits units granted will vest when the fair value of TJ Chemical’s assets equal or exceed two times the Threshold Amount, which is defined as the initial value of TJ Chemical, and 50% of the profits units granted will vest when the fair value of TJ Chemical’s assets equal or exceed three times the Threshold Amount, provided, that the participant is employed by KRATON or its subsidiaries on such vesting date, and provided further, that 100% of the profits units shall become vested upon a change in control. Upon the occurrence of any of the foregoing vesting events, TJ Chemicals will pay to the holders of the profits units the amount of the difference between initial value of the profits units and the then current fair value of the profits units as determined by the profits units agreement. Compensation expense will be recorded in our financial statements for this difference at the time it becomes probable the profits units will become vested. On June 15, 2005, TJ Chemical granted Mr. Fogarty 300,000 profit units. In addition, Mr. Davis forfeited 281,250 profits units

Polymer Holdings LLC and KRATON Polymers LLC

Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)

in accordance with his separation agreement. As of September 30, 2005, there were 2,031,250 profits units granted and outstanding.

     (d) KRATON Polymers LLC Executive Deferred Compensation Plan

          On September 9, 2004, the Board of Directors KRATON adopted the KRATON Deferred Compensation Plan. Under the plan, certain employees will be permitted to elect to defer a portion (generally up to 50%) of their annual incentive bonus with respect to each bonus period. Participating employees will be credited with a notional number of membership units based on the fair value of TJ Chemical membership units as of the date of deferral, although the distribution of membership units in such accounts may be made indirectly through Management LLC. Such membership units will be distributed upon termination of the participant’s employment subject to a call right or upon a change in control. We reserved 2 million membership units for issuance pursuant to the KRATON Deferred Compensation Plan and as of September 30, 2005, there were no granted or outstanding membership units.

     (e) 2005 Incentive Compensation Plan

          On June 9, 2005, the Compensation Committee of the Board of Directors, or the Board, of KRATON approved and adopted the 2005 Incentive Compensation Plan, including the performance-based criteria by which potential payouts to participants will be determined. The 2005 Incentive Compensation Plan is designed to attract, retain, motivate and reward officers, and certain employees that have been deemed eligible to participate. The common bonus pool is determined based on EBITDA and may be increased or decreased up to $1 million based on a series of additional performance criteria as established by the Compensation Committee. For the bonus year which ends December 31, 2005, KRATON believes that the bonus pool will range from approximately $10 million to $14 million. Based on the current forecast for the twelve months ended December 31, 2005, KRATON has adequately accrued for the 2005 Incentive Compensation Plan as of September 30, 2005.

     (f) Retirement Plans

          The components of net period benefit cost related to pension benefits for the three and nine months ended September 30, 2005 and September 30, 2004 are as follows (in thousands):

		Three Months Ended								Nine months Ended
		September 30									September 30
		2005				2004				2005				2004
Components of net periodic benefit cost:
Service cost		$	886			$	831			$	2,658			$	2,493
Interest cost			779				694				2,337				2,082
Expected return on plan assets			(736	)			(683	)			(2,208	)			(2,048	)
Net periodic benefit cost		$	929			$	842			$	2,787			$	2,527

     The components of net periodic benefit cost related to other postretirement benefits for the three and nine months ended September 30, 2005 and September 30, 2004 are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2005				2004				2005				2004
Components of net periodic benefit cost:
Service cost		$	91			$	106			$	275			$	319
Interest cost			119				134				357				402
Recognized actuarial gain			—				—				(3	)			—
Net periodic benefit cost		$	210			$	240			$	629			$	721

Polymer Holdings LLC and KRATON Polymers LLC

Notes to the Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

     (8) Supplemental Guarantor Information — Polymer Holdings LLC

          Polymer Holdings was not a party to the issuance of the 8.125% Notes. Polymer Holdings’ separate financial statements are included in the following Supplemental Guarantor Information as of, and for the Nine Months Ended September 30, 2005, for the sole purpose that the following consolidated balances will agree to Polymer Holdings’ consolidated financial statements.

Balance Sheet

		As of September 30, 2005
		Polymer								Guarantor				Non-Guarantor
		Holdings (1)				KRATON (2)				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	—			$	32,847			$	38,703			$	—			$	71,550
Receivables, net			—				—				60,423				97,563				(7,374	)			150,612
Inventories of products			—				—				118,606				79,935				(7,238	)			191,303
Inventories of materials and supplies			—				—				5,853				3,559				—				9,412
Other current assets			—				5,795				970				10,730				—				17,495
Total current assets			—				5,795				218,699				230,490				(14,612	)			440,372
Property, plant, and equipment, less accumulated depreciation			—				130,106				173,176				92,171				—				395,453
Identifiable intangible assets, less accumulated amortization			—				54,998				—				48,811				—				103,809
Investment in consolidated subsidiaries			329,582				—				—				—				(329,582	)			—
Investment in joint venture			—				813				—				9,726				—				10,539
Deferred financing costs			1,724				13,275				—				—				—				14,999
Other long-term assets			—				104,981				272,814				3,964				(372,745	)			9,014
Total assets		$	331,306			$	309,968			$	664,689			$	385,162			$	(716,939	)		$	974,186
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	—			$	2,680			$	—			$	—			$	—			$	2,680
Accounts payable — trade			—				2,900				22,931				39,022				—				64,853
Other payables and accruals			—				3,844				19,947				26,478				—				50,269
Due to (from) related parties			—				—				2,127				17,184				(7,374	)			11,937
Deferred income taxes			—				—				(417	)			1,657				—				1,240
Insurance bond payable			—				1,380				—				—				—				1,380
Total current liabilities			—				10,804				44,588				84,341				(7,374	)			132,359
Long-term debt, net of current portion			102,317				460,653				—				—				—				562,970
Deferred income taxes			(3,703	)			299				30,815				(391	)			—				27,020
Long-term liabilities			—				279,765				16,583				105,714				(372,745	)			29,317
Total liabilities			98,614				751,521				91,986				189,664				(380,119	)			751,666
Commitments and contingencies (note 5)			—				—				—				—				—				—
Member’s equity:
Common equity			232,692				(444,259	)			572,703				195,463				(336,820	)			219,779
Accumulated other comprehensive income			—				2,706				—				35				—				2,741
Total member’s equity			232,692				(441,553	)			572,703				195,498				(336,820	)			222,520
Total liabilities and member’s equity		$	331,306			$	309,968			$	664,689			$	385,162			$	(716,939	)		$	974,186

Polymer Holdings LLC and KRATON Polymers LLC

Notes to the Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)

Balance Sheet

		As of December 31, 2004
		Polymer								Guarantor				Non-Guarantor
		Holdings (1)				KRATON (2)				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	—			$	15,981			$	30,376			$	—			$	46,357
Receivables, net			—				454				43,143				84,467				(7,468	)			120,596
Inventories of products			—				1,684				120,264				91,666				(2,538	)			211,076
Inventories of materials and supplies			—				—				5,673				3,105				—				8,778
Other current assets			—				2,288				577				7,516				—				10,381
Total current assets			—				4,426				185,638				217,130				(10,006	)			397,188
Property, plant, and equipment, less accumulated depreciation			—				138,133				181,292				104,908				—				424,333
Identifiable intangible assets, less accumulated amortization			—				60,883				—				48,811				—				109,694
Investment in consolidated subsidiaries			329,582				—				—				—				(329,582	)			—
Investment in joint venture			—				813				—				9,940				—				10,753
Deferred financing costs			1,826				14,973				—				—				—				16,799
Other long-term assets			—				118,127				252,066				3,529				(365,076	)			8,646
Total assets		$	331,408			$	337,355			$	618,996			$	384,318			$	(704,664	)		$	967,413
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	—			$	2,680			$	—			$	—			$	—			$	2,680
Accounts payable — trade			—				2,900				29,977				47,091				—				79,968
Other payables and accruals			—				8,143				16,199				15,717				—				40,059
Due to (from) related parties			—				—				456				21,483				(7,468	)			14,471
Deferred income taxes			—				—				(417	)			1,657				—				1,240
Total current liabilities			—				13,723				46,215				85,948				(7,468	)			138,418
Long-term debt, net of current portion			93,672				462,663				—				—				—				556,335
Deferred income taxes			(671	)			12,344				19,053				(6,213	)			—				24,513
Long-term liabilities			—				261,950				12,865				115,890				(365,076	)			25,629
Total liabilities			93,001				750,680				78,133				195,625				(372,544	)			744,895
Commitments and contingencies (note 5)			—				—				—				—				—				—
Member’s equity:
Common equity			238,407				(414,355	)			540,863				167,733				(332,120	)			200,528
Accumulated other comprehensive income			—				1,030				—				20,960				—				21,990
Total member’s equity			238,407				(413,325	)			540,863				188,693				(332,120	)			222,518
Total liabilities and member’s equity		$	331,408			$	337,355			$	618,996			$	384,318			$	(704,664	)		$	967,413