e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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o |
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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)
Commission file number 333-123749
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Delaware
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20-0411521 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation) |
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700 Milam Street, 13th Floor, North Tower
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Houston, TX 77002
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832-204-5400 |
(Address of principal executive offices, |
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(Registrants telephone number, including area code) |
including zip code) |
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KRATON Polymers LLC
(Exact name of registrant as specified in its charter)
Commission file number 333-123747
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Delaware
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94-2805249 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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700 Milam Street, 13th Floor, North Tower
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Houston, TX 77002
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832-204-5400 |
(Address of principal executive offices, |
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(Registrants telephone number, including area code) |
including zip code) |
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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
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 Managements 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.
3
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)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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(Restated |
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See note 1(c)) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
71,550 |
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$ |
46,357 |
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Receivables, net of allowances of $884 and $750 |
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150,612 |
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120,596 |
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Inventories of products |
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191,303 |
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211,076 |
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Inventories of materials and supplies |
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9,412 |
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8,778 |
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Other current assets |
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17,495 |
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10,381 |
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Total current assets |
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440,372 |
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397,188 |
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Property,
plant, and equipment, less accumulated depreciation of $57,654 and $38,086 |
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395,453 |
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424,333 |
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Identifiable intangible assets, less accumulated amortization of $13,887 and $8,002 |
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103,809 |
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109,694 |
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Investment in joint venture |
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10,539 |
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10,753 |
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Deferred financing costs |
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14,999 |
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16,799 |
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Other long-term assets |
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9,014 |
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8,646 |
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Total assets |
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$ |
974,186 |
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$ |
967,413 |
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Liabilities and Members Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
2,680 |
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$ |
2,680 |
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Accounts payabletrade |
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64,853 |
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|
79,968 |
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Other payables and accruals |
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50,269 |
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40,059 |
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Due to related parties |
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|
11,937 |
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14,471 |
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Deferred income taxes |
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1,240 |
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1,240 |
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Insurance bond payable |
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1,380 |
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Total current liabilities |
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132,359 |
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138,418 |
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Long-term debt, net of current portion |
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562,970 |
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556,335 |
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Deferred income taxes |
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27,020 |
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24,513 |
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Long-term liabilities |
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29,317 |
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25,629 |
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Total liabilities |
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751,666 |
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744,895 |
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Commitments and contingencies (note 5) |
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Members equity: |
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Common equity |
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219,779 |
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200,528 |
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Accumulated other comprehensive income |
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2,741 |
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21,990 |
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Total members equity |
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222,520 |
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222,518 |
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Total liabilities and members equity |
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$ |
974,186 |
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$ |
967,413 |
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See accompanying notes to consolidated financial statements.
4
Polymer Holdings LLC
Consolidated Statements of Operations
Three Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)
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September 30, |
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September 30, |
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2005 |
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2004 |
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(Restated |
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See note 1(c)) |
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Revenues |
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Sales |
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$ |
269,017 |
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$ |
209,407 |
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Other |
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7,457 |
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1,840 |
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Total revenues |
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276,474 |
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211,247 |
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Costs and expense |
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Costs of goods sold |
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225,945 |
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179,186 |
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Gross profit |
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50,529 |
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32,061 |
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Research and development expenses |
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6,700 |
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5,530 |
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Selling, general, and administrative expenses |
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19,130 |
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16,467 |
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Depreciation and amortization of
identifiable intangibles |
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11,548 |
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11,185 |
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Earnings in joint venture |
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(182 |
) |
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11 |
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Interest, net |
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11,746 |
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11,722 |
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Income (loss) before income taxes |
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1,587 |
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(12,854 |
) |
Income tax (provision) benefit |
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(633 |
) |
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6,848 |
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Net income (loss) |
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$ |
954 |
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$ |
(6,006 |
) |
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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)
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September 30, |
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September 30, |
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2005 |
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2004 |
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(Restated |
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See note 1(c)) |
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Revenues |
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Sales |
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$ |
732,338 |
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$ |
589,886 |
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Other |
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|
20,287 |
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8,738 |
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Total revenues |
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752,625 |
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598,624 |
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Costs and expense
|
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Costs of goods sold |
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586,145 |
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514,692 |
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Gross profit |
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166,480 |
|
|
|
83,932 |
|
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|
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Research and development expenses |
|
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19,500 |
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|
17,246 |
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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 |
) |
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|
(134 |
) |
Interest, net |
|
|
34,578 |
|
|
|
27,719 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
25,000 |
|
|
|
(39,251 |
) |
Income tax (provision) benefit |
|
|
(6,159 |
) |
|
|
15,332 |
|
|
|
|
|
|
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Net income (loss) |
|
$ |
18,841 |
|
|
$ |
(23,919 |
) |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
Polymer Holdings LLC
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)
|
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|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Restated |
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|
|
|
|
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|
See note 1(c)) |
|
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
|
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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 |
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|
|
2,522 |
|
Accretion of discount on senior subordinated notes |
|
|
8,645 |
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|
|
|
|
Change in the fair value of interest rate swaps |
|
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(128 |
) |
|
|
1,669 |
|
Loss on disposal of fixed assets |
|
|
55 |
|
|
|
637 |
|
(Undistributed) distributed earnings in joint venture |
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(589 |
) |
|
|
427 |
|
Deferred tax provision (benefit) |
|
|
483 |
|
|
|
(17,053 |
) |
Non-cash compensation |
|
|
410 |
|
|
|
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Increase (decrease) in working capital: |
|
|
|
|
|
|
|
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Accounts receivable |
|
|
(43,567 |
) |
|
|
(27,426 |
) |
Due from related party |
|
|
351 |
|
|
|
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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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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.
6
KRATON Polymers LLC
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(in thousands of U.S. dollars)
|
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|
|
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|
|
|
|
|
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 Members Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
2,680 |
|
|
$ |
2,680 |
|
Accounts payabletrade |
|
|
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) |
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
Common equity |
|
|
316,669 |
|
|
|
291,703 |
|
Accumulated other comprehensive income |
|
|
2,741 |
|
|
|
21,990 |
|
|
|
|
|
|
|
|
Total members equity |
|
|
319,410 |
|
|
|
313,693 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
972,462 |
|
|
$ |
965,587 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
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.
8
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.
9
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 KRATONs 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 KRATONs 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.
10
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 managements 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 members 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.
11
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 members equity |
|
|
317,382 |
|
|
|
313,693 |
|
|
|
226,208 |
|
|
|
222,518 |
|
Total liabilities and members equity |
|
|
970,601 |
|
|
|
965,587 |
|
|
|
972,427 |
|
|
|
967,413 |
|
|
|
|
(1) |
|
The financial information for Polymer Holdings and KRATON are identical for the items set
forth in the table. |
12
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 staffs 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 incurredgenerally 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 |
|
|
|
|
|
|
|
|
13
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 KRATONs 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 Partys 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.
14
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
KRATONs
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
15
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 KRATONs 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.
16
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.
17
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.
Fogartys 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.
18
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 participants 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 Chemicals 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 participants 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 Chemicals 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 Chemicals 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 Chemicals
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
19
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 participants 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 |
|
|
20
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 Members 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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members 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 members equity |
|
|
232,692 |
|
|
|
(441,553 |
) |
|
|
572,703 |
|
|
|
195,498 |
|
|
|
(336,820 |
) |
|
|
222,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
331,306 |
|
|
$ |
309,968 |
|
|
$ |
664,689 |
|
|
$ |
385,162 |
|
|
$ |
(716,939 |
) |
|
$ |
974,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes. |
|
(2) |
|
KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. |
21
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 Members 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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members 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 members equity |
|
|
238,407 |
|
|
|
(413,325 |
) |
|
|
540,863 |
|
|
|
188,693 |
|
|
|
(332,120 |
) |
|
|
222,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
331,408 |
|
|
$ |
337,355 |
|
|
$ |
618,996 |
|
|
$ |
384,318 |
|
|
$ |
(704,664 |
) |
|
$ |
967,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes. |
|
(2) |
|
KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. |
22
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)
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
Polymer |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Holdings (1) |
|
|
KRATON (2) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
143,409 |
|
|
$ |
154,784 |
|
|
$ |
(29,176 |
) |
|
$ |
269,017 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,457 |
|
|
|
|
|
|
|
7,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
143,409 |
|
|
|
162,241 |
|
|
|
(29,176 |
) |
|
|
276,474 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
|
|
|
|
438 |
|
|
|
115,689 |
|
|
|
138,994 |
|
|
|
(29,176 |
) |
|
|
225,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
(438 |
) |
|
|
27,720 |
|
|
|
23,247 |
|
|
|
|
|
|
|
50,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
3,437 |
|
|
|
3,263 |
|
|
|
|
|
|
|
6,700 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
|
|
|
|
10,252 |
|
|
|
8,878 |
|
|
|
|
|
|
|
19,130 |
|
Depreciation and amortization |
|
|
|
|
|
|
4,953 |
|
|
|
4,572 |
|
|
|
2,023 |
|
|
|
|
|
|
|
11,548 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(182 |
) |
|
|
|
|
|
|
(182 |
) |
Interest expense (income) |
|
|
3,063 |
|
|
|
9,284 |
|
|
|
(1,885 |
) |
|
|
1,284 |
|
|
|
|
|
|
|
11,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(3,063 |
) |
|
|
(14,675 |
) |
|
|
11,344 |
|
|
|
7,981 |
|
|
|
|
|
|
|
1,587 |
|
Income tax (provision) benefit |
|
|
635 |
|
|
|
3,998 |
|
|
|
(3,091 |
) |
|
|
(2,175 |
) |
|
|
|
|
|
|
(633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,428 |
) |
|
$ |
(10,677 |
) |
|
$ |
8,253 |
|
|
$ |
5,806 |
|
|
$ |
|
|
|
$ |
954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2004 |
|
|
|
Polymer |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Holdings (1) |
|
|
KRATON (2) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
115,682 |
|
|
$ |
124,379 |
|
|
$ |
(30,654 |
) |
|
$ |
209,407 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,840 |
|
|
|
|
|
|
|
1,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
115,682 |
|
|
|
126,219 |
|
|
|
(30,654 |
) |
|
|
211,247 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
|
|
|
|
6,011 |
|
|
|
92,003 |
|
|
|
111,826 |
|
|
|
(30,654 |
) |
|
|
179,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
(6,011 |
) |
|
|
23,679 |
|
|
|
14,393 |
|
|
|
|
|
|
|
32,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
2,681 |
|
|
|
2,849 |
|
|
|
|
|
|
|
5,530 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
|
|
|
|
11,296 |
|
|
|
5,171 |
|
|
|
|
|
|
|
16,467 |
|
Depreciation and amortization |
|
|
|
|
|
|
4,692 |
|
|
|
4,482 |
|
|
|
2,011 |
|
|
|
|
|
|
|
11,185 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Interest expense (income) |
|
|
|
|
|
|
12,107 |
|
|
|
(1,583 |
) |
|
|
1,198 |
|
|
|
|
|
|
|
11,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
|
|
|
|
(22,810 |
) |
|
|
6,803 |
|
|
|
3,153 |
|
|
|
|
|
|
|
(12,854 |
) |
Income tax (provision) benefit |
|
|
|
|
|
|
9,532 |
|
|
|
(3,038 |
) |
|
|
354 |
|
|
|
|
|
|
|
6,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
(13,278 |
) |
|
$ |
3,765 |
|
|
$ |
3,507 |
|
|
$ |
|
|
|
$ |
(6,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes. |
|
(2) |
|
KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. |
23
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)
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
Polymer |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Holdings (1) |
|
|
KRATON (2) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
399,119 |
|
|
$ |
441,788 |
|
|
$ |
(108,569 |
) |
|
$ |
732,338 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,287 |
|
|
|
|
|
|
|
20,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
399,119 |
|
|
|
462,075 |
|
|
|
(108,569 |
) |
|
|
752,625 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
|
|
|
|
6,384 |
|
|
|
304,790 |
|
|
|
383,540 |
|
|
|
(108,569 |
) |
|
|
586,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
(6,384 |
) |
|
|
94,329 |
|
|
|
78,535 |
|
|
|
|
|
|
|
166,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
9,783 |
|
|
|
9,717 |
|
|
|
|
|
|
|
19,500 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
|
|
|
|
32,825 |
|
|
|
21,867 |
|
|
|
|
|
|
|
54,692 |
|
Depreciation and amortization |
|
|
|
|
|
|
13,911 |
|
|
|
13,814 |
|
|
|
6,035 |
|
|
|
|
|
|
|
33,760 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,050 |
) |
|
|
|
|
|
|
(1,050 |
) |
Interest expense (income) |
|
|
8,745 |
|
|
|
27,258 |
|
|
|
(5,286 |
) |
|
|
3,861 |
|
|
|
|
|
|
|
34,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(8,745 |
) |
|
|
(47,553 |
) |
|
|
43,193 |
|
|
|
38,105 |
|
|
|
|
|
|
|
25,000 |
|
Income tax (provision) benefit |
|
|
3,030 |
|
|
|
12,949 |
|
|
|
(11,762 |
) |
|
|
(10,376 |
) |
|
|
|
|
|
|
(6,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(5,715 |
) |
|
$ |
(34,604 |
) |
|
$ |
31,431 |
|
|
$ |
27,729 |
|
|
$ |
|
|
|
$ |
18,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
Polymer |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Holdings (1) |
|
|
KRATON (2) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
319,311 |
|
|
$ |
347,593 |
|
|
$ |
(77,018 |
) |
|
$ |
589,886 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,738 |
|
|
|
|
|
|
|
8,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
319,311 |
|
|
|
356,331 |
|
|
|
(77,018 |
) |
|
|
598,624 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
|
|
|
|
30,940 |
|
|
|
245,390 |
|
|
|
315,380 |
|
|
|
(77,018 |
) |
|
|
514,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
(30,940 |
) |
|
|
73,921 |
|
|
|
40,951 |
|
|
|
|
|
|
|
83,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
8,174 |
|
|
|
9,072 |
|
|
|
|
|
|
|
17,246 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
|
|
|
|
28,135 |
|
|
|
18,368 |
|
|
|
|
|
|
|
46,503 |
|
Depreciation and amortization |
|
|
|
|
|
|
13,297 |
|
|
|
13,210 |
|
|
|
5,342 |
|
|
|
|
|
|
|
31,849 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
(134 |
) |
Interest expense (income) |
|
|
|
|
|
|
28,549 |
|
|
|
(4,498 |
) |
|
|
3,668 |
|
|
|
|
|
|
|
27,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
|
|
|
|
(72,786 |
) |
|
|
28,900 |
|
|
|
4,635 |
|
|
|
|
|
|
|
(39,251 |
) |
Income tax (provision) benefit |
|
|
|
|
|
|
25,567 |
|
|
|
(10,115 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
15,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
(47,219 |
) |
|
$ |
18,785 |
|
|
$ |
4,515 |
|
|
$ |
|
|
|
$ |
(23,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes. |
|
(2) |
|
KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. |
24
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)
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
Polymer |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Holdings(1) |
|
|
KRATON (2) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash Flows provided by (used in) operating activities |
|
$ |
|
|
|
$ |
(30,332 |
) |
|
$ |
43,542 |
|
|
$ |
15,954 |
|
|
$ |
|
|
|
$ |
29,164 |
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of plant and equipment, net of proceeds
from sales of equipment |
|
|
|
|
|
|
|
|
|
|
(5,860 |
) |
|
|
(2,622 |
) |
|
|
|
|
|
|
(8,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
(5,860 |
) |
|
|
(2,622 |
) |
|
|
|
|
|
|
(8,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
|
|
|
|
(2,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,010 |
) |
Proceeds from (payments on) intercompany loans |
|
|
|
|
|
|
30,962 |
|
|
|
(20,816 |
) |
|
|
(10,146 |
) |
|
|
|
|
|
|
|
|
Net proceeds from insurance bond |
|
|
|
|
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
|
|
|
|
30,332 |
|
|
|
(20,816 |
) |
|
|
(10,146 |
) |
|
|
|
|
|
|
(630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate difference on cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,141 |
|
|
|
|
|
|
|
5,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
16,866 |
|
|
|
8,327 |
|
|
|
|
|
|
|
25,193 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
|
15,981 |
|
|
|
30,376 |
|
|
|
|
|
|
|
46,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
32,847 |
|
|
$ |
38,703 |
|
|
$ |
|
|
|
$ |
71,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
Polymer |
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Holdings(1) |
|
|
KRATON (2) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash Flows provided by (used in) operating activities |
|
$ |
|
|
|
$ |
(22,936 |
) |
|
$ |
57,332 |
|
|
$ |
23,387 |
|
|
$ |
|
|
|
$ |
57,783 |
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of plant and equipment, net of
proceeds from sales of equipment |
|
|
|
|
|
|
|
|
|
|
(21,908 |
) |
|
|
(6,820 |
) |
|
|
|
|
|
|
(28,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
(21,908 |
) |
|
|
(6,820 |
) |
|
|
|
|
|
|
(28,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
|
|
|
|
(17,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from insurance bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) intercompany loans |
|
|
|
|
|
|
40,704 |
|
|
|
(32,380 |
) |
|
|
(8,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
|
|
|
|
22,917 |
|
|
|
(32,380 |
) |
|
|
(8,324 |
) |
|
|
|
|
|
|
(17,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate difference on cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents |
|
|
|
|
|
|
(19 |
) |
|
|
3,044 |
|
|
|
8,381 |
|
|
|
|
|
|
|
11,406 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
19 |
|
|
|
(182 |
) |
|
|
17,663 |
|
|
|
|
|
|
|
17,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,862 |
|
|
$ |
26,044 |
|
|
$ |
|
|
|
$ |
28,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Polymer Holdings LLC and Polymer Holdings Capital Corporation are the issuers of the 12%
Discount Notes. Polymer Holdings Capital Corporation has minimal assets and income. We do
not believe that separate financial information concerning the issuers would provide
information that would be useful. Neither Polymer Holdings nor Polymer Holdings Capital
Corporation is a guarantor of the 8.125% Notes. |
|
(2) |
|
KRATON Polymers LLC and KRATON Polymers Capital Corporation are the issuers of the 8.125%
Notes. KRATON Polymers Capital Corporation has minimal assets and income. We do not believe
that separate financial information concerning the Issuers would provide additional
information that would be useful. |
25
Polymer Holdings LLC and KRATON Polymers LLC
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(in thousands of U.S. dollars)
(Unaudited)
(9) Supplemental Guarantor Information KRATON Polymers LLC
KRATON and KRATON Polymers Capital Corporation, a financing subsidiary, collectively, the
Issuers, are co-issuers of the 8.125% Notes. The Guarantor Subsidiaries fully and unconditionally
guarantee, on a joint and several basis, the Issuers obligations under the 8.125% Notes. KRATONs
remaining subsidiaries are not guarantors of the 8.125% Notes. We do not believe that separate
financial statements and other disclosures concerning the Guarantor Subsidiaries would provide any
additional information that would be material to investors in making an investment decision.
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
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 joint venture |
|
|
813 |
|
|
|
|
|
|
|
9,726 |
|
|
|
|
|
|
|
10,539 |
|
Deferred financing costs |
|
|
13,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,275 |
|
Other long-term assets |
|
|
104,981 |
|
|
|
272,814 |
|
|
|
3,964 |
|
|
|
(372,745 |
) |
|
|
9,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
309,968 |
|
|
$ |
664,689 |
|
|
$ |
385,162 |
|
|
$ |
(387,357 |
) |
|
$ |
972,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members 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 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 |
|
|
460,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460,653 |
|
Deferred income taxes |
|
|
299 |
|
|
|
30,815 |
|
|
|
(391 |
) |
|
|
|
|
|
|
30,723 |
|
Long-term liabilities |
|
|
279,765 |
|
|
|
16,583 |
|
|
|
105,714 |
|
|
|
(372,745 |
) |
|
|
29,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
751,521 |
|
|
|
91,986 |
|
|
|
189,664 |
|
|
|
(380,119 |
) |
|
|
653,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity |
|
|
(444,259 |
) |
|
|
572,703 |
|
|
|
195,463 |
|
|
|
(7,238 |
) |
|
|
316,669 |
|
Accumulated other comprehensive income |
|
|
2,706 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
2,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity |
|
|
(441,553 |
) |
|
|
572,703 |
|
|
|
195,498 |
|
|
|
(7,238 |
) |
|
|
319,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
309,968 |
|
|
$ |
664,689 |
|
|
$ |
385,162 |
|
|
$ |
(387,357 |
) |
|
$ |
972,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. |
26
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 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
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 joint venture |
|
|
813 |
|
|
|
|
|
|
|
9,940 |
|
|
|
|
|
|
|
10,753 |
|
Deferred financing costs |
|
|
14,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,973 |
|
Other long-term assets |
|
|
118,127 |
|
|
|
252,066 |
|
|
|
3,529 |
|
|
|
(365,076 |
) |
|
|
8,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
337,355 |
|
|
$ |
618,996 |
|
|
$ |
384,318 |
|
|
$ |
(375,082 |
) |
|
$ |
965,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members 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 |
|
|
462,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462,663 |
|
Deferred income taxes |
|
|
12,344 |
|
|
|
19,053 |
|
|
|
(6,213 |
) |
|
|
|
|
|
|
25,184 |
|
Long-term liabilities |
|
|
261,950 |
|
|
|
12,865 |
|
|
|
115,890 |
|
|
|
(365,076 |
) |
|
|
25,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
750,680 |
|
|
|
78,133 |
|
|
|
195,625 |
|
|
|
(372,544 |
) |
|
|
651,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity |
|
|
(414,355 |
) |
|
|
540,863 |
|
|
|
167,733 |
|
|
|
(2,538 |
) |
|
|
291,703 |
|
Accumulated other comprehensive income |
|
|
1,030 |
|
|
|
|
|
|
|
20,960 |
|
|
|
|
|
|
|
21,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity |
|
|
(413,325 |
) |
|
|
540,863 |
|
|
|
188,693 |
|
|
|
(2,538 |
) |
|
|
313,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
337,355 |
|
|
$ |
618,996 |
|
|
$ |
384,318 |
|
|
$ |
(375,082 |
) |
|
$ |
965,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. |
27
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)
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
143,409 |
|
|
$ |
154,784 |
|
|
$ |
(29,176 |
) |
|
$ |
269,017 |
|
Other |
|
|
|
|
|
|
|
|
|
|
7,457 |
|
|
|
|
|
|
|
7,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
143,409 |
|
|
|
162,241 |
|
|
|
(29,176 |
) |
|
|
276,474 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
438 |
|
|
|
115,689 |
|
|
|
138,994 |
|
|
|
(29,176 |
) |
|
|
225,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
(438 |
) |
|
|
27,720 |
|
|
|
23,247 |
|
|
|
|
|
|
|
50,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
3,437 |
|
|
|
3,263 |
|
|
|
|
|
|
|
6,700 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
10,252 |
|
|
|
8,878 |
|
|
|
|
|
|
|
19,130 |
|
Depreciation and amortization |
|
|
4,953 |
|
|
|
4,572 |
|
|
|
2,023 |
|
|
|
|
|
|
|
11,548 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
(182 |
) |
|
|
|
|
|
|
(182 |
) |
Interest expense (income) |
|
|
9,284 |
|
|
|
(1,885 |
) |
|
|
1,284 |
|
|
|
|
|
|
|
8,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(14,675 |
) |
|
|
11,344 |
|
|
|
7,981 |
|
|
|
|
|
|
|
4,650 |
|
Income tax (provision) benefit |
|
|
3,998 |
|
|
|
(3,091 |
) |
|
|
(2,175 |
) |
|
|
|
|
|
|
(1,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,677 |
) |
|
$ |
8,253 |
|
|
$ |
5,806 |
|
|
$ |
|
|
|
$ |
3,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2004 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
115,682 |
|
|
$ |
124,379 |
|
|
$ |
(30,654 |
) |
|
$ |
209,407 |
|
Other |
|
|
|
|
|
|
|
|
|
|
1,840 |
|
|
|
|
|
|
|
1,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
115,682 |
|
|
|
126,219 |
|
|
|
(30,654 |
) |
|
|
211,247 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
6,011 |
|
|
|
92,003 |
|
|
|
111,826 |
|
|
|
(30,654 |
) |
|
|
179,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
(6,011 |
) |
|
|
23,679 |
|
|
|
14,393 |
|
|
|
|
|
|
|
32,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
2,681 |
|
|
|
2,849 |
|
|
|
|
|
|
|
5,530 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
11,296 |
|
|
|
5,171 |
|
|
|
|
|
|
|
16,467 |
|
Depreciation and amortization |
|
|
4,692 |
|
|
|
4,482 |
|
|
|
2,011 |
|
|
|
|
|
|
|
11,185 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Interest expense (income) |
|
|
12,107 |
|
|
|
(1,583 |
) |
|
|
1,198 |
|
|
|
|
|
|
|
11,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(22,810 |
) |
|
|
6,803 |
|
|
|
3,153 |
|
|
|
|
|
|
|
(12,854 |
) |
Income tax (provision) benefit |
|
|
9,532 |
|
|
|
(3,038 |
) |
|
|
354 |
|
|
|
|
|
|
|
6,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(13,278 |
) |
|
$ |
3,765 |
|
|
$ |
3,507 |
|
|
$ |
|
|
|
$ |
(6,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. |
28
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)
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
399,119 |
|
|
$ |
441,788 |
|
|
$ |
(108,569 |
) |
|
$ |
732,338 |
|
Other |
|
|
|
|
|
|
|
|
|
|
20,287 |
|
|
|
|
|
|
|
20,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
399,119 |
|
|
|
462,075 |
|
|
|
(108,569 |
) |
|
|
752,625 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
6,384 |
|
|
|
304,790 |
|
|
|
383,540 |
|
|
|
(108,569 |
) |
|
|
586,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
(6,384 |
) |
|
|
94,329 |
|
|
|
78,535 |
|
|
|
|
|
|
|
166,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
9,783 |
|
|
|
9,717 |
|
|
|
|
|
|
|
19,500 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
32,825 |
|
|
|
21,867 |
|
|
|
|
|
|
|
54,692 |
|
Depreciation and amortization |
|
|
13,911 |
|
|
|
13,814 |
|
|
|
6,035 |
|
|
|
|
|
|
|
33,760 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
(1,050 |
) |
|
|
|
|
|
|
(1,050 |
) |
Interest expense (income) |
|
|
27,258 |
|
|
|
(5,286 |
) |
|
|
3,861 |
|
|
|
|
|
|
|
25,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(47,553 |
) |
|
|
43,193 |
|
|
|
38,105 |
|
|
|
|
|
|
|
33,745 |
|
Income tax (provision) benefit |
|
|
12,949 |
|
|
|
(11,762 |
) |
|
|
(10,376 |
) |
|
|
|
|
|
|
(9,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(34,604 |
) |
|
$ |
31,431 |
|
|
$ |
27,729 |
|
|
$ |
|
|
|
$ |
24,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
319,311 |
|
|
$ |
347,593 |
|
|
$ |
(77,018 |
) |
|
$ |
589,886 |
|
Other |
|
|
|
|
|
|
|
|
|
|
8,738 |
|
|
|
|
|
|
|
8,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
319,311 |
|
|
|
356,331 |
|
|
|
(77,018 |
) |
|
|
598,624 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
30,940 |
|
|
|
245,390 |
|
|
|
315,380 |
|
|
|
(77,018 |
) |
|
|
514,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
(30,940 |
) |
|
|
73,921 |
|
|
|
40,951 |
|
|
|
|
|
|
|
83,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
|
|
|
|
8,174 |
|
|
|
9,072 |
|
|
|
|
|
|
|
17,246 |
|
Selling, general, and
administrative expenses |
|
|
|
|
|
|
28,135 |
|
|
|
18,368 |
|
|
|
|
|
|
|
46,503 |
|
Depreciation and amortization |
|
|
13,297 |
|
|
|
13,210 |
|
|
|
5,342 |
|
|
|
|
|
|
|
31,849 |
|
Earnings in joint venture |
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
(134 |
) |
Interest expense (income) |
|
|
28,549 |
|
|
|
(4,498 |
) |
|
|
3,668 |
|
|
|
|
|
|
|
27,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(72,786 |
) |
|
|
28,900 |
|
|
|
4,635 |
|
|
|
|
|
|
|
(39,251 |
) |
Income tax (provision) benefit |
|
|
25,567 |
|
|
|
(10,115 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
15,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(47,219 |
) |
|
$ |
18,785 |
|
|
$ |
4,515 |
|
|
$ |
|
|
|
$ |
(23,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. |
29
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)
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash Flows provided by (used in) operating activities |
|
$ |
(30,332 |
) |
|
$ |
43,542 |
|
|
$ |
15,954 |
|
|
$ |
|
|
|
$ |
29,164 |
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of plant and equipment, net of proceeds from
sales of equipment |
|
|
|
|
|
|
(5,860 |
) |
|
|
(2,622 |
) |
|
|
|
|
|
|
(8,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(5,860 |
) |
|
|
(2,622 |
) |
|
|
|
|
|
|
(8,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(2,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,010 |
) |
Proceeds from (payments on) intercompany loans |
|
|
30,962 |
|
|
|
(20,816 |
) |
|
|
(10,146 |
) |
|
|
|
|
|
|
|
|
Net proceeds from insurance bond |
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
30,332 |
|
|
|
(20,816 |
) |
|
|
(10,146 |
) |
|
|
|
|
|
|
(630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate difference on cash |
|
|
|
|
|
|
|
|
|
|
5,141 |
|
|
|
|
|
|
|
5,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
|
|
|
|
16,866 |
|
|
|
8,327 |
|
|
|
|
|
|
|
25,193 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
15,981 |
|
|
|
30,376 |
|
|
|
|
|
|
|
46,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
32,847 |
|
|
$ |
38,703 |
|
|
$ |
|
|
|
$ |
71,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2004 |
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
KRATON (1) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Cash Flows provided by (used in) operating activities |
|
$ |
(22,936 |
) |
|
$ |
57,332 |
|
|
$ |
23,387 |
|
|
$ |
|
|
|
$ |
57,783 |
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of plant and equipment, net of proceeds from sales of
equipment |
|
|
|
|
|
|
(21,908 |
) |
|
|
(6,820 |
) |
|
|
|
|
|
|
(28,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(21,908 |
) |
|
|
(6,820 |
) |
|
|
|
|
|
|
(28,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(17,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,787 |
) |
Net proceeds from insurance bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) intercompany loans |
|
|
40,704 |
|
|
|
(32,380 |
) |
|
|
(8,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
22,917 |
|
|
|
(32,380 |
) |
|
|
(8,324 |
) |
|
|
|
|
|
|
(17,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate difference on cash |
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(19 |
) |
|
|
3,044 |
|
|
|
8,381 |
|
|
|
|
|
|
|
11,406 |
|
Cash and cash equivalents at beginning of period |
|
|
19 |
|
|
|
(182 |
) |
|
|
17,663 |
|
|
|
|
|
|
|
17,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
2,862 |
|
|
$ |
26,044 |
|
|
$ |
|
|
|
$ |
28,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
KRATON Polymers Capital Corporation has minimal assets and income. We do not believe that
separate financial information concerning the Issuers would provide additional information
that would be useful. |
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations
with our consolidated financial statements and related notes thereto as of and for the year ended
December 31, 2004, included in the prospectuses filed with the SEC by Polymer Holdings and KRATON
on September 2, 2005. This discussion contains forward-looking statements and involves numerous
risks and uncertainties, including, but not limited to the risk factors disclosed in the
prospectuses and those discussed in Factors Affecting Our Results of Operations, and elsewhere in
this Form 10-Q. Actual results may differ materially from those contained in any forward-looking
statements.
Except where otherwise noted, the financial information and managements discussion and
analysis presented in this section are solely for KRATON and its subsidiaries. Prior to the
Acquisition, Polymer Holdings did not have any material assets or liabilities, and, since the
Acquisition, its only material asset is its investment in KRATON. Polymers Holdings also has
additional outstanding indebtedness, consisting of its 12% Discount Notes. Financial information
for Polymer Holdings is therefore identical to that of KRATON, except with respect to interest
expense, tax provision, net income and total debt.
Overview
We believe we are the worlds leading producer of styrenic block copolymers, or SBCs. SBCs
are highly-engineered synthetic elastomers, which are used in a wide variety of products to impart
flexibility, resilience, strength, durability and processability. SBCs are a fast growing subset
of the broader elastomers industry. We pioneered these products over 40 years ago. We offer a
broad line of SBCs to over 700 customers in over 60 countries worldwide. Our products are used in
a wide variety of applications including road and roofing materials, automotive applications,
numerous consumer products (diapers, tool handles, toothbrushes), tapes, labels, medical devices,
packaging and footwear products.
Our KRATON products are high performance elastomers, which are engineered for a wide range of
end-use applications. Our products possess a combination of high strength and low viscosity, which
facilitates ease of processing at elevated temperatures and high speeds. Our products can be
processed in a variety of manufacturing applications, including injection molding, blow molding,
compression molding, extrusion, hot melt, and solution applied coatings. We offer our customers a
broad portfolio of products that includes more than 100 core commercial grades of SBCs.
We generate substantially all of our product sales and gross margin from our two primary
product lines: (1) unhydrogenated SBCs, or USBCs, and (2) hydrogenated SBCs, or HSBCs. USBCs are
sold broadly under the KRATON D brand name and HSBCs are sold broadly under the KRATON G name and
accounted for 63% and 37% of our full-year 2004 product sales revenues, respectively. USBCs are
primarily used in asphalt modification, packaging and adhesives, sealants and footwear end-use
markets. HSBCs, the production of which is more complex and capital-intensive than that of USBCs,
are primarily used in value-added compounding and personal hygiene and adhesive and sealant
applications.
Recent Developments
Gulf Coast Hurricanes Impact Update
The following is an update on the impact on operations resulting from the two hurricanes
recently hitting the Gulf Coast:
|
|
|
Our operations were not directly affected since our USA manufacturing plant is
located in Ohio; |
|
|
|
|
We currently anticipate that we will be able to serve customers as planned, with
limitations only applying to our isoprene-based products; |
|
|
|
|
Our current inventory levels are sufficient due to our proactive efforts in securing
additional raw materials where available, with limitations only applying to our
isoprene-based products; |
|
|
|
|
We see further tightening of both primary and secondary raw material supply,
translating into increased cost proportional to the prevailing markets; and |
31
|
|
|
Delivery capabilities were briefly affected by the current nationwide freight
availability issue but are now normalized. |
Supply Disruption Issues
On July 1, 2005, Shell Chemicals declared that it was excused from supplying our contractual
minimum butadiene requirements at our Belpre, Ohio production facility due to tropical storm Cindy
that impacted its Norco, Louisiana plant. As a result, our supply of butadiene was placed on
allocation. On August 9, 2005, Shell Chemicals notified us that it intended to further lower the
allocation of butadiene supply to us due to new operational issues. Hurricanes Katrina and Rita,
which followed these events, further constrained on Shell Chemicals ability to supply butadiene.
Presently, with the combination of the allocation of butadiene supplied to us from Shell Chemicals,
our existing butadiene stocks, and alternative sources of supply, we believe that these events will
not have a material adverse impact on our financial results.
On September 22, 2005, Shell Chemicals Deer Park Chemical Plant shut down operations due to
Hurricane Rita. Subsequently, Shell Chemicals declared that it was excused from supplying our
contractual minimum isoprene requirements to our Belpre, Ohio production facility. On October 8,
2005, Shell Chemicals resumed normal operations. See SIS Sales Allocations below for a further
description of the impact of this event.
On October 10, 2005, Shell Chemicals declared that it was excused from supplying our minimum
styrene requirements at our European facilities due to operational problems. During this period, we
were able to meet our supply needs through Shells allocation of styrene, existing styrene
inventories, and alternative sources of supply. On October 24,
2005, Shell Chemicals resumed normal
operations. We believe that this event will not have a material adverse impact on our financial
results.
On November 1, 2005, Shell Chemicals declared that it was excused from supplying our minimum
styrene requirements at our European facilities due to a workers strike at its production facility
in Pernis, the Netherlands. On November 8, 2005, Shell Chemicals
resumed normal operations. With the combination of our existing styrene stocks and alternative
sources of supply, this event did not have a material adverse impact on our financial results.
We currently estimate the immediate impact of these supply disruption issues, coupled with the
gulf coast hurricanes impact, described above, will negatively impact our pre-tax results by
approximately $3 million. Management, however cannot predict the long-term impact to us, our
suppliers or the industry in general.
SIS Sales Allocations
Supplies of isoprene remain constrained due to continued worldwide shortages of isoprene.
Therefore, we continue to be on allocation to ensure we match SIS sales to our isoprene supply.
Moreover, in addition to seeking alternative sources of isoprene supply, we are taking a number of
actions to mitigate the impact including: changes in production scheduling, inventory reductions,
evaluating the need for further product allocations and new technology versions of SIS that require
less isoprene in the production process. We expect the isoprene market to remain tight for the
foreseeable future, which means that the historical volume growth will continue to be
constrained. The impact of this required allocation on year-to-date 2005 business has reduced our
total sales by less than 2%, as compared to the same period in 2004. The specific impact on our
financial results, attributable to additional isoprene supply disruptions described in Supply
Disruption Issues is included in the aforementioned $3 million.
Belpre, Ohio Production Facility Capacity Expansion
On September 16, 2005, we announced that we will be increasing the production capacity of
KRATON D at our Belpre, Ohio production facility by approximately 10 kT through a low cost
debottleneck as a result of the success of utilizing Lean Six Sigma techniques. This increase in
capacity is in response to rising demand in the asphalt modification end-use in the North American
market.
32
Paulinia, Brazil New Polyisoprene Latex Plant
On October 31, 2005, we announced that we will be constructing a new 1.5 kT polyisoprene latex
plant at our Paulinia, Brazil facility in response to strong demand from our medical and consumer
products customers. The addition of this new plant would give us the global capability to supply
nearly 3kT of polyisoprene latex per year. The new plant is expected to be operational in the
fourth quarter of 2006 and would also enable us to quickly and cost effectively expand further
based upon market needs. KRATON polyisoprene latex is a unique synthetic alternative to natural
rubber latex for dipped goods and various specialty products.
Changes in Executive Officers
On September 14, 2005, we announced the appointment of Raymond K. Guba, as Chief Financial
Officer & Vice President effective October 24, 2005. In his role, Mr. Guba will be responsible for
managing our financial and IT groups. He will report to Mr. George Gregory, Chief Executive Office
and President. Mr. Guba brings to KRATON extensive senior management experience in finance from
his 19-year career with General Electric Co., which included responsibility for strategy
formulation and execution; financial reporting; financial planning and analysis; acquisition due
diligence and integration; cash flow management; and contract negotiations around the globe.
During his tenure with General Electric he held a variety of positions with increasing
responsibility, and most recently Mr. Guba was employed by GE Energy, a General Electric Co.
subsidiary, as Chief Financial Officer for their Installations and Field Services business.
On July 28, 2005, we announced that Nicholas G. Dekker would serve as our interim Chief
Financial Officer, effective August 15, 2005. Mr. Dekker has been responsible for all the finance
functions and investor relations since that date and will continue in his role through the filing
of this quarterly report. In November 2005, Mr. Dekker will receive
25,000 Euros as compensation related to his additional
responsibilities. After the filing of this quarterly report, Mr. Dekker will assume the
role of Vice President of Europe and Director of Finance for Europe
and Asia. Mr. Dekker provided consulting services for KRATON from April 2000 until
January 2002 at which time Mr. Dekker became a permanent employee of KRATON. Mr. Dekker began his
KRATON career as European Finance Manager and was promoted to Finance Manager for Europe and Asia
Pacific in 2004.
On June 6, 2005, we announced that David M. Davis, Vice President, Finance and Chief Financial
Officer, has resigned effective August 15, 2005 in order for him to pursue other opportunities.
On August 29, 2005, we announced that Roger P. Morgan, Vice President of Europe, Africa and
Asia Pacific and Robert A. Newman, Vice President of Technology were retiring from their positions
with KRATON. We have finalized the separation arrangements with both Mr. Morgan and Mr. Newman.
Mr. Newmans last date of employment was September 30, 2005, and Mr. Morgans last date of
employment was October 7, 2005.
Changes in Board of Directors
On July 26, 2005, William Price and Richard Aube resigned from our Board of Directors and all
committees of the Board on which they served. Mr. Price has been replaced by Nathan Wright, a
principal of TPG. The vacancy on the Board created by the resignation of Mr. Aube has not been
filled. At its meeting on July 26, 2005, the Board appointed Mr. Wright to the Compensation
Committee of our Board of Directors and John Breckenridge to replace Mr. Aube on the Compensation
Committee and the Executive Committee of our Board of Directors.
End-Use Realignment
We have historically sold into five end-use markets: (1) adhesives, sealants and coatings; (2)
compounding and personal hygiene, or CAPH; (3) packaging and polymer-modification, or P&P; (4)
asphalt modification; and (5) footwear. We do not consider footwear a core end-use market due to
its small percentage of total revenues.
In August 2005, we decided to split the CAPH end-use going forward into two separate end-uses,
compounding channels and personal hygiene in order to focus our resources and better pursue growth
opportunities.
Exchange Offers
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 of 1933, as
amended (the Securities
33
Act), for notes registered under the Securities Act. In addition, 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 notes registered under the
Securities Act. In each offer, 100% of the previously outstanding notes 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.
Please see Management Discussion and Analysis of Financial Condition and Results of
OperationsDescription of Our Indebtedness for a description of the terms of the notes.
The registration rights agreement relating to the 12% Discount Notes and the registration
rights agreement relating to the 8.125% Notes, each required the registration statements to be
filed on April 1, 2005, be declared effective by the SEC, on or prior to July 1, 2005, and an
exchange offer be completed by August 1, 2005. As a result of the untimely declaration of
effectiveness of the registration statements and completion of the offerings, both the 12% Discount
Notes and 8.125% Notes accrued the special interest subsequent to July 1, 2005, through the date
Polymer Holdings and KRATON completed the offers to exchange at the rates provided in the
applicable registration rights agreement.
Restatement of Prior Financial Statements
During the preparation of the interim financial statements to be included in the Form 10-Q 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
decreasing 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 members 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.
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 |
) |
34
|
|
|
|
|
|
|
|
|
|
|
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 members equity |
|
|
317,382 |
|
|
|
313,693 |
|
|
|
226,208 |
|
|
|
222,518 |
|
Total liabilities and members equity |
|
|
970,601 |
|
|
|
965,587 |
|
|
|
972,427 |
|
|
|
967,413 |
|
|
|
|
(1) |
|
The financial information for Polymer Holdings and KRATON are identical for the items set
forth in the table. |
Critical Accounting Policies
Our significant accounting policies are more fully described in the notes to the consolidated
financial statements included in the prospectuses filed with the SEC in connection with the
exchange offers. The process of preparing financial statements, in accordance with generally
accepted accounting principles in the United States requires management to make estimates and
judgments regarding certain items and transactions. These judgments are based on historical
experience, current economic and industry trends, information provided by outside sources, and
management estimates. It is possible that materially different amounts could be recorded if these
estimates and judgments change or if the actual results differ from these estimates and judgments.
We consider the following to be our most significant critical accounting policies, which involve
the judgment of management.
Revenue Recognition
We recognize revenue from sales when title transfers to the customer as products are shipped.
In specific cases, we supply customers on a consignment basis and recognize revenue as the product
is utilized. We classify amounts billed to customers for shipping and handling as revenues, with
the related shipping and handling costs included in cost of goods sold. By-product sales (included
in other revenue) are also recorded upon shipment.
Agreements have been entered into with some customers, whereby they earn rebates when the
volume of their purchases of our product reaches certain agreed levels. These rebates typically
represent approximately 1% of our product sales and are estimated by management and recognized as a
reduction in revenues.
Inventories
Our inventory is principally comprised of finished goods inventory. Inventories are stated at
the lower of cost or market as determined on a first-in first-out, or FIFO basis. Inventory cost is
comprised of raw materials, utilities and other manufacturing costs, including labor. On a
quarterly basis, we evaluate the carrying cost of inventory to ensure that it is stated at the
lower of cost or market. Our products are typically not subject to spoiling or obsolescence and
consequently our reserves for slow moving and obsolete inventory have historically been immaterial.
From time to time, the value of our inventory is re-evaluated to reflect customer demand for
specific products.
35
Property, Plant and Equipment
The most critical accounting policy affecting our chemical assets is the determination of the
estimated useful lives of our property, plant and equipment. The estimated useful lives of our
chemical assets, which range from three years to twenty years, are used to compute depreciation
expense and are also used for impairment tests. The estimated useful lives for the chemical
facilities are based on the assumption that we would provide an appropriate level of annual capital
expenditures while the plants are still in operation. Without these continued capital expenditures,
the useful lives of these plants could significantly decrease. Changes to estimated useful lives
would impact the amount of depreciation and amortization expense recorded in the statement of
operations.
We are required to perform impairment tests on our assets whenever events or changes in
circumstances lead to a reduction in the estimated useful lives or estimated future cash flows that
would indicate that the carrying amount may not be recoverable. Under the provisions of Statement
of Financial Accounting Standards, or SFAS, No. 144, we must compare the undiscounted future cash
flows of an asset to its carrying value. Key factors that could significantly affect future cash
flows include international competition, environmental regulations, higher or lower product prices,
feedstock costs, energy costs and remaining estimated useful life.
Income Taxes
Since the Acquisition, we conduct all operations, including the U.S. operations, in separate
legal entities and as a result income tax amounts are reflected on a separate return basis.
Factors Affecting Our Results of Operations
Raw Materials
Our results of operations are directly affected by the cost of raw materials. The three
primary raw materials used in the production of our products are styrene, butadiene and isoprene.
These monomers together represented approximately 80% of total raw material purchases volume and
approximately 40% of cost of goods sold in 2004. Our financial performance for the year ended
December 31, 2004 and most of 2005 have been impacted by significant increases in raw material
feedstock prices. Beginning in 2003, we have experienced continually increasing raw material
feedstock prices, which has continued through most of 2005. Prices for our key raw materials
increased between 30% and 70% during 2004. Our raw material feedstock costs are volatile as they
are influenced by crude oil prices. The spot price of West Texas Intermediate crude oil has
increased from a yearly average of $31.11 per barrel in 2003 to $41.43 per barrel in 2004, and a
nine month average of $55.61 per barrel in the first nine months of 2005.
Styrene, butadiene and isoprene used by our U.S. and European facilities are primarily
supplied by Shell Chemicals or its affiliates under long-term supply contracts with various
expiration dates. Prices under these contracts are typically determined by contractual formulas
that reference both Shell Chemicals cost of production as well as market prices. In Japan,
butadiene and isoprene supplies for our joint venture plant are supplied under our joint venture
agreement, where our partner supplies most of our necessary requirements with the remaining
requirements supplied by other third-party suppliers. Styrene in Japan is sourced from local
third-party suppliers. Our facility in Paulinia, Brazil purchases all of its raw materials from
local third-party suppliers.
Styrene is used in the production of substantially all KRATON products. Styrene pricing
reflects the costs of ethylene and benzene. Prices for styrene are volatile. Styrene prices are
primarily driven by worldwide supply and demand as well as the cost of ethylene and benzene, which
are influenced by prevailing crude oil prices, natural gas prices and alternative uses of benzene
in the fuel market. Market prices for styrene rose in late 2002, and reached near historical highs
at the beginning of 2003. Market prices for styrene further increased throughout most of 2004 and
have been volatile through most of 2005. The significant price increase has been associated with
increasing crude oil and benzene prices.
Butadiene is used in the production of certain grades of KRATON products. Prices for
butadiene are also volatile, with prices reflecting worldwide supply and demand and prevailing
crude oil and ethylene prices. Market prices for butadiene increased in the latter part of 2002 and
early 2003, due to increased energy prices and tight
36
supply conditions. We saw a slight decline in mid 2003 and flat pricing through the first
quarter of 2004. However, beginning in the second quarter of 2004 and continuing throughout the
remainder of 2004 and most of 2005, we have experienced increasing market prices for butadiene.
The increased market prices for butadiene is primarily due to increased crude oil prices and tight
supply conditions resulting from strong demand, operational problems of some key producers and
limited new production in the U.S. and Europe.
Isoprene is used in the production of certain grades of KRATON products. Isoprene is
primarily produced and consumed captively by producers for the manufacture of rubber tires. As a
result, there is limited non-captive isoprene produced for the market in which we operate. Prices
can be volatile. Our prices are generally affected by prices for crude oil and natural gas as well
as prevailing supply and demand conditions. Market prices for isoprene began to rise during the
fourth quarter of 2003 and continued to rise throughout 2004 and most of 2005. A significant
factor contributing to higher prices is the extreme tightness in the market caused by operational
problems of some key producers and growing demand.
Changes in prices for raw materials will have an impact on our results of operations.
Historically, pricing for KRATON products have generally fluctuated with the cost of raw materials
and changing market circumstances. Our practice has been and continues to be to evaluate and
adjust prices to reflect these conditions.
Seasonality
Our product sales are affected by seasonal changes in end-use markets. Sales of KRATON
products that are sold into the asphalt modification end-use market, which accounted for 24% of
fiscal 2004 product sales revenue, are approximately 50% higher during the second and third
quarters of each fiscal year because winter weather conditions reduce road and roofing construction
in the first and fourth quarters. As a result of these seasonal changes, inventory levels tend to
be higher in the first half of each fiscal year. Other than this seasonal trend, overall results of
operations tend to show relatively little effect of seasonality.
Economic and Market Conditions
Our results of operations are influenced by changes in general economic conditions. A
dramatic economic slowdown could adversely affect demand for our products. However, due to the
value-added nature of our products, the fact that most of our products constitute only a small
portion of the total cost of the products in which they are used and the diversity of our end-use
markets, we believe we are less affected by general economic conditions than many other industries.
In addition, changes in interest rates may increase financing costs as our senior secured credit
facility bears interest at a floating rate. Changes in inflation may increase the costs of raw
materials and other costs, and we may not be able to pass such cost increases on to the consumers
of our products.
International Operations and Currency Fluctuations
We operate a geographically diverse business, with 48% of 2004 net product sales generated
from customers located in the Americas, 36% in Europe and 16% in the Asia Pacific region. In 2004,
we estimate that our products were sold to customers in more than 60 countries. We serve our
customer base from six manufacturing plants in six countries. As described above, changes in
general economic conditions in these countries will influence our results of operations. In
particular, certain of the countries in which we operate, such as Brazil, have experienced
prolonged periods of negative economic growth coupled with high inflation. The existence of such
conditions in the countries in which we operate could negatively affect our operations in those
countries.
37
Although we sell and manufacture our products in many countries, our sales and production
costs are mainly denominated in U.S. dollars, Euros, Japanese Yen and Brazilian Real. The following
table shows the U.S. dollar exchange rate for these currencies in the third quarter of 2005 and
2004. These rates may differ from the actual rates used in the preparation of the consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. $ per 10,000 |
|
|
|
|
|
|
|
|
U.S. $ per Euro |
|
Japanese Yen |
|
U.S. $ per Brazilian Real |
|
|
|
|
|
|
Average |
|
Period End |
|
Average |
|
Period End |
|
Average |
|
Period End |
Quarter Ended |
|
September 30, 2004 |
|
|
1.222 |
|
|
|
1.232 |
|
|
|
90.99 |
|
|
|
90.05 |
|
|
|
0.336 |
|
|
|
0.350 |
|
|
Quarter Ended |
|
September 30, 2005 |
|
|
1.220 |
|
|
|
1.204 |
|
|
|
89.93 |
|
|
|
88.35 |
|
|
|
0.426 |
|
|
|
0.450 |
|
|
Nine Months Ended |
|
September 30, 2004 |
|
|
1.225 |
|
|
|
1.232 |
|
|
|
91.77 |
|
|
|
90.05 |
|
|
|
0.336 |
|
|
|
0.350 |
|
|
Nine Months Ended |
|
September 30, 2005 |
|
|
1.262 |
|
|
|
1.204 |
|
|
|
92.83 |
|
|
|
88.35 |
|
|
|
0.400 |
|
|
|
0.450 |
|
Our financial results are subject to the impact of gains and losses on currency transactions
denominated in currencies other than the functional currency of the relevant operations. Any gains
and losses are included in operating income, but have historically not been material. We
historically have not engaged in foreign currency hedging activities.
In addition, our financial results are subject to the impact of gains and losses on currency
translations, which occur when the financial statements of foreign operations are translated into
U.S. dollars. The financial statements of operations outside the U.S. where the local currency is
considered to be the functional currency are translated into U.S. dollars using the exchange rate
at each balance sheet date for assets and liabilities and the average exchange rate for each period
for revenues, expenses, gains and losses and cash flows. The effect of translating the balance
sheet into U.S. dollars is included as a component of other comprehensive income (loss) in members
equity. Any appreciation of the functional currencies against the U.S. dollar will increase the
U.S. dollar equivalent of amounts of revenues, expenses, gains and losses and cash flows, and any
depreciation of the functional currencies will decrease the U.S. dollar amounts reported.
Results of Operations
Three Months Ended September 30, 2005, Compared to Three Months Ended September 30, 2004
The following table summarizes certain information relating to KRATONs operating results that
have been derived from its financial statements.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, 2005 (1) |
|
|
September 30, 2004 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
|
|
|
|
(Restated) |
|
Revenues: |
|
|
|
|
|
|
|
|
Sales |
|
$ |
269,017 |
|
|
$ |
209,407 |
|
Other |
|
|
7,457 |
|
|
|
1,840 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
276,474 |
|
|
|
211,247 |
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost 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 (loss) 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 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net loss were $11.7 million, $0.6
million and $1.0 million, respectively, for the three months ended September 30, 2005. |
38
The following table summarizes certain information relating to our operating results as a
percentage of total revenues and has been derived from the financial information presented above.
We believe this presentation is useful to investors in comparing historical results. Certain
amounts in the table may not sum due to the rounding of individual components.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, 2005 (1) |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(Restated) |
|
Revenues: |
|
|
|
|
|
|
|
|
Sales |
|
|
97.3 |
% |
|
|
99.1 |
% |
Other |
|
|
2.7 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
Total Revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
81.7 |
|
|
|
84.8 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
18.3 |
|
|
|
15.2 |
|
Research and development expenses |
|
|
2.4 |
|
|
|
2.6 |
|
Selling, general and administrative expenses |
|
|
6.9 |
|
|
|
7.8 |
|
Depreciation and amortization of
identifiable intangibles |
|
|
4.2 |
|
|
|
5.3 |
|
Earnings in joint venture |
|
|
(0.1 |
) |
|
|
|
|
Interest, net |
|
|
3.1 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1.7 |
|
|
|
(6.1 |
) |
Income tax (provision) benefit |
|
|
(0.5 |
) |
|
|
3.2 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1.2 |
% |
|
|
(2.8 |
)% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net income were 4.2%, 0.2%
and 0.3%, respectively, for the three months ended September 30, 2005. |
Total Revenues
Total revenues increased by 30.9% to $276.5 million for the three months ended September 30,
2005, as compared to $211.2 million for the three months ended September 30, 2004. This increase
was primarily due to increased prices for our products and the overall increase in sales volumes.
Sales volumes increased approximately 12.1 kT, or 13.3%, during the comparable periods primarily
due to the increased demand in the asphalt modification end-use market. This increased demand was
primarily due to additional road investment projects in Eastern Europe, expansion of home
construction, and favorable autumn weather. The Euro remained fairly constant, the Japanese Yen
weakened approximately 1.2% and the Brazilian Real appreciated approximately 26.8% during the three
months ended September 30, 2005, as compared to the three months ended September 30, 2004.
Sales. Sales increased by 28.5% to $269.0 million for the three months ended September 30,
2005, as compared to $209.4 million for the three months ended September 30, 2004. $28.6 million of
the increase in sales was due to increased prices for our products, $27.8 million was due to
increased sales volumes and an estimated $3.2 million was due to the appreciation of the functional
currencies of our foreign operations against the U.S. dollar. Sales are divided into KRATON D and
KRATON G.
For the three months ended September 30, 2005, KRATON D sales increased by 49.2% to $197.2
million as compared to $132.2 million for the three months ended September 30, 2004. $36.3 million
of the increase in sales was due to increased prices for our products, $26.1 million was due to
increased sales volumes and $2.6 million was due to the appreciation of the functional currencies
of our foreign operations against the U.S. dollar. The increase in sales volumes was primarily due
to the increase in demand within the asphalt modification end-use market previously discussed.
For the three months ended September 30, 2005, KRATON G sales decreased by 7.0% to $71.8
million from $77.2 million as compared to the three months ended September 30, 2004. $7.8 million
of this decrease in sales was due to decreased sales volumes, which was only partially offset by
$1.8 million in increased prices for our products and an estimated $0.6 million due to the
appreciation of the functional currencies of our foreign operations against the U.S. dollar. The
decrease in sales volumes was primarily due to increased competition and available alternative
technologies.
Other revenue. Other revenues increased by 316.7% to $7.5 million for the three months ended
September
39
30, 2005, as compared to $1.8 million for the three months ended September 30, 2004.
Other revenue primarily consists of the sales of small quantities of residual products that are a
by-product of the manufacturing process of KRATON IR, an isoprene rubber product we report as part
of our KRATON D sales at our Netherlands facility. The increase in other revenues in the current
period is primarily due to the fact that there was no production at our Netherlands facility during
the three months ended September 30, 2004, as a result of the June 6, 2004 fire and subsequent shut
down of the facility until October 1, 2004.
Cost of Goods Sold
Costs of goods sold increased by 26.1% to $225.9 million for the three months ended September
30, 2005, as compared to $179.2 million for the three months ended September 30, 2004. As a
percentage of total revenues, cost of goods sold decreased to 81.7% from 84.8%. The $46.7 million
increase in cost of goods sold was due to: (1) an estimated $30.5 million of increased monomer and
other variable costs, (2) an estimated $16.8 million increase due to an increase in volumes, (3) an
estimated $4.5 million increase in cost of goods sold associated with the increased by-product
sales and (4) an estimated $1.4 million increase related to other manufacturing expenses. In
addition, the increase in cost of goods sold was offset by $6.5 million of reduced costs in the
third quarter of 2005, as compared to the prior year period. The $6.5 million of reduced costs is
due to $6.6 million of additional cost of sales in the 2004 period as compared to $0.1 million in
the 2005 period as a result of the subsequent sale of inventory that was written up to fair value
and sold during the periods. On December 23, 2003, in connection with the Acquisition, we wrote-up
our inventory by $38.4 million to reflect the amount of manufacturing profit in inventory. Average
acquisition costs for isoprene and butadiene increased by approximately 29% and 31%, respectively,
in the comparable periods due to the continuing rise of crude oil prices and tight supply and
demand conditions in the marketplace.
Gross Profit
Gross profit increased by 57.3% to $50.5 million for the three months ended September 30,
2005, as compared to $32.1 million for the three months ended September 30, 2004. Gross profit as
a percentage of total revenues increased from 15.2% in the three months ended September 30, 2004 to
18.3% in the three months ended September 30, 2005, due to the factors noted above. Excluding the
$0.1 million and $6.6 million non-cash increase in cost of goods sold relating to the subsequent
sale of inventory that had been written up to fair value for the three months ended September 30,
2005 and 2004, respectively, gross profit would have been $50.6 million and $38.7 million, or 18.3%
of total revenues for both periods.
Operating Expenses
Research and development expenses. Research and development expenses increased by 21.8% to
$6.7 million for the three months ended September 30, 2005, as compared to $5.5 million the three
months ended September 30, 2004. Research and development expenses increased due to the increased
incentive compensation related to improved financial performance. As a percentage of total
revenues, research and development expenses decreased to 2.4% from 2.6%.
Selling, general and administrative expenses. Selling, general and administrative expenses
increased by 15.8% to $19.1 million for the three months ended September 30, 2005, as compared to
$16.5 million for the three months ended September 30, 2004. Selling, general and administrative
expenses increased due to the increased incentive compensation related to improved financial
performance and severance costs. As a percentage of total revenues, selling, general and
administrative expenses decreased to 6.9% from 7.8% due to the increase in total revenues in the
2005 period, partially offset by the increase in expenses in the second quarter of 2005.
Depreciation and amortization of identifiable intangibles. Depreciation and amortization
expense increased by 2.7% to $11.5 million for the three months ended September 30, 2005, as
compared to $11.2 million for the three months ended September 30, 2004. This increase was
primarily due to assets that were under construction during 2004, that were completed and placed in
service.
Earnings in joint venture. The Kashima plant is operated by a joint venture with JSR
Corporation under
the name KRATON JSR Elastomers K.K. Earnings in the joint venture increased to $0.2 million
for the three months ended September 30, 2005, as compared to a loss of less than $0.1 million for
the three months ended
40
September 30, 2004. This increase in earnings was primarily due to increased
sales prices, partially offset by decreased sales volumes. We use the equity method of accounting
for our joint venture at the Kashima site.
Interest expense Polymer Holdings. Polymer Holdings interest expense was $11.7 million for
both the three months ended September 30, 2005 and the three months ended September 30, 2004. Items
impacting interest expense were an increase of $3.0 million related to the accretion of the debt
discount associated with the issuance of the 12% Discount Notes offset by $1.7 million of expense
relating to the change in fair value of the interest rate swaps in the 2004 period and a $1.3
million decrease related to lower debt balances at higher interest rates. During the three months
ended September 30, 2005, and September 30, 2004, the average debt balances outstanding were $564.6
million and $550.4 million, respectively. The effective interest rates on our debt during the same
periods were 8.2% and 6.6%, respectively. Included in interest expense is $0.6 million and $0.7
million of expense related to the amortization of deferred financing costs for the three months
ended September 30, 2005 and 2004, respectively.
Interest expense KRATON. KRATONs interest expense decreased 25.6% to $8.7 million for the
three months ended September 30, 2005, as compared to $11.7 million for the three months ended
September 30, 2004. This decrease was primarily due to $1.7 million of expense relating to the
change in fair value of the interest rate swaps in the 2004 period and a $1.3 million decrease
related to lower debt balances at higher interest rates. During the three months ended September
30, 2005, and September 30, 2004, the average debt balances outstanding were $463.8 million and
$550.4 million, respectively. The effective interest rates on our debt during the same periods
were 7.3% and 6.6%, respectively. Included in interest expense is $0.6 million and $0.7 million of
expense related to the amortization of deferred financing costs for the three months ended
September 30, 2005 and 2004, respectively.
Income Tax (Provision) Benefit
Income tax (provision) benefit Polymer Holdings. Polymer Holdings income tax provision was
$0.6 million for the three months ended September 30, 2005, as compared to income tax benefit of
$6.8 million for the three months ended September 30, 2004. For the three months ended September
30, 2005, our operations generated income before income taxes due to the aforementioned increased
gross profit. In the three months ended September 30, 2004, our operations generated a loss before
income taxes due to reduced gross profit.
Income tax (provision) benefit KRATON. KRATONs income tax provision was $1.3 million for
the three months ended September 30, 2005, as compared to income tax benefit of $6.8 million for
the three months ended September 30, 2004. For the three months ended September 30, 2005, our
operations generated income before income taxes due to the aforementioned increased gross profit.
In the three months ended September 30, 2004, our operations generated a loss before income taxes
due to reduced gross profit.
Net Income (Loss)
Net income (loss) Polymer Holdings. Polymer Holdings net income was $1.0 million for the three
months ended September 30, 2005, as compared to $6.0 million of net loss for the three months ended
September 30, 2004, for the reasons discussed above.
Net income (loss) KRATON. KRATONs net income was $3.4 million for the three months ended
September 30, 2005, as compared to $6.0 million of net loss for the three months ended September
30, 2004, for the reasons discussed above.
41
Nine Months Ended September 30, 2005, Compared to Nine Months Ended September 30, 2004
The following table summarizes certain information relating to our operating results that has
been derived from our financial statements.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 (1) |
|
|
September 30, 2004 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
|
|
|
|
(Restated) |
|
Revenues: |
|
|
|
|
|
|
|
|
Sales |
|
$ |
732,338 |
|
|
$ |
589,886 |
|
Other |
|
|
20,287 |
|
|
|
8,738 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
752,625 |
|
|
|
598,624 |
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost 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 (loss) in joint venture |
|
|
(1,050 |
) |
|
|
(134 |
) |
Interest, net |
|
|
25,833 |
|
|
|
27,719 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
33,745 |
|
|
|
(39,251 |
) |
Income tax benefit |
|
|
(9,189 |
) |
|
|
15,332 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
24,556 |
|
|
$ |
(23,919 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net income were $34.6 million,
$6.2 million and $18.8 million, respectively, for the nine months ended September 30, 2005. |
The following table summarizes certain information relating to our operating results as a
percentage of total revenues and has been derived from the financial information presented above.
We believe this presentation is useful to investors in comparing historical results. Certain
amounts in the table may not sum due to the rounding of individual components.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 (1) |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(Restated) |
|
Revenues: |
|
|
|
|
|
|
|
|
Sales |
|
|
97.3 |
% |
|
|
98.5 |
% |
Other |
|
|
2.7 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
Total Revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
77.9 |
|
|
|
86.0 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
21.1 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
2.6 |
|
|
|
2.9 |
|
Selling, general and administrative expenses |
|
|
7.3 |
|
|
|
7.8 |
|
Depreciation and amortization of
identifiable intangibles |
|
|
4.5 |
|
|
|
5.3 |
|
Earnings (loss) in joint venture |
|
|
(0.1 |
) |
|
|
|
|
Interest, net |
|
|
3.4 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
4.5 |
|
|
|
(6.6 |
) |
Income tax benefit |
|
|
(1.2 |
) |
|
|
2.6 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3.3 |
% |
|
|
(4.0 |
)% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
The financial information for Polymer Holdings is identical to that set forth in the table,
except that Polymer Holdings interest expense, tax provision and net income were 4.6%, 0.8% and
2.5%, respectively, for the nine months ended September 30, 2005. |
Total Revenues
Total revenues increased by 25.7% to $752.6 million for the nine months ended September 30,
2005, as compared to $598.6 million for the nine months ended September 30, 2004. This increase
was due to the increased
42
prices for our products, an increase in sales volumes and the
strengthening foreign currency exchange rates against the U. S. dollar. Sales volumes increased
approximately 6.3 kT, or 2.4% during the comparable periods. The Euro appreciated approximately
3.0%, the Japanese Yen appreciated approximately 1.2% and the Brazilian Real appreciated
approximately 19.0% during the nine months ended September 30, 2005, as compared to the nine months
ended September 30, 2004.
Sales. Sales increased by 24.1% to $732.3 million for the nine months ended September 30,
2005, as compared to $589.9 million for the nine months ended September 30, 2004. The increase in
sales was the result of $116.4 million due to increased prices for our products, an estimated $13.9
million relating to the increase in volumes and an estimated $12.1 million due to the appreciation
of the functional currencies of our foreign operations against the U.S. dollar. Sales are divided
into KRATON D and KRATON G.
For the nine months ended September 30, 2005, KRATON D sales increased by 35.5% to $509.3
million as compared to $376.0 million for the nine months ended September 30, 2004. The increase
in sales was the result of $111.2 million due to increased prices for our products, an estimated
$11.8 million increase relating to volumes and an estimated $10.3 million due to the appreciation
of the functional currencies of our foreign operations against the U.S. dollar. The increase in
sales volume was due to higher sales into the asphalt modification end use market due to the
additional road investment projects in Eastern Europe, expansion of home construction, and
favorable autumn weather.
For the nine months ended September 30, 2005, KRATON G sales increased by 4.3% to $223.0
million from $213.9 million as compared to the nine months ended September 30, 2004. The increase
in sales was the result of $8.5 million due to increased prices for our products and an estimated
$1.8 million due to the appreciation of the functional currencies of our foreign operations against
the U.S. dollar, partially offset by $1.2 million relating to reduced sales volumes. The decrease
in sales volumes was primarily due to increased competition and available alternative technologies.
Other revenue. Other revenues increased by 133.3% to $20.3 million for the nine months ended
September 30, 2005, as compared to $8.7 million for the nine months ended September 30, 2004.
Other revenue primarily consists of the sales of small quantities of residual products that are a
by-product of the manufacturing process of KRATON IR, an isoprene rubber product we report as part
of our KRATON D sales at our Netherlands facility. The increase in other revenues in the current
period is primarily due to the fact that there was no production at our Netherlands facility during
the three months ended September 30, 2004, as a result of the June 6, 2004 fire and subsequent shut
down of the facility until October 1, 2004.
Cost of Goods Sold
Costs of goods sold increased by 13.9% to $586.1 million for the nine months ended September
30, 2005, as compared to $514.7 million for the nine months ended September 30, 2004. As a
percentage of total revenues, cost of goods sold decreased to 77.9% from 86.0%. The $71.4 million
increase in cost of goods sold was due to: (1) an estimated $66.0 million of increased monomer and
other variable costs, (2) an estimated $10.1 million of increase in cost of goods sold associated
with the increased by-product sales (3) an estimated $9.0 million increase due to the appreciation
of the functional currencies of our foreign operations against the U.S. dollar, (4) an estimated
$8.8 million of increased other manufacturing expenses, and (5) an estimated $8.4 million of
increase relating to the sales volume increase. In addition, the increase in cost of goods sold
was offset by $30.9 million of reduced costs in 2005, as compared to the prior year period. The
$30.9 million of reduced costs is due to $32.6 million of additional cost of sales in the 2004
period as compared to $1.7 million in the 2005 period as a result of the subsequent sale of
inventory that was written up to fair value and sold during the periods. On December 23, 2003, in
connection with the Acquisition, we wrote-up our inventory by $38.4 million to reflect the amount
of manufacturing profit in inventory. Average acquisition costs for styrene, isoprene and
butadiene increased by approximately 19%, 43% and 37%, respectively, in the comparable periods due
to the continuing rise of crude oil prices and tight supply and demand conditions in the
marketplace.
Gross Profit
Gross profit increased by 98.5% to $166.5 million for the nine months ended September 30,
2005, as compared to $83.9 million for the nine months ended September 30, 2004. Gross profit as a
percentage of total
43
revenues increased from 14.0% in the nine months ended September 30, 2004 to
22.1% in the nine months ended September 30, 2005, due to the factors noted above. Excluding the
$1.7 million and $32.6 million non-cash increase in cost of goods sold relating to the subsequent
sale of inventory that had been written up to fair value for the nine months ended September 30,
2005 and 2004, respectively, gross profit would have been $168.2 million and $116.6 million, or
22.3% and 19.5% of total revenues for those periods, respectively.
Operating Expenses
Research and development expenses. Research and development expenses increased by 13.4% to
$19.5 million for the nine months ended September 30, 2005, as compared to $17.2 for the nine
months ended September 30, 2004. Research and development expenses increased due to the increase in
the U.S. dollar equivalent of Euro-denominated expenses as a result of the appreciation of the Euro
against the U.S. dollar and increased incentive compensation related to improved financial
performance. As a percentage of total revenues, research and development expenses decreased to
2.6% from 2.9%.
Selling, general and administrative expenses. Selling, general and administrative expenses
increased by 17.6% to $54.7 million for the nine months ended September 30, 2005, as compared to
$46.5 million for the nine months ended September 30, 2004. Selling, general and administrative
expenses increased due to: (1) the increase in the U.S. dollar equivalent of Euro-denominated
expenses as a result of the appreciation of the Euro against the U.S. dollar, (2) increased
incentive compensation related to improved financial performance, and (3) one-time costs associated
with the filing of the registration statements as required by the registration rights agreements
governing the 8.125% Notes and 12% Discount Notes. As a percentage of total revenues, selling,
general and administrative expenses decreased to 7.3% from 7.8% due to the increase in revenues in
the nine months ended September 30, 2005, partially offset by the increase in expenses in the nine
months ended September 30, 2005.
Depreciation and amortization of identifiable intangibles. Depreciation and amortization
expense increased by 6.3% to $33.8 million for the nine months ended September 30, 2005, as
compared to $31.8 million for the nine months ended September 30, 2004. This increase was
primarily due to assets that were under construction during 2004 that were completed and placed in
service.
Earnings in joint venture. The Kashima plant is operated by a joint venture with JSR
Corporation under the name KRATON JSR Elastomers K.K. Earnings in the joint venture increased
1,000.0% to $1.1 million for the nine months ended September 30, 2005, as compared to $0.1 million
for the nine months ended September 30, 2004. This increase in earnings was primarily due to
increased sales prices, partially offset by decreased sales volumes. We use the equity method of
accounting for our joint venture at the Kashima site.
Interest expense-Polymer Holdings. Polymer Holdings interest expense increased 24.9% to $34.6
million for the nine months ended September 30, 2005, as compared to $27.7 million for the nine
months ended September 30, 2004. This increase was primarily due to an $8.6 million increase
related to the accretion of the debt discount associated with the issuance of the 12% Discount
Notes offset by $1.7 million of expense relating to the change in fair value of the interest rate
swaps in the 2004 period. During the nine months ended September 30, 2005 and September 30, 2004,
the average debt balances outstanding were $562.5 million and $555.9 million, respectively. The
effective interest rates on our debt during the same periods were 7.9% and 5.8%, respectively.
Included in interest expense is $1.8 million and $2.0 million of expense related to the
amortization of deferred financing costs for the nine months ended September 30, 2005 and 2004,
respectively.
Interest expense-KRATON. KRATONs interest expense decreased 6.9% to $25.8 million for the
nine months ended September 30, 2005, as compared to $27.7 million for the nine months ended
September 30, 2004. This decrease was primarily due to $1.7 million of expense relating to the
change in fair value of the interest rate swaps in the 2004 period. During the nine months ended
September 30, 2005 and September 30, 2004, the average debt balances outstanding were $464.5
million and $555.8 million, respectively. The effective interest rates on our debt during the same
periods were 7.1% and 5.8%, respectively. Included in interest expense is $1.7 million and $2.0
million of expense related to the amortization of deferred financing costs for the nine months
ended September 30, 2005 and 2004, respectively.
44
Income Tax (Provision) Benefit
Income tax (provision) benefit Polymer Holdings. Polymer Holdings income tax provision was
$6.2 million for the nine months ended September 30, 2005, as compared to income tax benefit of
$15.3 million for the nine months ended September 30, 2004. For the nine months ended September 30,
2005, our operations generated income before income taxes due to the aforementioned increased gross
profit. In the nine months ended September 30, 2004, our operations generated a loss before income
taxes due to reduced gross profit.
Income tax (provision) benefit KRATON. KRATONs income tax provision was $9.2 million for
the nine months ended September 30, 2005, as compared to income tax benefit of $15.3 million for
the nine months ended September 30, 2004. For the nine months ended September 30, 2005, our
operations generated income before income taxes due to the aforementioned increased gross profit.
In the nine months ended September 30, 2004, our operations generated a loss before income taxes
due to reduced gross profit.
Net Income (Loss)
Net income (loss) Polymer Holdings. Polymer Holdings net income was $18.8 million for the nine
months ended September 30, 2005, as compared to $23.9 million of net loss for the nine months ended
September 30, 2004, for the reasons discussed above.
Net income (loss) KRATON. KRATONs net income was $24.6 million for the nine months ended
September 30, 2005, as compared to $23.9 million of net loss for the nine months ended September
30, 2004, for the reasons discussed above.
Liquidity and Capital Resources
Operating activities. Net cash provided by operating activities was $29.2 million, a decrease
of $28.6 million for the nine months ended September 30, 2005, as compared to net cash provided by
operating activities of $57.8 million for the nine months ended September 30, 2004. The decrease
in cash provided by operating activities in the nine months ended September 30, 2005, was primarily
due to increased accounts receivable resulting from the increase in product sales previously
discussed, the timing of accounts payable payments and the impact of inventory.
Investing activities. Net cash used for investing activities was $8.5 million for the nine
months ended September 30, 2005, as compared to $28.7 million for the nine months ended September
30, 2004. This decrease was primarily driven by the decrease in capital expenditures of $20.2
million during the nine months ended September 30, 2005, as compared to the prior period, which is
due to the spending during the nine months ended September 30, 2004, related to the completion of
the 15 kT KRATON D plant expansion at our Berre, France facility and the 13 kT KRATON G expansion
at our Belpre, Ohio facility.
Financing activities. Net cash used in financing activities was $0.6 million for the nine
months ended September 30, 2005, as compared to $17.8 million of net cash used in financing
activities for the nine months ended September 30, 2004. The decrease is primarily due to the
$15.1 million voluntary prepayments on the Term Loans in the 2004 period.
Sources of liquidity. We are a holding company without any operations or assets other than our
subsidiaries. Our liquidity depends on distributions from our subsidiaries and we expect to
continue to fund our liquidity requirements principally with cash derived from operations.
However, our subsidiaries are not obligated to make any funds available to us for payment on our
obligations. KRATONs ability to distribute amounts to Polymer Holdings is restricted by the terms
of its senior secured credit facility and the indenture governing the 8.125% Notes. In particular,
KRATONs senior secured credit facility does not permit (and the indenture governing KRATONs
8.125% Notes may not permit) the payment of dividends or other distributions to us necessary to
make payments of interest and principal when due on Polymer Holdings 12% Discount Notes.
We have historically funded our liquidity needs with cash from the operations of our
subsidiaries. Net cash provided by operations was $29.2 million for the nine months ended
September 30, 2005. We believe that during 2005 we will generate sufficient cash flows from
operations to fund our liquidity needs. KRATON has available to it, upon compliance with customary
conditions, a senior secured revolving credit facility in the amount of $60
million, which was fully available at September 30, 2005. The Acquisition significantly
increased our level of indebtedness. The ability of KRATON to pay principal and interest on its
indebtedness, fund working capital, make
45
anticipated capital expenditures and to make funds
available to Polymer Holdings for payment on its 12% Discount Notes when due depends on the future
performance of KRATON, which is subject to general economic conditions and other factors, some of
which are beyond our control. There can be no assurance that our business will generate sufficient
cash flow from operations or that future borrowings will be available under KRATONs senior secured
revolving credit facility to fund liquidity needs in an amount sufficient to enable KRATON and
Polymer Holdings to service their indebtedness. Furthermore, if we decide to undertake additional
investments in existing or new facilities, this will likely require additional capital, and there
can be no assurance that this capital will be available.
Under the terms of the senior secured credit facility, KRATON is subject to certain financial
covenants, including maintenance of a minimum interest rate coverage ratio and a maximum leverage
ratio and limits on consolidated capital expenditures. Currently, KRATON is required to maintain
an interest coverage ratio of 2.00:1.00 through the fourth fiscal quarter of 2006 and a maximum
leverage ratio of 6.95:1.00 for the first three fiscal quarters of 2005. Beginning in the fourth
fiscal quarter of 2005 and the first two fiscal quarters of 2006, KRATON is required to maintain a
maximum leverage ratio of 6.45:1.00 and it becomes progressively more restrictive. In addition,
KRATONs consolidated capital expenditures are capped at $31 million for 2005, $39 million for
2006, $37 million for 2007 and $32 million for 2008 and thereafter with certain unused amounts
permitted to be carried forward. KRATONs failure to comply with any of these financial covenants would give rise
to a default under the senior secured credit facility.
As of September 30, 2005, Polymer Holdings was in compliance with the financial covenants
contained in Polymer Holdings 12% Discount Notes, and KRATON was in compliance with the applicable
financial ratios in KRATONs senior secured credit facility and the other covenants contained in
KRATONs senior secured credit facility and the indenture governing KRATONs 8.125% Notes.
In October 2004, KRATON obtained an amendment to the senior secured credit facility because of
the potential impact of a variety of factors, principally increased monomer costs, on its ability
to comply with the financial covenants contained in the senior secured credit facility in future
periods. In particular, the senior secured credit facility requires KRATON to comply with
specified financial ratios and tests, including a maximum leverage ratio and a minimum
interest coverage ratio. As a result of the amendment, the issuance of the 12% Discount Notes by
Polymer Holdings and the subsequent prepayment of $76.2 million of the term loan portion of the
senior secured credit facility, KRATON has significantly improved its ability to comply with these
covenants in the future. Polymer Holdings owns 100% of KRATON equity interests, and neither KRATON,
nor any of its subsidiaries, guarantees the 12% Discount Notes and, therefore, the 12% Discount
Notes are not included in KRATONs consolidated total debt. Furthermore, by using $76.2 million of
the proceeds to prepay part of the term loan portion of the senior secured credit facility KRATON
significantly reduced its consolidated total debt. According to the amendment to the senior secured
credit facility the maximum leverage ratio must not exceed 6.95 to 1.00 in the first three quarters
of 2005 and 6.45 to 1.00 in the fourth quarter of 2005 and the first half of 2006. The leverage
ratio becomes more restrictive during the remaining term. These levels are less restrictive than
those in effect prior to the amendment to the senior secured credit facility. For more information
regarding covenants contained in the senior secured credit facility, see Description of Our
Indebtedness Senior Credit Facility Covenants.
Capital expenditures. In 2005, we expect to spend approximately $18 million to $23 million on
capital expenditures, of which approximately $12 million to $15 million is expected to be
maintenance and infrastructure-related spending and approximately $6 million to $8 million is
expected to be expansionary and cost reduction spending. Capital expenditures decreased $20.2
million to $8.6 million in the nine months ended September 30, 2005, as compared to the nine months
ended September 30, 2004. The decrease is primarily due to the spending during the nine months
ended September 30, 2004, associated with the completion of the 15 kT KRATON D plant expansion at
our Berre, France facility and the 13 kT KRATON G expansion at our Belpre, Ohio facility. Our
minimum capital expenditure levels to maintain and achieve incremental improvements in our
facilities are approximately $12 million to $15 million per year. This amount does not include any
capital expenditures required as a result of the study of the Pernis operations discussed in Other
Contingencies. We believe that we will be able to finance such capital investments from cash
generated from operations and do not anticipate utilizing the revolving portion of our senior
secured credit facility, or other financing activities, to finance such investments.
Contractual Commitments
Our principal outstanding contractual obligations relate to the long-term debt under the
senior secured credit facility, the 8.125% Notes, the 12% Discount Notes, the operating leases of
some of our facilities and the
46
feedstock contracts with Shell Chemicals, or its affiliates, to
provide us with styrene, butadiene and isoprene. The following table summarizes our contractual
cash obligations for the periods indicated.
Payments Due by Period
As of September 30, 2005, our contractual cash obligations for the remainder of 2005, and
2006, 2007, 2008 and 2009 by year and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
Total |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Thereafter |
|
|
|
(in millions) |
|
Long-term debt(1) |
|
$ |
613.3 |
|
|
$ |
0.7 |
|
|
$ |
2.7 |
|
|
$ |
2.7 |
|
|
$ |
2.7 |
|
|
$ |
2.7 |
|
|
$ |
601.8 |
|
Estimated interest payments on
debt(1) |
|
|
313.9 |
|
|
|
4.0 |
|
|
|
32.3 |
|
|
|
32.1 |
|
|
|
31.9 |
|
|
|
40.8 |
|
|
|
172.8 |
|
Operating leases |
|
|
37.9 |
|
|
|
1.7 |
|
|
|
6.4 |
|
|
|
5.5 |
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
13.7 |
|
Purchase obligations(2)(3) |
|
|
300.8 |
|
|
|
3.1 |
|
|
|
12.4 |
|
|
|
12.4 |
|
|
|
12.4 |
|
|
|
12.4 |
|
|
|
248.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
1,265.9 |
|
|
$ |
9.5 |
|
|
$ |
53.8 |
|
|
$ |
52.7 |
|
|
$ |
52.4 |
|
|
$ |
61.1 |
|
|
$ |
1,036.4 |
|
|
|
|
(1) |
|
KRATONs contractual obligations exclude $150.0 million related to Polymer Holdings 12%
Discount Notes all of which is due in 2014. KRATONs total long-term debt, estimated interest
payments and contractual cash obligations subsequent to 2009 are $451.8 million, $82.8 million
and $795.5 million, respectively. |
|
(2) |
|
Pursuant to the feedstock supply contracts with Shell Chemicals or its affiliates, we are
obligated to purchase minimum quantities of isoprene each year. We have two isoprene supply
contracts, which require us to purchase minimum quantities. If we do not meet these minimums,
we would be obligated to pay a penalty of approximately U.S. $300.0 per ton up to a maximum
aggregate penalty of approximately $4.2 million. |
|
(3) |
|
Pursuant to a production agreement with Basell Polyfine GMBH, we are obligated to pay a
minimum indirect service fee each year of approximately $8.2 million. Not included in this
table are future obligations arising under our Operating Agreements and Site Services,
Utilities, Materials and Facilities Agreements that do not specify fixed or minimum quantities
of goods or services to be purchased and do not contain fixed, minimum or variable price
provisions. Under such agreements, our obligations to third parties are based on costs
incurred by them in connection with the operation and maintenance of, and other services
provided to, our European facilities. For a description of these agreements, see
BusinessShell Chemicals Operating Agreements. The initial terms of these agreements range
between 20 years and 40 years and each agreement includes bilateral renewal rights. During the
years ended December 31, 2004, 2003 and 2002, we incurred costs aggregating $66.5 million,
$55.9 million and $44.2 million, respectively, under these agreements. |
Pursuant to the styrene and butadiene feedstock supply contracts with Shell Chemicals, and its
affiliates for our European operations, we are obligated to purchase minimum quantities. The
contracts do not contain a stated penalty for failure to purchase the minimum quantities. However,
if we do not purchase the minimum requirements, we are required under the terms of the contracts to
meet with Shell Chemicals in an effort to determine a resolution equitable to both parties.
Description of Our Indebtedness
Senior Secured Credit Facility
As part of the Acquisition, KRATON entered into a new senior secured credit agreement with
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. The senior secured credit facility was amended in connection with the consummation of
the sale of the 12% Discount Notes. The following is a summary of the material terms of the senior
secured credit facility, as amended. This description does not purport to be complete and is
qualified in its entirety by reference to the provisions of the senior secured credit agreement.
Structure.
KRATONs senior secured credit facility consists of:
|
|
|
a senior secured term loan of $360.0 million, which we refer to as the Term Facility,
and |
|
|
|
|
a senior secured revolving credit facility of up to $60.0 million, which we refer to as
the Revolving Facility. |
The full amount of the Term Facility was drawn in a single drawing at the closing to fund the
Acquisition. Subject to customary conditions, including the absence of defaults under the senior
secured credit agreement, amounts available under the Revolving Facility may be borrowed, repaid
and reborrowed on or after the closing, as
applicable, including in the form of letters of credit and swing line loans, until the
maturity date thereof. The Revolving Facility may be utilized to fund our working capital and for
other general corporate purposes.
47
Maturity, Amortization and Prepayment. The Term Facility has a maturity of seven years and
amortizes in 24 consecutive equal quarterly installments in an aggregate annual amount equal to
1.0% of the original principal amount of the Term Facility during the first six years thereof, with
the balance payable in four equal quarterly installments in year seven. Unless terminated earlier,
the Revolving Facility has a maturity of five years and has a single maturity.
The senior secured credit 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 is met); (4) 100% of the net cash proceeds of debt incurrences (other than debt
incurrences permitted under the senior secured credit facility); and (5) 50% of our excess cash
flow (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.
Interest and Fees. The term loans under the Term Facility bear interest at a rate equal to the
adjusted Eurodollar rate plus 2.75% per annum or, at our option, the base rate plus 1.75% per
annum, in each case declining by 0.25% if certain leverage ratios are attained and by a further
0.25% if certain ratings are obtained. The loans under the Revolving Facility initially bear
interest at a rate equal to the adjusted Eurodollar rate plus 2.75% per annum or at our option, the
base rate plus 1.75% per annum, and may decline by as much as 0.25% if certain leverage ratios are
met. 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.
Guarantees. All of KRATONs obligations under the senior secured credit facility are
guaranteed by Polymer Holdings and existing and subsequently acquired or organized domestic
subsidiaries and by us.
Security. The senior secured credit facility is secured by first priority security interests
in substantially all of our assets and the assets of the guarantors. In addition, the senior
facilities are secured by a first priority security interest in 100% of our capital stock and each
of our domestic subsidiaries, 65% of the capital stock of each of our foreign subsidiaries, to the
extent owned by us or a guarantor, and all intercompany indebtedness owed to us or any guarantor.
Covenants. The senior secured credit facility contains a number of covenants that, among other
things, restrict our ability and the ability of our subsidiaries to (1) dispose of assets; (2)
incur additional indebtedness; (3) incur guarantee obligations; (4) repay other indebtedness; (5)
make certain restricted payments and pay dividends; (6) create liens on assets or prohibit liens
securing the new senior secured credit facility; (7) make investments, loans or advances; (8) make
distributions to Polymer Holdings; (9) make certain acquisitions; (10) engage in mergers or
consolidations; (11) enter into sale and leaseback transactions; (12) engage in certain
transactions with subsidiaries and affiliates; or (13) amend the terms of the 8.125% Notes and
otherwise restrict corporate activities. In addition, under the senior secured credit facility, we
are required to comply with specified financial ratios and tests, including a minimum interest
coverage ratio, a maximum leverage ratio and maximum capital expenditures.
Under the terms of the senior secured credit facility, we are subject to certain financial
covenants, including maintenance of a minimum interest rate coverage ratio and a maximum leverage
ratio and are subject to limits on our consolidated capital expenditures. Currently, we are
required to maintain an interest coverage ratio of 2.00:1.00 through the fourth fiscal quarter of
2006 and a maximum leverage ratio of 6.95:1.00 for the first three fiscal quarters of 2005.
Beginning in the fourth fiscal quarter of 2005 and the first two fiscal quarters of 2006, we are
required to maintain a maximum leverage ratio of 6.45:1.00 and it becomes progressively more
restrictive. In addition, our consolidated capital expenditures are capped at $31 million for
2005, $39 million for 2006, $37 million for 2007 and $32 million for 2008 and thereafter with
certain unused amounts permitted to be carried forward. Our failure to comply with any of these
financial covenants would give rise to a default under the senior secured credit facility.
As of
September 30, 2005, KRATON was in compliance with all covenants under the
senior secured credit facility.
Events of Default. The senior secured credit facility contains customary events of default,
including (1) nonpayment of principal or interest; (2) defaults under certain other agreements or
instruments of indebtedness;
48
(3) noncompliance with covenants; (4) breaches of representations and
warranties; (5) bankruptcy-related events or dissolution; (6) judgments in excess of specified
amounts; (7) certain ERISA matters; (8) invalidity of guarantees of the senior secured credit
facility or impairment of security interests in collateral; and (9) certain change of control
events.
Amendment and Waiver under the senior secured credit facility. In October 2004, as part of a
refinancing of indebtedness, we amended our senior secured credit facility in order (1) to permit
the issuance by Polymer Holdings of the 12% Discount Notes, (2) to provide for more flexibility in
the minimum required interest coverage ratio covenant and the maximum permitted leverage covenant,
(3) to change the maximum permitted capital expenditures covenant, and (4) to increase the interest
rate on the loans until, after March 31, 2005, a specified senior leverage ratio is met or until
certain ratings are obtained.
KRATONs 8.125% Senior Subordinated Notes due 2014
As part of the Acquisition, KRATON issued $200.0 million aggregate principal amount of Senior
Subordinated Notes due 2014 that bear interest at a rate of 8.125% per annum. The following is a
summary of the material terms of the 8.125% Notes. This description does not purport to be complete
and is qualified, in its entirety, by reference to the provisions of the indenture governing the
8.125% Notes.
Maturity Date. The 8.125% Notes mature on January 15, 2014.
Interest Payment Dates. Interest on the 8.125% Notes is payable semi-annually on January 15
and July 15 each year, commencing July 15, 2004.
Guarantees. The 8.125% Notes are guaranteed on a senior subordinated basis by all of KRATONs
existing and future subsidiaries that guarantee the indebtedness under KRATONs senior secured
credit facility described above.
Security and Ranking. The 8.125% Notes and the guarantees are KRATONs and the guarantor
subsidiaries general unsecured obligations, are subordinate to KRATONs and the guarantor
subsidiaries existing and future senior indebtedness, including indebtedness under the senior
secured credit facility, and rank equally with KRATONs and the guarantor subsidiaries future
senior subordinated indebtedness. The 8.125% Notes and the guarantees effectively rank junior to
KRATONs secured indebtedness and to the secured indebtedness of all of KRATONs guarantor
subsidiaries to the extent of the value of the assets securing the indebtedness and are
structurally subordinated to all liabilities of KRATONs subsidiaries that are not guarantors of
the 8.125% Notes.
Optional Redemption. Generally, KRATON cannot elect to redeem the 8.125% Notes until January
15, 2009. On or after such date, KRATON may elect to redeem the 8.125% Notes at certain
predetermined redemption prices, plus accrued and unpaid interest. Prior to January 15, 2007,
KRATON may redeem up to 35% of the aggregate principal amount of the 8.125% Notes with the net cash
proceeds of certain permitted equity offerings or contributions 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,
limitations on covenants to furnish the holders of 8.125% Notes with financial statements and other
financial information and to provide the holders of 8.125% Notes notice of material events.
The 8.125% Notes contain certain negative covenants including limitations on indebtedness,
limitations on restricted payments, limitations on restrictions on distributions from certain
subsidiaries, limitations on lines of business, and merger and consolidations.
As of September 30, 2005, KRATON was in compliance with all covenants under the
8.125% Notes.
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 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.
49
As previously discussed, the Registration Rights Agreement provided for the SEC to declare the
registration statement to be effective on or before July 1, 2005, or KRATON would be in
Registration Default. The SEC did not declare the registration statement to be effective on or
before July 1, 2005, and accordingly, KRATON accrued the Special Interest subsequent to July 1,
2005, through October 24, 2005, the date KRATON completed the offer to exchange.
Polymer Holdings 12% Senior Discount Notes Due 2014
As part of a refinancing of indebtedness in October 2004, Polymer Holdings issued the 12%
Discount Notes. The following is a summary of the material terms of the 12% Discount Notes. This
description does not purport to be complete and is qualified, in its entirety, by reference to the
provisions of the indenture governing the 12% Discount Notes.
Maturity Date. The 12% Discount Notes mature on July 15, 2014.
Accretion. The 12% Discount Notes were issued at a substantial discount to their principal
amount at maturity and generated gross proceeds of approximately $91.9 million. The accreted value
of each 12% Discount Note will continue to increase on a daily basis from the date of issuance
until January 15, 2009 at a rate of 12% 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.
Cash Interest Payment Dates. Cash interest will accrue and be payable on the 12 % Discount
Notes at a rate of 12% per annum from January 15, 2009, or from the most recent date to which
interest has been paid, and will be payable semi-annually in arrears on January 15 and July 15 of
each year, commencing July 15, 2009, to the holders of record on the immediately preceding January
1 and July 1.
Guarantees. None of Polymer Holdings subsidiaries, including KRATON, guarantee the 12%
Discount Notes.
Holding Company Structure and Ranking. Polymer Holdings is a holding company and does not have
any material assets or operations other than ownership of KRATONs capital stock. All of its
operations are conducted through KRATON and KRATONs subsidiaries and, therefore, Polymer Holdings
will be dependent upon KRATONs cash flow and the cash flow of our subsidiaries to meet its
obligations under the 12% Discount Notes. As a result of the holding company structure, any right
of Polymer Holdings and its creditors, including the holders of the 12% Discount Notes, to
participate in the assets of any of its subsidiaries upon such subsidiarys liquidation or
reorganization will be structurally subordinated to the claims of that subsidiarys creditors and
holders of preferred stock of such subsidiary, if any. In addition, in the event of the bankruptcy,
liquidation, reorganization or other winding up of Polymer Holdings, or upon a default in payment
with respect to, or the acceleration of, any indebtedness under the senior secured credit facility
or other secured indebtedness of Polymer Holdings, the assets of Polymer Holdings will be available
to pay obligations on the 12% Discount Notes only after all secured indebtedness has been repaid
from such assets.
Optional Redemption. Generally, Polymer Holdings cannot elect to redeem the 12% Discount Notes
until January 15, 2009. On or after such date, Polymer Holdings may elect to redeem the 12%
Discount Notes at certain predetermined redemption prices, plus accrued and unpaid interest. Prior
to January 15, 2007, Polymer Holdings may redeem up to 35% of the aggregate principal amount of the
12% Discount Notes with the net cash proceeds of certain permitted equity offerings or
contributions at a redemption price equal to 112% of the accreted value of the 12% Discount Notes
being redeemed on the date of redemption.
Covenants. The 12% Discount Notes contain certain affirmative covenants including, among
others, to furnish the holders of 12% Discount Notes with financial statements and other financial
information and to provide the holders of 12% Discount Notes notice of material events.
The 12% Discount Notes contain certain negative covenants including limitations on
indebtedness,
50
limitations on restricted payments, limitations on restrictions on distributions from
certain subsidiaries, limitations on lines of business, and merger and consolidations.
As of September 30, 2005, Polymer Holdings was in compliance with all covenants
under the 12% Discount Notes.
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 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.
As previously discussed, the Registration Rights Agreement provided for the SEC to declare the
registration statement to be effective on or before July 1, 2005, or Polymer Holdings would be in
Registration Default. The SEC did not declare the registration statement to be effective on or
before July 1, 2005, and accordingly, Polymer Holdings accrued the Special Interest subsequent to
July 1, 2005, through October 20, 2005, the date Polymer Holdings completed the offer to exchange.
Other Contingencies
As a chemicals manufacturer, our operations in the United States and abroad are subject to a
wide range of environmental laws and regulations at both the national and local levels. These laws
and regulations govern, among other things, air emissions, wastewater discharges, solid and
hazardous waste management, site remediation programs and chemical use and management.
Pursuant to these laws and regulations, our facilities are required to obtain and comply with
a wide variety of environmental permits for different aspects of their operations. Generally, many
of these environmental laws and regulations are becoming increasingly stringent, and the cost of
compliance with these various requirements can be expected to increase over time.
Management believes that we are in material compliance with all current environmental laws and
regulations. We estimate that any expenses incurred in maintaining compliance with these
requirements will not materially affect our results of operations or cause us to exceed our level
of anticipated capital expenditures. However, we cannot assure you that regulatory requirements or
permit conditions will not change, and we cannot predict the aggregate costs of additional measures
that may be required to maintain compliance as a result of such changes or expenses.
In the context of our separation from Shell Chemicals in February 2001, Shell Chemicals agreed
to indemnify us for specific categories of environmental claims brought with respect to matters
occurring before our separation from Shell Chemicals in February 2001. However, the indemnity from
Shell Chemicals is subject to dollar and time limitations. Coverage under the indemnity also
varies depending upon the nature of the environmental claim, the location giving rise to the claim
and the manner in which the claim is triggered. Therefore, if claims arise in the future related
to past operations, we cannot assure you that those claims will be covered by the Shell Chemicals
indemnity and also cannot be certain that any amounts recoverable will be sufficient to satisfy
claims against us.
In addition, we may in the future be subject to claims that arise solely from events or
circumstances occurring after February 2001 that would not, in any event, be covered by the Shell
Chemicals indemnity. While we recognize that we may in the future be held liable with respect for
remediation activities beyond those identified to date, at present we are not aware of any
circumstances that are reasonably expected to give rise to remediation claims that would have a
material adverse effect on our results of operations or cause us to exceed our projected level of
anticipated capital expenditures.
On December 16, 2003, Shell Chemicals, the operator of our Pernis facility in the Netherlands
delivered a preliminary study reviewing the facilitys operations and physical plant. Based on a
study consisting of interviews
of plant personnel, a review of plant documentation, and limited fieldwork relating to
selected areas of the manufacturing complex that included both our manufacturing assets and those
of Shell Chemicals, the study preliminarily estimated that significant expenditures could be
required by us over an indeterminate period.
51
The study identified both required maintenance and
suggested near-term and long-term improvements to the facility and physical plant. On March 8,
2004, Shell presented an update of this study, which had been reviewed by the plant manager for the
facility, and provided some analysis of the preliminary study. Limited engineering work had been
done at this point, and estimates of costs were still based solely on factored estimates. On or
about September 30, 2005, Shell Chemicals delivered a more detailed engineering estimate which
indicates we would incur approximately $20 million to $30 million of required spending over the
next 5 years to bring the facility up to Shell corporate standards for like assets. We are
currently discussing the basis and assumptions used in the engineering study and intend to conduct
additional engineering work to assess the validity of the Shell Chemicals study. We are also
reviewing ways we could lower the cost of this estimate particularly in light of the existing
isoprene contract that may expire on December 31, 2009, should either party give 24 months prior
written notice.
Off-Balance Sheet Transactions
We are not involved in any material off-balance sheet transactions as of September 30, 2005.
Market Risk
We are exposed to market risk from changes in interest rates, foreign currency exchange rates,
and commodity prices.
Interest rate risk. We have $263.3 million of variable rate debt outstanding under our senior
secured credit facility as of September 30, 2005. The debt bears interest at the adjusted
Eurodollar plus 2.50% per annum or at our option, the base rate plus 1.50% per annum. Under our
Credit Agreement, we are required to hedge, or otherwise protect against interest rate
fluctuations, a portion of our variable rate debt. As a result, we entered into two interest rate
swap agreements in the amount of $80.0 million each, effective June 11, 2004 and July 6, 2004,
respectively. 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. The agreements have an average fixed rate of 3.524%.
As of September 30, 2005, the fair market value of the agreements was a $2.6 million asset.
Foreign currency risk. We conduct operations in many countries around the world. Our results
of operations are subject to both currency transaction risk and currency translation risk. We
incur currency transaction risk whenever we enter into either a purchase or sale transaction using
a currency other than the local currency of the transacting entity. With respect to currency
translation risk, our financial condition and results of operations are measured and recorded in
the relevant domestic currency and then translated into U.S. dollars for inclusion in our
historical combined financial statements. Exchange rates between these currencies and U.S. dollars
in recent years have fluctuated significantly and may do so in the future. Approximately half of
our revenue and costs are denominated in U.S. dollars; Euro-related currencies are also
significant. The net appreciation of the Euro against the U.S. dollar and other world currencies
since 2001 has had a positive impact on our sales as reported in U.S. dollars in our historical
combined financial statements. Historically, we have not undertaken hedging strategies to minimize
the effect of currency fluctuations.
Commodity price risk. We are subject to commodity price risk under agreements for the supply
of our raw materials and energy. We have not hedged our commodity price exposure. We do not
currently intend to hedge our commodity price exposure.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our variable rate debt consists of borrowings under the senior secured credit facility. The
interest rates are a function of the bank prime rate or LIBOR. A 1% point change in the base
interest rate on our $263.3 million of variable rate debt would result in an approximate $2.6
million change in income before taxes. In addition, we have entered into interest rate swaps that
will terminate on June 24, 2007 covering $160 million of debt that convert the variable rate debt
to a fixed rate that averages 3.524%. A 1% point change in the base interest rate would result in
an approximate $1.6 million change in income before taxes that would serve to offset the change
noted above.
52
ITEM 4. CONTROLS AND PROCEDURES
We have carried out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon our evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of September 30, 2005, the disclosure
controls and procedures are effective to provide reasonable assurance that information required to
be disclosed in the reports we are required to prepare pursuant to the indenture for the notes it
is recorded, processed, summarized and reported as and when required.
There have been no changes in our internal control over financial reporting during the quarter
ended September 30, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
53
PART II Other Information
ITEM 1. LEGAL PROCEEDINGS
Pursuant to the sale agreements between us and Shell Chemicals relating to the Separation from
Shell Chemicals in 2001, Shell Chemicals has agreed to indemnify us for certain liabilities and
obligations to third parties or claims against us by a third party relating to matters arising
prior to the closing of the acquisition by Ripplewood Chemical, subject to certain time
limitations. Shell Chemicals has been named in several lawsuits relating to the elastomers
business that we have acquired. In particular, claims have been filed against Shell Chemicals
alleging workplace asbestos exposure at the Belpre, Ohio facility. We are indemnified by Shell
Chemicals with respect to these claims, subject to certain time limitations. In addition, we and
Shell Chemicals have entered into a consent order relating to certain environmental remediation at
the Belpre, Ohio facility.
While we are involved from time to time in litigation and governmental actions arising in the
ordinary course of business, we are not aware of any actions which we believe would materially
adversely affect our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 |
|
Option Grant Agreement dated December 2, 2004, between TJ Chemical Holdings LLC, or TJ
Chemical, and Steven Demetriou. |
|
10.2 |
|
Option Grant Agreement dated December 2, 2004, between TJ Chemical and James Ball. |
|
10.3 |
|
Employment Agreement dated November 9, 2005, between KRATON and Kevin M. Fogarty. |
|
10.4 |
|
Option Grant Agreement dated October 24, 2005, between TJ Chemical and Raymond K. Guba. |
|
10.5 |
|
Profit Unit Award Agreement Dated October 24, 2005, between KRATON Management LLC and Raymond
K. Guba. |
|
10.6 |
|
Notional Unit Award Grant Agreement dated October 24, 2005, between KRATON and Raymond K.
Guba. |
|
31.1 |
|
Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
31.2 |
|
Certification of Interim CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
31.3 |
|
Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the
Securities Exchange Commission Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002. |
|
32.1 |
|
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002. |
54
Signatures
The registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
Polymer Holdings LLC
KRATON Polymers LLC
|
|
Date: November 14, 2005 |
/s/ George B. Gregory
|
|
|
George B. Gregory |
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
/s/ Nicholas G. Dekker
|
|
|
Nicholas G. Dekker |
|
|
Interim Chief Financial Officer |
|
55
Exhibit Index
10.1 |
|
Option Grant Agreement dated December 2, 2004, between TJ Chemical Holdings LLC, or TJ
Chemical, and Steven Demetriou. |
|
10.2 |
|
Option Grant Agreement dated December 2, 2004, between TJ Chemical and James Ball.
|
|
10.3 |
|
Employment Agreement dated November 9, 2005, between KRATON and Kevin M. Fogarty.
|
|
10.4 |
|
Option Grant Agreement dated October 24, 2005, between TJ Chemical and Raymond K. Guba. |
|
10.5 |
|
Profit Unit Award Agreement Dated October 24, 2005, between KRATON Management LLC and Raymond
K. Guba. |
|
10.6 |
|
Notional Unit Award Grant Agreement dated October 24, 2005, between KRATON and Raymond K.
Guba. |
|
31.1 |
|
Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
31.2 |
|
Certification of Interim CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
31.3 |
|
Certification of CFO pursuant to Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Commission Act of 1934, as
adopted pursuant to Section 302 of the SarbanesOxley Act of 2002. |
|
32.1 |
|
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002. |
56