UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

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

Delaware (State or other jurisdiction of incorporation)		20-0411521 (I.R.S. Employer Identification No.)

15710 John F. Kennedy Blvd. Suite 300
Houston, TX 77032		281-504-4700
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Delaware		94-2805249
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15710 John F. Kennedy Blvd. Suite 300
Houston, TX 77032		281-504-4700
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES o NO þ

Indicate 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 þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.
YES o NO þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

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

The equity interests of the registrant are not publicly held and the aggregate market value is therefore not determinable.

DOCUMENTS INCORPORATED BY REFERENCE

 

 

TABLE OF CONTENTS

		PAGE
Part I — Financial Information
Item 1. Financial Statements and Accompanying Notes
Polymer Holdings LLC:
Consolidated Balance Sheets — March 31, 2006 (Unaudited) and December 31, 2005			4
Consolidated Statements of Operations (Unaudited) — Three Months Ended March 31, 2006 and 2005			5
Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended March 31, 2006 and 2005			6
Kraton Polymers LLC:
Consolidated Balance Sheets — March 31, 2006 (Unaudited) and December 31, 2005			7
Consolidated Statements of Operations (Unaudited) — Three Months Ended March 31, 2006 and 2005			8
Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended March 31, 2006 and 2005			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			46
Part II — Other Information
Item 1. Legal Proceedings			48
Item 2. Changes in Securities and Use of Proceeds			48
Item 3. Defaults Upon Senior Securities			48
Item 4. Submission of Matters to a Vote of Securityholders			48
Item 5. Other Information			48
Item 6. Exhibits			48
First Supplemental Indenture
Amendment No. 3 to Credit and Guaranty Agreement
Sales Contract
Amendment No. 4 to Credit and Guaranty Agreement
Certification of CEO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification 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, Quarterly 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
March 31, 2006 and December 31, 2005
(in thousands of U.S. dollars)

		March 31,				December 31,
		2006				2005
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	66,392			$	100,934
Receivables, net of allowances of $1,094 and $1,013			133,502				107,586
Inventories of products			239,938				192,595
Inventories of materials and supplies			9,612				9,336
Other current assets			20,009				23,511
Deferred income taxes			1,953				1,953
Total current assets			471,406				435,915
Property, plant, and equipment, less accumulated depreciation			393,493				394,192
Identifiable intangible assets, less accumulated amortization			99,886				101,848
Investment in joint venture			9,613				10,542
Deferred financing costs			13,799				14,399
Other long-term assets			9,413				9,605
Total assets		$	997,610			$	966,501
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	30,570			$	30,570
Accounts payable—trade			81,098				64,345
Other payables and accruals			38,714				48,758
Due to related parties			14,966				13,119
Insurance note payable			7,392				—
Total current liabilities			172,740				156,792
Long-term debt, net of current portion			539,893				537,418
Deferred income taxes			30,239				29,818
Long-term liabilities			30,536				29,713
Total liabilities			773,408				753,741
Commitments and contingencies (See Note 8)
Member’s equity:
Common equity			220,416				215,452
Accumulated other comprehensive income (loss)			3,786				(2,692	)
Total member’s equity			224,202				212,760
Total liabilities and member’s equity		$	997,610			$	966,501

See Notes to the Consolidated Financial Statements.

Polymer Holdings LLC

Consolidated Statements of Operations
Three Months Ended March 31, 2006 and 2005
(in thousands of U.S. dollars)
(Unaudited)

		March 31, 2006				March 31, 2005
Revenues
Sales		$	220,786			$	201,931
Other			8,603				5,269
Total revenues			229,389				207,200
Costs and expense
Costs of goods sold			176,944				157,364
Gross profit			52,445				49,836
Research and development expenses			5,941				5,997
Selling, general, and administrative expenses			17,904				18,072
Depreciation and amortization of identifiable intangibles			11,040				10,982
Earnings in joint venture			(306	)			(557	)
Interest, net			11,607				11,319
Income before income taxes			6,259				4,023
Income tax provision			(1,913	)			(952	)
Net income		$	4,346			$	3,071

See Notes to the Consolidated Financial Statements.

Polymer Holdings LLC

Consolidated Statements of Cash Flows
Three Months Ended March 31, 2006 and 2005
(in thousands of U.S. dollars)
(Unaudited)

		March 31, 2006				March 31, 2005
Cash flows provided by (used in) operating activities:
Net income		$	4,346			$	3,071
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of identifiable intangibles			11,040				10,982
Amortization of deferred financing costs			600				600
Accretion of discount on senior subordinated notes			3,145				2,793
(Gain) loss on disposal of fixed assets			34				(18	)
Distributed (undistributed) earnings in joint venture			959				(96	)
Deferred tax provision (benefit)			431				(709	)
Non-cash compensation			617				206
Decrease (increase) in working capital:
Accounts receivable			(22,696	)			(10,509	)
Due from related party			1,726				486
Inventories			(43,074	)			(30,283	)
Other assets			4,751				(5,518	)
Accounts payable, other payables and accruals, and long-term liabilities			4,684				411
Net cash used in operating activities			(33,437	)			(28,584	)
Cash flows (used in) provided by investing activities:
Purchase of property, plant and equipment			(6,154	)			(1,791	)
Proceeds from sale of property, plant and equipment			—				122
Net cash used in investing activities			(6,154	)			(1,669	)
Cash flows (used in) provided by financing activities:
Repayment of debt			(670	)			(670	)
Net proceeds from insurance note payable			7,392				5,519
Net cash provided by financing activities			6,722				4,849
Effect of exchange rate differences on cash			(1,673	)			2,146
Net decrease in cash and cash equivalents			(34,542	)			(23,258	)
Cash and cash equivalents, beginning of period			100,934				46,357
Cash and cash equivalents, end of period		$	66,392			$	23,099
Supplemental disclosure cash flow information:
Cash paid during the period for income taxes, net of refunds received		$	814			$	217
Cash paid during the period for interest			12,769				12,309

See Notes to the Consolidated Financial Statements.

Kraton Polymers LLC

Consolidated Balance Sheets
March 31, 2006 and December 31, 2005
(in thousands of U.S. dollars)

		March 31,				December 31,
		2006				2005
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	66,392			$	100,934
Receivables, net of allowances of $1,094 and $1,013			133,502				107,586
Inventories of products			239,938				192,595
Inventories of materials and supplies			9,612				9,336
Other current assets			20,009				23,511
Deferred income taxes			1,953				1,953
Total current assets			471,406				435,915
Property, plant, and equipment, less accumulated depreciation			393,493				394,192
Identifiable intangible assets, less accumulated amortization			99,886				101,848
Investment in joint venture			9,613				10,542
Deferred financing costs			12,149				12,711
Other long-term assets			9,413				9,605
Total assets		$	995,960			$	964,813
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	30,570			$	30,570
Accounts payable—trade			81,098				64,345
Other payables and accruals			38,714				48,758
Due to related parties			14,966				13,119
Insurance note payable			7,392				—
Total current liabilities			172,740				156,792
Long-term debt, net of current portion			431,423				432,093
Deferred income taxes			35,466				34,010
Long-term liabilities			30,536				29,713
Total liabilities			670,165				652,608
Commitments and contingencies (See Note 8)
Member’s equity:
Common equity			322,009				314,897
Accumulated other comprehensive income (loss)			3,786				(2,692	)
Total member’s equity			325,795				312,205
Total liabilities and member’s equity		$	995,960			$	964,813

See Notes to the Consolidated Financial Statements.

Kraton Polymers LLC

Consolidated Statements of Operations
Three Months Ended March 31, 2006 and 2005
(in thousands of U.S. dollars)
(Unaudited)

		March 31, 2006				March 31, 2005
Revenues
Sales		$	220,786			$	201,931
Other			8,603				5,269
Total revenues			229,389				207,200
Costs and expense
Costs of goods sold			176,944				157,364
Gross profit			52,445				49,836
Research and development expenses			5,941				5,997
Selling, general, and administrative expenses			17,904				18,072
Depreciation and amortization of identifiable intangibles			11,040				10,982
Earnings in joint venture			(306	)			(557	)
Interest, net			8,425				8,493
Income before income taxes			9,441				6,849
Income tax (provision) benefit			(2,946	)			(1,894	)
Net income		$	6,495			$	4,955

See Notes to the Consolidated Financial Statements.

Kraton Polymers LLC

Consolidated Statements of Cash Flows
Three Months Ended March 31, 2006 and 2005
(in thousands of U.S. dollars)
(Unaudited)

		March 31,				March 31,
		2006				2005
Cash flows (used in) provided by operating activities:
Net income		$	6,495			$	4,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of identifiable intangibles			11,040				10,982
Amortization of deferred financing costs			562				567
(Gain) loss on disposal of fixed assets			34				(18	)
Distributed (undistributed) earnings in joint venture			959				(96	)
Deferred tax provision			1,465				233
Non-cash compensation			617				206
Increase (decrease) in working capital:
Accounts receivable			(22,696	)			(10,509	)
Due from related party			1,726				486
Inventories			(43,074	)			(30,283	)
Other assets			4,751				(5,518	)
Accounts payable, other payables and accruals, and long-term liabilities			4,684				411
Net cash (used in) operating activities			(33,437	)			(28,584	)
Cash flows (used in) provided by investing activities:
Purchase of property, plant and equipment			(6,154	)			(1,791	)
Proceeds from sale of property, plant and equipment			—				122
Net cash used in investing activities			(6,154	)			(1,669	)
Cash flows (used in) provided by financing activities:
Repayment of debt			(670	)			(670	)
Net proceeds from insurance note payable			7,392				5,519
Net cash provided by financing activities			6,722				4,849
Effect of exchange rate differences on cash			(1,673	)			2,146
Net decrease increase in cash and cash equivalents			(34,542	)			(23,258	)
Cash and cash equivalents, beginning of period			100,934				46,357
Cash and cash equivalents, end of period		$	66,392			$	23,099
Supplemental disclosure cash flow information:
Cash paid during the period for income taxes, net of refunds received		$	814			$	217
Cash paid during the period for interest			12,769				12,309

See Notes to the Consolidated Financial Statements.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(1) Summary of Significant Accounting Policies

(a) Organization 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.

     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 three months of 2006 are not necessarily indicative of results to be expected for the year ending December 31, 2006. 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.

     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 reported in Polymer Holdings’ and Kraton’s Combined Form 10-K for the year ended December 31, 2005.

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

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(2) Stock-Based Compensation

     In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123. As required, we adopted the provisions of SFAS No. 123(R) effective at the beginning of our fiscal 2006, using the modified-prospective method. Upon adoption of SFAS No. 123(R), we elected to use the Black-Scholes option-pricing model. If we had adopted SFAS No. 123(R) in prior years, our operating income for the years ended December 31, 2005, 2004 and 2003 would have been reduced by approximately $1.5 million, $1.0 million and $0.0 million, respectively. SFAS No. 123(R) requires the benefit of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow in the accompanying consolidated statements of cash flows.

     See footnote 9 (b) for a description of the T.J. Chemical Holdings LLC 2004 Option Plan. There were no options granted during the three months ended March 31, 2006, and there were no options exercised during the three months ended March 31, 2006 and 2005.

     During the three months ended March 31, 2006 and March 31, 2005, we recorded $429 thousand and $157 thousand, respectively, in stock-based employee compensation expense, net of tax effects of $188 thousand and $49 thousand, respectively. At March 31, 2006, there was $6.6 million of unrecognized compensation cost related to nonvested option awards, and $2.4 million of unrecognized compensation expense related to nonvested restricted stock awards.

     The Company expects to recognize in stock-based employee compensation expense the following (in millions):

Year Ended
December 31,		Amount
2006		$	2.4
2007			2.4
2008			2.4
2009			1.3
2010			0.5

     The weighted average fair value per option at the date of grant for options granted in the first quarter of 2005 was $0.65 (no options were granted in the first quarter of 2006), as valued using the Black-Scholes option-pricing model with the following assumptions:

		Three Months Ended
		March 31, 2005
Risk-free interest rate			3.75	%
Expected dividend yield			0.0	%
Expected volatility			0.998
Expected term (in years)			5.0

     Since our membership units are privately held, the estimated volatility is based on the historical volatility of similar companies stock that are publicly traded. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk free rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

     For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the option’s vesting period. The following table illustrates the effect on net income if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for the noted periods (in thousands):

		Three Months Ended
		March 31, 2005
		Polymer Holdings				Kraton
Reported net income		$	3,071			$	4,955
Add: Stock based employee compensation expense (1)			—				—
Less: Total fair value computed stock-based compensation, net of tax			(252	)			(252	)
Pro forma net income		$	2,819			$	4,703

     Information pertaining to option activity for the three months ended March 31, 2006 is as follows (number of options and aggregate intrinsic value in thousands):

										Weighted
						Weighted				Average
		Number				Average				Remaining				Aggregate
		of				Exercise				Contractual				Intrinsic
		Options				Price				Term				Value (1)
Outstanding-beginning of year			14,835			$	1.00				—
Granted			—				—				—
Exercised			—				—				—
Cancelled			240				1.00				—
Outstanding at March 31, 2006			14,595			$	1.00				2.2				—
Exercisable at March 31, 2006			2,993			$	1.00				—				—

     The number, weighted average exercise price and weighted average remaining contractual life of options outstanding as of March 31, 2006, and the number and weighted average exercise price of options exercisable as of March 31, 2006 follow (number of options in thousands):

										Weighted				Weighted
		Range of				Number of				Average				Average
		Exercise Prices				Options				Exercise Price				Remaining Life
Outstanding options:		$	1.00				14,595			$	1.00				2.2
Exercisable options:		$	1.00				2,993			$	1.00

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(3) Detail of Certain Balance Sheet Accounts

     The components of inventories and other payables and accruals included the following (in thousands):

		March 31,				December 31,
		2006				2005
Inventories:
Finished products		$	209,347			$	167,454
Work in progress			3,305				2,615
Raw materials			27,286				22,526
		$	239,938			$	192,595
Other payables and accruals:
Employee related		$	8,304			$	16,217
Interest			3,844				8,069
Property and other taxes			6,304				5,095
Customer rebates			2,368				4,382
Income taxes payable			279				752
Other			17,615				14,243
		$	38,714			$	48,758

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(4) Comprehensive Income (Loss)

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

		Three Months Ended
		March 31
		2006				2005
Polymer Holdings
Net income		$	4,346			$	3,071
Foreign currency adjustments			6,273				(11,603	)
Unrealized gain on interest rate swaps			205				1,544
Total comprehensive income (loss)		$	10,824			$	(6,988	)
Kraton
Net income		$	6,495			$	4,955
Foreign currency adjustments			6,273				(11,603	)
Unrealized gain on interest rate swaps			205				1,544
Total comprehensive income (loss)		$	12,973			$	(5,104	)

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

		March 31, 2006				December 31, 2005
Foreign currency adjustments		$	694			$	(5,579	)
Unrealized gain on interest rate swaps			3,092				2,887
Total accumulated other comprehensive income (loss)		$	3,786			$	(2,692	)

(5) Long-Term Debt

     Long-term debt consists of the following (in thousands):

		March 31, 2006				December 31, 2005
Kraton:
Senior Secured Credit Facility:
Term loans		$	261,993			$	262,663
Revolver			—				—
8.125% Senior Subordinated Notes			200,000				200,000
Total long-term debt			461,993				462,663
Less current portion of long-term debt			30,570				30,570
Total Kraton			431,423				432,093
Polymer Holdings:
12.000% Senior Discount Notes			108,470				105,325
Total Polymer Holdings		$	539,893			$	537,418

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(a) Senior Secured Credit Facility

     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 as amended on March 4, 2004, October 21, 2004 and February 16, 2006. We refer in these notes 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 in these notes 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 March 31, 2006, and December 31, 2005, we had no outstanding borrowings under the Revolving Facility.

   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

     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. 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 is 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, 2005, due to the amendment to the Term Loans, dated May 12, 2006, as discussed in Note 11 below.

  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.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

     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 March 31, 2006, we were in compliance with all covenants under the Credit Agreement.

     See Note 11 for a description of recent amendments.

(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 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 March 31, 2006, and December 31, 2005, 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 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 March 31, 2006, we are in compliance with all covenants under the 8.125% Notes.

(c) Senior Discount Notes Due July 15, 2014

     In connection with an amendment to Kraton’s senior secured credit facility dated October 21, 2004, 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 12.000% Senior Discount Notes due 2014, or the 12.000% Discount Notes, on November 2, 2004. Neither Kraton nor any of its subsidiaries guarantee the 12.000% Discount Notes. The 12.000% 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

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

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 12.000% Discount Notes outstanding at March 31, 2006, was $150.0 million, with an accreted value of $108.5 million.

  Interest

     No cash interest will accrue on the 12.000% Discount Notes prior to January 15, 2009. Thereafter, cash interest on the 12.000% 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 12.000% 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 12.000% Discount Notes at certain predetermined redemption prices, plus accrued and unpaid interest. On April 24, 2006, we announced the commencement of a cash tender offer for any and all of the outstanding 12.000% Discount Notes.

  Covenants

     The 12.000% 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 12.000% 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 March 31, 2006, we were in compliance with all covenants under the 12.000% Discount Notes.

     See Note 11 for a description of the tender offer with respect to the 12.000% Discount Notes.

(6) Financial Instruments

(a) Interest Rate Swap Agreements

     Under the term loan portion of the senior secured credit facility, we are required to hedge, or otherwise protect against interest rate fluctuations, a portion of the variable rate debt. As a result, we entered into two interest rate swap agreements in the amount of $80.0 million effective June 11, 2004, and $80 million effective July 6, 2004. Both of these agreements will terminate on June 24, 2007, have a fixed rate quarterly payment date on each of September 24, December 24, March 24 and June 24, commence on June 24, 2004, and end on the termination date. On November 1, 2004, both of these agreements were designated as cash flow hedges on the exposure of the variability of future cash flows subject to the variable quarterly interest rates on $160.0 million of the term loan portion of the credit facility. As of March 31, 2006, the fair market value of the agreements in effect was an asset of $3.2 million. The agreements have an average fixed rate of 3.524%.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(b) Fair Value of Financial Instruments

     The following table presents the carrying values and approximate fair values of our long-term debt at March 31, 2006 and December 31, 2005 (in thousands):

		March 31, 2006
		Carrying Value				Fair Value
Term loans		$	261,993			$	261,993
8.125% Notes			200,000				199,100
12.000% Discount Notes			108,470				118,725

		December 31, 2005
		Carrying Value				Fair Value
Term loans		$	262,663			$	262,663
8.125% Notes			200,000				192,000
12.000% Discount Notes			105,325				108,375

     Due to the Term Loans having variable interest rates, the fair value equals their carrying value.

(7) 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.

(8) 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.

(9) 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 Company call right in the event of termination of employment. As of March 31, 2006, there were 2,740,000 membership units of Management LLC issued and outstanding.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(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. As of March 31, 2006, there were 14,595,000 options granted and outstanding.

     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.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(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. As of March 31, 2006, there were 2,231,250 profits units granted and outstanding.

(d) Kraton Polymers LLC Executive Deferred Compensation Plan

     On September 9, 2004, the Board of Directors of 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 March 31, 2006, there were no granted or outstanding membership units.

(e) 2006 Incentive Compensation Plan

     On March 8, 2006, the Compensation Committee of the Board of Directors, or the Board, of Kraton approved and adopted the 2006 Incentive Compensation Plan including the performance-based criteria by which potential payouts to participants will be determined. The 2006 Incentive Compensation Plan is designed to attract, retain, motivate and reward officers, and certain employees that have been deemed eligible to participate. For the bonus year which ends December 31, 2006, the Board will establish a common bonus pool proportional to the EBITDA generated. It is expected that the common bonus pool be in the range of $5 million to $10 million, but could be more or less depending on performance. Once the common bonus pool is determined based on EBITDA, the common bonus pool under the 2006 Incentive Compensation Plan may be increased or decreased up to $1 million based on a series of additional performance criteria as established by the Compensation Committee.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements

For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(f) Retirement Plans

     The components of net periodic benefit cost related to pension benefits for the three months ended March 31, 2006, and March 31, 2005, are as follows (in thousands):

		Three Months Ended
		March 31
		2006				2005
Components of net periodic benefit cost:
Service cost		$	797			$	886
Interest cost			849				779
Expected return on plan assets			(799	)			(736	)
Net periodic benefit cost		$	847			$	929

     The components of net periodic benefit cost related to other postretirement benefits for the three months ended March 31, 2006, and March 31, 2005, are as follows (in thousands):

		Three Months Ended
		March 31
		2006				2005
Components of net periodic benefit cost:
Service cost		$	103			$	92
Interest cost			137				119
Recognized actuarial gain			—				(1	)
Net periodic benefit cost		$	240			$	210

(10) Industry Segment and Foreign Operations

     We operate in one segment for the manufacture and marketing of styrenic block copolymers. In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” or SFAS 131, our chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. Since we operate in one segment and in one group of similar products, all financial segment and product line information required by SFAS 131 can be found in the consolidated financial statements.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

     For geographic reporting, revenues are attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant, and equipment, which are attributed to the geographic location in which they are located. Net revenues and long-lived assets by geographic region were as follows (in thousands):

		Three Months Ended March 31,
		2006				2005
Net Revenues:
United States		$	85,309			$	83,563
Germany			24,293				21,712
Japan			16,107				14,308
Netherlands			14,323				10,118
Italy			13,289				12,126
United Kingdom			9,326				6,914
China			8,923				3,710
Brazil			7,233				6,186
France			6,993				12,039
Canada			6,100				5,844
Thailand			3,679				2,759
Taiwan			3,634				2,871
Argentina			3,125				2,833
Australia			2,980				2,086
Turkey			2,777				1,977
All other countries			21,298				18,154
		$	229,389			$	207,200

		March 31,				December 31,
		2006				2005
Long-lived Assets:
United States		$	272,484			$	270,639
France			93,095				91,593
Brazil			34,479				30,008
Germany			26,805				26,011
Netherlands			24,292				23,732
Japan			3,346				3,342
All other countries			12,965				12,837
			467,466				458,162
Less accumulated depreciation			(73,973	)			(63,970	)
		$	393,493			$	394,192

Polymer Holdings LLC and Kraton Polymers LLC

Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)

(11) Subsequent Event

     Tender Offer

     On April 24, 2006, Polymer Holdings and Polymer Holdings Capital Corporation announced the commencement of a cash tender offer for any and all of the outstanding $150,000,000 aggregate principal amount at maturity of the 12.000% Discount Notes on the terms and subject to the conditions set forth in their Offer to Purchase and Consent Solicitation Statement dated April 24, 2006, in a transaction we refer to as the Offer. Polymer Holdings and Polymer Holdings Capital Corporation are also soliciting consents for amendments to the indenture under which the 12.000% Discount Notes were issued. The proposed amendments include elimination of substantially all of the restrictive covenants, certain events of default and certain other provisions contained in the indenture. Consummation of the Offer is subject to the satisfaction of a number of conditions, including, among others, receipt of consents from holders of a majority in principal amount at maturity of the outstanding 12.000% Discount Notes and the consummation of a refinancing by Kraton, whereby Kraton’s existing senior secured credit facility will be amended to provide for, among other things, a new $385 million term loan facility resulting in an increase of approximately $103 million in its senior secured debt. Polymer Holdings and Polymer Holdings Capital Corporation are planning to fund the purchase of the 12.000% Discount Notes with proceeds from the refinancing and a cash distribution by Kraton to Polymer Holdings.

     The Offer will expire at 9:00 a.m., New York City time, on May 22, 2006, unless extended or earlier terminated by the offerors (such date and time, as they may be extended, or the Expiration Time). The consent solicitation expired at 5:00 p.m., New York City time, on May 5, 2006, (such date and time is referred to as the Consent Payment Deadline). Holders of 12.000% Discount Notes who tendered their notes prior to the Consent Payment Deadline received the total consideration of $860 for each $1,000 principal amount at maturity of the 12.000% Discount Notes accepted for payment. Holders of 12.000% Discount Notes must tender their notes at or prior to the Expiration Time to receive the tender offer consideration, which will be $810 for each $1,000 principal amount at maturity of the 12.000% Discount Notes that are accepted for payment. The total consideration is the sum of the tender offer consideration plus a consent payment of $50 per $1,000 principal amount at maturity of 12.000% Discount Notes are accepted for payment.

     As of May 5, 2006, the consent solicitation payment deadline, $149.75 million in aggregate principal amount at maturity, or approximately 99.8% of the 12.000% Discount Notes outstanding had been validly tendered and not withdrawn. Pursuant to the terms of the Offer, the execution on May 9, 2006 of the supplemental indenture implementing the amendments described above constituted the withdrawal deadline, after which tenders of 12.000% Discount Notes may not be withdrawn and consents delivered with respect to the 12.000% Discount Notes may not be revoked. The 12.000% Discount Notes validly tendered and not withdrawn as of May 5, 2006 were accepted for payment and purchased by the offerors on May 12, 2006 for aggregate total consideration equal to $128,785,000. The Offer will expire at 9:00 a.m., New York City time, on May 22, 2006, unless extended or earlier terminated by the offerors.

     On, or on a date promptly following, the Expiration Time unless extended by Polymer Holdings and Polymer Holdings Capital Corporation, all Notes validly tendered and not validly withdrawn after the Consent Payment Deadline but prior to the Expiration Time will be accepted for payment, and holders of 12.000% Discount Notes so tendered will receive the tender offer consideration.

     Amendment to Kraton’s Senior Secured Credit Facility

     On May 12, 2006 Kraton consummated an amendment to its senior secured credit agreement dated as of December 23, 2003, as amended as of March 4, 2004, as further amended as of October 21, 2004 and as further amended as of February 16, 2006, which we refer to as the Amendment. The following description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the provisions of the senior secured credit agreement, as so amended, filed as an exhibit to this Form 10-Q.

     Overview

     The Amendment provides for a new Term Facility of $385 million, representing a $25 million increase over the original Term Facility, and extends the maturity of the Term Facility from December 23, 2010 to May 12, 2013. In addition, the Amendment extends the maturity of the Revolving Facility to May 12, 2011 and provides for the possibility of increasing the existing Revolving Facility and from $60 million to $80 million, subject to new revolving lenders becoming parties to the credit agreement. On the effective date of the Amendment, Kraton borrowed the full $385 million available under the new Term Facility and used the proceeds to repay in full existing borrowings under the original Term Facility, to make a distribution to Polymer Holdings to finance a portion of the funds necessary to consummate the Offer and pay fees and expenses related to the foregoing.

     Interest and Fees

     The term loans under the new Term Facility bear interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at our option, the base rate plus 1.00% per annum. These rates represent a reduction of 0.50% from the applicable rates in the original Term Facility.

     Covenants

     The Amendment modified certain of the specified financial ratios that we are required to maintain and financial tests that we are required to meet. These modifications include the elimination of our obligation to comply with the maximum capital expenditures test. In addition, under the Amendment, we are required to maintain an interest coverage ratio of 2.00:1.00 through the fourth fiscal quarter of 2006, increasing to 2.25:1.00 through the first fiscal quarter of 2008 and becoming progressively more restrictive thereafter and to prevent our leverage ratio from exceeding 6.45:1.00 through the first two fiscal quarters of 2006, decreasing to 5.95:1.00 through the first two fiscal quarters of 2007, decreasing further to 5.45:1.00 through the first fiscal quarter of 2008 and becoming progressively less restrictive thereafter.

     Events of Default

     The Amendment permits Polymer Holdings to cure a financial covenant default under the credit agreement by issuing shares of common stock for cash or otherwise receiving cash equity contributions within a prescribed period of time following the occurrence of the default.

Polymer Holdings LLC and Kraton Polymers LLC

Notes to the Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(in thousands of U.S. dollars)
(Unaudited)

(12) 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 Three Months Ended March 31, 2006, for the sole purpose that the following consolidated balances will agree to Polymer Holdings’ consolidated financial statements.

Balance Sheet

		As of March 31, 2006
		Polymer								Guarantor				Non-Guarantor
		Holdings (1)				Kraton (2)				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	—			$	23,144			$	43,248			$	—			$	66,392
Receivables, net			—				877				53,062				98,806				(19,243	)			133,502
Inventories of products			—				—				134,661				113,500				(8,223	)			239,938
Inventories of materials and supplies			—				—				6,054				3,558				—				9,612
Other current assets			—				11,903				827				7,279				—				20,009
Deferred income taxes			—				—				6,027				(4,074	)			—				1,953
Total current assets			—				12,780				223,775				262,317				(27,466	)			471,406
Property, plant, and equipment, less accumulated depreciation			—				125,071				171,606				96,816				—				393,493
Identifiable intangible assets			—				51,075				—				48,811				—				99,886
Investment in consolidated subsidiaries			329,582				—				—				—				(329,582	)			—
Investment in joint venture			—				813				—				8,800				—				9,613
Deferred financing costs			1,650				12,149				—				—				—				13,799
Other long-term assets			—				118,125				317,997				3,954				(430,663	)			9,413
Total assets		$	331,232			$	320,013			$	713,378			$	420,698			$	(787,711	)		$	997,610
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	—			$	30,570			$	—			$	—			$	—			$	30,570
Accounts payable-trade			—				2,900				30,573				47,625				—				81,098
Other payables and accruals			—				3,844				11,349				23,521				—				38,714
Due to (from) related parties			—				—				9,880				24,329				(19,243	)			14,966
Insurance note payable			—				7,392				—				—				—				7,392
Total current liabilities			—				44,706				51,802				95,475				(19,243	)			172,740
Long-term debt, net of current portion			108,470				431,423				—				—				—				539,893
Deferred income taxes			(5,227	)			(13,517	)			46,591				2,392				—				30,239
Long-term liabilities			—				312,538				29,998				118,663				(430,663	)			30,536
Total liabilities			103,243				775,150				128,391				216,530				(449,906	)			773,408
Commitments and Contingencies (See Note 8)
Member’s equity:
Common equity			227,989				(458,229	)			584,987				203,474				(337,805	)			220,416
Accumulated other comprehensive income			—				3,092				—				694				—				3,786
Total member’s equity			227,989				(455,137	)			584,987				204,168				(337,805	)			224,202
Total liabilities and member’s equity		$	331,232			$	320,013			$	713,378			$	420,698			$	(787,711	)		$	997,610

Polymer Holdings LLC and Kraton Polymers LLC

Notes to the Consolidated Financial Statements
For the Three Months Ended March 31, 2006 and 2005
(in thousands of U.S. dollars)
(Unaudited)

Balance Sheet

		As of December 31, 2005
		Polymer								Guarantor				Non-Guarantor
		Holdings (1)				Kraton (2)				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	—			$	54,941			$	45,993			$	—			$	100,934
Receivables, net			—				—				45,048				69,950				(7,412	)			107,586
Inventories of products			—				—				109,691				88,697				(5,793	)			192,595
Inventories of materials and supplies			—				—				5,935				3,401				—				9,336
Other current assets			—				4,729				9,565				9,217				—				23,511
Deferred income taxes			—				—				6,027				(4,074	)			—				1,953
Total current assets			—				4,729				231,207				213,184				(13,205	)			435,915
Property, plant, and equipment, less accumulated depreciation			—				127,589				173,900				92,703				—				394,192
Identifiable intangible assets, less accumulated amortization			—				53,037				—				48,811				—				101,848
Investment in consolidated subsidiaries			329,582				—				—				—				(329,582	)			—
Investment in joint venture			—				813				—				9,729				—				10,542
Deferred financing costs			1,688				12,711				—				—				—				14,399
Other long-term assets			—				105,385				290,963				4,127				(390,870	)			9,605
Total assets		$	331,270			$	304,264			$	696,070			$	368,554			$	(733,657	)		$	966,501
Liabilities and Member’s Equity
Current liabilities:
Current portion of long-term debt		$	—			$	30,570			$	—			$	—			$	—			$	30,570
Accounts payable – trade			—				2,900				26,726				34,719				—				64,345
Other payables and accruals			—				8,069				21,448				19,241				—				48,758
Due to (from) related parties			—				—				1,835				18,696				(7,412	)			13,119
Total current liabilities			—				41,539				50,009				72,656				(7,412	)			156,792
Long-term debt, net of current portion			105,325				432,093				—				—				—				537,418
Deferred income taxes			(4,192	)			(9,055	)			42,764				301				—				29,818
Long-term liabilities			—				285,485				28,950				106,148				(390,870	)			29,713
Total liabilities			101,133				750,062				121,723				179,105				(398,282	)			753,741
Commitments and contingencies (See Note 8)			—				—				—				—				—				—
Member’s equity:			—				—				—				—				—				—
Common equity			230,137				(448,685	)			574,347				195,028				(335,375	)			215,452
Accumulated other comprehensive income			—				2,887				—				(5,579	)			—				(2,692	)
Total member’s equity			230,137				(445,798	)			574,347				189,449				(335,375	)			212,760
Total liabilities and member’s equity		$	331,270			$	304,264			$	696,070			$	368,554			$	(733,657	)		$	966,501