**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

| **ý**                            | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**           |
|---------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                  |       |                                                                                                |
| ** **                            | ** ** | **For  the fiscal year ended December 31, 2004**                                                    |
| ** **                            | ** ** | ** **                                                                                          |
| **OR**                                |
| ** **                            |
| **o**                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|                                  |       |                                                                                                |
| ** **                            | ** ** | **For  the transition period from       to     ** |
|                                  |       |                                                                                                |
| **Commission File Number  333-57170** |

 

**Resolution Performance Products LLC**

**(Exactname of registrant as specified in its charter)**

 

| **Delaware**                                                         | ** ** | **76-0607613**                                |
|----------------------------------------------------------------------|------------|-----------------------------------------------|
| **(State  or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S.  Employer  Identification Number)** |

 

**Commission File Number 333-57170-01**

** **

**RPP Capital Corporation**

**(Exactname of registrant as specified in its charter)**

 

| **Delaware**                                                         | ** ** | **76-0660306**                                |
|----------------------------------------------------------------------|------------|-----------------------------------------------|
| **(State  or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S.  Employer  Identification Number)** |

 

**1600 Smith Street, Suite 2400**

**Houston, Texas 77002**

**(888) 949-2502**

**(Addressof principal executive offices and telephone number, including area code)**

 

**Securitiesregistered pursuant to Section 12(b) of the Act:**None

 

**Securitiesregistered pursuant to Section 12(g) of the Act:**None

 

**Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.**

 
| **RESOLUTION PERFORMANCE PRODUCTS LLC** | **YES**ý | **NO**o    |
|-----------------------------------------|---------------|------------|
| ** **                              | ** **    | ** ** |
| **RPP CAPITAL CORPORATION**             | **YES**ý | **NO**o    |

 

**Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]**

 

**Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).**

**Yes**o     No ý

 

**At February 1, 2005, therewere 1,000,000 outstanding membership units of Resolution Performance ProductsLLC and 1,000 outstanding shares of common stock of RPP Capital Corporation,none of which was held by non-affiliates of the Registrants.   At December 31, 2004, the market value ofthe voting and non-voting common equity of each of Resolution PerformanceProducts LLC and RPP Capital Corporation held by non-affiliates was zero.**

 

**Documents Incorporated byReference: None**

 

 

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**RESOLUTIONPERFORMANCE PRODUCTS LLC**

 

**RPPCAPITAL CORPORATION**

 

**FORM 10-K**

 

**TABLE OFCONTENTS**

 
| **PART I**   | ** **                                                                                  |
|--------------|---------------------------------------------------------------------------------------------|
|         |                                                                                        |   |
| Item  1.     | Business                                                                                    |   |
| Item  2.     | Properties                                                                                  |   |
| Item 3.      | Legal Proceedings                                                                           |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                        |   |
|         |                                                                                        |   |
| **PART II**  | ** **                                                                                  |
|         |                                                                                        |   |
| Item  5.     | Market  for the Registrant’s Common Equity and Related Stockholder Matters             |   |
| Item 6.      | Selected Financial  Data                                                                    |   |
| Item  7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item  7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
| Item 8.      | Financial Statements  and Supplementary Data                                                |   |
| Item  9.     | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures      |   |
| Item 9A.     | Controls and  Procedures                                                                    |   |
| Item 9B.     | Other Information                                                                           |   |
|         |                                                                                        |   |
| **PART III** | ** **                                                                                  |
|         |                                                                                        |   |
| Item  10.    | Directors  and Executive Officers of the Registrant                                         |   |
| Item 11.     | Executive  Compensation                                                                     |   |
| Item 12.     | Security  Ownership of Certain Beneficial Owners and Management                             |   |
| Item 13.     | Certain  Relationships and Related Transactions                                             |   |
| Item 14.     | Principal  Accounting Fees and Services                                                     |   |
|         |                                                                                        |   |
| **PART IV**  | ** **                                                                                  |
|         |                                                                                        |   |
| Item  15.    | Exhibits  and Financial Statement Schedules                                                 |   |
|         |                                                                                        |   |
| SIGNATURES   |                                                                                        |   |

 

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This report contains certain forward-lookingstatements that involve risks and uncertainties, including statements about ourplans, objectives, goals, strategies, future events, future revenues orperformance, capital expenditures, financing needs, plans or intentionsrelating to acquisitions and other information that is not historical innature.  When used in this report, thewords “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes”and variations of these words or similar expressions are intended to identifyforward-looking statements.   Allforward-looking statements, including without limitation, management’sexamination of operating trends, are based upon our current expectations andvarious assumptions.  Our expectations,beliefs and projections are expressed in good faith and we believe there is areasonable basis for them.  However,there can be no assurance that management’s expectations, beliefs andprojections will result or be achieved. Our actual results could differ materially from the results anticipatedin these forward-looking statements. Some of the factors that could negatively affect our performance arediscussed in Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations, and under the caption “Risk Factors” inour Registration Statement on Form S-4 (File No. 333-112016), which wasdeclared effective by the SEC on February 4, 2004, and elsewhere in thisreport.

 

Unless otherwiseindicated in this report, (1) the terms “RPP LLC,” “we,” “our,” “ours” and “us”refer to Resolution Performance Products LLC and its subsidiaries, includingthe non-U.S. subsidiaries acquired in connection with or following therecapitalization described below, or, where the context requires, theoperations of our predecessor, the epoxy resins and Versatic acids andderivatives business of the Royal Dutch/Shell Group of Companies (together withits affiliates, “Shell”), (2) the term “RPP Capital” refers to RPP CapitalCorporation, our wholly-owned subsidiary and a co-obligor on our 13 1/2% SeniorSubordinated Notes due 2010, 9 1⁄2% Senior Second Secured Notes due 2010 and 8% SeniorSecured Notes due 2009, (3) the term “Issuers” refers to RPP LLC and RPPCapital, (4) the term “RPP Inc.” refers to Resolution Performance ProductsInc., our parent company, formerly known as Shell Epoxy Resins Inc., and (5)the term “RPP B.V.” refers to Resolutions Holdings B.V., our wholly-ownedsubsidiary. The financial data included in this report relating to the periodprior to the November 2000 recapitalization come from the financial statementsof the epoxy resins and Versatic acids and derivatives business of Shell.

 

On March 29, 2005, we filed a Form 8-K with the SECdisclosing an error in the accounting for the valuation allowance for deferredtax assets resulting in a restatement of the financial statements for the yearended December 31, 2003, and each of the quarters ended March 31, 2004, June30, 2004 and September 30, 2004, respectively. Accordingly, we hereby amend and restate our Annual Report on Form 10-Kfiled on March 16, 2004, our Quarterly Report on Form 10-Q filed on May 7,2004, our Quarterly Report on Form 10-Q filed on August 3, 2004 and ourQuarterly Report on Form 10-Q filed on November 4, 2004 (“prior period filings”).  The restatements of the prior period filingscorrect an error in the determination of the valuation allowance for deferredtax assets dating back to December 31, 2003. See the disclosure under the heading “Restatement” in Note 2 to theconsolidated financial statements appearing elsewhere in this report.  These restatements only impact changes toincome taxes (benefit), net loss, deferred tax assets and owner’s deficit andhave no impact on cash from operating activities, operating income, loss beforeincome taxes or EBITDA. All other information is unchanged and reflects thedisclosures made at the time of the original prior period filings.

 

For a discussion of theimpact of the restatements, please see Item 6. “Selected Financial Data,” Item7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” Item 8. “Financial Statements and Supplementary Data, and Item 15,“Exhibits and Financial Statement Schedules.”

 

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**PART I**

 

## **ITEM 1.   BUSINESS**

 

**Overview**

 

We are one of the leading worldwide manufacturers anddevelopers of epoxy resins and are also the leading global manufacturer ofVersatic acids and derivatives. Epoxy resins are chemicals primarily used inthe manufacture of coatings, adhesives, printed circuit boards, fiberreinforced plastics and construction materials because of their excellentadhesion, effective corrosion resistance, strong electrical insulation andmechanical strength properties. Products containing epoxy resins serve a widerange of end-use industries, including automotive, aerospace, electrical,construction and industrial maintenance and food and beverage containercoatings. Versatic acids and derivatives are specialty products whichcomplement our epoxy resin product offerings in the coatings, adhesives andconstruction applications. We focus on providing our customers with specialty “systemsand solutions,” which are packages of basic and specialty epoxy resins combinedwith curing agents and other materials that are designed to meet the specifictechnical requirements of our customers. Many of our products are developed andformulated for specific end-customer products and applications, where thepurchasing decisions are driven primarily by product performance, technicalspecifications and the ability to deliver customized service and solutionsrather than solely by price.

 

We are a global business with customers in multiplegeographic regions.  Regional sales fromexternal customers based on segment information consist of the following:  the Americas 43% and Europe/Asia Pacific 57%of revenues for the year ended December 31, 2004.  Geographic segment information is containedin Note 14 to the consolidated financial statements included elsewhere in thisfiling.  These customers are served byour global sales and customer service network and by manufacturing facilities locatedin in North America and Europe. We manufacture the two principal components, orintermediates, of epoxy resins, which are bisphenol-A, or BPA, andepichlorohydrin, or ECH, and we operate two of the three largest liquid epoxyresins manufacturing plants in the world. This backward integration andworld-scale manufacturing capability provides us with a competitive cost, positionand reliable supply of intermediates for the production of epoxy resins. Webelieve that our leading market position in the epoxy resins and Versatics andderivatives industries is primarily attributable to our strategy of offeringour customers a broad line of products, technical expertise and productapplications support along with being among the world’s low cost producers ofepoxy resins.

 

We manufacture and sell liquid epoxy resins, or LER,typically using internally produced BPA and ECH; although, we ocassionally useECH and/or BPA produced by third parties. We also combine LER with a variety ofother materials, which we either manufacture ourselves or purchase from others,to produce solid epoxy resins, epoxy resin solutions and specialty epoxyresins. In addition, we manufacture a wide range of epoxy resin curing agents,catalysts and other additives which are sold alone or with our epoxy resinproducts. Epoxy resins are used in many applications, the most significant ofwhich include coatings, electrical and electronics, composites, and adhesives.

 

As the leading manufacturer and marketer of Versaticacids and derivatives we take advantage of our manufacturing economies of scaleand internally produced ECH supply. Versatic acids and derivatives can bedivided into three groups: basic Versatic acids, VeoVa and Cardura.  Basic Versatic acids are used mainly inpharmaceuticals, peroxides and agrochemicals, whereas VeoVa and Cardura areused mainly in decorative and protective coatings and personal care products.Our principal customers for these products operate in the automotive coatings,paint and construction industries, similar to our epoxy resin customers.

 

We also sell excess production capacity of BPA and ECHto third parties to the extent practical. BPA is a critical component ofpolycarbonate plastics, which are primarily used in the rapidly growingelectrical and electronics market, including computer and business equipmentand optical disk applications. Polycarbonate is also used in the automotive andlighting industries. In addition to being used in the manufacture of epoxyresins and Versatic acids and derivatives, ECH is used in water treatmentapplications.

 

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On November 14, 2000, with an effective date ofNovember 1, 2000, RPP LLC acquired the Epoxy Resins and Versatic Acids andDerivatives business of Shell (the “Transaction”).  On the same dates, simultaneous with theabove acquisition, RPP Inc. was acquired by RPP Holdings LLC, an affiliate ofApollo Management IV, L.P., (“Apollo”) in a recapitalization transaction.  RPP Inc., our parent company, wasrecapitalized in a transaction financed in part by the proceeds from a seniorsecured credit facility, and a private placement of 13 1/2% Senior SubordinatedNotes.  Prior to the recapitalizationtransaction, RPP Inc. was a wholly-owned subsidiary of Shell.

 

**Industry Overview**

 

We are one of three global producers of liquid epoxyresins, who together accounted for more than half of the 2004 global capacityfor LER, which is the foundation product of the industry.  The U.S. and Europe accounted for asignificant portion of the industry’s global LER demand and capacity in 2004,with the U.S. and Europe also being significant exporters of epoxy resins as well.  Due to import tariffs, transportation costs,customer preferences in performance and applications and industry structure,industry dynamics vary by region. In 2004, these three global producersaccounted for the majority of LER capacity in the United States and Europe.There are also several other companies, predominantly in Asia and EasternEurope, most of whom with the exception of Nan Ya usually participate locallyand do not have the world-scale manufacturing and logistics capabilities orcost structure to compete as effectively in the epoxy resins industry on aglobal basis. However, several other producers recently have developed thecapability to export to the U.S. and Europe and compete effectively for aportion of the markets.

 

During the year ended December 31, 2004, prices of ourmajor feedstocks (acetone, chlorine, propylene, and phenol) increasedsignificantly relative to 2003. Historically, feedstock pricing has been animportant factor in profitability as there is a lag between feedstock pricechanges and product price changes. This lag has typically ranged from three totwelve months depending on the magnitude of the feedstock cost change andmarket dynamics.  As feedstocks continuedto increase over already high 2003 levels, we took action to eliminate thislag.  At the end of 2004 substantiallyall sales were made according to monthly prices, or at prices which RPP couldchange at any time.

 

After a relatively flat demand for our epoxy resins in2002 and 2003, demand for our epoxy resins in 2004 increased significantly.Similarly, the pricing environment for our epoxy resins was positively impactedby increased demand and lack of availability of raw materials in some segmentsof the market. Overall average prices for the year ended December 31, 2004 alsoincreased significantly over 2003. However, our feedstock costs increaseddramatically resulting in compressed margins throughout the first half of 2004.We also experienced compressed margins in our BPA business.  Our Versatics business experienced volumegrowth while maintaining unit margins.

 

We believe the Versatic acids and derivatives markethad worldwide sales in excess of $190 million in 2004 based on internal marketintelligence. Furthermore, we believe that we are the largest supplier ofVersatic acids and derivatives in the world with an estimated 75% global marketshare.  The major competition for ourVersatic acids and derivatives business is from alternative products whichprovide similar, though not exactly comparable, functionality. Cardura and thebasic Versatic acids have a particular niche in their competitive marketsthrough their unique performance attributes. For VeoVa, there is a large marketof competitive products, most importantly, butyl acrylate. In the markets inwhich VeoVa directly competes with alternative products, VeoVa attains varyingmarket shares which we believe range from 5% to 30%. The Versatic acids andderivatives business has traditionally been focused in the European andJapanese markets.  However, recentefforts to promote the use of Versatic acids and derivatives in other regions,including the U.S, have resulted in regional expansion.

 

BPA is produced and consumed globally and we believethere are three leading producers of BPA that account for approximately 55% ofglobal capacity. Most major BPA producers are forward integrated into either orboth polycarbonate and epoxy resins and at times will sell excess BPA to thirdparties. We believe that we are one of the largest suppliers of BPA to thirdparties and have the third largest capacity for production of BPA in the world.From 1997 to 2000, demand for BPA grew by approximately 13% per year drivenprimarily by the polycarbonate (“PC”) end-uses (electronics, computer,telecommunications and data equipment), whereas from 2000 to 2004, the averagegrowth rate was approximately 6%.  In 2004 there was a strongrecovery in global BPA demand primarily driven by stronger productionrates.  Compared to 2003, the estimated demand growth has again approached13%. More importantly, in the second half of 2004, the resulting tightnessin supply and demand has allowed for margin expansion despite the fact that theprices for benzene (and thus BPA’s key feedstock, phenol) have seenunprecedented increases in 2004.

 

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**Competition**

 

We compete primarily with Dow Chemical, HuntsmanAdvanced Materials (formerly Vantico Group S.A.) and Nan Ya in the epoxy resinsindustry.  In 2004, we, together with Dow,Huntsman Advanced Materials and Nan Ya, were the major producers of liquidepoxy resins, which are the foundation product of this industry, and accountedfor a majority of LER capacity in the United States, Europe and Asia. Due toimport tariffs, transportation costs, customer preferences in performance andapplications and industry structure, industry dynamics vary by region. Nan Yais a significant competitor in Asia and also competes globally. In addition, ThaiEpoxy, among others, has established export capabilities and now competes for aportion of the markets in Europe and the U.S. There are also other smallercompetitors, primarily in Asia and Eastern Europe, who participate locally andin the export market to a limited extent. Historically, these smaller competitors other than Nan Ya have not hadthe world class manufacturing capabilities or cost structure to effectivelycompete in the global epoxy resins industry over the long term.

 

We believe the significant capital required toconstruct a world scale manufacturing facility, the production volumes requiredto maintain low unit costs, the need to secure a broad range of reliable rawmaterial and intermediate material supplies, the significant technicalknowledge required to develop high performance products, applications andprocesses and the need to develop close, integrated relationships withcustomers serve as barriers to entry for new competitors.  We, Dow and Nan Ya are the only three globalepoxy resins companies that are backward integrated into BPA and ECH and havetechnologically advanced manufacturing facilities.  We believe that our strengths in productbreadth, technical/sales expertise and cost-advantaged production technologyallow us to effectively compete in a broad range of segments characterized bydifferent buying criteria.

 

In the production and sale of BPA, we compete withcompanies who are backward integrated into phenol such as Sunoco and MitsuiChemical, and those who are forward integrated into polycarbonate, such asGeneral Electric and Bayer. Forward integrated polycarbonate manufacturers havecaptive demand but also sell excess BPA to third parties. Both Sunoco and MitsuiChemical do not have captive demand, but sell to third parties and/or arevirtually integrated with downstream companies. Competition in the BPA market is based primarily on price, productquality and security of supply.

 

In the Versatic acids and derivatives product line,which is a small but growing niche market, the main competition is othermonomers, such as acrylate esters, which are also used as a monomer with vinylacetate for the production of emulsion polymers. For Cardura, the maincompetition is from hydroxy acrylic monomers for use in automotive/industrialcoatings applications, and other reactive diluents.

 

**Business Strategy**

 

We are pursuing a strategy designed to increase ourrevenues and cash flow and enhance our global leadership position. Key elementsof our strategy include improving profitability through margin managment,expanding our presence in specialty products, and improving operating efficiency.

 

**Products**

 

We manufacture and sell epoxy resins and relatedproducts, Versatic acids and derivatives, and BPA and ECH, the intermediatematerials used in epoxy resins. Our primary products are epoxy resins andrelated products. In addition, as part of our strategy to provide a range ofcomplementary products which meet our customers’ needs, we manufacture and sellVersatic acids and derivatives. As a backward integrated manufacturer of epoxyresins, we also manufacture BPA and ECH, the two principal intermediatematerials of epoxy resins, for our internal use and sell the excess to thirdparties.

 

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*EpoxyResins and Related Products*

 

Epoxy resins are a family of synthetic thermosetpolymers. Epoxy resins are generally combined with other chemical additives tocreate inert, chemically-stable, or “cured,” products. Once cured, epoxy resinshave attractive attributes such as outstanding adhesion, corrosion andchemicals resistance, high strength and toughness, temperature stability,electrical insulation properties and easy processability.

 

Liquid epoxy resins are the foundation of the industrysince most epoxy resins are initially produced as liquid and can then bemodified into solid epoxy resins or solutions through the addition ofincremental BPA or solvents. In addition to these resins, there are otherspecialty epoxy resins based on other raw materials. Epoxy resins are used inapplications such as coatings, electrical and electronics, construction, adhesivesand composites in a variety of end-use industries. Epoxy resins accounted for63%, 64% and 66% of our revenues for the years ended December 31, 2004,  2003 and 2002, respectively.

 

*VersaticAcids and Derivatives*

 

Versatic acids and derivatives include Versatic acids,VeoVa and Cardura. The applications for Versatic acids include pharmaceuticals(such as semi-synthetic penicillins), peroxides and agrochemicals and for VeoVaand Cardura range from decorative and protective coatings to personal care products(such as hair spray). Versatic acids and derivatives are specialty products.One of the primary end-uses of these products is in polymers and additives forthe coatings industry. Within this segment there is a wide spectrum of polymersystems, usually coating binders, which provide significant benefits to thefinished coating, including adhesion, gloss, flexibility, outdoor durabilityand ease of application. These products are also distinguished by their uniquebranched molecular structure. We manufacture Versatic acids and derivativesusing our integrated manufacturing sites and our internally produced ECH.

 

Our customers use Cardura as an intermediate for theproduction of automotive coatings as well as a flow improver for epoxy resins.Our VeoVa is mainly sold to latex producers for use in the production of latexpaints. We are also developing additional applications beyond the traditionalcoatings market in order to broaden the customer base, such as the use of VeoVain adhesive and paper coatings and Cardura for flow improvement of pigment inepoxy paints. In addition, we completed construction of an advancedmanufacturing facility for Cardura at our Pernis facility in December 2001 andexpanded our production capacity for Cardura.

 

Versatic acids and derivatives accounted forapproximately 15%, 15% and 12% of our revenues for the years ended December 31,2004, 2003 and 2002, respectively.  Although 2004 Versatics revenues as a percentage of total revenues isflat with the prior year, sales volume increased 11%.

 

*Bisphenol-A*

 

BPA is produced in a molten state and is either usedin a molten or pelletized form in our production process for epoxy resins or isflaked or pelletized for sale to third parties. BPA is used primarily forproducing polycarbonate and epoxy resins as well as for the production of otherproducts, including flame-retardants. End-uses of polycarbonate resins includeelectrical and electronic products (including computer and business equipmentand optical disks), glazing and sheeting, automobiles, appliances, power tools,recreational products, packaging, medical devices, films, signs and ophthalmiclenses. BPA is also used in the production of tetrabromobisphenol (TBBPA) whichis used to impart flame resistance to epoxy resins in printed circuit boards,as well as to polycarbonates and other plastics.

 

A limited number of manufacturers produce BPA forresale. By producing our own BPA, we maintain a low cost supply position for theproduction of epoxy resins. We also sell excess BPA in order to achieveeconomies of scale and thereby lower our manufacturing costs. We currently consumeapproximately 55% of our total BPA production capacity to produce epoxy resinsand use the excess capacity for merchant sales. We believe that we are one of the largest suppliers of BPA to thirdparties and one of the largest producers of BPA in the world. Because thelargest end-use segment for BPA is the manufacture of polycarbonate resins, wefocus on sales to polycarbonate producers, who desire the high quality productyielded by our process. In addition, because we do not

 

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compete in the polycarbonate market, we believe our position as asupplier to non-integrated polycarbonate customers is enhanced.

 

As our base epoxy resin business grows, we anticipatethat we will be increasing our internal use of BPA and to the extent that thirdparty sales conflict with epoxy resins production, third party BPA sales willbe reduced or production capacity increased.

 

Sales of BPA to third parties accounted for 18%, 16%and 17% of our revenues for the years ended December 31, 2004, 2003 and 2002,respectively.

 

*OtherProducts*

 

Sales of ECH and other products to third partiesaccounted for 3%, 5% and 5% of our revenues for the years ended December 31,2004, 2003 and 2002, respectively.

 

## **Customers**

 

Our top twenty and fifty customers accounted forapproximately 54% and 73% of our revenues in 2004. No one customer accountedfor 10% or more of our revenues in 2004. Of our top 50 customers, 87% have been with us the last 5 years ormore.  Many of our customers are inmature industries, which have undergone consolidation.  As a result, in many end-use markets, such asaerospace, automotive and heavy electrical equipment manufacture, there areonly a few large potential customers for our products.

 

**Sales and Marketing**

 

We market an extensive product line to meet a widevariety of customer needs. We focus on selecting customers who are or have thepotential to be leaders in their industries and who have growth objectiveswhich support our own. In addition, we focus on customers who value our “systemsand solutions” package. This package includes high-quality, reliable productsbacked by local sales support and technical expertise offered at an attractiveprice.

 

We sell and support our products in over 74 countriesthroughout the world through our sales and customer service network. We use adirect sales force for sales to our larger customers and third-partydistributors to cost effectively serve our smaller customers. Our direct salesforce, customer service and support network consists of 30 employees in theAmericas, 37 employees in Europe/Africa/Middle East and 22 employees in AsiaPacific. Our customer service and support network is organized into keyregional customer service centers. We have global account teams that focus oncoordination for major global customers, including technical service, supplyand commercial terms. In addition, technical professionals are assigned to eachof the three regions to support the sales effort. In the Americas, we also havea telephone resource for technical advice and support for our customers.

 

Our distributors are compensated through a discountfrom the list price for products purchased. We have also been consolidating thenumber of distributors we use to reduce our logistics and supervisory costs. Wehave routine distributor evaluations and incentive programs which are designedto reinforce the “systems and solutions” sales approach. We choose ourdistributors based on reputation, flexibility and capability to bring the “systemsand solutions” marketing strategy to their customers. Each distributor carriesour entire line of resins and related products, as well as Versatic acids andderivatives. Our broad product line provides our distributors with acompetitive advantage over competing distributors with more limited productlines or who must source from multiple suppliers to achieve the same productbreadth.   In 2004, distributorsaccounted for approximately 16% of our sales.

 

Sales to many of our customers in the United States andelsewhere are made under written contracts with an initial term of one year orlonger and have either evergreen provisions or automatic renewal. Thesecontracts are generally for the supply of products based on targeted amounts ora specified percentage of the customer’s requirements. Prices in contracts forepoxy resins are generally negotiated monthly based on market prices and ofteninclude volume discounts. Prices in contracts for BPA are either establishedusing multi-variable formulas based on underlying chemical benchmark prices,cost of production and a margin based on

 

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published market indicators or negotiated periodically.

 

**Research and Development**

 

Our research and development activities are aimed atdeveloping and enhancing products, processes, applications and technologies tomaintain our position as a leading global epoxy resins supplier. We focus on:

 

a)              developing new orimproved epoxy and specialty chemical applications based on our existingproduct line and identified customer needs;

b)             developing new resinproducts or Versatic applications for customers in order to improve theircompetitive advantage and profitability;

c)              providing premiertechnical service for customers of specialty products;

d)             providing technicalsupport for our manufacturing locations and assisting in plant optimization;

e)              ensuring that ourproducts are manufactured in accordance with our global environmental, healthand safety policies and objectives;

f)                developing lowercost manufacturing processes globally; and

g)             expanding productioncapacity.

 

We emphasize a customer driven, “systems and solutions”approach in discovering new applications and processes and providing excellentcustomer service through our technical staff. Through regular direct contactwith our key customers, our research and development personnel can become awareof evolving customer needs in advance and can anticipate their requirements inplanning customer programs. We also focus on on-going improvement of plantyields, fixed costs and capacity. For example, our continuous LER manufacturingprocess is fed from feedstock streams from our BPA and ECH plants located onthe same site. These integrated streams are characterized by exceptionalproduct consistency, low cost economics, and high quality resin that is valuedby the customer for demanding applications. We estimate that this processprovides us with a sustainable cost advantage over conventional batchtechnology, which is the traditional method of manufacturing epoxy resins.

 

We have approximately 91 scientists and techniciansworldwide. We conduct research and development activities at our facilities inPernis, The Netherlands; Houston, Texas; and Louvain la Neuve, Belgium. Ourresearch and development facilities include a broad range of epoxy and Versaticssynthesis, testing and formulating equipment, and small scale versions ofcustomer manufacturing processes for applications development anddemonstration.

 

Our research and development expenditures were $18million, $16 million and $20 million in 2004, 2003 and 2002, respectively.  We centrally manage all these activites toensure an adequate investment return and to globally share ideas within ourbusiness.

 

**Intellectual Property**

 

Our most significant intellectual property rights areour patents and related proprietary rights. As of December 31, 2004, we ownedor licensed or had rights to approximately 440 patents and patent applications.Over half of our patents are in Europe and the remainder are in the UnitedStates and Asia. We anticipate that we will apply for additional patents in thefuture as we develop new products and processes. Our intellectual propertyrights include know-how and patents covering analytical tests, extensiveapplications testing capability and industry-leading processing for ECH and BPAand formulating knowledge of thermoset resin systems for specific end-uses suchas protective and decorative coatings, electrical laminates, electronics,composites, adhesives, fibers, textiles and civil engineering. We have a broadportfolio of patents and intellectual property agreements relating to ourtechnology and products.

 

As of December 31, 2004, we owned or had licensingrights to a number of trademarks. Our most significant trademarks areRESOLUTIONTM,EPIKOTETM Resins, EPONTM Resins, EPIKURETM Curing Agents, EPI-REZTM Waterborne Resins,

 

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HELOXYTMModifiers, CARDURATMGlycidyl Ester, VEOVATMMonomers and VERSATICTMacids.

 

Shell has retained rights in some of the intellectualproperty acquired by us as part of the recapitalization.  See Item 13. “Certain Relationships andRelated Transactions—Ongoing Relationship with Shell—Intellectual PropertyAgreements.”

 

**Raw Materials**

 

We manufacture BPA and ECH, the two key intermediatematerials for epoxy resins, at both the Deer Park and Pernis plants. Thisreduces logistics costs and assures long-term and reliable supply. We currentlyuse our BPA for the production of our epoxy resins and sell the remainder tothird parties. We produce our own ECH but also maintain a position in themerchant market both as a buyer and as a seller to assure supply flexibilityand improve plant operating rates.

 

We purchase chlorine, a primary raw material for ECH,under long-term supply contracts with third parties which allow us to buy thisraw material at a margin above production cost. We also purchase propylene, theother primary raw material for ECH, under long-term supply agreements withShell that are based on market price less negotiated volume discounts. Wepurchase phenol and acetone, the primary raw materials for BPA, under supplycontracts with Shell and other third parties that are based on discountedmarket prices and input-cost formulae. Because we are co-located with Shell atseveral of our facilities, our transportation and logistics costs for certainraw materials which Shell provides us are minimized.

 

Raw materials for Versatic acids consist of carbonmonoxide, propylene trimer and di-isobutylene. Carbon monoxide is supplied bypipeline under a long-term contract from a production facility near our Pernisplant, propylene trimer is obtained from third parties via price formula basedcontracts and spot purchases and di-isobutylene is obtained from third partiesunder multi-year supply agreements. At our Pernis site, Versatic acids arecombined with ECH to produce Cardura and at our Moerdijk site they are combinedwith acetylene, which is purchased from Shell and others under supplyagreements of various terms, to produce VeoVa.

 

The majority of our raw materials used inmanufacturing our products are available from more than one source and arereadily available on the open market. Those materials that are single sourcedgenerally have long-term supply contracts as a basis to guarantee maximumsupply reliability. Prices for most of our main feedstocks are driven byunderlying petrochemical benchmark prices and energy costs.

 

**Manufacturing and Facilities**

 

We manufacture our products in the United States andEurope. Our major manufacturing operations take place at two world-scale sitesin Pernis, The Netherlands and Deer Park, Texas. To be world-scale, we believean LER plant must produce over 80kt per year of resins, achieving the thresholdfor major economies of scale. Deer Park currently has 133kt capacity and Pernishas 100kt capacity, making Deer Park the largest epoxy resin plant in the worldand Pernis one of the three largest plants in the world. We believe the DeerPark plant is the only “continuous” resins plant in the world in which BPA andECH are manufactured and reacted continuously to make epoxy all in oneproduction site. Based on our estimates, this plant, which produces some of themost consistent quality liquid epoxy resins, provides us with a cost advantageover conventional batch technology, which is the traditional method ofmanufacturing epoxy resins, and we believe, provides us with competitivemanufacturing costs.

 

The manufacturing process for LER requires access tosophisticated technology and experience to make consistent quality product. ECHis difficult to handle, especially the disposal of by-products from itsproduction. Backward integration into both ECH and BPA and world-scale plantsare needed to achieve low manufacturing costs through the cycle. Epoxyproduction requires that product be manufactured to meet narrow ranges ofmolecular weight and product reactivity. These properties are then aligned withperformance properties for customers, such as filler settling, adhesion andcolor stability.

 

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**Employees**

 

At December 31, 2004, we had approximately 950employees worldwide (excluding Shell employees who operate certain of ourfacilities under operating and maintenance agreements). Of our employees, approximately51% are based in the Americas, 44% in Europe, Middle East and Africa, and 5% inAsia Pacific.

 

At December 31, 2004, approximately 84 employees atour Deer Park plant were subject to a collective bargaining agreement whichexpires in November 2006. At December 31, 2004, approximately 71 employees atour Norco plant were subject to a collective bargaining agreement which expiresin June 2007. At December 31, 2004, approximately 210 employees at our Pernisplant were subject to a collective bargaining agreement which expired inOctober 2004 and is currently under negotiation.  In several locations outside the UnitedStates, employees are represented by local Staff Councils as required by locallaws or customs. When necessary, we have completed the required consultationprocess with these entities.  Managementgenerally considers its relationships with its employees to be satisfactory.

 

**Environmental/Occupational Healthand Safety Matters**

 

We have adopted and implemented health, safety andenvironmental policies, which include systems and procedures governingenvironmental emissions, waste generation, process safety management, handling,storage and disposal of hazardous substances, worker health and safetyrequirements, emergency planning and response, and product stewardship.Facility managers have assumed day-to-day responsibility for statutory andregulatory compliance, with oversight and support provided by our corporateenvironmental, health and safety managers.

 

We are subject to extensive regulation under theenvironmental and occupational health and safety laws by federal, state andlocal governmental entities and foreign authorities, such as the EuropeanUnion. These laws are designed to protect workers and the public from exposureto certain hazardous chemicals and dangerous work conditions, to protectnatural resources and to limit discharges of hazardous substances to theenvironment from ongoing operations. They provide for substantial fines andpotential criminal sanctions for violations. They also establish requirementsto remediate contamination. The laws are complex, change frequently and havetended to become more stringent over time.

 

For example, statutes such as the FederalComprehensive Environmental Response, Compensation and Liability Act andcomparable state and foreign laws impose strict, joint and several liabilityfor investigating and remediating the consequences of spills and other releasesof hazardous materials, substances and wastes at current and former facilities,and at third-party disposal sites. In addition, other laws permit individualsto seek recovery of damages for alleged personal injury or property damage dueto exposure to hazardous substances and conditions at our facilities or tohazardous substances otherwise owned, sold or controlled by us. Therefore,notwithstanding our commitment to environmental management, we cannot assureyou that environmental, health and safety liabilities will not be incurred inthe future, nor that such liabilities will not result in a material adverseeffect on our financial condition, results of operations or businessreputation.

 

Our sites have an extended history in the manufactureof epoxy resins and other industrial chemical processes. Shell has performedsite assessments at the major manufacturing facilities. The assessments haveidentified soil and groundwater contamination associated with historicaloperations and on-site waste disposal practices at a majority of the sites.Liabilities associated with these matters generally are covered under ourenvironmental indemnity from Shell. These conditions are currently beinginvestigated, remediated and/or monitored by Shell, some at the direction ofgovernmental authorities. With two exceptions, Lakeland and Barbastro, themanufacturing facilities are part of larger integrated complexes and,therefore, the on-going activities are part of a site-wide cleanup program.Shell has retained control over such activities under the term of theenvironmental agreements.  See Item 13. “Certain Relationships and RelatedTransactions—Ongoing Relationship with Shell—Environmental Agreements.”

 

At the Barbastro facility, we are unaware of any soilor groundwater conditions likely to require material expenditures. At theLakeland facility, the other one of our two sites which is not co-located witha Shell facility, groundwater contamination is present and migrating from thefacility. The characterization and remediation of this condition and thesources thereof are the subject of a consent order (and any amendments thereto)issued by the Florida Department of Environmental Protection.  Remediation activities are

 

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currently on-going. Shell retains financial responsibility for allcontamination issues that are or become subject to the consent order and anyexisting or future amendments thereto.

 

As a general matter, notwithstanding the indemnityprovided by Shell, certain liabilities for environmental and occupationalhealth and safety matters fall outside the scope of the protections offered inthe environmental agreements, including liabilities and costs resulting fromfuture laws, permit conditions and other requirements. These liabilities mayresult in the incurrence of material costs and/or impact our future operations.They include the following:

 

•      Thepermit for the hazardous waste incinerators at the Norco facility expired inJanuary 2001.  In accordance with theregulation, we have submitted a permit application for renewal to the LouisianaDepartment of Environmental Quality (LDEQ). We are permitted to continue to operate the incinerators pending thepermit renewal. We are currently in the process of submitting an updated permitrenewal application to LDEQ to satisfy the maximum achievable controltechnology requirement for hazardous waste incinerators that we recentlyimplemented and demonstrated compliance.

 

•      Certainchemicals have been alleged to interact with the endocrine systems of humansand wildlife and disrupt normal processes (*i.e.*endocrine disrupters). BPA is under evaluation as a potential “endocrinedisrupter.” BPA is used as an intermediate at the Deer Park and Pernismanufacturing facilities and is also sold directly to third parties. Newlegislation in Europe will take effect in 2005 and require that risk labels beused for BPA indicating “Possible risk of impaired fertility”.  In addition, an extensive toxicology testingprogram is being conducted by BPA producers under the European Union’sregulation 793/93/EC.  In the event thatBPA is further regulated, additional operating costs would likely be incurredto meet more stringent regulation of the chemical.

 

**Industry Regulatory Matters**

 

The production and marketing of chemical substancesare regulated by national and international laws. Although almost every countryhas its own legal procedure for registration and import, laws and regulationsin the European Union and the United States are most significant to ourbusiness, including the European inventory of existing commercial chemicalsubstances, the European list of notified chemical substances, and the UnitedStates Toxic Substances Control Act inventory. Chemicals which are on one ormore of the above lists can usually be registered and imported withoutadditional testing in other countries, although additional administrativehurdles may exist.

 

We also actively seek approvals from the U.S. Food andDrug Administration for certain specialty chemicals produced by us, principallywhere we believe that these specialty chemicals will or may be used by ourcustomers in the manufacture of products that will come in direct or indirectcontact with food.

 

## **Insurance**

 

In the normal course of business, we are subject tonumerous operating risks, including risks associated with environmental, healthand safety while manufacturing, developing and supplying products, potentialdamage to a customer, and the potential for an environmental accident.

 

We currently have in force insurance policies coveringproperty, general liability, excess liability, workers compensation/employer’sliability, and environmental liability.  All of these policies are in amounts that we believe are consistent withindustry practices and provide that we pay a deductible on each claim.   However, there can be no assurance that theinsurance will adequately protect us and, if we are only partially insured orwere to be completely uninsured, a related claim could result in a materialadverse effect on our financial condition and results of operations.

 

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## **WorkingCapital**

 

As a leading worldwide manufacturer and developer ofepoxy resins, our working capital requirements principally include accountsreceivable, finished product and raw materials inventory, labor, equipment anddebt service costs. Management believes that we maintain adequate workingcapital to meet our needs in the current business environment.

 

**ITEM 2.  PROPERTIES**

 

We are headquartered in Houston, Texas and operatethrough a network of nine manufacturing facilities. We own the plants andequipment at all of our facilities. We lease the underlying real property atall of our facilities under long-term leases with Shell, other than thoselocated in Barbastro, Spain and Lakeland, Florida, which we own. All of ourmanufacturing facilities are co-located within Shell or Shell affiliatefacilities, other than our facilities in Barbastro, Spain and Lakeland,Florida. All of our facilities which are co-located within a Shell site shareutilities with the Shell site through operating agreements, and generally suchutilities and related assets are not owned by us. Our manufacturing facilitieswith associated principal manufacturing capacities (which may vary based onproduct mix in some locations) are listed below.

 
| **Plant Location**         | ** ** | **Product**                                           | ** ** | **2004 Capacities** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | ** **                                            | ** ** | **(in kilotons****)**    | ** ** |
| Argo (IL, USA)             |       | Waterborne (WB) and  solutions                        |       | 45                       |       |
| Barbastro (Spain)          |       | SER, Solutions and  Other                             |       | 11                       |       |
| Deer Park (TX, USA)        |       | BPA                                                   |       | 230                      |       |
|                       |       | ECH                                                   |       | 80                       |       |
|                       |       | LER                                                   |       | 133                      |       |
|                       |       | SER, Solutions and  Other                             |       | 23                       |       |
| Lakeland (FL, USA)         |       | Curing Agents and Other                               |       | 22                       |       |
| Moerdijk  (Netherlands)(1) |       | Versatic acids and  derivatives                       |       | 67                       |       |
| Norco (LA, USA)            |       | Crude ECH and AC                                      |       | 90                       |       |
|                       |       | SER, Solutions and  Other                             |       | 25                       |       |
| Pernis (Netherlands)       |       | BPA                                                   |       | 156                      |       |
|                       |       | ECH                                                   |       | 80                       |       |
|                       |       | LER                                                   |       | 100                      |       |
|                       |       | SER, Solutions and  Other                             |       | 30                       |       |
|                       |       | Versatic acids (1)(2)  and derivatives |       | 103                      |       |
| Stanlow (UK)(1)            |       | SER, Solutions and  Other                             |       | 16                       |       |
| Wesseling (Germany) (3)    |       | SER, Solutions and  Other                             |       | 24                       |       |

 

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(1)These facilities areoperated by Shell on our behalf pursuant to contractual arrangements.

(2) RPP is currentlyreviewing technical issues with regard to shifting certain operations to RPP in2005.

(3)These facilities areoperated by Basell on our behalf pursuant to contractual arrangements.

 

## **ITEM 3.   LEGAL PROCEEDINGS**

 

In the ordinary course of business, we are subject tovarious laws and regulations and, from time to time, litigation. In the opinionof management, compliance with existing laws and regulations will notmaterially affect our financial position or results of operations. Managementis not aware of any material pending actions against us.

 

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## **ITEM4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

On November 3, 2004,at the Annual Meeting of the Securityholders, RPP Inc., as sole member of RPPLLC approved the following:  the re-election of Marvin O. Schlanger asChairman of the Board of Managers and (ii) the election of each of Laurence M.Berg, Peter P. Copses, Joshua J. Harris, Scott M. Kleinman, Carl S. Stutts andHeinn F. Tomfohrde, III, as a Manager. Also, on November 3, 2004, throughUnanimous Written Consent of Sole Stockholders in Lieu of Annual Meeting, RPPLLC, as sole stockholder of RPP Capital Corporation, approved the re-electionof Marvin O. Schlanger, Joshua J. Harris and Scott M. Kleinman as directors ofRPP Capital Corporation.

 

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# **PART II**

# ** **

**ITEM5.   MARKET FOR THE REGISTRANT’S COMMONSTOCK AND RELATED STOCKHOLDER MATTERS**

 

At February 1, 2005, RPP LLC had 1,000,000 unitsoutstanding and one holder of record, which was RPP Inc. At February 1, 2005,RPP Capital had 1,000 shares of common stock outstanding and one holder ofrecord, which was RPP LLC. There is no established trading market for the unitsor the shares.

 

During 2004, RPP LLC paid a constructive cash distributionto RPP Inc. in the amount of $1 million for certain pension payments, which RPPInc. in turn paid to Shell in accordance with the Master Sales Agreement datedNovember 14, 2000 and related ancillary agreements.  RPP Capital did not declare or pay any cashdividends during 2004.  The ability ofRPP LLC to make distributions with respect to its membership interests islimited by contractual restrictions contained in the credit agreement and theindentures governing the 13 1⁄2% Senior Subordinated Notes due 2010, the 9 1⁄2%Senior Second Secured Notes due 2010 and the 8% Senior Secured Notes Due 2009.

 

At December 31, 2004, neither RPP LLC nor RPP Capitalhad any compensation plans (or individual compensation arrangement) pursuant towhich their respective membership interests or common equity were authorizedfor issuance.

 

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**ITEM 6.  SELECTED FINANCIAL DATA**

 

The following table presents selected historicalfinancial data. The historical statement of income data for the years endedDecember 31, 2004, 2003 and 2002 and the historical balance sheet data as ofDecember 31, 2004 and 2003 are derived from our audited consolidated financialstatements included elsewhere in this filing. The selected financial data forthe year ended December 31, 2003 has been restated to reflect the revisionsdiscussed under the heading “Restatement” in Note 2 to the consolidatedfinancial statements appearing elsewhere in this report.  The historical statement of income data forthe years ended December 31, 2001 and 2000 and the historical balance sheetdata as of December 31, 2002, 2001 and 2000 are derived from our audited consolidatedand combined financial statements that are not included herein. 

 
| ** **                                              | ** ** | **Historical (1)**                    | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **(in millions, except percentages)** | ** ** |
| ** **                                              | ** ** | **For the years ended December 31,**  | ** ** |
| ** **                                              | ** ** | **2004**                              | ** ** | **2003 (Restated)** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Statement  of Income Data:**                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                |       | $                                     | 996        |   | $ | 782 |   | $ | 740 |   | $ | 863 |   | $ | 949 |   |
| Purchases and  variable product costs(2)                |       | 715                                   |       | 558 |   | 438 |   | 483 |   | 579 |   |
| Operating  expenses                                     |       | 128                                   |       | 113 |   | 122 |   | 152 |   | 166 |   |
| Selling, general  and administrative expenses           |       | 56                                    |       | 53 |   | 59 |   | 61 |   | 54 |   |
| Depreciation and  amortization                          |       | 47                                    |       | 46 |   | 36 |   | 34 |   | 34 |   |
| Research and  development expenses                      |       | 18                                    |       | 16 |   | 20 |   | 25 |   | 26 |   |
| Restructuring  charges(3)                               |       | —                                |       | — |   | 6 |   | — |   | — |   |
| Special  charges(4)                                     |       | —                                |       | — |   | 8 |   | 15 |   | 49 |   |
| Operating income  (loss)(2)                             |       | 32                                    |       | (4 | ) | 51 |   | 93 |   | 41 |   |
| Interest  expense, net                                  |       | 79                                    |       | 76 |   | 65 |   | 68 |   | 9 |   |
| Income from  equity investment                          |       | —                                |       | 2 |   | 1 |   | — |   | 3 |   |
| Gain on sale of  assets(5)                              |       | —                                |       | 14 |   | 1 |   | 1 |   | — |   |
| Net (loss)  income                                      |       | $                                     | (67        | ) | $ | (45 | ) | $ | (7 | ) | $ | 15 |   | $ | 19 |   |
| **Other  Financial Data:**                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash flows (used  for) provided by operating activities |       | $                                     | (39        | ) | $ | (43 | ) | $ | 64 |   | $ | 95 |   | $ | 126 |   |
| Cash flows (used  for) provided by investing activities |       | (29                                   | )          | 7 |   | (45 | ) | (23 | ) | (17 | ) |
| Cash flows  provided by (used for) financing activities |       | 23                                    |       | 80 |   | (21 | ) | (85 | ) | (90 | ) |
| Capital  expenditures                                   |       | 26                                    |       | 18 |   | 48 |   | 24 |   | 18 |   |
| **Non-GAAP  Financial Data:**                           |       |                                  |       |   |   |   |   |   |   |   |   |
| EBITDA(6)                                               |       | $                                     | 79         |   | $ | 58 |   | $ | 89 |   | $ | 128 |   | $ | 78 |   |
| EBITDA margin(7)                                        |       | 8                                     | %          | 7 | % | 12 | % | 15 | % | 8 | % |
| **Balance  Sheet Data (at period end):**                |       |                                  |       |   |   |   |   |   |   |   |   |
| Total assets                                            |       | $                                     | 911        |   | $ | 875 |   | $ | 793 |   | $ | 734 |   | $ | 792 |   |
| Total debt                                              |       | 701                                   |       | 675 |   | 566 |   | 575 |   | 681 |   |
| Capital leases                                          |       | 1                                     |       | 1 |   | 2 |   | 1 |   | — |   |

 

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(1)   Historicalfinancial information prior to November 1, 2000 has been restated to reflectthe retroactive effect of the change in our method of accounting for ourinventories in the United States from LIFO (last-in, first-out) method to FIFO(first-in, first-out) method.

(2)   Forthe year ended December 31, 2003, these line items were each improved by $3.6million due to a one-time non-cash adjustment in our accounting forinventory.  See Note 4 to the auditedconsolidated financial statements for the year ended December 31, 2003 includedelsewhere in this filing.

(3)   Restructuringcharges consist of employee related severance expenses and other exit costs incurredin connection with cost reduction programs.

(4)   Specialcharges consist of non-recurring costs such as transaction and transition costs,including severance costs related to restructuring or cost reduction programs.Transition costs, which are referred to in, among other agreements, the indenturedated November 14, 2000 between RPP LLC and The Bank of New York, as trustee,  the indenture dated April 9, 2003 between RPPLLC, RPP Capital, and Deutsche Bank Trust Company Americas, as trustee, theindenture dated December 22, 2003 between RPP LLC, RPP Capital and The Bank of NewYork, as trustee, and as determined by management, are expenses incurred 

 

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outside the ordinarycourse of business that relate to the activities required to establish RPP LLCas an independent company. Special charges also include $3.0 million ofemployee severance costs for the fiscal year ended December 31, 2001.

(5)   OnNovember 14, 2003, a wholly owned subsidiary of the Company completed the saleof forty percent of the outstanding shares in Japan Epoxy Resins Co., Ltd to its joint venture partner,Mitsubishi Chemical Company for a purchase price of $23 million. A gainon the sale was recorded in the amount of $14 million after recognizing directcosts of $5 million and accumulated foreign currency translation gain of $4million.

(6)   EBITDArepresents income (loss) before income taxes, interest expense and depreciationand amortization. EBITDA is presented because it is used by investors toanalyze and compare operating performance, which includes a company’s abilityto service and/or incur debt. In addition, management focuses on EBITDA becauseit is used as an internal performance measure. However, EBITDA should not be considered in isolation or as a substitutefor net income, cash flows or other income or cash flow data prepared inaccordance with generally accepted accounting principles in the United States (“GAAP”)or as a measure of a company’s profitability or liquidity. EBITDA is notcalculated under GAAP and therefore is not necessarily comparable to similarlytitled measures of other companies. The following table reconciles thedifferences between net income (loss), as determined under GAAP and EBITDA (inmillions):

** **

| ** **                     | ** ** | **For the Fiscal Years Ended  December 31,** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                     | ** ** | ** **                                   | ** ** | **(Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss) income              |       | $                                            | (67        | ) | $ | (45 | ) | $ | (7 | ) | $ | 15 |   | $ | 19 |   |
| Income tax  expense (benefit)  |       | 20                                           |       | (19 | ) | (5 | ) | 11 |   | 16 |   |
| Interest  expense, net         |       | 79                                           |       | 76 |   | 65 |   | 68 |   | 9 |   |
| Depreciation and  amortization |       | 47                                           |       | 46 |   | 36 |   | 34 |   | 34 |   |
|                           |       |                                         |       |   |   |   |   |   |   |   |   |
| EBITDA                         |       | $                                            | 79         |   | $ | 58 |   | $ | 89 |   | $ | 128 |   | $ | 78 |   |

 

EBITDA for the periodsshown above includes special charges, restructuring charges, severance costs andgain on sale of assets.

 

(7)   EBITDAmargin is calculated as a percentage of revenue.

 

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND** RESULTS OF OPERATIONS

 

The following discussion should be read in conjunctionwith Item 6. “Selected Financial Data,” and the audited consolidated financialstatements, including the notes thereto, included elsewhere in this report. Inaddition to historical information, the following discussion contains forwardlooking statements that are subject to a number of risks and uncertainties. Ouractual results may differ materially from the results discussed in theseforward-looking statements. Important factors that could cause our actualresults to differ materially from the results referred to in theforward-looking statements made below are discussed below or under the heading “RiskFactors” in our Registration Statement on Form S-4 declared effective on February4, 2004 (File No. 333-112106). There may be other factors that may cause ouractual results to differ materially from the results referred to in theforward-looking statements. All forward-looking statements attributable to usor persons acting on our behalf apply only as of the date of this filing andare expressly qualified in their entirety by the cautionary statements includedin this filing. We undertake no obligation to publicly update or reviseforward-looking statements which may be made to reflect events or circumstancesafter the date made or to reflect the occurrence of unanticipated events.

 

**CriticalAccounting Policies**

 

The preparation of financial statements in conformitywith generally accepted accounting principles in the United States requires usto use our judgment to make estimates and assumptions that affect certainamounts reported in our financial statements. As additional information becomes available, these estimates andassumptions are subject to change and thus impact amounts reported in thefuture.  Critical accounting polices arethose accounting policies that involve judgment and uncertainties affecting theapplication of those policies and the likelihood that materially differentamounts would be reported under different conditions or using differingassumptions.   We periodically update ourestimates used in the preparation of the financial statements based on ourlatest assessment of the current and projected business and general economicenvironment.  Our significant accountingpolicies are summarized in Note 2 to the audited consolidated financialstatements included elsewhere in this filing. Below are accounting policiesthat we consider to be critical due to the amount of judgment and uncertaintyinherent in the application of these policies.

 

Revenue Recognition and Accounts Receivable.  Revenues are recognized in accordance withStaff Accounting Bulleting No. 104, “Revenue Recognition” issued by theSecurities and Exchange Commission. Revenues associated with sales of chemical products are recorded whentitle and risk passes to the customer.  Wemaintain allowances for anticipated discounts, rebates, and returns tocustomers that are based on historical experience. We also maintain anallowance for estimated bad debt expense that is based on historicalexperience.

 

Inventories. Inventories are valued at the lower of cost or market.  Cost is determined on the first-in first-outmethod.  We record an allowance forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions or expected futureproduct sales.

 

Long-Lived Assets and Depreciation andAmortization.  With respect to long-livedassets, key assumptions include the estimate of useful lives and therecoverability of carrying values of fixed assets, and other intangible assets.The recovery of assets to be held and used is measured by a comparison of thecarrying amount of an asset to future undiscounted net cash flows expected tobe generated by the asset, which is subject to considerable judgment. If theuseful lives of the assets were found to be shorter than originally estimated,depreciation and amortization charges would be accelerated.

 

Pensions and Other Retirement Plan Obligations and NetPeriodic Pension Expense.  Pensionexpense, as well as the existing liabilities for pensions and otherpostretirement benefits are determined in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting forPensions” and SFAS No. 106, “Employers’ Accounting for Postretirement BenefitsOther than Pensions”.  The application ofthese accounting principles requires the use of statistical actuarial modelsand numerous assumptions and estimates including discount rates, rate of returnon pension assets, the annual rate of inflation of health care costs, retireelife expectancies, increase rates of compensation and the general interest rateenvironment.  Changes in these

 

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assumptions could increase or decrease the expense and liabilitiesrelated to these plans currently and in the future.

 

Income Taxes. Income tax expense and income tax liabilities are accounted for usingSFAS No. 109, “Accounting for Income Taxes”. The application of this accountingprinciple involves various uncertainties regarding the interpretation ofcomplex tax regulations, both federal and foreign. We currently havesignificant deferred tax assets resulting primarily from net operating losscarry forwards and deductible temporary differences, which will reduce taxableincome in future periods.  We provided avaluation allowance on future tax benefits for certain net operatinglosses.   A valuation allowance isrequired when it is more likely than not that all or a portion of a deferredtax asset will not be realized.  Forminga conclusion that a valuation allowance is not needed is difficult when thereis negative evidence such as cumulative losses and losses in the most recentyear. Cumulative losses weigh heavily in the overall assessment. We areorganized as a limited liability company and are not subject to U.S. incometax. Income tax information presented includes U.S. income taxes and foreignincome taxes attributed to our operations that are the responsibility of RPP HoldingsLLC and our foreign subsidiaries.  Weaccrue for income taxes, including both deferred and current income taxprovisions. Additionally, RPP Holdings LLC have made a Section 338(h) (10)election to allow our recapitalization in November 2000 to be treated as anacquisition of assets for tax purposes. Accordingly, for tax purposes the basesof our U.S. assets were stepped-up to their fair market values, and we are ableto depreciate our assets using higher bases than the historical amounts.

 

Our legaland tax structure reflects the global nature of our business.  Managementperforms a review of its global tax positions on an annual basis and reserveamounts for potential tax contingencies.  We establish the reserves basedupon management's assessment of exposure associated with permanent taxdifferences, tax credits and interest expense applied to temporary differenceadjustments.  Significant judgment is required in determining accruals forpotential tax contingencies.  In the ordinary course of a global business,there are many transactions for which the ultimate tax outcome is uncertain. Based on the reviews by management and the result of discussions andresolutions of proposed adjustments with certain tax authorities, includingjudicial procedures as appropriate, and the closure of tax years subject to taxaudit, reserves are adjusted as necessary.  The Netherlands tax authorityis currently examining Resolution Holdings B.V.’s tax returns for the years 2000to 2002.  Net operating losses carried back during this period of timeresulted in $18 million of tax refunds in the fourth quarter of 2003. Although the Netherlands tax authority has not issued a formal notice ofdeficiency, the Company will aggressively contest any proposedadjustments.  Although the final resolution of any proposed adjustments isuncertain and may involve unsettled areas of the law, based on currentlyavailable information, the Company has provided for the best estimate of theprobable tax assets and liability for such matters.  In the current year,this has resulted in a reduction to the recorded amount of net operating lossesto reflect the best estimate of the amount of net operating loss carryforwardsthe Company believes will ultimately be sustained.  While the final resolution of these mattersmay result in tax assets and liabilities which are significantly higher orlower than the recorded amounts, management currently believesthat the expected resolution will not have a material effect on the Company’sfinancial position or liquidity.  However, an unfavorable resolution could have a materialeffect on the Company's results of operations or cash flows in the quarter inwhich an adjustment is recorded or the tax is due or paid.

 

Contingencies and Other Matters.  In the ordinary course of business, we aresubject to various laws and regulations and, from time to time,litigation.  Losses and relatedliabilities are accounted for by applying the criteria of SFAS No. 5, “Accountingfor Contingencies”.   Management isrequired to assess the likelihood of any adverse judgments or outcomes to thesematters, as well as potential ranges of probable losses.   A determination of the amount of reservesrequired, if any, for these contingencies is judgmental and is based on acareful analysis of each individual issue with the assistance of outside legalcounsel.   The required reserves maychange in the future due to new developments in each matter or changes inapproach such as a change in settlement strategy in dealing with these matters.

 

**Overview**

 

As a manufacturer and global supplier of epoxy resinsand associated products, our results of operations have been negativelyimpacted by external factors such as high energy costs and variabledemand.  High energy costs such as theincreasing price of crude oil and related petrochemical products and the highercost of natural gas have translated into significant increases in our rawmaterial costs. The slow economic recovery resulted in soft demand for ourproducts and therefore continued overcapacity in the industry.   Excess capacity had limited our ability toraise prices on most of our products. During 2004, we saw a strengthening of demand for our products and as aresult, we have been successful in raising prices on virtually all products,although raw material costs have also increased.   As a result, our gross profit margins improvedduring the second half of 2004.

 

Our liquidity and capitalresources have also been negatively impacted by our sustained reduced marginsand high level of debt.   To provide financialflexibility under our credit agreement, in 2003 we issued $340 million ofsenior secured and senior second secured notes, repaid the term loan bank debt,and amended the credit agreement.  InJanuary 2005, we refinanced our bank credit facility with a new creditagreement that provides up to $150 million of borrowing capacity.  At December 31, 2004, we had long-term debtoutstanding of $701 million.

 

For a detailed discussion of our results of operation,liquidity and capital resources, see the captions below under “-Results ofOperations” and “-Liquidity and Capital Resources”.

 

**Results of Operations**

 

The following table setsforth certain information derived from the audited consolidated statements ofoperations of RPP LLC for the years ended December 31, 2004, 2003 and 2002expressed as a percentage of revenues. The following table and discussionshould be read in conjunction with the information contained in ourconsolidated financial statements and the notes thereto included elsewhere inthis report.  There can be no assurancethat the trends in the operating results will continue in the future. Theresults of operations for the year ended December 31, 2003 have been restatedto reflect the revisions discussed under the heading “Restatement” in Note 2 tothe consolidated financial statements included elsewhere in this filing.

 

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| ** **                            | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                            | ** ** | ** **                   | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Revenue                               |       | 100                          | %          | 100 | % | 100 | % |
| Cost and  expenses:                   |       |                         |       |   |   |   |   |
| Purchases and  variable product costs |       | 72                           |       | 71 |   | 59 |   |
| Operating  expenses                   |       | 13                           |       | 14 |   | 16 |   |
| Selling, general  and administrative  |       | 5                            |       | 7 |   | 8 |   |
| Depreciation and  amortization        |       | 5                            |       | 6 |   | 5 |   |
| Research and  development             |       | 2                            |       | 2 |   | 3 |   |
| Restructuring  charges                |       | —                       |       | — |   | 1 |   |
| Special charges                       |       | —                       |       | — |   | 1 |   |
| Total                                 |       | 97                           |       | 100 |   | 93 |   |
|                                  |       |                         |       |   |   |   |   |
| Operating income                      |       | 3                            |       | — |   | 7 |   |
|                                  |       |                         |       |   |   |   |   |
| Gain on sale of  asset                |       | —                       |       | 2 |   | — |   |
| Income from  equity investment        |       | —                       |       | — |   | — |   |
| Interest  expense, net                |       | 8                            |       | 10 |   | 9 |   |
|                                  |       |                         |       |   |   |   |   |
| Loss before  income taxes             |       | (5                           | )          | (8 | ) | (2 | ) |
|                                  |       |                         |       |   |   |   |   |
| Income tax expense  (benefit)         |       | 2                            |       | (2 | ) | (1 | ) |
|                                  |       |                         |       |   |   |   |   |
| Net loss                              |       | (7                           | )%         | (6 | )% | (1 | )% |

 

The following is a discussion of significant financialstatement items related to our audited consolidated statements of income. SeeNote 14 to the consolidated financial statements included elsewhere in thisfiling for segment information.

 

*Revenues*

 

Our revenue is primarily generated through the sale ofour three main product lines: (1) epoxy resins, (2) Versatic acids and derivatives,and (3) sales of BPA to third parties. In addition, we sell small amounts ofECH to third parties. Revenue has historically been driven by volumes, marketprices and foreign currency fluctuations. Revenue also includes other incomederived primarily from royalty income and commission income.

 

*OtherRevenue*

 

Other revenue consists mainly of the sale of a BPAtechnology licenses and related support services.

 

*Purchasesand Variable Product Costs*

 

Purchases and variable product costs are primarilycomprised of feedstock costs. Feedstock costs are driven primarily by marketconditions. Volumes fluctuate with production.  The significant feedstocks for which we arehighly sensitive to market prices are phenol, acetone, propylene and chlorine.We purchase chlorine, a primary raw material for ECH, under long-term supplycontracts with third parties allowing us to buy this raw material at a marginabove production cost. We also purchase propylene, the other primary rawmaterial for ECH, under long-term supply agreements with Shell that are basedon market price less negotiated volume discounts. We purchase phenol andacetone, the primary raw materials for BPA, under supply contracts with Shelland other third parties that are based on discounted market prices andinput-cost formulae. Because we are co-located with Shell at several of ourfacilities, our transportation and logistics costs for certain raw materialswhich Shell provides us are minimized. Variable manufacturing costs, which areprimarily utilities, are also a significant component of this line item.

 

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Purchase and variable costs are reduced by the sale of by-productsgenerated during the manufacturing process, primarily hydrochloric acid.

 

*OperatingExpenses*

 

Operating expenses represent the costs associated withthe non-variable operations of our manufacturing facilities. Included inoperating costs are personnel related costs, manufacturing overhead, periodicmaintenance, turnaround costs and environmental costs. Depreciation relating tomanufacturing assets is included within depreciation and amortization.

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses arecomprised primarily of costs associated with non-manufacturing, non-researchand development operations, including management, accounting, treasury,information technology, marketing and sales, and legal. This includes costsassociated with health, safety and environmental projects. Additionally, selling,general and administrative expenses include the expenses incurred, offset bythe reimbursements from Resolution Specialty Materials LLC (“RSM”), anaffiliate, related to the Management Services Agreement described in Note 3 tothe consolidated financial statements.

 

*Depreciationand Amortization*

 

Depreciation is computed on a straight-line basis overthe estimated useful lives of the respective assets. Estimated useful lives forplant and equipment, office buildings, tanks and pipelines are twenty years andrange from five to ten years for other assets. Amortization is computed on astraight-line basis for intangibles such as patents.

 

*Researchand Development Expenses*

 

Research and development expenses are costs associatedwith product or customer specific initiatives and costs associated withprojects that seek improvements in manufacturing processes. Primarily all ofour research and development expenses are generated from our three research anddevelopment facilities.

 

*RestructuringCharges*

 

Restructuring chargesconsist of employee related severance expenses and other exit costs incurred inconnection with our cost reduction programs.

 

*SpecialCharges*

 

Special charges consist of non-recurring type costssuch as transaction expenses incurred in connection with the recapitalizationtransaction, transition expenses to establish us as an independent entity andseverance costs related to restructuring or cost reduction programs.

 

*Gain onsale of assets*

 

On November 14, 2003, a wholly owned subsidiary completedthe sale of forty percent of the outstanding shares in Japan Epoxy Resins Co.,Ltd to itsjoint venture partner, Mitsubishi Chemical Company for a purchase priceof $23 million.   A gain on the sale wasrecorded in the amount of $14 million after recognizing direct costs of $5million and accumulated foreign currency translation gain of $4 million.

 

*Incomefrom Equity Investment*

 

Income from equity investment is related to an unconsolidatedequity investment, which was significantly reduced in November 2003 as a resultof the sale mentioned above.

 

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*InterestExpense, net*

 

Interest expense, net consists of interest expensepayable with respect to borrowings under our credit agreement and the existing notes,offset by our interest income from short-term cash investments. Interestexpense also includes penalties incurred in connection with voluntaryprepayments and fees related to credit agreement amendments, amortization ofdeferred financing costs and amortization of the premium or discount for the existingnotes that are outstanding.

 

*IncomeTax Expense*

 

We are organized as a limited liability company andare not subject to U.S. income tax. Income tax information presented includesU.S. income taxes and foreign income taxes attributed to our operations thatare the responsibility of RPP Holdings LLC and our foreign subsidiaries.

 

We accrue for income taxes, including both deferredand current income tax provisions. Additionally, RPP Holdings LLC have made aSection 338(h) (10) election to allow our recapitalization in November 2000 tobe treated as an acquisition of assets for tax purposes. Accordingly, for taxpurposes the bases of our U.S. assets were stepped-up to their fair marketvalues, and we are able to depreciate our assets using higher bases than thehistorical amounts.

 

*EBITDA*

 

EBITDA represents income (loss) before income taxes,interest expense and depreciation and amortization. EBITDA is presented becauseit is used by investors to analyze and compare operating performance, whichincludes a company’s ability to service or incur debt.  In addition, management focuses on EBITDA becauseit is used as an internal performance measure. However, EBITDA should not be considered in isolation or as a substitutefor net income, cash flows or other income or cash flow data prepared inaccordance with GAAP, or as a measure of a company’s profitability orliquidity.  EBITDA is not calculatedunder GAAP and therefore is not necessarily comparable to similarly titledmeasures of other companies.

 

**Comparison of 2004 results to 2003**

 

*Revenues*

 

Total revenues increased by $214 million, or 27%, to $996million compared to the prior year. The increase in revenues is a result ofhigher average prices and volumes.  Theincrease in average prices was primarily attributable to price increases oncertain products and the impact of a weaker dollar on ourEuro-related sales.   Overall averageprices increased by 18% from the prior year period; however, excluding theimpact of a weaker dollar on our Euro-related sales, overall average pricesincreased 13%.  Overall volumes increasedby 7% from the prior year period primarily due to stronger demand.  The $214 million increase in revenuesconsists of a $157 million, or 73%, increase in prices and a $57 million, or 27%,increase in volumes.

 

Total revenues in the U. S. increased by $81 million,or 23%, to $431 million for the year ended December 31, 2004.  Of the $81 million increase in U. S. revenues,$32 million, or 40%, was due to price increases and $49 million, or 60%, wasdue to volume increases.  Overall averageprices increased by 10% from the prior year period.  Overall volumes increased by 14% from theprior year period primarily due to stronger demand.

 

Total revenues in Europe increased by $133 million, or31%, to $563 million for the year ended December 31, 2004.  Of the $133 million increase in Europerevenues, $101 million, or 76%, was due to price increases and $32 million, or24%, was due to volume increases.  Overallaverage prices increased by 22% from the prior year period; however, excludingthe impact of a weaker dollar on our Euro-related sales, overall average pricesincreased 10%.  Overall volumes increasedby 7% from the prior year period primarily due to stronger demand.

 

*Purchasesand Variable Product Costs*

 

Purchases and variable product costs increased by $157million, or 28%, to $715 million. This increase was largely driven by higherprices for feedstocks due to the increasing price of crude oil and relatedpetrochemical products, the higher cost of natural gas and higher sales volumes.  The $157 million increase in purchases and variableproducts costs consists of a $117 million, or 74%,

 

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increase in prices and a $40 million, or 26%, increase in volumes.

 

Purchases and variable product costs in the U. S.increased by $58 million, or 21%, to $332 million.   The increase was primarily a result ofhigher feedstock and natural gas prices and higher sales volumes.

 

European purchases and variable product costsincreased by $99 million, or 15%, to $35 million.   The increase was a result of higherfeedstock prices and higher sales volumes.

 

*OperatingExpenses*

 

Operatingexpenses increased by $15 million, or 13%, to $128 million.  The increase is primarily due to highermaintenance costs, increased turnaround activity and foreign currency impact.

 

*Selling, Generaland Administrative Expenses*

 

Selling,general and administrative expenses increased by $3 million, or 6%, to $56million.  The increase is due to foreigncurrency impact and increased costs of additional marketing and salesactivity.  Additionally, selling, generaland administrative expenses include the expenses incurred of $11 million,offset by the reimbursements from RSM of $11 million related to the ManagementServices Agreement described under “Certain Relationships and RelatedTransactions.” Included in the $11 million of reimbursements is $0.185 millionrelated to RPP LLC officer salaries.

 

*Depreciationand Amortization*

 

Depreciationand amortization expenses increased by $1 million, or 2%, to $47 million.  The increase is primarily due to higherdepreciation expense related to higher capital expenditures and foreigncurrency impact.

 

*Research andDevelopment Expenses*

 

Researchand development costs increased by $2 million, or 13%, to $18 million.  The increase is primarily due to productsafety studies undertaken in conjunction with various industry groups andforeign currency impact.

 

*OperatingIncome*

 

Operatingincome increased by $36 million to $32 million in 2004. The increase wasprimarily due to the increases in revenues, partially offset by increases inpurchase and variable product costs, operating expenses, selling, general andadministrative expenses, depreciation and amortization and research anddevelopment costs.

 

*Interestexpense, net*

 

Interest expense, netincreased by $3 million, or 4%, to $79 million. The increase is due to higher average outstanding debt balances andhigher average interest rates related to the April 2003 issuance of $200million of senior second secured notes and refinancing of the credit agreementin the second and fourth quarters of 2003, partially offset by a $7 millionwrite-off of deferred financing costs in 2003.

 

*Lossbefore Income Taxes*

 

Loss before income taxes decreased by $17 million to a$47 million loss in 2004.  The decreaseis due to the increased operating income, partially offset by higher interestexpense, the 2003 gain on sale of assets and reduced income from equityinvestment.

 

*IncomeTax Expense (Benefit)*

 

Income tax expense increased by $39 million to $20million in 2004.  The increase in incometax expense is primarily related to the write-off of certain net operatinglosses that we believe are not sustainable as a result of reassessing theirunderlying tax positions.

 

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*Net Loss*

 

Net loss increased by $22 million to $67 million in2004. The increase was due to increased income tax expense, partially offset bydecreased loss before income taxes.

 

*EBITDA*

 

EBITDA increased by $21 million, or 36%, to $79million. The increase was primarily due to the increases in revenues, partiallyoffset by increases in purchase and variable product costs, operating expenses,selling, general and administrative expenses and research and development costsand no gain on sale of assets.  See “Item6. Selected Financial Data” for a reconciliation of EBITDA to net loss.

 

**Comparison of 2003 results to2002** **(Restated)**

 

*Revenues*

 

Total revenues increased by $42 million, or 6%, to$782 million compared to the prior year. The increase in revenues is a resultof increased average prices, partially offset by lower volumes.  The increase in average prices was primarilyattributable to the impact of a weaker dollar on our Euro-relatedsales and to a lesser extent due to modest price increases on certainproducts.  Overall average pricesincreased by 10% from the prior year, however, excluding the impact of a weakerdollar on our Euro-related sales, overall average prices were flat.  Overall volumes decreased by 3% from theprior year as a result of soft demand.

 

Total revenues in the U. S. decreased by $18 million,or 5%, to $349 million for the year ended December 31, 2003.  The decrease in revenue was a result of lowervolumes and flat prices.  Volumesdecreased by 8% from the prior year.

 

Total revenues in Europe increased by $66 million, or18%, to $430 million for the year ended December 31, 2003.   The increase in revenue was a result ofhigher volumes and higher average prices. Average prices increased 18%, however, excluding the impact of a weakerdollar on our Euro-related sales, overall average prices were lower by 3% thanthe corresponding year end.  Volumesincreased by 9% from the prior year.

 

*Purchasesand Variable Product Costs*

 

Purchases and variable product costs increased by $120million, or 27%, to $558 million. This increase was largely driven by higherprices for feedstocks due to the increasing price of crude oil and relatedpetrochemical products and the higher cost of natural gas, partially offset bylower sales volume and the inventory adjustment discussed in Note 4 of theconsolidated financial statements, included elsewhere in this report.

 

Purchases and variable product costs in the U. S.increased by $50 million, or 29%, to $224 million.   The increase was primarily a result ofhigher feedstock prices, partially offset by lower sales volumes.

 

European purchases and variable product costsincreased by $72 million, or 27%, to $334 million.   The increase was a result of higherfeedstock prices and higher sales volumes.

 

*OperatingExpenses*

 

Operating expenses decreased by $9 million, or 7%, to$113 million.  The decrease isprincipally related to the cost reduction program implemented at the beginningof 2003 and lower net periodic pension expense. Pension expense decreased due to the change in estimates in connectionwith our postretirement medical benefit obligation and to a lesser extent dueto a reduction of pension benefits recognized in late 2002.  In addition, pension expense also decreaseddue to a revision of the retirement age and turnover

 

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percentage recognized in the second quarter of 2003.

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses decreasedby $6 million, or 10%, to $53 million. The decrease is primarily a result ofthe cost reduction program implemented by us at the beginning of 2003 and lowernet periodic pension expense.  Pensionexpense decreased due to the change in estimates in connection with our postretirement medical benefit obligation and to a lesser extent due to a reductionof pension benefits.   In addition,pension expense also decreased due to a revision of the retirement age andturnover percentage.  Also, included inthe current period is an insurance refund of approximately $1 million relatedto premiums paid in prior periods.

 

*Depreciationand Amortization*

 

Depreciation and amortization increased by $10million, or 28%, to $46 million.  Theincrease is primarily attributable to an increase in depreciation expenseresulting from capital projects placed in service late in the prior year period,such as the information technology project completed in November 2002.

 

*Researchand Development Expenses*

 

Research and development expenses decreased by $4million, or 20%, to $16 million. The decrease is primarily due to the costreduction program implemented by us at the beginning of 2003.

 

*RestructuringCharges*

 

Restructuring charges decreased by $6 million.  We did not incur severance or other exitcosts during 2003 as in 2002.

 

*SpecialCharges*

 

Special charges decreased by $8 million.  The decrease is primarily related to thecompletion of our transition activities in the last quarter of 2002.  Transition activities for the year endedDecember 31, 2002 consisted of non-recurring transition expenses from ourpredecessor’s IT and accounting systems.

 

*OperatingIncome*

 

Operating income decreased by $55 million, to a $4million loss. The decrease was primarily due increases in purchases and variable product costs and depreciation andamortization expenses, partially offset by increased revenue and decreasedoperating expenses, research and development, restructuring charges and specialcharges.

 

*Gain on Saleof Assets*

 

Gain on sale of assets increased by $13 million fromprior year.   On November 14, 2003, oneof our wholly owned subsidiaries completed the sale of forty percent of theoutstanding shares in Japan Epoxy Resins Co., Ltd to its joint venture partner,Mitsubishi Chemical Company, for a purchase price of $23 million.   A gain on the sale was recorded in theamount of $14 million after recognizing direct costs of $5 million and accumulatedforeign currency translation gain of $4 million.  The transaction was exempt from taxes as aresult of the structure of ownership.  Inconnection with the sale of its shares, a new joint venture agreement,technology license agreement and trademark license agreement were negotiatedand agreed.  We continue to hold throughour wholly owned subsidiary, 10% of the outstanding shares in Japan EpoxyResins Co.

 

*Incomefrom Equity Investment*

 

Income from equity investment increased by $1 millionto $2 million.  The increase was due tohigher earnings recognized from our 50% equity joint venture, Japan EpoxyResins Co., Ltd.   As discussed above, asubstantial portion of the equity

 

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investment was sold and the remaining 10% equity investment will beaccounted for using the cost method.

 

*Interest Expense,net*

 

Interest expense, net increased by $11 million, or17%, to $76 million.  The increase isprimarily due to a $7 million write-off of deferred financing costs related tothe prepayments, refinancing and credit agreement amendment. In addition, theincrease is also due to higher average outstanding debt balances and higheraverage interest rates. The current period does not include bank fees relatedto a credit agreement amendment in the prior year of approximately $1 million.

 

*Lossbefore Income Taxes*

 

Loss before taxes increased by $52 million to a $64million loss in 2003.  The increase isdue to the decrease in operating income and increased interest expense, net,which was partially offset by the gain on sale of an asset.

 

*IncomeTax Expense (Benefit)*

 

Income tax benefit increased by $14 million to a $19million benefit in 2003.  The increase inbenefit is primarily related to an increase in our deferred tax assets,partially offset by the decreased loss before income taxes and an increase in avaluation allowance. The increase in the valuation allowance results fromrecognizing that it is more likely than not that certain carryforwards incertain tax jurisdictions will not be realized as a result of current andfuture taxable income.  Accordingly, thevaluation allowance has been increased in the current year to reflect lowerthan anticipated net deferred tax asset realization.

 

*Net Loss*

 

Net loss increased by $38 million to a $45 million netloss in 2003.  The increase was due toincreased loss before income taxes and decreased income tax benefit.

 

*EBITDA*

 

EBITDA decreased by $31 million, or 35%, to $58million.  The decrease was primarily dueto increases in purchases and variable product costs, partially offset byincreases in revenue, gain on sale of asset and income from equity investmentand decreased operating expenses, and research and development expenses.  See “Item 6. Selected Financial Data” for areconciliation of EBITDA to net loss.

 

**Liquidity and Capital Resources**

 

**General**

 

During the year endedDecember 31, 2004, our operating cash flow was less than our working capital andcapital investment needs. As a result, our cash and cash equivalents decreasedby $45 million as compared to December 31, 2003.  Our working capital requirements principallyinclude accounts receivable, finished product and raw materials inventory,labor, equipment and debt service costs. We expect to finance our operationsthrough net cash provided by operating activities, existing cash and cashequivalents on hand, and borrowings under our new revolving credit facility andto the extent needed, sales of assets. As a result of our high level of debt,we will have to continue to generate significant cash flows through operatingactivities, borrowings and asset sales to meet our current debt servicerequirements.

 

Our high level of debtmay preclude us from borrowing any more funds beyond those available under the newrevolving credit agreement. Based on our current level of operations,management believes that our cash flow from operations, together with existingcash and cash equivalents on hand, future borrowings under our new revolving creditfacility and sales of assets, if

 

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necessary, will be sufficient to fund our workingcapital needs and expenditures, for property, plant and equipment and debtservice obligations in the foreseeable future, although no assurance can begiven in this regard.

 

**Series of Note Issuances**

 

The $328 million aggregate principal amount of 13 1⁄2%Senior Subordinated Notes due 2010 were issued in  private offerings pursuant to Rule 144A andRegulation S under the Securities Act of 1933 in 2000, 2001 and 2002 by RPP LLCand RPP Capital.  These notes weresubsequently exchanged with registered identical series of notes with theSecurities and Exchange Commission in 2001, 2002 and 2003, respectively.  The $328 million of 13 1⁄2% Senior SubordinatedNotes are senior subordinated unsecured obligations ranking junior in right ofpayment to all of our existing and future senior debt and all liabilities ofour subsidiaries that do not guarantee the notes. The proceeds from theissuance of $200 million of the 13 1⁄2% Senior Subordinated Notes in November2000 were used to finance in part the recapitalization and related transactioncosts and expenses. The net proceeds from the issuance of $75 million of the 131⁄2% Senior Subordinated Notes issued in November 2001 and $53 million of thenotes issued in December 2002 were used to repay borrowings under the Credit Agreement(as defined below). Interest on the 13 1⁄2% Senior Subordinated Notes is payablesemi-annually in cash on each May 15 and November 15. The 13 1⁄2% SeniorSubordinated Notes mature on November 15, 2010 and may be redeemed in whole atany time or in part from time to time, on and after November 15, 2005, at thespecified redemption prices set forth under the related indenture.

 

On April 9, 2003,RPP LLC completed a private offering, together with RPP Capital, itswholly-owned subsidiary, of $175 million aggregate principal amount of 91⁄2%Senior Second Secured Notes Due 2010. The $175 million of 9 1⁄2% Senior SecondSecured Notes are senior secured obligations ranking equal in right of paymentto all of our existing and future senior debt and senior in right of paymentwith all of our existing and future subordinated indebtedness.  The 91⁄2% Senior Second Secured Notes are securedby a junior lien, subject to permitted liens, on all of our domestic assets(subject to certain exceptions) that secure our obligations under the CreditAgreement (as defined below) and a portion of the capital stock of our directand indirect domestic subsidiaries and direct foreign subsidiaries.   Interest is payable semi-annually in cash onApril 15 and October 15, beginning October 15, 2003.  The proceeds, net of $5 million debt issuecosts, from the offering were used to repay borrowings under the CreditAgreement among RPP LLC, RPP Capital, RPPI, Resolution Europe B.V. (the “Borrowers”)and the various lenders party thereto, dated as of November 14, 2000 as amended,(the “Credit Agreement”) and for general corporate purposes, including workingcapital. The 91⁄2% Senior Second Secured Notes mature on April 15, 2010 and maybe redeemed in whole at any time or in part from time to time, on and afterApril 15, 2006, at the specified redemption prices set forth under the relatedindenture.

 

We and the otherBorrowers executed the Fourth Amendment to the Credit Agreement dated as ofApril 1, 2003.  The Fourth Amendment,among other things, (a) permitted the Borrowers to issue up to $200 million of 91⁄2% Senior Second Secured Notes due 2010 so long as they used at least the first$135 million of net proceeds from the offering of the Notes to prepay the termloans outstanding under the Credit Agreement, (b) amended the financialcovenants by eliminating the consolidated interest coverage ratio covenant andthe adjusted total leverage ratio covenant and added an adjusted bank leverageratio covenant, and (c) reduced the size of the revolving credit facility from$100 million to $75 million.

 

In May 2003, RPP LLC andRPP Capital registered an identical series of $175 million 91⁄2% Senior SecondSecured Notes due 2010 with the Securities and Exchange Commission andsubsequently completed an offer to exchange the unregistered notes for theregistered notes.

 

On May 22, 2003, RPP LLC completed a private offering,together with RPP Capital, its wholly-owned subsidiary, as co-issuer of anadditional $25 million aggregate principal amount of 91⁄2% Senior Second SecuredNotes Due 2010.  These notes, togetherwith the $175 million aggregate principal amount of 91⁄2% Senior Second SecuredNotes due 2010 that were originally issued on April 9, 2003, are treated as asingle class of securities under our existing indenture.  The proceeds, net of $2 million debt issuecosts from the offering, were used for general corporate purposes, includingworking capital.

 

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In July 2003, RPP LLC and RPP Capital registered anidentical series of 91⁄2% Senior Second Secured Notes Due 2010 with theSecurities and Exchange Commission and subsequently completed an offer toexchange all of the unregistered notes for registered notes.  As a result of these two exchange offers, allof the outstanding $200 million of 91⁄2% Senior Second Secured Notes due 2010 areregistered notes.

 

On December 22, 2003, RPP LLC completed a privateoffering, together with RPP Capital, its wholly-owned subsidiary, as co-issuer,of $140 million aggregate principal amount of 8% Senior Secured Notes Due2009.  The $140 million of 8% SeniorSecured Notes are senior secured obligations ranking equal in right of paymentto all of our existing and future senior debt and senior in right of paymentwith all of our existing and future subordinated indebtedness.  The 8% Senior Secured Notes are secured by alien, subject to permitted liens, on all of our domestic assets (subject tocertain exceptions) that secure our obligations under the Credit Agreement anda portion of the capital stock of our direct and indirect domestic subsidiariesand direct foreign subsidiaries. Our obligations under the 8% Senior SecuredNotes and our obligations under the 9 1⁄2% Senior Second Secured Notes aresecured by liens on the same collateral. By virtue of the lien priority, the 8% Senior Secured Notes areeffectively senior to the obligations under the 91⁄2% Senior Second Secured Notesto the extent of the value of the collateral securing such notes. Interest ispayable semi-annually in cash on December 15 and June 15, beginning June 15,2004.   The proceeds, net of $4 milliondebt issue costs from the offering of the 8% Senior Secured Notes, were used torepay borrowings under the Credit Agreement and general corporate purposes,including working capital.   The 8%Senior Secured Notes mature on December 15, 2009 and may be redeemed in wholeat any time or in part from time to time, on and after December 15, 2006, atthe specified redemption prices set forth under the related indenture.

 

In February 2004, RPP LLC and RPP Capital registeredan identical series of 8% Senior Secured Notes Due 2009 with the Securities andExchange Commission and subsequently completed an offer to exchange all of theunregistered notes for registered notes.

 

We and the other borrowers executed the FifthAmendment to the Credit Agreement with an effective date as of December 22,2003.  The Fifth Amendment, among otherthings, (a) permitted us to issue the 8% Senior Secured Notes so long as thenet proceeds from the offering of the notes were used to repay all of theremaining term loans outstanding under the Credit Agreement, (b) eliminated theadjusted bank leverage ratio covenant, and (c) imposed an asset coverage testwhich limited borrowings and letters of credit under the revolving creditfacility to the sum (the “Borrowing Base”) of 65% of our U. S. inventory, 85%of the net book value of our U. S. receivables and 20% of the net book value ofour U. S. plant, property and equipment, which Borrowing Base we were requiredto report on a monthly basis.  If theutilization under the revolving credit facility exceeded the most recentlyreported Borrowing Base, we were required repay outstanding borrowings and/orcash collateralize letters of credit in the amount equal to such excess.   Substantially all of our current and futureassets were pledged as security under the Credit Agreement.

 

**Former Credit Agreement**

 

On November 14, 2000, RPP Inc., RPP LLC, RPP Capitaland Resolution Europe B.V. (formerly known as Resolution Nederland B.V.)entered into a $600 million credit agreement with a syndicate of financialinstitutions, which we refer to as the Credit Agreement. The indebtedness underthe 2000 credit agreement was refinanced with the proceeds of the credit agreementdescribed under the “-New Credit Agreement” and the Credit Agreement wasterminated. The Credit Agreement provided for a six-year $75 million revolvingcredit facility, the euro equivalent of which was also available, to be usedfor, among other things, working capital and general corporate purposes of RPPLLC and its subsidiaries, including without limitation, certain permittedacquisitions. The revolving credit facility also included a sub-limit forletters of credit in an amount not to exceed $50 million. At December 31, 2004,$28 million was outstanding under the revolving credit facility and $2 millionin outstanding letters of credit. At December 31, 2004, we had additionalborrowing capacity under the Credit Agreement of $45 million. During 2004, weborrowed $172 million and made payments of $146 million under the Credit Agreement.As of December 31, 2004, we were in compliance with the borrowing base limit ofthe Credit Agreement.

 

Borrowings that were maintained as dollar term loansor loans under the revolving credit facility denominated in dollars, accruedinterest at either Citibank’s prime lending base rate or the eurodollar rateplus, in each case, a margin ranging from

 

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1.25% to 3.00%, which margin was dependent upon our leverage, asdetermined on a quarterly basis. Interest rates on loans under the revolvingcredit facility denominated in euros accrued interest at the euro rate plusassociated costs plus a margin ranging from 2.25% to 3.00% which margin wasdependent upon our leverage, as determined on a quarterly basis.

 

Interest period elections generally ranged from one tosix months, or to the extent available, nine or twelve months for eurodollarand euro rate loans. With respect to eurodollar loans and euro rate loans,interest was payable at the end of each interest period or, for interestperiods longer than three months, at least every three months.

 

With respect to base rate loans under the Credit Agreement,interest was payable quarterly on the last business day of each fiscal quarter.Calculation of all interest was based on the actual number of days elapsed in ayear comprising 360 days. For each drawn letter of credit, we were required topay a per annum fee equal to the spread over the eurodollar rate for therevolving credit facility, a fronting fee equal to  1/4 of 1% on the aggregate daily stated amount of each letter ofcredit, plus administrative charges. Additionally, we paid a commitment feeranging from 0.375% to 0.500% per annum, depending on our leverage ratio, whichcommitment fee was payable quarterly on the unused available portion of therevolving credit facility.

 

The loans incurred under the Credit Agreement by RPPLLC and RPP Capital were guaranteed by RPP Inc. and all of our existing andfuture direct and indirect wholly-owned domestic subsidiaries.  The U.S. loans under the Credit Agreement weresecured by a perfected security interest in substantially all of our propertiesand assets and our direct and indirect wholly-owned domestic restrictedsubsidiaries, now owned or acquired later, including a pledge of all capitalstock and notes owned by us and our domestic restricted subsidiaries; providedthat no more than 65% of the stock of our foreign subsidiaries was required tobe pledged in respect of such loans.  Inaddition, loans incurred under the 2000 credit agreement by Resolution EuropeB.V. (f/k/a Resolution Nederland B.V.), a subsidiary of RPP B.V., wereguaranteed by RPP Inc., us and all of our existing and future direct andindirect domestic and material foreign subsidiaries (the “Non-U.S. Guarantors”),subject to exceptions and restrictions. The obligations of Resolution Europe B.V. (f/k/a Resolution NederlandB.V.) and the Non-U.S. Guarantors were secured by a perfected security interestin the assets described above and in certain material property and assets ownedby Resolution Europe B.V. (f/k/a Resolution Nederland B.V.) and the Non-U.S.Guarantors.

 

**NewCredit Agreement**

 

**On January 24, 2005, RPP LLCand RPP Capital entered into a $150 million revolving credit facility pursuantto a credit agreement among Resolution Performance Products Inc.,  Resolution Europe B.V., the other creditparties party thereto, General Electric Capital Corporation, GE Leveraged LoansLimited and the other lenders party thereto (the “New Credit Agreement”).**

 

The proceeds of the initial loans under the New CreditAgreement were used to refinance indebtedness under the former CreditAgreement.

 

The New Credit Agreement currently provides for theextension of revolving loans to RPP LLC (and any other entity approved to be aUS borrower) of up to $100 million in aggregate principal amount at any timeoutstanding (“U.S. Credit Facility”), and for the extension of revolving loansto Resolution Europe B.V. (and any other entity approved to be a Netherlandsborrower) of up to the Euro equivalent of $50 million in aggregate principalamount at any time outstanding (“Netherlands Credit Facility”).  Loans under the U.S. Credit Facility and theNetherlands Credit Facility may be used for, among other things, workingcapital and general corporate purposes of RPP LLC and its direct and indirectsubsidiaries (including, without limitation, Resolution Europe B.V.), including,without limitation, certain permitted acquisitions.  The U.S. Credit Facility includes a sub-limitfor letters of credit in an amount not to exceed $30 million.  The Netherlands Credit Facility includes asub-limit for letters of credit in an amount not to exceed the Euro equivalentof $10 million.  The extension ofrevolving loans under the U.S. Credit Facility and the Netherlands CreditFacility terminates on June 24, 2009.

 

**Borrowingsby RPP LLC under the U.S. Credit Facility denominated in dollars accrueinterest at either a U.S. index rate or the eurodollar rate plus, in each case,a margin ranging from 1.00% to 2.50%, depending on RPP LLC’s consolidated fixedcharge coverage ratio, as calculated under the New Credit Agreement anddetermined on a quarterly basis. Borrowings by RPP LLC under**

 

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the U.S. Credit Facility denominated in Euros accrue interest at theeuro rate plus a margin ranging from 2.00% to 2.50% depending on RPP LLC’sconsolidated fixed charge coverage ratio, as calculated under the New CreditAgreement and determined on a quarterly basis. Borrowings by Resolution Europe B.V. under the Netherlands CreditFacility accrue interest at either the euro rate plus associated costs or aeuro base rate plus, in each case, a margin ranging from 2.00% to 2.50%depending on RPP LLC’s consolidated fixed charge coverage ratio, as calculatedunder the New Credit Agreement and determined on a quarterly basis.

 

**Interestperiod elections generally range from one to six months for eurodollar and eurorate loans.  With respect to eurodollarloans and euro rate loans, interest is payable at the end of each interestperiod or, for interest periods longer than three months, at least every threemonths.  With respect to euro base rateloans and US index rate loans, interest is payable monthly on the last businessday of each month.  Calculation of allinterest is based on the actual number of days elapsed in a year comprising360 days.  For each drawn letter ofcredit, we are required to pay a per annum fee equal to the margin over theeurodollar rate for the revolving credit facility, plus administrative charges(including a 0.125% per annum issuing fee). In addition, RPP LLC will pay a commitment fee of 0.75% per annum of theaverage daily balance of the unused portion of the U.S. Credit Facility,payable monthly in arrears, if less than half of the total commitments underthe U.S. Credit Facility are utilized, or 0.50% per annum if greater than orequal to half of such total commitments are utilized.  Resolution Europe B.V. will pay a commitmentfee of 0.75% per annum of the average daily balance of the unused portion ofthe Netherlands Credit Facility, payable monthly in arrears, if less than halfof the total commitments under the Netherlands Credit Facility are utilized,and 0.50% per annum if greater than or equal to half of such total commitmentsare utilized.**

 

**Theamount of availability for borrowings and letters of credit under the U.S.Credit Facility is limited to the sum (the “U.S. Borrowing Base”) of (1) 85% ofthe net book value of RPP LLC’s receivables, (2) the lesser of 65% of the bookvalue of RPP LLC’s inventory consisting of raw materials and finished goods and85% of the net orderly liquidation value of such inventory, and (3) the lesserof 100% of the net orderly liquidation value of RPP LLC’s U.S. plant, propertyand equipment and $25 million (less amortization), which U.S. Borrowing BaseRPP LLC will be required to report on a monthly basis.  If the utilization under the U.S. CreditFacility exceeds the most recently reported U.S. Borrowing Base, RPP LLC mustrepay outstanding borrowings and/or cash collateralize letters of credit in theamount equal to such excess.**

 

**Theamount of availability for borrowings and letters of credit under theNetherlands Credit Facility is limited to the sum (the “Netherlands BorrowingBase”) of (1) 85% of the net book value of Resolution Europe B.V.’s receivablesoriginating from customers located in Austria, Australia, Belgium, Canada,**Switzerland, Czech Republic, Germany, Denmark,Spain, Finland, France, the UK, Greece, Hungary, Ireland, Italy, theNetherlands, Norway, New Zealand, Poland, Portugal, Sweden, Slovakia and the U.S.and (2) 65% of the net book value of Resolution Europe B.V.’s receivablesoriginating from customers located in China, Hong Kong, Japan, Romania,Singapore, Slovenia and Taiwan, which Netherlands Borrowing Base Resolution EuropeB.V. will be required to report on a monthly basis.  If the utilization under the NetherlandsCredit Facility exceeds the most recently reported Netherlands Borrowing Base,Resolution Europe B.V. must repay outstanding borrowings and/or cash collateralizeletters of credit in the amount equal to such excess.

 

The loans incurred underthe U.S. Credit Facility are guaranteed by RPP Inc., RPP Capital Corporation andall of RPP Inc.’s existing and future direct and indirect domestic subsidiariesother than RPP LLC (the “U.S. Guarantors”). The loans incurred under the U.S. Credit Facility are secured by asecurity interest in substantially all of RPP LLC’s and the U.S. Guarantors’properties and assets, including a pledge of all capital stock and notes ownedby them and their subsidiaries; provided that no more than 65% of the votingstock of their first-tier foreign subsidiaries is required to be pledged inrespect of such loans under the U.S. Credit Facility.  As part of the security for the U.S. Credit Facility,the lenders have control agreements over the bank accounts into which RPP LLC’scustomers remit payment.  Loans incurredunder the Netherlands Credit Facility are guaranteed by Resolution HoldingsB.V. and all of its existing and future direct and indirect material foreignsubsidiaries other than Resolution Europe B.V. (the “Non-U.S. Guarantors”),subject to exceptions and restrictions. The obligations of Resolution Europe B.V. and the Non-U.S. Guarantorsare secured by a security interest in substantially all of the properties andassets owned by Resolution Europe B.V. and the Non-U.S. Guarantors, includingby a pledge of all capital stock and notes owned by such entities.  As part of the security for the NetherlandsCredit Facility, the lenders maintain bank accounts into which Resolution EuropeB.V.’s  customers remit payment.  Such receipts are transferred to ResolutionEurope B.V. once any outstanding revolver balances are repaid.  TheCredit Agreement contains customary representations and warranties, affirmativeand negative covenants and events of default.

 

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**EquipmentLeases**

 

During 2001, we entered into five to seven year leasesfor equipment at an aggregate annual rental of $0.3 million. The equipment hasbeen capitalized at its fair market value of $1.2 million, which approximatesthe present value of the minimum lease payments. During 2002, we entered into anumber of thirty-six month leases for equipment at an aggregate annual rental of$0.8 million. The equipment has been capitalized at its fair market value of$2.3 million, which approximates the present value of the minimum leasepayments. As of December 31, 2004, $1 million of these capital leases wasoutstanding.  The thirty-six month leasesare expected to be fully paid by June 2005. We will continue to review enteringinto capital lease agreements as alternate sources of financing with favorableinterest rates as opportunities arise.

 

**EquipmentNotes**

 

In addition during 2001, we entered into unsecuredtrade notes, totaling $3.9 million, payable over thirty-six months with one ofour vendors for the purchase of computer equipment and related services. As of December31, 2004, $0.3 million of these unsecured trade notes was outstanding.   The trade notes are expected to be fully paidby June 2005.

 

**InsuranceNotes**

 

Each year we enter intotrade notes with a funding corporation to finance our insurance coverage.Payments on these trade notes were approximately $5 million in 2004 and there was$3 million outstanding as of December 31, 2004 under these 2003 and 2004 tradenotes. We plan to enter into a similar arrangement for a similar amount tofinance our insurance needs in 2005.

 

**CashFlows**

 

For the year endedDecember 31, 2004, we used net cash for operating activities of $39 million,used cash for investing activities of $29 million and provided net cash byfinancing activities of $23 million. Investing activities primarily consisted of $26 million of capitalexpenditures for property, plant and equipment and a $3 million  investment in Resolutions’ JV LLC(“RJV”).  Financing activities primarilyconsisted of net borrowing from the Credit Agreement.  For the year ended December 31, 2003, we usednet cash for operating activities of $43 million, provided cash by investingactivities of $7 million and provided cash by financing activities of $80million. Investing activities primarily consisted of expenditures for property,plant and equipment of $18 million offset by the proceeds of $23 million on thesale of forty percent of the outstanding shares in Japan Epoxy Resins Co., Ltdto our joint venture partner, Mitsubishi Chemical Company.  In connection with the financing activities,we paid a constructive distribution related to certain pension costs to Shellon RPP Inc.’s behalf.  For the year endedDecember 31, 2002, we generated net cash by operating activities of $64million, used cash in investing activities of $45 million and used cash infinancing activities of $21 million. Investing activities primarily consistedof expenditures for property, plant and equipment of $48 million and proceedsfrom the sale of non-productive assets of $2 million. 

 

Our management usesEBITDA as an internal performance measure rather than a measure of our liquidity.Our cash flow from operations has been significantly different than our EBITDA.For example, for the year ended December 31, 2004, our EBITDA was $79 million,but our cash flow from operations was negative $39 million and our interestexpense, net, was $79 million.

 

**Capital Expenditures**

 

Capital expendituresfor property, plant and equipment totaled $26 million, $18 million and $48million for the years ending December 31, 2004, 2003 and 2002, respectively.  Capital expenditures for 2004 consisted of $1million for information technology projects, $2 million for mandatoryenvironmental projects and $23 million for maintenance and operatingprojects.  Capital expenditures for 2003consisted of $1 million for information technology projects, a net $6 millionfor mandatory environmental projects (gross $11 million before indemnificationrecovery of $5 million from Shell), $6 million for growth and improvedprofitability and $5 million for maintenance and operating projects.  Of the $48 million spent in 2002, $30 millionwas for an the information technology project, a net $10 million was formandatory environmental projects (gross $26 million before 

 

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indemnification recovery of $16million from Shell), $6 million was for projects related to growth and improvedprofitability, and $2 million was for maintenance and operating projects.

 

Because we have anestablished infrastructure in place, our capital expenditures are generally notfor the building of new plants but for their maintenance, mandatoryenvironmental projects, occasional incremental expansion or costreduction/efficiency improvement where justified by the expected return oninvestment.   We expect our capitalexpenditures for 2005 to be approximately $35 million of which $20 million isfor maintenance and operating projects, and $15 million for growth and improvedprofitability projects.

 

**ContractualObligations and Other**

 

We do not have anyarrangements or relationships with unconsolidated entities or special purposeentities. Related party transactions are limited to those described in Note 3of the consolidated financial statements. Off-balance sheet arrangements arelimited to operating leases described in Note 13 of the consolidated financialstatements.  The following is a summaryof our material contractual cash payment obligations as of December 31, 2004(in millions):

 
| **Contractual Obligation**               | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-term debt  obligations*             |       | $        | —     |     | $          | —   |       | $        | —     |           | $          | —    |       | $ | 701 |   | $ | 701 |   |
| Interest expense                         |       | 75       |       | 75       |       | 75       |       | 75       |       | 119            |       | 419       |       |
| Capital lease  obligations               |       | 1        |       | —   |       | —   |       | —   |       | —         |       | 1         |       |
| Pension &  other benefit obligations |       | 1        |       | 2        |       | 2        |       | 3        |       | 38             |       | 46        |       |
| Other  contractual obligations**         |       | 143      |       | 111      |       | 111      |       | 84       |       | 165            |       | 614       |       |
| Operating lease  obligations             |       | 10       |       | 10       |       | 10       |       | 9        |       | 29             |       | 68        |       |
| Total                                    |       | $        | 230        |     | $          | 198      |       | $        | 198        |           | $          | 171       |       | $ | 1,052 |   | $ | 1,849 |   |

 

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* The revolving creditfacility also includes a sub-limit for letters of credit in an amount not toexceed $50 million.

At December 31, 2004, $28million was outstanding under the revolving credit facility and $2 million inoutstanding letters of credit.  

** Other contractualobligations are comprised of the fixed or minimum amounts of goods and/orservices under long-term contracts and assumes that certain contracts areterminated in accordance with their terms after giving the requisite noticewhich is generally two to three years for most of these contracts; however,under certain circumstances, some of these minimum commitment term periodscould be further reduced which would significantly decrease these contractualobligations.

 

We expect to contributeapproximately $12 million to its Netherlands pension plan and $0 to its U. S.pension plan for fiscal 2005.

 

**Global Tax Positions**

 

Our legal and taxstructure reflects the global nature of our business.  We perform a review of our global taxpositions on an annual basis and reserve amounts for potential taxcontingencies.  We establish the reservesbased upon management's assessment of exposure associated with permanent taxdifferences, tax credits and interest expense applied to temporary differenceadjustments.  Significant judgment isrequired in determining accruals for potential tax contingencies.  In the ordinary course of a global business,there are many transactions for which the ultimate tax outcome isuncertain.  Based on the reviews bymanagement and the result of discussions and resolutions of proposedadjustments with certain tax authorities, including judicial procedures asappropriate, and the closure of tax years subject to tax audit, reserves areadjusted as necessary.  The Netherlandstax authority is currently examining Resolution Holdings B.V.’s tax returns forthe years 2000 to 2002.  Net operatinglosses carried back during this period of time resulted in $18 million of taxrefunds in the fourth quarter of 2003.  TheNetherlands tax authority has not issued a formal notice of deficiency and wewill aggressively contest any proposed adjustments.  Although the final resolution of any proposedadjustments is uncertain and may involve unsettled areas of the law, based oncurrently available information, we have provided for the best estimate of theprobable tax assets and liability for such matters.  In the current year,this has resulted in a reduction to the recorded amount of net operating lossesto reflect the best estimate of the amount of net operating loss carryforwardsthe Company believes will ultimately be sustained.  While the final resolution of these mattersmay result in tax assets and liabilities which are significantly higher orlower than the recorded amounts, we currently believe that the expectedresolution will not have a material effect on our financial position orliquidity.  However, an unfavorableresolution could have a material effect on our results of operations or cashflows in the quarter in which an adjustment is recorded or the tax is due orpaid.

** **

**Outsourcing Services**

 

During the second quarterof 2004, we commenced providing outsourcing services to RSM under theManagement Services Agreement (“MSA”). The agreement was executed on May 27, 2004 and has an initial term ofthree years with automatic renewal for one-year periods thereafter unlesswritten notice is given by either party. Currently in progress is an information technology project that consistsof installing and configuring hardware and software as well as establishing aninternal telecommunications and information technology infrastructure.  In addition to the information technologyproject, RPP provides outsourcing services that include monitoring of servicesunder a transition services agreement, human resources, environmental, healthand safety, financial and treasury, information technology, legal, intellectualproperty sales/service, purchasing, logistics and any negotiated additionalservices or projects.  In exchange forproviding the mentioned outsourcing services, RPP bills RSM monthly and thecharges are composed of the following formula: 33 1/3% of the estimated totalsalary, bonus, travel reimbursement, benefits and other costs payable by RPP toits Chief Financial Officer, General Counsel, Director of Human Resources,Chief Information Officer, Chief Administrative Officer and Director ofEnvironmental Health and Safety, plus an amount equal to any incremental costincurred by RPP in connection

 

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with the provision of the services multiplied by 1.075and an amount equal to all out of pocket expenses incurred by RPP in providingthe services.  In addition, RSM grantsoptions to purchase common units of RSM to certain members of the management,employees or independent contractors of RPP who are involved in the provisionor oversight of the services.  As ofDecember 31, 2004, RSM paid us $11 million related to the MSA and informationtechnology project. The actual expenses incurred, offset by the reimbursementsfrom RSM, are recorded in selling, general, and administrative expenses.  Therefore, the mark-up related to these costsis included as a reduction of selling, general, and administrative expenses andhave been insignificant to date. Included in the $11 million of reimbursementsis $0.185 million related to RPP LLC officer salaries.

 

**Outlookfor 2005**

 

We have experienced animprovement in demand in the markets we serve, and expect to see continuedimprovement in demand in 2005.  Supply/demandfundamentals are expected to improve.  However,raw material volatility could continue into 2005 because of, among otherthings, political instability in the Middle East or supply disruptionselsewhere. There can be no assurances that (a) any global recovery willcontinue during 2005, (b) we will be able to realize margins we havehistorically achieved as feedstock costs decline, or (c) our feedstock costswill not rise faster than our product prices and, therefore reduce our margins.

 

We believe that, assumingcontinued global growth, demand for epoxy resins will improve in 2005 from 2004levels, as described above. Also, we have announced and implemented significantincreases of epoxy resins prices during the second half of 2004 in NorthAmerica, Europe and Asia.  We believethat our actions taken in 2004 to implement monthly pricing mechanisms in mostproduct lines will improve our ability to react to changing market conditionsin 2005, such as changes in raw material prices or changes in supply/demandfundamentals.

 

There can be noassurances that (i) demand for our products will increase during 2005 or (ii)the announced price increases by us or our competitors will be accepted by ourcustomers or that we will not lose any significant customers or volumes in thefuture as a result of these price increases. 

 

**Environmental,Health and Safety**

 

Our business is subjectto various federal, state, local and foreign laws and regulations which governenvironmental health and safety (“EHS”) related matters. Compliance with theselaws and regulations requires substantial continuing financial commitments andplanning. Moreover, the laws and regulations directly affect how we operate ourbusiness.  The financial commitmentsconsist of environmental costs for normal day to day operations, voluntary andmandatory matters, as well as remediation issues.

 

As of December 31, 2004and 2003, we assessed that an environmental remediation liability accrual wasnot needed based on the current available facts, present laws and regulations,and current technology. We accrue for environmental liabilities when theliability is probable and the costs are reasonably estimable. This assessment wasbased on the lack of evidence of any claims or possible claims against us fromthe closing date of the recapitalization. For environmental conditions thatexisted prior to the closing date, our environmental remediation liability isinfluenced by agreements associated with the transactions whereby Shellgenerally will indemnify us for environmental damages associated withenvironmental conditions that occurred or existed before the closing date ofthe recapitalization, subject to certain limitations. In addition, forincidents occurring after the closing date of the recapitalization transaction,management believes that we maintain adequate insurance coverage, subject todeductibles, for environmental remediation activities.

 

As mentioned above, wehave substantial continuing financial commitments for compliance withenvironmental matters.   During the yearended, December 31, 2004 and 2003, we expended a total of $2 million and $11million in related mandatory environmental capital projects and we applied $5million from the deferred credit balance to offset these expenditures.  The deferred credit balance resulted from the2002 settlement with Shell with regard to environmental matters covered byShell’s indemnity to us.  As of December31, 2004 and 2003, the deferred credit balance was zero.  We expect a similar operating environmental commitment

 

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to continue in future years; however, the level offinancial commitment may increase if environmental laws and regulations becomemore stringent.

 

**Researchand Development**

 

Our research anddevelopment activities are aimed at developing and enhancing products,processes, applications and technologies on a global basis.  We emphasize a customer driven, “systems andsolutions” approach in discovering new applications and processes andproviding  customer service through ourtechnical staff. We also focus on on-going improvement of plant yields, fixedcosts and capacity.  Our research anddevelopment expenditures were $18 million, $16 million and $20 million for the yearsended December 31, 2004, 2003 and 2002, respectively. In order to continue tofind alternate applications for our products and to continue to seekefficiencies in our manufacturing efforts, we expect to spend similar amountsin the future on product development and process development.

 

**Effectsof Currency Fluctuations**

 

We conduct operations incountries around the world. Therefore, our results of operations are subject toboth currency transaction risk and currency translation risk. We incur currencytransaction risk whenever we enter into either a purchase or sales transactionusing a currency other than the local currency of the transacting entity. Withrespect to currency translation risk, our financial condition and results ofoperations are measured and recorded in the relevant domestic currency and thentranslated into U.S. dollars for inclusion in our consolidated financialstatements. Exchange rates between these currencies and U.S. dollars in recentyears have fluctuated significantly and may do so in the future.  For the year ended December 31, 2004, 57% ofour total revenues and 52% of our total expenses were from companiesincorporated outside of the United States. For the year ended December 31, 2003, 55% of our total revenues and 57%of our total expenses were from companies incorporated outside the UnitedStates.  For the year ended December 31, 2002,50% of our total revenues and 56% of our total expenses were from companiesincorporated outside the United States.  Asubstantial amount of assets and liabilities outside the United States arecurrently denominated in the Euro. Historically, we have not undertaken hedgingstrategies to minimize the effect of currency fluctuations. Significant changesin the value of the Euro relative to the U.S. dollar could also have an adverseeffect on our financial condition and results of operations and our ability tomeet interest and principal payments on Euro-denominated debt, includingcertain borrowings under the Credit Agreement, and U.S. dollar denominateddebt, including the notes and certain borrowings under the Credit Agreement.

 

**Inflationand Seasonality**

 

Certain of our expenses,used in the production of final products, such as supplies, maintenance andrepairs and compensation and benefits, are subject to normal inflationarypressures. Although to date we have been able to offset inflationary costincreases through operating efficiencies and cost reductions, there can be noassurance that we will be able to offset any future inflationary cost increasesthrough these or similar means. Our revenues and earnings are moderatelyseasonal, with the second and third quarters generally providing strongerresults. Such seasonality has also been customary in the chemical industry ingeneral, and we expect this trend to continue in future periods.

 

**RecentAccounting Pronouncements**

 

In December 2003, the Financial Accounting StandardsBoard (“FASB”) issued a revision to SFAS No. 132, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits”.  The revision amends SFAS No.’s 87, 88 and 106 and requires additionaldisclosures to those in the original SFAS 132 to include information describingthe types of plan assets, investment strategy, measurement date(s), planobligations, cash flows, and components of net periodic benefit or costsrecognized during interim periods.   Theeffective dates for the additional disclosure requirements are December 15,2003 and June 15, 2004.  Adoption of therevisions did not have a material impact on our consolidated financialposition, results of operations or cash flows.

 

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In December 2003, FASB Interpretation No. 46 (RevisedDecember 2003), Consolidation of Variable Interest Entities (“FIN46R”), wasissued primarily to clarify the required accounting for interests in variableinterest entities (“VIE’s”).  Thisstandard replaces FASB Financial Interpretation No. 46, Consolidation of VariableInterest Entities that was issued in January 2003 to address certain situationsin which a company should include in its financial statements the assets,liabilities and activities of another entity. For us, application of FIN 46R is required for interest in certain VIEsthat are commonly referred to as special-purpose entities, or SPEs, as ofDecember 31, 2003 and for interests in all other types of VIEs as of March 31,2004.  Our application of FIN 46R, as ofDecember 31, 2003 and as of March 31, 2004, did not and is not expected to havea material impact on our consolidated financial statements. 

 

In January 2004, the FASB issued FASB Staff Position(“FSP”) FAS 106-1, Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003.  The FSP permits a sponsor of retiree healthbenefit plans to make a one-time election to defer recognition of the effectsof the new Medicare legislation in accounting for its plans under SFAS No. 106,“Employers Accounting for Postretirement Benefits Other Than Pensions”, or inmaking disclosures related to its plans required by SFAS No. 132 until the FASBdevelops and issues authoritative guidance on accounting for subsidies providedby the Act.  Such FASB guidance couldrequire a change in currently reported information.   Adoption of the standard did not have amaterial impact on our consolidated financial position, results of operationsor cash flows.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Shared-Based Payment.” SFAS No. 123(R) addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS No. 123(R) requires an entity to recognize the grant-date fair-value ofstock options and other equity-based compensation issued to employees in theincome statement. The revised Statement generally requires that an entityaccount for those transactions using the fair-value-based method, andeliminates the intrinsic value method of accounting in APB Opinion No. 25,“Accounting for Stock Issued to Employees”, which was permitted under StatementNo. 123, as originally issued.  Therevised statement requires entities to disclose information about the nature ofthe share-based payment transactions and the effects of those transactions onthe financial statements.

 

SFAS No. 123(R) is effective for public companies thatdo not file as small business issuers as of the beginning of the first interimor annual reporting period that begins after June 15, 2005 (i.e., secondquarter 2005 for the Company). All public companies must use either themodified prospective or the modified retrospective transition method. Earlyadoption of this Statement for interim or annual periods for which financialstatements or interim reports have not been issued is encouraged. We have notyet evaluated the impact of adoption of this pronouncement. 

 

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs”, to amend the guidance in Chapter 4, “Inventory Pricing”, ofFASB Accounting Research Bulletin No. 43, “Restatement and Revision ofAccounting Research Bulletins.” SFAS No. 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage). The Statement requires that those items be recognized as current-periodcharges. Additionally, SFAS No. 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 is effective for fiscal yearsbeginning after June 15, 2005. We are currently evaluating the impact of theadoption of this Statement which is required to be adopted in our fiscal year2005. 

 

As part of its short-term international convergenceproject with the IASB, on December 16, 2004, the FASB issued SFAS No. 153 toaddress the accounting for non-monetary exchanges of productive assets. SFASNo. 153 amends APB No. 29, “Accounting for Non-Monetary Exchanges”, whichestablished a narrow exception for non-monetary exchanges of similar productiveassets from fair value measurement. This Statement eliminates that exceptionand replaces it with an exception for exchanges that do not have commercialsubstance. Under SFAS No. 153 non-monetary exchanges are required to beaccounted for at fair value, recognizing any gains or losses, if their fairvalue is determinable within reasonable limits and the transaction hascommercial substance. The Statement specifies that a non-monetary exchange hascommercial substance if future cash flows of the entity are expected to changesignificantly as a result of the exchange. An entity should apply theprovisions of SFAS No. 153 prospectively for non-monetary asset exchangetransactions in fiscal periods beginning after June 15, 2005. We will adoptthis Statement in fiscal 2005 and adoption is not expected to have a materialimpact on our consolidated financial position or results of operations. 

 

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**Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We are engaged inmanufacturing and marketing resins and other chemicals in the U.S. andinternationally. As a result, we are exposed to certain market risks whichinclude financial instruments such as foreign currency, short-term investments,trade receivables, and long-term debt. The adverse effects of potential changesin these market risks are discussed below. The sensitivity analyses presenteddo not consider the effects that such adverse changes may have on overalleconomic activity nor do they consider additional actions management may taketo mitigate our exposure to such changes. The notes to our audited consolidatedfinancial statements provide a description of our accounting policies and otherinformation related to these financial instruments.

 

A substantial amount ofassets and liabilities outside the U.S. are denominated in Euros. The exchangerate of the U.S. dollar to the Euro was approximately 0.73310 and 0.7964 at December 31,2004 and 2003, respectively. We may utilize forward exchange contracts to hedgeforeign currency transaction exposures. There were no foreign exchangecontracts outstanding at December 31, 2004.

 

We place our short-terminvestments, which generally have a term of less than 90 days, with highquality financial institutions. We also limit the amount of credit exposure toany one institution, and have investment guidelines concerning diversificationand maturities designed to maintain safety and liquidity. Due to the short-termnature of these instruments, their carrying value approximates market value.Management does not believe that a decrease of 1.0% from 2004 averageinvestment rates would be material to interest expense, net during 2005.

 

Management evaluates thecreditworthiness of our customers and monitors accounts on a regular basis, buttypically does not require collateral. Our trade receivables are primarilydenominated in U.S. dollars and Euros. In addition, trade receivables aregenerally due within 30 to 60 days and are collected in a timely manner.Historically, bad debts have not been material and have been within management’sexpectations. Management believes timely collection of trade receivablesminimizes associated credit risk.

 

As of December 31,2004, our outstanding long-term debt consisted of the notes, a revolving creditfacility that included a letter of credit facility. The aggregate notes, whichmature in 2009 and 2010 and totaled $673 million, bear interest at a fixed rateof 13 1/2%, 91⁄2% and 8%.  As of December 31, 2004, their fair valuewas estimated to be $725 million in the aggregate. Borrowings under the CreditAgreement that were denominated in U.S. dollars accrued interest at eitherCitibank’s prime lending rate or the eurodollar rate plus, in each case, amargin ranging from 1.25% to 3.00%, which margin was dependent upon ourleverage, as determined quarterly. Borrowings that were denominated in euros accruedinterest at the euro rate (Euribor) plus associated costs plus a margin rangingfrom 2.25% to 3.00%, which margin was dependent upon our leverage, asdetermined quarterly. We periodically review various alternatives to protectlong-term debt against interest rate fluctuations.

 

## **ITEM 8**.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Financial statements andsupplementary data required by this Item 8 are set forth at the pages indicatedin Item 15(a) below.

 

**ITEM9.   CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

** **

None.

 

**ITEM 9A.**     **CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this Annual Report on Form 10-K, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure Controls”). This evaluation (“Controls Evaluation”) was done

 

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under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

 

Our management, including the CEO and CFO, does not expect that our Disclosure Controls or our “internal controls over financial reporting” (“Internal Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Based upon the ControlsEvaluation, the CEO and CFO have concluded that the Company’s disclosurecontrols and procedures were not effective as of December 31, 2004 at thereasonable assurance level, because of the material weakness describedbelow.  In light of the material weaknessdescribed below, the Company performed additional analysis and otherpost-closing procedures to ensure our consolidated financial statements areprepared in accordance with generally accepted accounting principles.  Accordingly, management believes that thefinancial statements included in this report fairly present, in all materialrespects, our financial condition, results of operations and cash flows for theperiods presented.

 

As of December 31, 2004, wedid not maintain effective controls over the valuation and completeness of ourdeferred income tax assets and liabilities (including the associated valuationallowance) and the income tax provision because we did not have accountingpersonnel with sufficient knowledge of generally accepted accounting principlesrelated to income tax accounting and reporting.   Specifically, we did not have effectivecontrols over the preparation and review of the valuation allowance and relatedto deferred tax assets to ensure accuracy and completeness.  This control deficiency resulted in therestatement of our financial statements for 2003 and the interim periods in2004 to correct errors in the Company’s accounting for a valuation allowancefor deferred tax assets.  The PublicCompany Accounting Oversight Board Standard No. 2, *An Audit ofInternal Control Over Financial Reporting in Conjunction with**an Audit of Financial Statements* states that a restatementof financial statements should be regarded as a strong indicator that amaterial weakness in internal control over financial reporting exists.  Consistent with this standard, management hasconcluded that this control deficiency constitutes a material weakness.  A material weakness is a control deficiency,or combination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

 

Inorder to remediate this material weakness, we have identified and will beginimplementing actions to improve the effectiveness of our disclosure controlsand procedures and internal control over financial reporting related to ourincome tax accounting.  In connectionwith this effort, we plan to strengthen the resources in our income taxaccounting function, implement greater senior level financial officer review ofthe income tax balance sheet accounts and related journal entries, and engage athird party specialist to assist our personnel conducting comprehensive anddetailed reviews of our tax reporting and accounting, in particular withrespect to developing more effective processes for establishing and monitoring deferred income taxes andrelated valuation allowances.

 

**ITEM 9B.**     **OTHER INFORMATION**

 

On March 29, 2005, weentered into an Indemnity Agreement with Carl S. Stutts, Director.  The agreement is filed herewith at exhibit10.73.

 

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**PART III**

 

## **ITEM10.   DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

## ** **

The following table sets forth certain information asof January 1, 2005 with respect to the members of our Board of Managersand our executive officers, who also hold the same positions with our parentRPP Inc.

 
| **Name**                               | ** ** | **Age** | ** ** | **Position**                                                                     |
|----------------------------------------|------------|---------|------------|----------------------------------------------------------------------------------|
|                                   |       |    |       |                                                                             |
| Marvin O. Schlanger                    |       | 56      |       | Chairman and Chief Executive Officer                                             |
| Layle K. Smith                         |       | 50      |       | President and Chief Operating Officer                                            |
| David S. Graziosi                      |       | 39      |       | Executive Vice President and Chief Financial Officer                             |
| Mark S. Antonvich                      |       | 44      |       | Senior Vice President, General Counsel and Corporate  Secretary                  |
| Wouter W. Jongepier                    |       | 42      |       | Vice President, Major Resins                                                     |
| Ed Hoozemans                           |       | 39      |       | Vice President, Versatic Acids                                                   |
| George M. Tomko                        |       | 49      |       | Vice President and Chief Information Officer                                     |
| Dennis F. White                        |       | 53      |       | Vice President, Human Resources                                                  |
| Douglas B. Rahrig                      |       | 54      |       | Vice President, Performance Products, Technology and  Development                |
| Edward Guetens                         |       | 63      |       | Vice President, Environment, Health & Safety,  Manufacturing and Engineering |
| Francois Vleugels                      |       | 56      |       | Vice President and Chief Administrative Officer,  Europe                         |
| Laurence M. Berg                       |       | 38      |       | Director                                                                         |
| Peter P. Copses                        |       | 46      |       | Director                                                                         |
| Joshua J. Harris                       |       | 40      |       | Director                                                                         |
| Scott M. Kleinman                      |       | 31      |       | Director                                                                         |
| Carl S. Stutts                         |       | 58      |       | Director                                                                         |
| Heinn F. Tomfohrde, III |       | 71      |       | Director                                                                         |

 

*Marvin O. Schlanger* became Chairman of the Board of Managersof RPP LLC on November 14, 2000. Mr. Schlanger was appointed Chairmanof RPP Capital on November 14, 2000 and became Chief Executive Officer of RPPCapital on March 2, 2001. He served as President of RPP LLC and RPPCapital until July 2001. Since October 1998, Mr. Schlanger has been aprincipal in the firm of Cherry Hill Chemical Investments, L.L.C., whichprovides management services and capital to the chemical and allied industries.From 1999 to 2000, he also served as interim president of OneChem, Ltd. From1988 to October 1998, Mr. Schlanger held various positions with ARCOChemical Company, serving most recently as President and Chief ExecutiveOfficer from May 1998 to October 1998 and as Executive Vice President andChief Operating Officer from 1994 to May 1998. Mr. Schlanger is also a directorof RPP Capital, Resolution Specialty Materials, Inc. and UGI Corporation and amember of the Board of RSM LLC.

 

*Layle K. Smith*became President and Chief OperatingOfficer of RPP LLC and RPP Capital in September 2004. From February 2002to February 2004, Mr. Smith was Chief Executive Officer and Director for NxtPhase Corporation.  He was also Presidentand Chief Operating Officer and Board Member for Ballard Power Systems from September 1998to November 2001.  Prior to September 1998,Mr. Smith held various positions at Dow Chemical Company serving most recentlyas Business Vice President – Specialty Chemicals.

 

*David S. Graziosi*became Executive Vice President and ChiefFinancial Officer of RPP LLC and RPP Capital in May 2004. Since 2000 and priorto joining us, Mr. Graziosi was Vice President and Chief Financial Officer ofGeneral Chemical Group Inc. (which filed a voluntary petition forreorganization under Chapter 11 of the U.S. Bankruptcy Code on December 3,2003).  From 1999 to 2000, he heldvarious positions with Reheis, Inc., a subsidiary of Gentek, Inc. and servedmost recently as its Business Controller/Chief Financial Officer.  From 1996 to 1999, he held various positionswith Sun Chemical Group B.V., and served most recently as its AssistantCorporate Controller.  Prior thereto, Mr.Graziosi had been employed by Colgate Palmolive from 1994 to 1996 and by ArthurAndersen LLP from 1988 to 1994. 

 

*Mark S. Antonvich* became Senior Vice President, GeneralCounsel and Corporate Secretary of RPP LLC and RPP Capital on January 1,2004 and prior thereto had been our Vice President and General Counsel sinceMay 8, 2001. Prior thereto, from August 2000 to May 2001, he had beenSenior Counsel for EGEP Inc., where he was responsible for international oiland gas transactions and providing legal support to operating assets in India.From 1995 to 2000, Mr. Antonvich represented Magma Copper Company and BHPMinerals in Tucson, Arizona and Houston, Texas, most recently serving as SeniorCorporate Counsel, advising those companies on international mineralacquisitions and divestments, commercial and general corporate matters,operational and environmental issues related to

 

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miningand mineral processing activities, and complex litigation. From 1987 to 1995,he was in private practice in the Washington, D.C. area, following graduationfrom the Georgetown University Law Center.

 

*Wouter W. Jongepier* became Vice President, Major Resins on January 1,2004. Prior thereto, he had held the positions of Vice President, Global Sales ofRPP LLC since November 2002, Vice President, Europe/Africa of RPP LLC fromNovember 2000 to November 2002 and the Sales Director of the Europeanand African operations of Shell’s Resins/Versatics Products business from 1999to November 2000. Mr. Jongepier joined Shell in 1988 and has served inroles varying from researcher in Belgium, specialties plant manager in Pernis,and market development manager in the southern part of Europe.

 

*Eduard Hoozemans* became Vice President, Versatics of RPP LLCon January 1, 2004. Prior thereto, he had held the positions ofBusiness Director, Versatics since November 2002 and Business Manager,Versatics from November 1999 to November 2002. Mr. Hoozemans joinedShell in 1989 and has served in roles varying from plant manager for the BPA-and Resins-plants in Pernis, business development manager in the Americas toproduct & key account manager in Germany for a large part of the Europeanbusiness.

 

*George M. Tomko*became Vice President and ChiefInformation Officer of RPP LLC in October 2004. From 1984 to 1997, Mr.Tomko held various positions of increasing responsibilities with MonsantoCorporation including Information Technology Director.  Subsequently he held Information Technologyleadership positions with Solutia Inc. and from 1999 to 2004 was with Astaris,LLC most recently as their Chief Information Officer.

 

*Dennis F. White* became Vice President, Human Resourcesof RPP LLC on November 14, 2000. Prior thereto, Mr. White had been theVice President of Human Resources of Shell’s Resins/Versatics Products sincelate 1999. Mr. White had previously been Director of Employee Resources forCriterion Catalyst Company from 1989 to 1999, and prior to that had spent 16years in various human resource positions with Shell.

 

*Douglas B. Rahrig* became Vice President, PerformanceProducts, Technology and Development of RPP LLC on January 1, 2004 andprior thereto had been our Director of Product and Applications Developmentsince October 2, 2001. From 1994 to 2001, Mr. Rahrig served as a VicePresident in various marketing and technical development roles at McWhorterTechnologies.

 

*Edward Guetens* became Vice President, Environment,Health & Safety, Manufacturing and Engineering of RPP LLCon January 1,2004 and prior thereto had been our Director Global Environment, Health &Safety and Engineering since 2001. From 1975 until 1999 Mr. Guetens served invarious positions with Arco Chemical Company, most recently as Director ofEngineering, Environment, Health & Safety and Manufacturing Programs.

 

*Francois Vleugels* became Vice President and ChiefAdministrative Officer—Europe of RPP LLC on January 1, 2004. From 1981until 2003, Mr. Vleugels served in various positions with Eastman ChemicalCompany, most recently as the Vice President and General Manager of Coatings,Adhesives and Specialty Polymers.

 

*Laurence M. Berg* became a director of RPP Inc. and amember of the Board of Managers of RPP LLC on November 14, 2000. Mr. Bergis a partner in Apollo Management, L.P., where he has worked since 1992. Priorto that time, Mr. Berg was a member of the Mergers and Acquisitions Departmentof Drexel Burnham Lambert Incorporated. Mr. Berg is also a director of SylvanInc., AMC Entertainment, Inc. and Rent-A-Center, Inc.

 

*Peter P. Copses* became a director of RPP Inc. and amember of the Board of Managers of RPP LLC on November 14, 2000. Mr.Copses is a partner in Apollo Management, L.P., where he has worked since 1990.From 1986 to 1990, Mr. Copses was initially an investment banker at DrexelBurnham Lambert Incorporated, and subsequently at Donaldson, Lufkin JenretteSecurities Corporation, concentrating on the structuring, financing and negotiationof mergers and acquisitions. Mr. Copses is also a director of Rent-A-Center,Inc., Zale Corporation, Compass Minerals International, Inc. General NutritionCenters, Inc., RSM Inc., and a member of the Board of Managers of RSM LLC.

 

*Joshua J. Harris* became a director of RPP Inc., a memberof the Board of Managers of RPP LLC and a director of RPP Capital on November 14,2000. Mr. Harris is a senior founding partner of Apollo Management, L.P. andhas served as an officer

 

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ofcertain affiliates of Apollo since 1990. Prior to that time, Mr. Harris was amember of the Mergers and Acquisitions Department of Drexel Burnham LambertIncorporated. Mr. Harris is also a director of Borden Chemical Inc., Compass MineralsInternational, Inc., GNC Corporation, Nalco Holding Company, PacerInternational, Inc., Quality Distribution Inc., United Agri Products, Inc., RSMInc. and a member of the Board of Managers of RSM LLC.

 

*Scott M. Kleinman* became a director of RPP Inc., a memberof the Board of Managers of RPP LLC and a director of RPP Capital on November 14,2000. Mr. Kleinman is a partner of Apollo Management, L.P., where he has workedsince February 1996. Prior to that time, Mr. Kleinman was employed bySmith Barney Inc. in its Investment Banking division from July 1994through January 1996. Mr. Kleinman is also a director of RSM LLC andBorden Chemical Inc.

 

*Carl S. Stutts*became a director of RPP Inc. and a member of the Board of Managers of RPP LLCon November 3, 2004.  Mr. Stuttsserved as President and Chief Executive Officer from April 2003 to July 2004and as Executive Vice President and Chief Financial Officer from April 1998to March 2003 for Texas Petrochemicals Corporation.  Mr. Stutts has also served as a GeneralPartner with The Columbine Venture Funds from April 1988 to April 1998.  Prior to that time,  Mr. Stutts spent 17 years with Tenneco, Inc.(and subsidiaries), rising in increasing levels of responsibilities in Tenneco’schemical subsidiaries and corporate offices, last serving as Vice President forTenneco Ventures, Inc. from 1984 to 1988. Mr. Stutts is also a director of HydroChem Industrial Services.

 

*HeinnF. Tomfohrde, III* became a director of RPP Inc. and a memberof the Board of Managers of RPP LLC on November 14, 2000. Mr. Tomfohrdehas served the chemicals industry in a variety of leadership positions for 44years. He served as President and Chief Operating Officer of InternationalSpecialty Products, Inc. and its predecessor company, GAF Chemicals Corp. from1987 to 1993. Prior to that time, Mr. Tomfohrde spent 31 years with UnionCarbide Corp., rising from positions in research and development and marketingto senior management, serving as President of Union Carbide’s Consumer andIndustrial Products Group from 1983 to 1986. Mr. Tomfohrde is also a directorof Compass Minerals International, Inc

 

**Compensation of Board of Managers**

 

In 2005, we will pay each non-employee director aretainer of $2,000 per month plus $2,000 for each Board meeting attended.

 

Furthermore, in the event that RPP LLC and itssubsidiaries consolidated earnings before interest, taxes, depreciation andamortization (as determined by our historical practices) is $116 million ormore during any twelve month period ending the last day of any fiscal quarterduring 2004 and 2005, each director who served in 2003 will receive 125% of theamount that would have been received had the 2004 plan been in effect in 2003.

 

Each of the members of the Board of Managers of RPPLLC also serves as a director of RPP Inc. and is compensated for such servicesby RPP Inc. RPP Inc. adopted a non-employee director stock option plan,effective as of November 14, 2000, pursuant to which options with respectto a total of 15,000 shares of RPP Inc.’s common stock will be available forgrant to directors of RPP Inc. or any of its subsidiaries, including us, whoare not also employees of RPP Inc. or any of its subsidiaries. The option planwill be administered by the board of directors of RPP Inc. or a compensationcommittee appointed from time to time by the board of directors. The right togrant options under the plan will expire on November 14, 2010 unlessearlier terminated by the board of directors of RPP Inc. Options granted underthe plan will be nonqualified stock options. As of December 31, 2004, RPPInc. granted options covering 9,199 shares to its non-employee directors, eachof whom also serves as a member of the Board of Managers of RPP LLC.

 

Options are granted in the amounts determined by theboard of directors of RPP Inc. or the compensation committee. Except asotherwise determined by the board of directors, options will vest as follows:

 

•        One-thirdof the options will time vest in equal increments over five years from date ofgrant. However, vesting of all of these options will be accelerated immediatelyupon the consummation of a sale of RPP Inc. for cash, or any transaction inwhich Apollo Management sells at least fifty percent of its shares of commonstock of RPP Inc.

 

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•        Two-thirdsof the options will be performance options and will vest eight years from dateof grant. However, vesting of all or a portion of the performance options willbe accelerated upon the consummation of a sale of RPP Inc. for cash, or anytransaction in which Apollo Management sells at least fifty percent of itsshares of common stock of RPP Inc. The amount vested will be based on theoperating results achieved by the business.

 

The vesting of options will cease when the grantee isno longer a director of RPP Inc. or any of its subsidiaries, and all unvestedoptions will be forfeited at such time.

 

The exercise price for the options will be determinedby the board of directors of RPP Inc. or the compensation committee. Alloptions granted under the plan will expire thirty days after the eighthanniversary of the date of grant.

 

**Committees of the Board of Managers**

 

The Board of Managers of RPP LLC has an executivecommittee, compensation committee, audit committee and environmental health andsafety committee.

 

The executive committee may exercise all powersexpressly reserved to the Board of Managers under Delaware law. The members ofthe executive committee are Messrs. Schlanger, Harris and Kleinman.

 

The compensation committee reviews and makesrecommendations regarding our compensation policies and forms of compensationprovided to our Board of Managers and officers. The compensation committee alsoreviews and determines bonuses for our officers and other employees. Inaddition, the compensation committee reviews and determines stock-basedcompensation for our board of managers, officers, employees and consultants andadministers our option plan. The members of the compensation committee areMessrs. Harris, Tomfohrde and Schlanger.

 

The audit committeeprovides assistance to the Board of Managers in fulfilling its legal andfiduciary obligations in matters involving our accounting, auditing, financialreporting, internal control and legal compliance functions. The audit committeealso oversees the audit efforts of our independent accountants and takes thoseactions it deems necessary to satisfy itself that the auditors are independentof management. The members of the audit committee are Messrs. Kleinman, Stuttsand Schlanger.

 

The environmental health and safety committee overseesour environmental health and safety compliance program. In addition, theenvironmental health and safety committee reviews compliance with environmentalhealth and safety indemnifications as well as our environmental health andsafety performance statistics. The environmental health and safety committeealso recommends to the Board of Managers the general budget for environmentalhealth and safety capital spending. The members of the environmental health andsafety committee are Messrs. Tomfohrde, Stutts and Schlanger.

 

**Audit Committee Financial Expert**

 

The Board of Managers hasdetermined that Mr. Kleinman, who is the Chairman of the Audit Committee,serves as the current “audit committee financial expert” as such term isdefined under the SEC rules.  Inaddition, Mr Schlanger qualifies as an “audit committee financial expert”.  Neither Mr. Kleinman nor Mr. Schlangerqualify as “independent” as such term is used in Item 7(d)(3)(iv) of Schedule14A under the Exchange Act assuming that the listing standards of the NationalAssociation of Securities Dealers, Inc. (“NASD”) applied.  Independence is not required as the Company’sequity is not traded on a public exchange.

 

**Code of Conduct and Ethics Policy**

 

We have adopted a code ofconduct and ethics policy, which applies to all of our employees, including ourChief Executive Officer and Chief Financial Officer.  Our code of conduct and ethics policy areposted on our website at www.resins.com under

 

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the heading “Corporate Information.”  We will also provide a copy of the code ofconduct and ethics policy to securityholders upon request.   Any amendments to or waivers from anyprovision of our code of conduct and ethics policy will be disclosed by postingsuch information on our website.

 

**ITEM 11****.   EXECUTIVE COMPENSATION**

 

## **The following table sets forthinformation concerning the compensation of our Chairman and each of our other fivemost highly compensated executive officers (including two former officers) whoearned over $100,000 in 2004 for the years ended December 31, 2004, 2003and 2002.**

 

**Summary Compensation Table**

 
| ** **                                                          | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **All Other** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|---------------|------------|
| **Name and Principal Position**                                     | ** ** | **Year**   | ** ** | **Salary**              | ** ** | **Bonus(1)**  | ** ** | **Compensation(2)** | ** ** |
| Marvin O. Schlanger                                                 |       | 2004       |       | $                       | 400,000    |          | $          | 250,000 |   | $ | — |   |
| Chairman and Chief  Executive Officer                               |       | 2003       |       | 150,000                 |       | —        |       | — |   |
|                                                                |       | 2002       |       | 300,000                 |       | 500           |       | — |   |
|                                                                |       |       |       |                    |       |          |       |   |   |
| Layle K. Smith(3)                                                   |       |       |       |                    |       |          |       |   |   |   |   |
| President and Chief  Operating Officer                              |       | 2004       |       | $                       | 85,385     |          | $          | 100,000 |   | $ | — |   |
|                                                                |       |       |       |                    |       |          |       |   |   |
| Jeff M. Nodland(3)                                                  |       | 2004       |       | $                       | 198,667    |          | $          | 15,000 |   | $ | — |   |
| Former President and  Chief Operating Officer                       |       | 2003       |       | 225,000                 |       | 5,000         |       | — |   |
|                                                                |       | 2002       |       | 250,000                 |       | 500           |       | — |   |
|                                                                |       |       |       |                    |       |          |       |   |   |
| David S. Graziosi(3)                                                |       |       |       |                    |       |          |       |   |   |   |   |
| Executive Vice  President and Chief Financial Officer and Secretary |       | 2004       |       | $                       | 155,952    |          | $          | 87,000 |   | $ | 9,188 |   |
|                                                                |       |       |       |                    |       |          |       |   |   |
| J. Travis Spoede                                                    |       | 2004       |       | $                       | 70,512     |          | $          | 125,000 |   | $ | — |   |
| Former Executive Vice  President and Chief                          |       | 2003       |       | 180,000                 |       | 30,000        |       | — |   |
| Financial Officer and  Secretary                                    |       | 2002       |       | 201,190                 |       | 50,500        |       | — |   |
|                                                                |       |       |       |                    |       |          |       |   |   |
| Mark S. Antonvich                                                   |       | 2004       |       | $                       | 210,866    |          | $          | 21,000 |   | $ | 15,000 |   |
| Senior Vice President,  General Counsel and Secretary               |       | 2003       |       | 175,499                 |       | 7,500         |       | 12,367 |   |
|                                                                |       | 2002       |       | 195,000                 |       | 500           |       | 15,000 |   |
|                                                                     |            |            |            |                         |            |               |            |  |  |  |  |  |  |

 

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(1)   In2002, each employee of the Company was paid the equivalent of $500 as bonus forthe year 2001, except for Mr. Spoede who was paid an information technologyproject bonus for individual performance.

(2)   Consistsof benefit payments in lieu of matching contribution and participation in theCompany’s 401(k) program for Mr. Graziosi and Mr. Antonvich.

(3)   Mr.Smith and Mr. Graziosi joined us on varying dates in 2004 and the respective2004 compensation is reported only from the start date to year-end.  Mr. Nodland transferred to RSM during 2004and 2004 compensation is reported only from the start of the year to histransfer date.

 

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**OPTIONGRANTS**

 

The following table sets forth options for shares of our parent company’scommon stock granted to each of our named executive officers during fiscal year2004.

 

**Individual Grants**

 
| **Name**                     | ** ** | **Number of  Securities  Underlying  Options  Granted** | ** ** | **Percent of Total  Options Granted  to Employees in  Fiscal Year** | ** ** | **Exercise or  Base Price  ($/share)** | ** ** | **Expiration  Date** | ** ** | **Potential  Realizable Value at  Assumed Annual  Rates of Stock  Price Appreciation  Term** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **5% ($)**                   | ** ** | **10% ($)**                                             |
|                         |       |                                                    |       |                                                                |       |                                   |       |                 |       |                                                                                         |       |   |   |
| Marvin  O. Schlanger         |       | —                                                  |       | —                                                              |       | —                                 |       | —               |       | —                                                                                       |       | — |   |
| Layle  K. Smith              |       | 7,000                                                   |       | 44                                                                  | %          | $                                      | 100        |                 | 10/20/12   |                                                                                         | —     |   | — |   |
| Jeffrey  M. Nodland (former) |       | —                                                  |       | —                                                              |       | —                                 |       | —               |       | —                                                                                       |       | — |   |
| David  S. Graziosi           |       | 3,000                                                   |       | 19                                                                  | %          | $                                      | 100        |                 | 06/09/12   |                                                                                         | —     |   | — |   |
| J.  Travis Spoede (former)   |       | —                                                  |       | —                                                              |       | —                                 |       | —               |       | —                                                                                       |       | — |   |
| Mark  S. Antonvich           |       | —                                                  |       | —                                                              |       | —                                 |       | —               |       | —                                                                                       |       | — |   |

 

The following table provides information as to the value of optionsheld by each of the named executive officers at the end of fiscal year 2004.None of the named executive officers exercised any options during the lastfiscal year.

 

**Option Values as of December 31, 2004**

 
| ** **                  | ** ** | **Number of Securities**              | ** ** | ** **                                        | ** ** | ** **          | ** ** |
|-----------------------------|------------|---------------------------------------|------------|---------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **Underlying Unexercised**            | ** ** | **Value of Unexercised In-the  Money Options at** | ** ** |
| ** **                  | ** ** | **Option at December 31,  2004** | ** ** | **December 31, 2004 (in  thousands)**        | ** ** |
| **Name**                    | ** ** | **Exercisable**                       | ** ** | **Unexercisable**                                 | ** ** | **Exercisable (1)** | ** ** | **Unexercisable(1)** | ** ** |
|                        |       |                                  |       |                                              |       |                |       |   |   |   |   |
| Marvin O. Schlanger         |       | 3,200                                 |       | 17,800                                            |       | $                   | —     |   | $ | — |   |
| Layle K. Smith              |       | —                                |       | 7,000                                             |       | —              |       | — |   |
| Jeffrey M.  Nodland(former) |       | 1,020                                 |       | —                                            |       | —              |       | — |   |
| David S. Graziosi           |       | —                                |       | 3,000                                             |       | —              |       | — |   |
| J. Travis Spoede  (former)  |       | —                                |       | —                                            |       | —              |       | — |   |
| Mark S. Antonvich           |       | 240                                   |       | 960                                               |       | —              |       | — |   |

 

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(1)           Thereis no established trading market for the stock of RPP Inc., but based on itsestimated fair value at December 31, 2004, no options have been designatedto be in-the-money.  The estimated marketvalue was calculated in-house by using reasonable and customary methods fordetermining market values when there is no established trading market.

 

**2000Option Plan**

 

RPP Inc. has adopted a stock option plan, effective asof November 14, 2000, pursuant to which options with respect to a total of69,000 shares of RPP Inc.’s common stock will be available for grant toemployees of, consultants to, or directors of RPP Inc. or us. The option planis administered by the board of directors of RPP Inc. or a compensationcommittee appointed from time to time by the board of directors. The right togrant options under the option plan will expire on November 14, 2010.Options granted under the plan are either nonqualified or incentive stockoptions.

 

Options are granted in amounts and at such times andto such eligible persons as determined by the board of directors of RPP Inc. orthe compensation committee. As of December 31, 2004, RPP Inc. grantednonqualified options covering 62,300 shares, representing approximately 10% ofits total common stock outstanding on a fully diluted basis. Options will vestin accordance with

 

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a schedule asdetermined by the board of directors of RPP Inc. or the compensation committeeand this vesting schedule will be outlined in the optionee’s optionagreement. We generally expect options to vest as follows:

 

(a)  One-thirdof the options will be time vesting options and will vest in equal incrementsover five years. However, upon termination of a grantee’s employment withoutcause or for good reason within six months following the sale of RPP Inc. forcash or any transaction in which RPP Holdings sells at least fifty percent ofits shares of common stock of RPP Inc. acquired by it, all of the time vestingoptions allocated to such terminated employee shall vest immediately on suchtermination.

 

(b)  Two-thirdsof the options will be performance options and will vest in equal incrementsover eight years. The amount vested will be based on the operating resultsachieved by the business. However, vesting of all or a portion of theperformance options will be accelerated upon the consummation of a sale of RPPInc. for cash, or any transaction in which Apollo sells at least fifty percentof shares of common stock of RPP Inc. acquired by it.

 

The vesting of options will occur only during anemployee’s term of employment. All unvested options will be forfeited upon atermination of employment.

 

The exercise price for the options will be determinedby the board of directors of RPP Inc. or the compensation committee, with theexercise price initially being the same as the per share price being paid byRPP Holdings in the recapitalization. The options will expire on the thirtiethday immediately following the eighth anniversary of issuance.

 

Upon a termination of employment, RPP Inc. and RPPHoldings have repurchase rights. Upon a sale of RPP Inc. for cash or theoccurrence of any transaction in which RPP Holdings sells at least 50% of theshares of common stock acquired by it, RPP Inc. also has repurchase rights. Therepurchase rights generally include buying the vested options from the granteewithin a specified period of time at the fair value calculated in-house usingreasonable and customary methods for determining market values when there is noestablished trading market.

 

**Employment Agreements**

 

On November 14, 2000, we entered into anemployment agreement with Marvin O. Schlanger to act as our Chairman of theBoard. Mr. Schlanger receives an annual base salary of $400,000 per year,subject to any increase as determined by the compensation committee of theboard of directors. In addition, Mr. Schlanger is entitled to receive anannual cash bonus based upon achievement of certain operating and/or financialgoals, with an annual target bonus amount equal to seventy-five percent of Mr.Schlanger’s then current annual base salary. On November 14, 2000, Mr.Schlanger also was granted options to purchase 21,000 shares of RPP Inc.’scommon stock under the RPP Inc. stock option plan. Mr. Schlanger will beentitled to participate in our benefit plans.

 

The term of Mr. Schlanger’s employment agreement isinitially three years, with automatic extensions for additional two yearperiods if neither party gives notice that the term will not be extended. Wemay terminate Mr. Schlanger’s employment at any time and for any reason and Mr.Schlanger may resign at any time and for any reason. Under his employmentagreement, Mr. Schlanger has also agreed to non-competition provisions. Inconsideration of this non-competition agreement, we have agreed to makepayments to Mr. Schlanger following the termination of his employment. Ifwe terminate Mr. Schlanger’s employment without cause or Mr. Schlanger resignsfor good reason (including any material diminution of his duties),Mr. Schlanger will be entitled to receive (1) earned but unpaid amountsunder our salary or benefit plans or programs and (2) his current base salaryfor a period equal to the greater of (a) 12 months following the terminationdate and (b) the period between the termination date and November 14,2003. If any such payments constitute a “parachute payment,” as defined in Section 280Gof the Internal Revenue Code of 1986, as amended, then the total amount ofpayments or benefits payable to Mr. Schlanger will be reduced to thelargest amount such that the provisions of 280G of the Code relating to “excessparachute payments” shall no longer be applicable. However, in the event Mr.Schlanger is terminated for cause or resigns without good reason, we will notbe obligated to make those payments.

 

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On March 15, 2002, Mr. Schlanger’s employmentagreement was amended, effective January 1, 2002, to (i) reduce hisannual base salary to $300,000, subject to any increase as determined by thecompensation committee of our Board of Directors, and (ii) to increase hisannual target bonus to an amount equal to one-hundred percent of Mr. Schlanger’sthen current annual base salary.

 

Effective January 1, 2003, Mr. Schlanger’semployment agreement was amended to (i) reduce his annual base salary to$150,000, subject to any increase as determined by the compensation committeeof our Board of Managers; provided, that if, during any twelve month periodending on the last day of any fiscal quarter during 2003 and 2004 (such day,the “Salary Reimbursement Date”), our and our subsidiaries’ consolidatedadjusted earnings before interest, taxes, depreciation and amortization (asdetermined in accordance with our historical practices) is $116 million ormore, his annual base salary will increase to $300,000 and he will receive 125%of the amount he otherwise would have received since January 1, 2003 ifhis annual base salary had been $300,000, (ii) provide that in the event of hisdeath, long-term disability, retirement or a Realization Event (as defined inour stock option plan) prior to the earlier of the Salary Adjustment Date and January 1,2004, he will receive a lump sum amount (to be considered pensionable wages)equal to 100% of the amount paid to him as base salary from January 1,2003 to such date, (iii) provide that his annual target bonus be an amountequal to 100% of his highest annual base salary during the term of hisemployment agreement.  The effective datefor achieving $116 million as related to (i) above has been extended to December 31,2005 by action of the Compensation Committee and the employment agreement isexpected to be amended accordingly.

 

Effective February 17, 2003, Mr. Schlanger’semployment agreement was amended to increase his base salary to $300,000 on January 1,2004. Effective November 24, 2003, Mr. Schlanger’s employment agreementwas amended to increase his base salary to $400,000 on January 1, 2004 andextend the term of his employment through November 14, 2005. Further, the November 2003amendment states that in addition to his base salary and bonus, Mr. Schlangershall receive $500,000 payable in eight quarterly installments commencing withthe quarter beginning on January 1, 2004 (the “Extension Bonus”), providedthat on the first day of such quarter he is still employed by us. In the eventof Mr. Schlanger’s death, long-term disability or the occurrence of aRealization Event (as defined in our stock option plan) prior to the ExtensionBonus being paid in full, we shall pay Mr. Schlanger a lump sum (to beconsidered pensionable wages) equal to the remaining unpaid balance of theExtension Bonus.

 

On June 18,2001, we entered into an employment agreement with Mark S. Antonvich to act asour Vice President and General Counsel. Mr. Antonvich receives an annual basesalary of $195,000 per year, subject to any increase as determined by the Boardor its compensation committee. In addition, Mr. Antonvich is entitled toreceive an annual cash bonus based upon achievement of certain operating and/orfinancial goals, with an annual target bonus amount equal to thirty-fivepercent of Mr. Antonvich’s then-current annual base salary. On June 18,2001, Mr. Antonvich also was granted options effective as of May 7, 2001 topurchase 1,200 shares of RPP Inc.’s common stock under the RPP Inc. stockoption plan. Mr. Antonvich is entitled to participate in our benefit plans.

 

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The term of Mr. Antonvich’s employment agreement wasinitially three years, with automatic extensions for additional two yearperiods if neither party gives notice that the term will not be so extended. Wemay terminate Mr. Antonvich’s employment at any time and for any reason and Mr.Antonvich may resign at any time and for any reason. Under his employmentagreement, Mr. Antonvich has also agreed to non-competition provisions. Inconsideration of this non-competition agreement, we have agreed to makepayments to Mr. Antonvich following the termination of his employment. If weterminate Mr. Antonvich’s employment without cause or Mr. Antonvichresigns for good reason (including any material diminution of his duties), Mr.Antonvich will be entitled to receive (1) earned but unpaid amounts under oursalary or benefit plans or programs and (2) his current base salary for aperiod equal to the greater of (a) 12 months following the termination date and(b) the period between the termination date and May 7, 2003. If any suchpayments constitute a “parachute payment,” as defined in Section 280G ofthe Internal Revenue Code of 1986, as amended, then the total amount ofpayments or benefits payable to Mr. Antonvich will be reduced to the largestamount such that the provisions of 280G of the Code relating to “excessparachute payments” shall no longer be applicable. However, in the eventMr. Antonvich is terminated for cause or resigns without good reason, wewill not be obligated to make those payments.

 

Effective January 1, 2003, Mr. Antonvich’semployment agreement was amended to (i) temporarily reduce his annual basesalary to $175,500, subject to any increase as determined by the compensationcommittee of our Board of Managers; provided, that if, during any twelve monthperiod ending on the last day of any fiscal quarter during 2003 and 2004 or2005 (such day, the “Salary Reimbursement Date”), our and our subsidiaries’consolidated adjusted earnings before interest, taxes, depreciation andamortization (as determined in accordance with our historical practices) is$116 million or more, his annual base salary will increase to $195,000 and hewill receive 125% of the amount he otherwise would have received since January 1,2003 if his annual base salary had been $195,000, (ii) provide that in theevent of his death, long-term disability, retirement or a Realization Event (asdefined in our stock option plan) prior to the earlier of the Salary AdjustmentDate and January 1, 2004, he will receive a lump sum amount (to beconsidered pensionable wages) equal to 11.11% of the amount paid to him as basesalary from January 1, 2003 to such date.  The effective date for achieving $116 millionas related to (i) above has been extended to December 31, 2005 by actionof the Compensation Committee and the employment agreement is expected to beamended accordingly.

 

Effective March 2004, Mr. Antonvich’s employmentagreement was amended to (i) reflect his title as Senior Vice President,General Counsel and Corporate Secretary and increase of his base annual salaryto $212,500, (ii)  provide that in theevent we terminate his employment without cause or he resigns for good reason(including any material diminution of his duties), he will be entitled toreceive, in addition to earned but unpaid amounts under our salary or benefitplans or programs, his highest annual base salary during the term of hisemployment agreement for a period equal to the greater of (a) 24 monthsfollowing the termination date and (b) the period between the termination dateand May 7, 2003 and (iii) extend the term of the employment agreement to 5years.

 

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On September 11, 2004, we entered into anemployment agreement with Layle K. Smith to act as our President and ChiefOperating Officer.  Mr. Smith receives anannual base salary of $300,000 per year, subject to any increase as determinedby the Board or its compensation committee. In addition, Mr. Smith is entitled to receive an annual cash bonus basedupon achievement of certain operating and/or financial goals, with an annualtarget bonus amount equal to fifty percent of Mr. Smith’s then current annualbase salary.  Mr. Smith was also grantedoptions to purchase 7000 shares of RPP, Inc.’s common stock under the RPP, Inc.stock option plan and Mr. Smith is entitled to participate in our benefitplans.

 

The term of Mr. Smith’s employment agreement isinitially three years, with automatic extensions of one year if neither partygives notice that the term will not be extended.  We may terminate Mr. Smith’s employment atany time and for any reason and Mr. Smith may resign at any time and for anyreason. Under his employment agreement, Mr. Smith has also agreed tonon-competition provisions. In consideration of this non-competition agreement,we have agreed to make payments to Mr. Smith following the termination of hisemployment.  If we terminate Mr. Smith’semployment without cause or Mr. Smith resigns for good reason (including anymaterial diminution of his duties), Mr. Smith will be entitled to receive (1)earned but unpaid amounts under our salary or benefit plans or programs and (2)his current base salary for a period equal to the greater of (a) 12 monthsfollowing the termination date and (b) the period between the termination dateand October 11, 2007. If any such payments constitute a “parachutepayment,” as defined in Section 280G of the Internal Revenue Code of 1986,as amended, then the total amount of payments or benefits payable to Mr. Smithwill be reduced to the largest amount such that the provisions of 280G of theCode relating to “excess parachute payments” shall no longer be applicable.However, in the event Mr. Smith is terminated for cause or resigns withoutgood reason, we will not be obligated to make those payments.

 

On May 10, 2004, we entered into an employmentagreement with David S. Graziosi to act as our Executive Vice President andChief Financial Officer.  Mr. Graziosireceives an annual base salary of $245,000 per year, subject to any increase asdetermined by the Board or its compensation committee.  In addition, Mr. Graziosi is entitled toreceive an annual cash bonus based upon achievement of certain operating and/orfinancial goals, with an annual target bonus amount equal to fifty percent ofMr. Graziosi’s then current annual base salary. Mr. Graziosi was also granted options to purchase 3,000 shares of RPPInc.’s common stock under the RPP Inc. stock option plan and Mr. Graziosi isentitled to participate in our benefit plans.

 

The term of Mr. Graziosi’s employment agreement is initiallythree years, with automatic extensions of one year if neither party givesnotice that the term will not be extended. We may terminate Mr. Graziosi’s employment at any time and for anyreason and Mr. Graziosi may resign at any time and for any reason. Under hisemployment agreement, Mr. Graziosi has also agreed to non-competitionprovisions. In consideration of this non-competition agreement, we have agreedto make payments to Mr. Graziosi following the termination of his employment.  If we terminate Mr. Graziosi’s employmentwithout cause or Mr. Graziosi resigns for good reason (including any materialdiminution of his duties), Mr. Graziosi will be entitled to receive (1) earnedbut unpaid amounts under our salary or benefit plans or programs and (2) hiscurrent base salary for a period equal to the greater of (a) 12 monthsfollowing the termination date and (b) the period between the termination dateand May 10, 2007. If any such payments constitute a “parachute payment,” asdefined in Section 280G of the Internal Revenue Code of 1986, as amended,then the total amount of payments or benefits payable to Mr. Graziosi will bereduced to the largest amount such that the provisions of 280G of the Coderelating to “excess parachute payments” shall no longer be applicable. However,in the event Mr. Graziosi is terminated for cause or resigns without goodreason, we will not be obligated to make those payments.

 

**Restricted Unit Plan**

 

On November 14, 2000, RPP Inc. established arestricted unit plan under which it issued to Marvin O. Schlanger restrictedstock units, representing a conditional right to receive 6,000 shares of commonstock of RPP Inc., and restricted note units, representing a conditional rightto receive $1,400,000 principal amount of junior subordinated notes. Mr.Schlanger will be entitled

 

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toreceive the underlying shares of RPP Inc. common stock and junior subordinatednotes upon the earliest to occur of (1) Mr. Schlanger’s achieving the age of65, (2) the termination of Mr. Schlanger’s employment or (3) upon a sale ofcontrol in which RPP Holdings sells at least fifty percent of its shares of RPPInc. or any merger or consolidation in which RPP Inc. is not the survivingentity.

 

**Agreementswith Former Executive Officers**

 

On April 19, 2004, we entered into a separationagreement with our then Executive Vice President and Chief Financial Officer,J. Travis Spoede, under which he resigned his position as an officer andemployee effective as of May 31, 2004.  Pursuant to the separation agreement, we paid Mr. Spoede all salary andbenefits due him through May 31, 2004 as well as medical coverage through September 30,2004.  In addition, we paid Mr. Spoedeadditional severance compensation of $125,000.

 

Effective June 1, 2004, we entered into aconsulting agreement with Mr. Spoede. Pursuant to the Consulting Agreement Mr. Spoede was paid $1,500 per dayplus related out of pocket expenses for services performed through January 7,2005.

 

On July 16, 2001, we entered into an employmentagreement with Jeffrey M. Nodland to act as our President and Chief OperatingOfficer. Mr. Nodland receives an annual base salary of $250,000 per year,subject to any increase as determined by the Board or its compensationcommittee. In addition, Mr. Nodland is entitled to receive an annual cash bonusbased upon achievement of certain operating and/or financial goals, with anannual target bonus amount equal to fifty percent of Mr. Nodland’s then-currentannual base salary. On August 10, 2001, Mr. Nodland also was granted optionseffective as of July 16, 2001 to purchase 5,100 shares of RPP Inc.’s commonstock under the RPP Inc. stock option plan. Mr. Nodland is entitled toparticipate in our benefit plans. 

 

The term of Mr. Nodland’s employment agreement isinitially three years, with automatic extensions for additional one yearperiods if neither party gives notice that the term will not be so extended. Wemay terminate Mr. Nodland’s employment at any time and for any reason and Mr.Nodland may resign at any time and for any reason. Under his employmentagreement, Mr. Nodland has also agreed to non-competition provisions. Inconsideration of this non-competition agreement, we have agreed to makepayments to Mr. Nodland following the termination of his employment. If weterminate Mr. Nodland’s employment without cause or Mr. Nodland resigns forgood reason (including any material diminution of his duties), Mr. Nodland willbe entitled to receive (1) earned but unpaid amounts under our salary orbenefit plans or programs and (2) his current base salary for a period equal tothe greater of (a) 12 months following the termination date and (b) the periodbetween the termination date and July 16, 2003. If any such payments constitutea “parachute payment,” as defined in Section 280G of the Internal Revenue Codeof 1986, as amended, then the total amount of payments or benefits payable toMr. Nodland will be reduced to the largest amount such that the provisions of280G of the Code relating to “excess parachute payments” shall no longer beapplicable. However, in the event Mr. Nodland is terminated for cause orresigns without good reason, we will not be obligated to make those payments. 

 

Effective January 1, 2003, Mr. Nodland’s employmentagreement was amended to (i) reduce his annual base salary to $225,000, subjectto any increase as determined by the compensation committee of our Board ofManagers; provided, that if, during any twelve month period ending on the lastday of any fiscal quarter during 2003 and 2004 (such day, the “SalaryReimbursement Date”), our and our subsidiaries’ consolidated adjusted earningsbefore interest, taxes, depreciation and amortization (as determined inaccordance with our historical practices) is $116 million or more, his annualbase salary will increase to $250,000 and he will receive 125% of the amount heotherwise would have received since January 1, 2003 if his annual base salaryhad been $250,000, (ii) provide that in the event of his death, long-termdisability, retirement or a Realization Event (as defined in our stock optionplan) prior to the earlier of the Salary Adjustment Date and January 1, 2004,he will receive a lump sum amount (to be considered pensionable wages) equal to11.11% of the amount paid to him as base salary from January 1, 2003 to suchdate. The effective date for achieving $116 million as related to (i) above hasbeen extended to December 31, 2005 by action of the Compensation Committee andthe employment agreement is expected to be amended accordingly. 

 

Effective August 2, 2004 upon the acquisition of RSMby Apollo, Mr. Nodland resigned from his positions as President and ChiefOperating Officer with the Company and became President of RSM.

 

**2004/2005 Executive Supplemental Bonus Plan**

 

In late December of 2003, we adopted asupplemental bonus plan (effective January 1, 2004) that authorizes ourChairman and Chief Executive Officer to award special bonuses to certain keyexecutives who have made important past contributions to us and who areexpected to be important contributors in the future. The majority of eachindividual award will not be paid until December of 2005 and the aggregateamount of the individual awards will not exceed $350,000 for the two-yearperiod of 2004-2005.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

No member of our compensation committee serves as amember of the board of directors or compensation committee of any entity thathas one or more executive officers serving as members of our Board of Managersor compensation committee.

 

 

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**ITEM 12****.   SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

All of our membership units are owned by RPP Inc. andall of RPP Capital’s equity securities are owned by us. The following tablesets forth information with respect to the ownership of the capital stock ofRPP Inc., as of January 1, 2005 (based on 602,030.4545 shares of commonstock outstanding), by

 

•each person who owns beneficially more than 5% of the capital stock of RPPInc.,

•each member of our Board of Managers,

•each of our named executive officers, and

•all of our executive officers and members of the Board of Managers of RPP LLCas a group.

 
| ** **                                                            | ** ** | **RPP Inc. Common Stock (1)** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Name and Address of Beneficial  Owner**                             | ** ** | **Number of  Shares**                             | ** ** | **Percent  of  Class** | ** ** |
| ** **                                                            | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Apollo Management IV,  L.P. (2)                                       |       | 546,720                                           |       | 90.8 | % |
| Shell Oil Company (3)                                                 |       | 45,000                                            |       | 7.5 |   |
| Marvin O. Schlanger (4)                                               |       | 3,200                                             |       |   | *  |
| Layle K. Smith (5)                                                    |       | 900                                               |       |   | * |
| Jeffrey M. Nodland  (former) (6)                                      |       | 1,565                                             |       |   | * |
| David Graziosi (7)                                                    |       | —                                            |       |   | * |
| Mark Antonvich (8)                                                    |       | 840                                               |       |   | * |
| J. Travis Spoede (9)                                                  |       | 1,020                                             |       |   | * |
| Carl S. Stutts (10)                                                   |       | —                                            |       |   | * |
| Laurence M. Berg (2)(11)                                              |       | 546,986                                           |       | 90.9 |   |
| Peter P. Copses (2)(11)                                               |       | 546,986                                           |       | 90.9 |   |
| Joshua J. Harris (2)(11)                                              |       | 546,986                                           |       | 90.9 |   |
| Scott M. Kleinman (2)(11)                                             |       | 546,986                                           |       | 90.9 |   |
| Heinn F. Tomfohrde, III  (12)                                         |       | 266                                               |       |   | * |
| All managers and  executive officers as a group (19 persons)(12) |       | 557,480                                           |       | 92.6 |   |

 

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* Less than one percent.

 

(1) The amounts and percentages of common stockbeneficially owned are reported on the basis of regulations of the SECgoverning the determination of beneficial ownership of securities. Under therules of the SEC, a person is deemed to be a “beneficial owner” of a securityif that person has or shares voting power, which includes the power to vote ordirect the voting of such security, or investment power, which includes thepower to dispose of or to direct the disposition of such security. A person isalso deemed to be a beneficial owner of any securities of which that person hasa right to acquire beneficial ownership within 60 days. Securities that can beso acquired are deemed to be outstanding for purposes of computing such person’sownership percentage, but not for purposes of computing any other person’spercentage. Under these rules, more than one person may be deemed beneficialowner of the same securities and a person may be deemed to be a beneficialowner of securities as to which such person has no economic interest. Except asotherwise indicated in these footnotes, each of the beneficial owners has, toour knowledge, sole voting and investment power with respect to the indicatedshares of common stock.

 

(2) Represents all shares held of record by RPPHoldings. RPP Holdings is an affiliate of, and is controlled by, ApolloManagement through its 79.1% beneficial ownership of RPP Holdings’ membershipinterests. The address of each of RPP Holdings and Apollo Management and ofMessrs. Berg, Copses, Harris and Kleinman is c/o Apollo Management, L.P., 9West 57th Street, 43rd Floor, New York, New York 10019.

 

(3) The address of Shell Oil Company is 910 LouisianaStreet, One Shell Plaza, Houston, Texas 77252.

 

(4) Represents 3,200 shares of common stock issuableupon exercise of options granted to Mr. Schlanger under the RPP Inc. stockoption plan that were vested as of January 1, 2005. Does not includeoptions to purchase 17,800 shares of common stock that

 

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RPP Inc. issued to Mr. Schlanger under the RPP Inc.stock option plan and 6,000 restricted stock units that RPP Inc. issued to Mr.Schlanger pursuant to the restricted unit plan on November 14, 2000. Theoptions are subject to time and performance vesting conditions. See “Management—2000Option Plan.” The restricted stock units represent a conditional right toreceive 6,000 shares of common stock of RPP Inc. upon the occurrence of theevents described under “Management—Restricted Unit Plan.” The address of Mr.Schlanger is c/o Resolution Performance Products Inc., 1600 Smith Street,Houston, Texas 77002. In addition, does not reflect Mr. Schlanger’sindirect ownership interest in the common stock of RPP Inc. through his directownership of 6,000 membership units of RPP Holdings.

 

(5) Does not include options to purchase 7,000 sharesof common stock that RPP Inc. issued to Mr. Smith under the RPP Inc. stockoption plan. These options are subject to time and performance vestingconditions. See “Management—2000 Option Plan.” The address of Mr. Smith is c/oResolution Performance Products Inc., 1600 Smith Street, Houston, Texas 77002.

 

(6) Includes 1,020 shares of common stock issuableupon exercise of options granted to Mr. Nodland under the RPP Inc. stock optionplan that were vested as of January 1, 2005. Does not include options topurchase 4,080 shares of common stock that RPP Inc. issued to Mr. Nodland underthe RPP Inc. stock option plan. These options are subject to time andperformance vesting conditions. See “Management—2000 Option Plan.” The addressof Mr. Nodland is c/o Resolution Performance Products Inc., 1600 Smith Street,Houston, Texas 77002.

 

(7) Does not include options to purchase 3,000 sharesof common stock that RPP Inc. issued to Mr. Graziosi under the RPP Inc. stockoption plan. These options are subject to time and performance vestingconditions. See “Management—2000 Option Plan.” The address of Mr. Graziosi isc/o Resolution Performance Products Inc., 1600 Smith Street, Houston, Texas77002.

 

(8) Includes 240 shares of common stock issuable uponexercise of options granted to Mr. Antonvich under the RPP Inc. stock optionplan that were vested as of January 1, 2005. Does not include options topurchase 960 shares of common stock that RPP Inc. issued to Mr. Antonvich underthe RPP Inc. stock option plan. These options are subject to time andperformance vesting conditions. See “Management—2000 Option Plan.” The addressof Mr. Antonvich is c/o Resolution Performance Products Inc., 1600 SmithStreet, Houston, Texas 77002.

 

(9) Includes no shares of common stock issuable upon exercise ofoptions granted to J.Travis Spoede under the RPP Inc. stock option plan thatwere vested as January 1, 2005.

 

(10) Does not include options to purchase 1,500 sharesof common stock that RPP Inc. issued to Mr. Stutts pursuant to the RPP Inc.non-employee director stock option plan. The options are subject to time andperformance vesting conditions. See “Management—Compensation of Board ofManagers.” The address of Mr. Stutts is 3810 Swarthmore, Houston, Texas 77005.

 

(11) Includes 546,720 shares owned by RPP Holdings.Each of Messrs. Berg, Copses, Harris and Kleinman may be deemed the beneficialowner of shares of RPP Inc. owned by RPP Holdings and membership units of RPPHoldings due to his status as a partner (in the case of Messrs. Berg, Copsesand Harris) and principal (in the case of Mr. Kleinman) of Apollo Management,which controls RPP Holdings. Each such person disclaims beneficial ownership ofany such shares in which he does not have a pecuniary interest. Includes 266shares of common stock issuable upon exercise of options granted to each ofMessrs. Berg, Copses, Harris and Kleinman pursuant to the RPP Inc. non-employeedirector stock option plan that were vested January 1, 2005. Does notinclude options to purchase 1,234 shares of common stock that RPP Inc. issuedto each of Messrs. Berg, Copses, Harris and Kleinman pursuant to the RPP Inc.non-employee director stock option plan. The options are subject to time andperformance vesting conditions. See “Management—Compensation of Board ofManagers.”

 

(12) Includes 266 shares of common stock issuable uponexercise of options granted to Mr. Tomfohrde pursuant to the RPP Inc.non-employee director stock option plan that were vested on January 1, 2005.Does not include options to purchase 1,234 shares of common stock that RPP Inc.issued to Mr. Tomfohrde pursuant to the RPP Inc. non-employee director stockoption plan. The options are subject to time and performance vestingconditions. See “Management—Compensation of Board of Managers.” The address ofMr. Tomfohrde is 9 Sea Robin Court, Hilton Head, South Carolina 29926.

 

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(13) Includes 7,365 shares of common stock issuableupon exercise of options granted to the managers and executive officers underthe RPP Inc. stock option plan that were vested on January 1, 2005. Doesnot include options to purchase 45,782 shares of common stock that RPP Inc.issued to the managers and executive officers under the RPP Inc. stock optionplan and 6,000 restricted stock units that RPP Inc. issued to Mr. Schlangerpursuant to the restricted unit plan on November 14, 2000.

 

## **ITEM 13**.   CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

## ** **

**Agreementswith Resolution Specialty Materials LLC**

 

*Joint Venture Agreement*

 

On October 15, 2004,the Company entered into a joint venture with Resolution Specialty MaterialsLLC (“RSM”), an affiliate, with a contribution of $2.5 million in cashrepresenting a 20% interest in the Resolutions’ JV LLC (“RJV”).   RSM is the majority owner and managingmember with an 80% interest in the joint venture.

 

*Master Services Agreement*

 

During the secondquarter of 2004, we commenced providing outsourcing services to ResolutionSpecialty Materials LLC (“RSM”), an affiliate of Apollo, under the ManagementServices Agreement (“MSA”).  Theagreement was executed on May 27, 2004 and has an initial term of three yearswith automatic renewal for one-year periods thereafter unless written notice isgiven by either party.  Currently inprogress is an information technology project that consists of installing andconfiguring hardware and software as well as establishing an internaltelecommunications and information technology infrastructure.  In addition to the information technologyproject, RPP provides outsourcing services that include monitoring of servicesunder a transition services agreement, human resources, environmental, healthand safety, financial and treasury, information technology, legal, intellectualproperty sales/service, purchasing, logistics and any negotiated additionalservices or projects.  In exchange forproviding the mentioned outsourcing services, RPP bills RSM monthly and thecharges are composed of the following formula: 33 1/3% of the estimated totalsalary, bonus, travel reimbursement, benefits and other costs payable by RPP toits Chief Financial Officer, General Counsel, Director of Human Resources,Chief Information Officer, Chief Administrative Officer and Director ofEnvironmental Health and Safety, plus an amount equal to any incremental costincurred by RPP in connection with the provision of the services multiplied by1.075 and an amount equal to all out of pocket expenses incurred by RPP inproviding the services.  In addition, RSMgrants options to purchase common units of RSM to certain members of themanagement, employees or independent contractors of RPP who are involved in theprovision or oversight of the services.  As of December 31, 2004, RSM paid us $11 million related to the MSAand information technology project. The actual expenses incurred, offset by thereimbursements from RSM, are recorded in selling, general, and administrativeexpenses.  Therefore, the mark-up relatedto these costs is included as a reduction of selling, general, andadministrative expenses and have been immaterial to date. Included in the $11million of reimbursements is $0.185 million related to RPP LLC officersalaries.

 

**Agreements with Stockholders of RPP Inc.**

 

*Apollo Management Agreement*

 

On November 14, 2000, we entered into amanagement consulting agreement with Apollo Management IV, L.P. Under the termsof the management consulting agreement, we retained Apollo Management toprovide management consulting and financial advisory services to us and payApollo Management an annual management fee of $1.0 million for providing thoseservices. In particular, Apollo Management will provide at our requestconsulting and advisory services relating to proposed financial transactions,acquisitions and other senior management matters relating to our business. Inaddition, as consideration for arranging the recapitalization and the relatedfinancing thereof, we paid Apollo Management a fee of $5.0 million on November 14,2000. We are also required to pay Apollo Management a transaction fee if weengage in any merger, acquisition or similar transaction unless we and ApolloManagement are unable to mutually agree upon the terms of Apollo Management’sengagement, in which case we will be able to retain another special advisor.Since Apollo Management beneficially owns 90.9% of us and a majority of themembers of our Board of Managers are affiliated with Apollo, it has the power,through its representatives and equity ownership, to approve on our

 

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behalfand set the terms of Apollo Management’s engagement, even if the independentmembers of the Board of Managers were opposed.  However, the members of the Board of Managersof RPP LLC who are affiliated with Apollo Management are aware that they havefiduciary obligations to RPP LLC, not Apollo, and RPP LLC expects that eachmember of its Board of Managers will comply with his fiduciary duties underDelaware law. The management consulting agreement has a ten-year term and,commencing on November 14, 2005 and at the end of each year thereafter,will automatically extend for an additional year unless notice to the contraryis given by either party at least thirty, but no more than sixty, days prior tothe end of any such year commencing on November 14, 2005.

 

On March 15, 2002, the terms of the managementconsulting agreement were amended to reduce the annual management fee payableto Apollo from $1 million to $750,000. In addition, RPP LLC agreed to payApollo Management an advisory fee of $1.05 million (i) immediately priorto a sale of RPP Inc. for cash, (ii) when Apollo Investment Fund IV, L.P.,Apollo Overseas Partners IV, L.P., or any investment fund managed by ApolloManagement or any of its affiliates sells at least 50% of the shares of commonstock of RPP Inc. that they acquired and at least 50% in the aggregate of theirinvestment in securities of RPP Inc. made on or after November 14, 2000 or(iii) at such time as Apollo Management and its affiliates cease to own in theaggregate at least 50% of the outstanding shares of common stock of RPP Inc. ona fully diluted basis.

 

Effective February 17, 2003, the terms of themanagement consulting agreement were amended to waive payment of the annualmanagement fee to Apollo during 2003 only; provided, that if, during any twelvemonth period ending on the last day of any fiscal quarter during 2003 or 2004, RPPLLC and its subsidiaries’ consolidated adjusted earnings before interest,taxes, depreciation and amortization (as determined in accordance with ourhistorical practices) is $116 million or more, we shall pay to Apollo (i) thequarterly installments of the annual management fee for the remainder of 2003and thereafter and (ii) 125% of the amount of the quarterly installments of theannual management fee which were waived during 2003.  In March 2004, the management consultingagreement was amended to extend the period for achieving such payment from December 31,2004 to December 31, 2005, to the extent permitted by the Credit Agreementand Indentures.

 

*Shareholders’ Agreement*

 

On November 14, 2000, RPP Inc. entered into ashareholders’ agreement with RPP Holdings and Shell which governs certainaspects of the relationship among RPP Inc., RPP Holdings and Shell. The shareholders’agreement contains, among other matters:

 

•restrictions on the transfer of shares of common stock by Shell;

 

•preemptive rights granted to Shell to purchase equity securities issued by RPPInc. to RPP Holdings or its affiliates in the amounts required to maintainShell’s percentage ownership;

 

•agreement by Shell to consent to the sale of more than 50% of the equitysecurities of RPP Inc. or substantially all of its assets to a third party ifsuch sale is approved by the Board of Directors of RPP Inc., and to sell itsshares of common stock if so required;

 

•rights of Shell to participate in certain transfers of common stock by RPPHoldings other than to an affiliate;

 

•rights of Shell to receive financial information; and

 

•prohibitions on transactions between RPP Inc. and its affiliates, subject tocertain exceptions.

 

The shareholders’ agreement terminates upon theearlier of a sale of RPP Inc. and the consummation of a public equity offeringthat raises gross proceeds of at least $100 million.

 

*InvestorRights Agreement*

 

On November 14, 2000, RPP Inc. entered into aninvestor rights agreement with RPP Holdings and members of management who ownstock, options and/or junior subordinated notes of RPP Inc. which governscertain aspects of the relationship among RPP Inc., RPP Holdings and themanagement holders. The investor rights agreement contains, among othermatters:

 

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•restrictions on the transfer of shares of common stock, options and juniorsubordinated notes by the management holders;

 

•rights of RPP Inc. and RPP Holdings to purchase common stock and juniorsubordinated notes in the event of certain permitted transfers by themanagement holders;

 

•agreement by the management holders to consent to the sale of more than 50% ofthe equity securities of RPP Inc. or substantially all of its assets to a thirdparty and to sell their shares of common stock if so required;

 

•rights of the management holders to participate in certain transfers of commonstock and junior subordinated notes by RPP Holdings other than to an affiliate;

 

•repurchase rights of RPP Inc. and RPP Holdings in the event of termination ofemployment of the management holders; and

 

•restrictions on sales of common stock and junior subordinated notes by themanagement holders in the event of an initial public offering.

 

The investor rights agreement terminates upon theearlier of a sale of RPP Inc. or approval by holders holding a majority of thecommon stock of RPP Inc. and the vote of the common stock of RPP Inc. owned byRPP Holdings.

 

*ShellRegistration Rights Agreement*

 

On November 14, 2000, RPP Inc. entered into aregistration rights agreement with Shell pursuant to which Shell has incidentalregistration rights to include its RPP Inc. common stock in the same orconcurrent registration statement filed by RPP Inc. for the registration of RPPInc. common stock under the Securities Act. RPP Inc. will bear all expenses,other than selling expenses, incurred in the registration process. Theregistration rights agreement also contains customary provisions with respectto registration procedures, underwritten offerings and indemnification andcontribution rights.

 

*RPPHoldings Registration Rights Agreement*

 

On November 14, 2000, RPP Inc. entered into aregistration rights agreement with RPP Holdings pursuant to which RPP Holdingshas demand and incidental registration rights. As a result, at RPP Holdings’request, RPP Inc. will be obliged to prepare and file a registration statementcovering the securities so requested to be registered by RPP Holdings. Inaddition, should RPP Inc. propose to register any of its common stock for saleto the public, RPP Holdings will have the right to include its RPP Inc. commonstock in the same or concurrent registration statement filed by RPP Inc. forthe registration of RPP Inc. common stock under the Securities Act. RPP Inc.will bear all expenses, other than selling expenses, incurred in theregistration process. The registration rights agreement also contains customaryprovisions with respect to registration procedures, underwritten offerings andindemnification and contribution rights.

 

*ManagementPromissory Notes and Other Indebtedness*

 

On November 14, 2000, we loaned $925,000 in theaggregate to some members of our then existing management and other employees,to finance up to one-half of the purchase price payable by them in connectionwith their purchases of RPP Inc.’s common stock and junior subordinated notesin the recapitalization. In particular, we made loans to each of our thenexecutive officers in the following amounts:

 

•Dany Subrata—$100,000 loaned to finance in part his purchase of 600 shares ofRPP Inc. stock and $140,000 principal amount of RPP Inc. junior subordinatednotes.

 

In March 2001, we loaned $100,000 to J. TravisSpoede Trust on behalf of J. Travis Spoede to finance in part his purchase of600 shares of RPP Inc. stock and $140,000 principal amount of RPP Inc. juniorsubordinated notes.

 

From June to September 2001, we madeadditional loans to new employees to finance in part their purchase of RPP Inc.’scommon stock and RPP Inc. junior subordinated notes, including:

 

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•Mark Antonvich—$100,000 loaned to finance in part his purchase of 600 shares ofRPP Inc. stock and $140,000 principal amount of RPP Inc. junior subordinatednotes; and

 

•Jeffrey M. Nodland—$250,000 loaned to finance in part his purchase of 545.4545shares of RPP Inc. stock and $350,000 principal amount of RPP Inc. juniorsubordinated notes.

 

The loans are evidenced by promissory notes made bythe employee in favor of us. Interest payable on each promissory note willaccrue at an annual rate of 10.75%. Interest payments are, at the option of theemployee, payable in cash semi-annually or accrue and become due and payable onthe eighth anniversary of the purchase date. Principal on the outstanding promissorynotes will become due and payable on the eighth anniversary of the purchasedate. Each promissory note is secured by the RPP Inc. common stock and juniorsubordinated notes to be purchased by such employee and options held by suchemployee and, except for such pledged securities, is non-recourse to theemployee.

 

*Securities Indemnification Agreement*

 

On November 14, 2000, we entered into asecurities indemnification agreement with Shell and RPP Holdings. Under theagreement, we agreed to indemnify Shell, RPP Holdings and their respectiveaffiliates and each of their respective directors and officers and otherrelated persons against liabilities arising under the Securities Act inconnection with the private placement offering of the $200 million of existingnotes issued on November 14, 2000, and we also granted contribution rightsto such persons.

 

*Other Payments or Dividends toAffiliates*

 

We paid approximately $6 million and $5 millionrelated to certain freight costs to Quality Distribution, an affiliate ofApollo, for the year ended December 31, 2004 and 2003, respectively. Webelieve the amounts paid to Quality Distribution were fair and at arm’s lengthterms.

 

We paid approximately $4million related to various raw materials to Borden Chemical Inc., an affiliateof Apollo in 2004.   Borden Chemical Inc.paid the Company approximately $0.1 million on the sales of certain products.

 

In 2004, we paid approximately $1 million to Shell onbehalf of RPP Inc., for certain pension costs in accordance with the MasterSales Agreement and related ancillary agreements.  During 2003, we paid approximately $4 millionto Shell on behalf of RPP Inc., of which $2 million was previously accrued, forcertain pension costs in accordance the Master Sales Agreement and relatedancillary agreements.

 

During 2004 and 2003, we made payments to Cherry HillChemical Investments LLC, an affiliate of Mr. Schlanger, in the amount of $0.1million each year for administrative support and office space used by Mr.Schlanger and other employees of RPP LLC.

 

**Ongoing Relationship with Shell**

 

In connection with the recapitalization, we, ourparent, RPP Inc., and Shell or their respective affiliates entered into severaladditional agreements providing for the continuation or transfer and transitionof certain aspects of our business operations. These agreements were the resultof arm’s-length negotiations in connection with the recapitalization, and webelieve they are generally on terms we could have obtained from unaffiliatedthird parties at that time. Set forth below are descriptions of the materialagreements that we or RPP Inc. have entered into with Shell.

 

For the years ended December 31, 2004, 2003 and2002 we paid Shell approximately $325 million, $289 million, $227 million,respectively, under the various agreements described below, net of paymentsmade by Shell to us.

 

*SUMF,OMS and Supply Agreements*

 

Several of our operations are located within oradjacent to sites occupied by Shell’s refinery business and its chemicalbusiness. In the United States, these shared sites are in: Deer Park, Texas;Norco, Louisiana; Argo, near Chicago, Illinois; and a

 

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laboratoryfacility in Westhollow, Texas. Shared sites in Europe are in: Pernis andMoerdijk, near Rotterdam, The Netherlands; Stanlow in the United Kingdom;Wesseling, Germany; and laboratory facilities in Pernis, The Netherlands andLouvain-La-Neuve, Belgium.

 

At most of the shared sites, we and Shell supply toeach other certain site services, utilities, materials and facilities, or “SUMFitems.” The substantial majority of the SUMF items are provided by Shell to us.These SUMF items include electricity, gas, water, steam, sewer systems, wastewater systems, waste management services, and environmental facilities, such asincinerators and biotreaters, which are used to treat waste products generatedby both Shell and us. They also include, in some sites, office services,emergency services, laboratory services, storage and warehousing functions,rail, barge and trucking facilities, and other items. We believe that some SUMFitems supplied by Shell are critical to the continued operations of ourbusiness and cannot easily be obtained from third parties. Other SUMF items,however, we believe can be readily obtained from parties other than Shell.

 

Effective as of November 1, 2000, Shell and RPPInc. or their affiliates entered into various new or amended and restatedagreements dealing with the shared sites, including SUMF agreements, groundleases from Shell to us for the ground under several of our plants and otherimprovements purchased by us, office and space leases and operation andmaintenance services agreements (“OMS agreements”).

 

In addition, the parties entered into a SUMF agreementrelating to our Lakeland, Florida site. Under this agreement, we will supplygroundwater recovery and biotreater systems services to facilitate compliancewith the consent order issued by the Florida Department of EnvironmentalProtection. See “Business—Environmental/Occupational Health and Safety Matters.”

 

*SUMFAgreements.    *In consideration for each SUMF item provided under aSUMF agreement, the purchaser of the SUMF item is required in most cases to paythe supplier an amount comprised of three basic components:

 

•its share of the supplier’s variable costs for the SUMF item based on thepurchaser’s consumption of such SUMF item;

 

•its share of the supplier’s direct site costs and operating costs for the SUMFitem based on the purchaser’s reserved capacity of the SUMF item or anallocation agreed upon in the SUMF agreement; and

 

•a fixed amount representing the infrastructure charge for the SUMF item.

 

The purchaser is responsible under the SUMF agreementsfor certain other charges, such as taxes levied or imposed on the supplier withrespect to SUMF items consumed by the purchaser. In a few cases, charges forthe SUMF items are based on commercial rates for similar products or services.

 

The SUMF agreements allocate liability for loss ordamage to a party’s property or employees or to third parties either to Shellor to us based upon certain factors, including the presence of a party’snegligence in causing the loss or damage. In addition, the SUMF agreementsprovide for indemnification by one party to the other in certain instances. Wehave obtained insurance to cover losses and damages for which we may beresponsible under the SUMF agreements. To the extent the environmental damagesare recoverable under the SUMF agreements and under the environmentalagreements, we are required to make our claims under the environmentalagreements.

 

SUMF items that we believe can be easily obtained froma third party other than Shell or that Shell believes can be easily obtained byit from a third party other than us, such as warehouse management and officeservices, are generally provided under the SUMF agreements on a short-termbasis, typically less than five years. Certain other SUMF items, such asprovision of utilities such as steam, are generally provided on a long-termbasis for a period of twenty years plus up to three five-year renewal terms.Either party has the right to terminate a SUMF agreement in its entirety forvarious reasons, including bankruptcy and payment or performance defaults ofthe other party and upon three years’ notice at the expiration of the initialterm or any renewal term. In addition, a party has the right to terminate aSUMF agreement in its entirety if it is terminating the operations of all orsubstantially all of its SUMF assets at the relevant site. Either party has theright to terminate individual SUMF items (other than sole supplier SUMF itemswhich can be terminated by terminating the SUMF agreement in its entirety) forvarious reasons, including bankruptcy and payment or certain limitedperformance defaults of the other party. In addition, the supplier of a SUMFitem can generally terminate the supply of that SUMF item to the purchaser ifit is ceasing to supply the SUMF item to the entire site; and the purchaser of 

 

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SUMF itemscan generally terminate individual short-term SUMF items on 90 days’ notice(but, in the case of sites in Europe, termination must generally occur at theend of each year) and individual long-term SUMF items on three years’ notice.

 

*LeaseAgreements.    *Shell has provided us ground leases in the United Statesfor the business’ facilities in Deer Park, Norco and Argo and in Europe for ourfacilities in Pernis, Moerdijk, Stanlow and Wesseling on a long-term basis forlease terms at least as long as the terms of the SUMF or equivalent agreementsrelated to those sites. Shell has also provided to us space leases forlaboratory space in Westhollow and laboratory, office and warehouse space inNorco in the United States and for laboratory space in Amsterdam andLouvain-La-Neuve in Europe. The term of the Westhollow lease is ten years fromthe closing date of the recapitalization and can be terminated by us any timeafter the effective date with proper notice (with Shell having the right toterminate at the end of 2005). The basic term of each of the Amsterdam and Louvain-La-Neuveleases is six years, subject to certain conditions. Rent under all the groundleases is either de minimis or included as part of the SUMF or equivalentagreement, except that rent payable by us to Shell under the Pernis lease isequal to the payments required to be made by Shell under its original leasewith the Port of Rotterdam and additional payments are required at Deer Parkand Norco for our use of Shell’s adjoining property. Under the ground leases,we are also required to pay the pro rata portion of taxes assessed on the land.Our space leases for laboratory and/or office and warehouse space in Norco,Westhollow, and Louvain-La-Neuve require us to pay rents for the space weoccupy. The rental payments for space at Norco escalate based on increases inthe producer price index. Shell is subleasing back space from us at our Norcofacility at the same rental rate per square foot that we pay Shell for thespace we lease from it at Norco. The ground leases impose certainresponsibilities on us with respect to environmental matters at or relating tothe business facilities, from November 1, 2000 and allocate liability forenvironmental damages to the properties. Generally, to the extent environmentaldamages are recoverable under a lease and under the Environmental Agreement,the claims will be made under the Environmental Agreements.

 

*OMSAgreements.    *Our versatics facility in Pernis, The Netherlands, issituated within Shell’s refinery and chemical site and is operated on ourbehalf by Shell pursuant to an OMS agreement. Shell’s solvents anddemineralized water plants in Pernis are located within our facility and areoperated by us on behalf of Shell pursuant to two OMS agreements. Shelloperates our Moerdijk, The Netherlands, and Stanlow, England, facilities underOMS agreements and our Wesseling, Germany facility is operated by a jointventure between Shell and BASF AG, under a production agreement that is similarto an OMS agreement.

 

In consideration for the services provided under anOMS agreement, the owner of the facility is generally required to pay theoperator of the facility an amount comprised of three basic components: (1) thefixed costs of the operator in supplying the operation services; (2)maintenance, parts and materials costs; and (3) depreciation and capitalcharges for certain shared assets.

 

The OMS agreements contain liability andindemnification provisions similar to those contained in the SUMF agreements.We have obtained insurance to cover losses and damages for which we may beresponsible under the OMS agreements.

 

Operation and maintenance services under the OMSagreements are generally provided on a long-term basis. However, the partieshave termination rights under these agreements that are similar to theirtermination rights under the SUMF agreements.

 

*IncineratorAgreement.    *In addition to shared services provided under the SUMFagreements, we operate for ourselves and for Shell two incinerators located atour Norco facility under a shared incinerator agreement. These incinerators areowned jointly by Shell and us (6% and 94%, respectively).

 

Shell is required to pay us an amount comprised of twobasic components: (1) its share of our variable costs relating to theincinerators based on Shell’s use of the incinerators; and (2) its share of ourfixed operating costs relating to the incinerators based on Shell’s capacityright in the incinerators. Shell’s initial capacity right in the incineratorsis 6%. We and Shell are also required to pay our respective shares of anyrequired capital improvements to the incinerators based on our relativecapacity rights and, in order to receive any of the benefits of discretionarycapital improvements to the incinerators, to pay our respective shares of anysuch improvements.

 

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The incinerator agreement contains liabilityprovisions similar to those contained in the SUMF Agreements. We have obtainedinsurance to cover losses and damages for which we may be responsible under theIncinerator Agreement.

 

*SupplyAgreements.    *We have contracted with Shell for our U.S. andEuropean facilities to purchase chemical ingredients, or feedstocks, to produceour products. The initial terms of the agreements vary from three to ten years.Some of the agreements can be extended at our option. Products we purchase fromShell include phenol and acetone, acetylene, propylene and various solvents. Wealso provide waste-stream propylene to Shell from our Norco facility under atwenty year contract.

 

The price we pay to Shell for feedstocks variesdepending upon the item. However, we believe that the prices Shell is chargingus are generally at the prices we can obtain from third persons. Some contractsrequire us to purchase all of our requirements for a particular feedstock fromShell. Those contracts generally permit us to obtain a lower price elsewhereand, if Shell does not match the lower price, we can purchase at the lowerprice from a third party. We can also purchase from third parties if a forcemajeure event prevents Shell from delivering feedstocks to us. Shell will makeits distribution facilities available for those third party purchases. Pricingfor propylene is based on market price less negotiated volume discounts.Pricing for phenol and acetone is based on discounted market prices andinput-cost formulae.

 

*EnvironmentalAgreements*

 

Shell and we entered into two environmental agreementsdated as of November 1, 2000, one for our U.S. business and one for ournon-U.S. business, setting forth Shell’s indemnification obligations withrespect to health, safety and environmental matters. Except as disclosed below,Shell will generally remain liable for environmental conditions that occurredor existed before November 14, 2000. The indemnity extends to damagesassociated with third-party claims (including those by a governmental entity)for (1) exposure or injury to persons or third-party property caused byhazardous substances at our property, off-site disposal locations and pre-closetoll manufacturing facilities; (2) the transportation, treatment, storage,handling or disposal of hazardous materials at off-site locations, our propertyand pre-close toll manufacturing facilities; and (3) the remediation ofcontamination at or migrating from our property and pre-close tollmanufacturing facilities. Claims relating to any of the above matters aresubject to an aggregate deductible of $1.0 million, which has been satisfied.

 

Special provision is also made for existinggroundwater contamination at and migrating from the facility in Lakeland,Florida, which is currently subject to a consent order issued by the FloridaDepartment of Environmental Protection. Indemnity claims for site contaminationissues at the Lakeland facility, which relate to the consent order and anyamendments thereto, are not subject to any deductible, nor are they limited intime or amount.

 

Shell also will indemnifyus for environmental damages relating to site contamination issues at (a) theLakeland, Florida facility which are not the subject of the consent order and(b) the facility in Barbastro.   Claimsfor these matters are limited to$10.0 million in the aggregate, are subject tothe $1.0 million deductible and must be asserted within five years of November 2000.

 

Shell also has agreed to provide a limited indemnitywhere, in the absence of a third-party claim and where we are not required bylaw or regulation to report, we elect to investigate and remediateenvironmental conditions for which a third-party claim, although not pending,would likely be brought if such a condition were brought to the attention ofthe relevant governmental agency. In such instance, Shell will indemnify us for75% of any costs incurred.

 

With respect to environmental conditions at theYokkaichi facility, RPP, Inc. and Shell have agreed that any environmentaldamages shall be reduced to reflect proportionate interest of RPP B.V. in thejoint venture and its exposure to environmental damages of the joint venture.

 

In addition to those noted above, the environmentalagreements impose some limitations on Shell’s indemnification obligations, theprimary of which include the following:

 

•we are not entitled to seek indemnity for environmental damages at a site thatresult from or are increased by any material change in use of that site;

 

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•we have certain restrictions on performing sub-surface investigations at theproperties after November 14, 2003 (except that those restrictions applyto the Pernis facility as of November 14, 2000); and

 

•Shell has no obligation for most environmental damages if such damages resultfrom or are increased by a post-closing requirement of any permit orenvironmental law, or any environmental laws or changes to applicable standardsthat come into force after November 14, 2000. This limitation applies onlyto

 

•site contamination issues at the Lakeland facility (other than known Lakelandsite contamination issues) and

 

•site contamination issues at the Barbastro facility.

 

RPP Inc., in turn, has agreed to indemnify and holdShell harmless for environmental damages that result from any environmentalcondition that arises on or after November 14, 2000, unless Shell hasagreed to assume responsibility for the matter under the terms of theenvironmental agreements.

 

In November 2002, Shell and we amended each ofthe U.S. and non-U.S. environmental agreements. Pursuant to the amendments, weand Shell agreed to mutually release each other from certain of the indemnityand other obligations contained in the environmental agreements entered into inNovember 2000. Specifically, we have released Shell from its obligation toindemnify us for damages associated with third party claims (including those bya governmental entity) for (a) compliance issues specifically identified in theNovember 2000 environmental agreements and (b) general non-compliance withrespect to environmental, health and safety laws in effect as of November 14,2000. In turn, Shell agreed to release us from any obligations that we had toShell for the above matters. As consideration for entering into the amendments,we received a total payment of approximately $13.9 million from Shell.

 

On December 17, 2002, Shell and we amended theU.S. environmental agreement. Pursuant to the amendment, we and Shell agreed tomutually release each other from certain of the indemnity and other obligationscontained in the U.S. environmental agreement entered into in November 2000.Specifically, we have released Shell from its obligations to indemnify us fordamages related solely to the portion of the Lakeland facility that we sold on December 20,2002. In turn, Shell delivered to us a quitclaim deed which provided aconveyance of Shell’s mineral rights reservation and access easement withrespect to the portion of the Lakeland facility that we sold.

 

*IntellectualProperty Agreements*

 

As part of the recapitalization, we entered into twointellectual property transfer and license agreements, one for our U.S.business and one for our non-U.S. business, pursuant to which Shell contributedto us by assignment or license intellectual property of all types used in Shell’sresins business worldwide. Certain of the intellectual property rights that wehave acquired from Shell are subject to pre-existing licenses to third parties.In addition, Shell retained some rights to the transferred intellectualproperty. For example, many patents and know-how are currently shared amongShell’s other divisions and our business. Where these shared rights are used inour business, they have either been acquired by us subject to licenses back toShell to use these rights for their other businesses, or licensed from Shell.Our licenses from Shell are royalty-free licenses and their duration isgenerally linked to the life of the relevant licensed rights. The licenses arefreely assignable and include the right to sublicense, with the exception ofcertain rights used principally by Shell that may be transferred only toaffiliates or successors of our business. Pursuant to the intellectual propertytransfer and license agreements, we have also acquired the worldwide trademarksthat are used exclusively in our business, and rights in the copyright to alltechnical information used in our business. In addition, Shell assigned to us,and we have assumed the obligations under, intellectual property agreements towhich Shell is a party and which are used exclusively in our business. To theextent any such material agreements are not transferable by their terms, Shellhas agreed to cooperate with us to obtain the necessary third party consents tosuch transfer. We and Shell have also agreed to indemnify each other for claimsby a third party arising out of or in connection with the exercise of thelicenses and rights granted under these agreements.

 

*TaxAgreement and Tax Deed*

 

As part of the recapitalization, we entered into a taxagreement for our U.S. business and a tax deed for our non-U.S. business datedas of November 1, 2000. The tax agreement provides, among other things, thatShell will be responsible for, and will

 

58

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indemnifyus against, any liability for taxes that were payable, or accrued, as a resultof business activities during the period prior to November 14, 2000. Thetax deed provides, among other things, that Shell Petroleum N.V. will indemnifyus against any liability for taxes arising as a result of business activitiesoccurring on or prior to November 1, 2000, subject to certain exceptions,such as liabilities for taxes that arise as a result of any change in law afterthe closing that had retrospective effect. The tax agreement and tax deed alsoprovide that we will be responsible for, and will indemnify Shell Chemicalagainst any liability for taxes that become payable after November 14,2000 and November 1, 2000, respectively, except to the extent that theliability relates to an event occurring during, or to income that was earned oraccrued during, a pre-closing period.

 

Pursuant to the tax agreement, both Shell Chemical andwe have made an election under Section 338(h)(10) of the Internal RevenueCode of 1986, as amended, to treat the recapitalization, for federal income taxpurposes, as a purchase of all of the assets of the epoxy resins business thatwe now own after the recapitalization. Making this election allows us toincrease our depreciation and amortization deductions for U.S. Federal incometax purposes with respect to the U.S. assets we now own.

 

**Item 14****.  PRINCIPAL ACCOUNTING FEES ANDSERVICES**.

 

The following tablereflects amounts billed for accounting fees and services rendered by PricewaterhouseCoopersLLP (in millions of U. S. dollars):

 
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Audit fees              |       | $        | 2          |     | $          | 1 |   |
| Audit related fees      |       | —   |       | 1        |       |
| Tax fees                |       | 1        |       | 1        |       |
| Total fees and services |       | $        | 3          |     | $          | 3 |   |

 

----

All of the accountingfees and services reflected in the above table were approved by the Audit Committeeat the beginning of each respective year in accordance with the Audit Committee’spre-approval procedures.  The audit feesin the above table are related to the audit of our year end financialstatements and the review of our interim financial statements.  Audit related fees are those fees related toour note issuances, audits of our benefit plans, and consultation as to theaccounting or disclosure treatment of transactions or events.   Tax fees are billed for tax complianceservices and transfer pricing consulting.

 

59

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**PART IV**

 

## **ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 
| (a)(1)                                                                                                            | Financial  Statements:                                                                                                   |       |
|-------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                              |                                                                                                                     |       |
| **Resolution Performance Products LLC**                                                                           | ** **                                                                                                               | ** ** |
|                                                                                                              |                                                                                                                     |       |
| Consolidated Financial Statements                                                                                 |                                                                                                                     |       |
|                                                                                                              |                                                                                                                     |       |
| As of December 31, 2004 and 2003 and for each  of the three years in the period ended December 31, 2004 |                                                                                                                     |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Report  of Independent Registered Public Accounting Firm                                                                 |       |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Consolidated Balance Sheets  as of December 31, 2004 and 2003                                                       |       |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Consolidated Statements  of Income for each of the three years in the period ended December 31,  2004               |       |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Consolidated Statements of  Owner’s Deficit for each of the three years in the period ended December 31,  2004 |       |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Consolidated  Statements of Cash Flows for each of the three years in the period ended December 31,  2004           |       |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Notes to  Consolidated Financial Statements                                                                              |       |
|                                                                                                              |                                                                                                                     |       |
| (a)(2)                                                                                                            | Financial Statement Schedule:                                                                                            |       |
|                                                                                                              |                                                                                                                     |       |
|                                                                                                              | Schedule II-Valuation  and Qualifying Accounts and Reserves                                                         |       |
|                                                                                                              |                                                                                                                     |       |
| (a)(3)                                                                                                            | Exhibits:                                                                                                                |       |
|                                                                                                                   |                                                                                                                          |            |  |  |

 

 
| 2.1    |   | Amended and Restated Master Sale Agreement (US)  dated as of November 14, 2000 among Shell Oil Company, Resin  Acquisition, LLC and Resolution Performance Products Inc. (incorporated by  reference to Exhibit 2.1 to the Registrants’ Registration Statement on Form  S-4 dated March 16, 2001 (File No. 333-57170)) |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 2.2    |   | Amended and Restated SPNV Resins Sale Agreement  dated as of November 14, 2000 between Shell Oil Company and Resolution  Performance Products Inc. (incorporated by reference to Exhibit 2.2 to the  Registrants’ Registration Statement on Form S-4 dated March 16, 2001  (File No. 333-57170))                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 2.3    |   | Assignment and Assumption Agreement dated November 13,  2000 between Resolution Performance Products Inc. and Resolution Performance  Products LLC (incorporated by reference to Exhibit 2.3 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 2.4    |   | Assignment and Assumption Agreement dated November 14,  2000 between Resin Acquisition, LLC and RPP Holdings LLC (incorporated by  reference to Exhibit 2.4 to the Registrants’ Registration Statement on Form  S-4 dated March 16, 2001 (File No. 333-57170))                                                         |

 

60

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| 3.1    |   | Certificate of Formation of Resolution Performance  Products LLC filed on May 10, 1999 (incorporated by reference to Exhibit 3.1  to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                                                                                                                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Certificate of Amendment to Certificate of Formation  of Resolution Performance Products LLC filed on November 14, 2000  (incorporated by reference to Exhibit 3.2 to the Registrants’ Registration  Statement on Form S-4 (File No. 333-57170))                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.3    |   | Amended and Restated Limited Liability Company  Agreement of Resolution Performance Products LLC dated as of November 14,  2000 (incorporated by reference to Exhibit 3.3 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.4    |   | Bylaws of Resolution Performance Products LLC dated  as of November 14, 2000 (incorporated by reference to Exhibit 3.4 to the  Registrants’ Registration Statement on Form S-4 dated March 16, 2001  (File No. 333-57170))                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.5    |   | Certificate of Incorporation of RPP Capital  Corporation dated as of October 23, 2000 (incorporated by reference to  Exhibit 3.5 to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.6    |   | Amended and Restated Bylaws of RPP Capital  Corporation dated as of November 14, 2000 (incorporated by reference to  Exhibit 3.6 to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1    |   | Indenture, dated as of November 14, 2000, among  Resolution Performance Products LLC, RPP Capital Corporation and The Bank of  New York, as trustee, relating to 13 1/2% Senior Subordinated Notes Due 2010  (incorporated by reference to Exhibit 4.1 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170))                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.2    |   | Form of 13 1/2% Senior Subordinated Note Due 2010  (included as Exhibit B to Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.3    |   | Registration Rights Agreement, dated as of November 14,  2000 among Resolution Performance Products LLC, RPP Capital Corporation, RPP  Holdings LLC, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities  Inc. and Salomon Smith Barney Inc. (incorporated by reference to Exhibit 4.3  to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.4    |   | Registration Rights Agreement, dated as of November 14,  2001, among Resolution Performance Products LLC, RPP Capital Corporation,  Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Inc., J.P.  Morgan Securities Inc. and Salomon Smith Barney Inc. (incorporated by  reference to Exhibit 4.4 to the Registrants’ Registration Statement on Form  S-4 dated December 14, 2001 (File No. 333-75172)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.5    |   | Registration Rights Agreement dated December 18,  2002 among Resolution Performance Products LLC, RPP Capital Corporation,  Morgan Stanley & Co. Incorporated, Credit Suisse First Boston  Corporation, J.P. Morgan Securities Inc. and Salomon Smith Barney Inc.  (incorporated by reference to Exhibit 4.5 to the Registrants’ Registration  Statement on Form S-4 dated January 14, 2003 (File No. 333-102505))  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.6    |   | Indenture dated as of April 9, 2003 among  Resolution Performance Products LLC, RPP Capital Corporation and Deutsche  Bank Trust Company Americas, as trustee, relating to 9 1/2% Senior Second  Secured Notes Due 2010 (incorporated by reference to Exhibit 4.6 to the  Registrants’ Registration Statement on Form S-4 dated April 25, 2003  (File No. 333-104750))                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.7    |   | Form of 9 1/2% Senior Second Secured Note due 2010  (included as Exhibit B to Exhibit 4.6)                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.8    |   | Registration Rights Agreement entered into as of April 9,  2003, between Resolution Performance Products LLC, RPP Capital Corporation,  Morgan Stanley & Co. Incorporated, Citigroup Capital Markets Inc., Credit  Suisse First Boston LLC                                                                                                                                                                                    |

 

61

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|   |   | and J.P. Morgan Securities, Inc. (incorporated by  reference to Exhibit 4.8 to the Registrants’ Registration Statement on Form  S-4 dated April 25, 2003 (File No. 333-104750))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.9    |   | Registration Rights Agreement dated May 22, 2003  among Resolution Performance Products LLC, RPP Capital Corporation, Morgan  Stanley & Co. Incorporated, Citigroup Capital Markets Inc., Credit Suisse  First Boston LLC and J.P. Morgan Securities, Inc. (incorporated by reference  to exhibit 4.9 to the Registrants’ Registration Statement on Form S-4 dated June 20,  2003 (File No. 333-106331))                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.10   |   | Registration Rights Agreement dated December 22,  2003 among Resolution Performance Products LLC, RPP Capital Corporation,  Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation,  J.P. Morgan Securities Inc. and Citigroup Global Markets Inc. (incorporated  by reference to exhibit 4.10 to the Registrants’ Registration Statement on  Form S-4 dated January 20, 2004 (File No. 112106))                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.11   |   | Indenture dated as of December 22, 2003 among  Resolution Performance Products LLC, RPP Capital Corporation and The Bank of  New York, as trustee, relating to 8% Senior Secured Notes due 2009  (incorporated by reference to exhibit 4.11 to the Registrants’ Registration  Statement on Form S-4 dated January 20, 2004 (File No. 333-112016))                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.12   |   | Form of exchange note (included as Exhibit B to  Exhibit 4.11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1   |   | Credit Agreement dated as of November 14, 2000  among Resolution Performance Products Inc., Resolution Performance Products  LLC, RPP Capital Corporation, Resolution Europe B.V. (f/k/a Resolution  Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.), the various lender  parties thereto, Salomon Smith Barney Inc., as Syndication Agent, Morgan  Guaranty Trust Company of New York, as Documentation Agent, and Morgan  Stanley Senior Funding Inc., as Administrative Agent, Lead Arranger and Sole  Book Manager (incorporated by reference to Exhibit 10.1 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2   |   | First Amendment to Credit Agreement dated November 6,  2001 (incorporated by reference to Exhibit 10.1 to the Registrants’ Current  Report on Form 8-K dated November 7, 2001 (Commission File No.  333-57170))                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3   |   | Employment Agreement dated as of November 14,  2000 between Resolution Performance Products LLC and Marvin O. Schlanger  (incorporated by reference to Exhibit 10.2 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4   |   | Secured Promissory Note dated as of November 14,  2000 entered into by Wouter W. Jongepier in favor of Resolution Performance  Products LLC (incorporated by reference to Exhibit 10.5 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5   |   | Pledge Agreement dated as of November 14, 2000  between Resolution Performance Products LLC and Wouter W. Jongepier  (incorporated by reference to Exhibit 10.6 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6   |   | Secured Promissory Note dated as of November 14,  2000 entered into by Dany Subrata in favor of Resolution Performance Products  LLC (incorporated by reference to Exhibit 10.7 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | Pledge Agreement dated as of November 14, 2000  between Resolution Performance Products LLC and Dany Subrata (incorporated by  reference to Exhibit 10.8 to the Registrants’ Registration Statement on Form  S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.8   |   | Secured Promissory Note dated as of March 7,  2001 entered into by J. Travis Spoede Trust (Dated 03/26/99) in favor of  Resolution Performance Products LLC (incorporated by reference to Exhibit  10.9 to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                                                                                                                                                                                                                                                                                                                                                                     |

 

62

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| 10.9   |   | Pledge Agreement dated as of March 7, 2001  among Resolution Performance Products LLC, J. Travis Spoede and the J. Travis  Spoede Trust (Dated 03/26/99) (incorporated by reference to Exhibit 10.10 to  the Registrants’ Registration Statement on Form S-4 dated March 16, 2001  (File No. 333-57170))                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10  |   | Employment Agreement dated July 16, 2001 between  Resolution Performance Product LLC and Jeffrey M. Nodland (incorporated by  reference to Exhibit 10.1 to the Registrants’ Quarterly Report on Form 10-Q  for the Quarter ended September 30, 2001 (Commission File No.  333-57170))                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11  |   | Secured Promissory Note dated August 10, 2001  from Jeffrey M. Nodland to Resolution Performance Product LLC (incorporated  by reference to Exhibit 10.2 to the Registrants’ Quarterly Report on Form  10-Q for the Quarter ended September 30, 2001 (Commission File No. 333-57170))                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12  |   | Pledge Agreement dated August 10, 2001 between  Jeffrey M. Nodland and Resolution Performance Products LLC (incorporated by  reference to Exhibit 10.3 to the Registrants’ Quarterly Report on Form 10-Q  for the Quarter ended September 30, 2001 (Commission File No.  333-57170))                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13  |   | Secured Promissory Note dated June 18, 2001  from Mark S. Antonvich to Resolution Performance Products LLC (incorporated  by reference to Exhibit 10.4 to the Registrants’ Quarterly Report on Form  10-Q for the Quarter ended September 30, 2001 (Commission File No.  333-57170))                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14  |   | Pledge Agreement dated June 18, 2001 between  Mark S. Antonvich to Resolution Performance Products LLC (incorporated by  reference to Exhibit 10.5 to the Registrants’ Quarterly Report on Form 10-Q  for the Quarter ended September 30, 2001 (Commission File No.  333-57170))                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15  |   | Environmental Agreement dated as of November 1,  2000 between Shell Oil Company and Resolution Performance Products LLC  (incorporated by reference to Exhibit 10.11 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16  |   | Environmental Agreement dated as of November 1,  2000 between Shell Petroleum N.V. and Resolution Performance Products LLC  (incorporated by reference to Exhibit 10.12 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.17  |   | Intellectual Property Transfer and License Agreement  and Contribution Agreement dated as of November 14, 2000 between Shell  Oil Company and Resolution Performance Products LLC (incorporated by  reference to Exhibit 10.13 to the Registrants’ Registration Statement on Form  S-4 dated March 16, 2001 (File No. 333-57170))                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.18  |   | Intellectual Property Transfer and License Agreement  and Contribution Agreement dated as of November 14, 2000 between Shell  Internationale Research Maatschappij B.V. and Shell Epoxy Resins Research B.V  (incorporated by reference to Exhibit 10.14 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170)).                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.19  |   | Interim Agreement for Information Technology  Services (US Business) dated as of November 1, 2000 among Shell Chemical  Company, Shell Services International Inc. and Resolution Performance  Products LLC (incorporated by reference to Exhibit 10.15 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.20  |   | Interim Agreement for Information Technology  Services (Non-US) dated as of November 1, 2000 among Shell Chemicals  Limited, Shell International B.V. and Resolution Europe B.V. (f/k/a  Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.)  (incorporated by reference to Exhibit 10.16 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170)) |

 

63

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| 10.21  |   | Indemnity and Contribution Agreement dated as of November 14,  2000 among Resolution Performance Products LLC and the indemnified parties  listed therein (incorporated by reference to Exhibit 10.17 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.22  |   | Management Consulting Agreement dated as of November 14,  2000 among Resolution Performance Products LLC and Apollo Management IV, L.P.  (incorporated by reference to Exhibit 10.18 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.23  |   | First Amended and Restated Deer Park Site Services,  Utilities, Materials and Facilities Agreement dated November 1, 2000  between Shell Chemical Company, for itself and as agent for Shell Oil  Company, and Resolution Performance Products LLC (incorporated by reference  to Exhibit 10.19 to the Registrants’ Registration Statement on Form S-4 dated  March 16, 2001 (File No. 333-57170))                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.24  |   | First Amended and Restated Norco Site Services,  Utilities, Materials and Facilities Agreement dated November 1, 2000  between Shell Chemical Company, for itself and as agent for Shell Oil Company,  and Resolution Performance Products LLC (incorporated by reference to Exhibit  10.20 to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.25  |   | First Amended and Restated Pernis Site Services,  Utilities, Materials and Facilities Agreement dated November 1, 2000  between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell  Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V.  (incorporated by reference to Exhibit 10.21 to the Registrants’ Registration  Statement on Form S-4 dated March 16, 2001 (File No. 333-57170)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.26  |   | First Amended and Restated Pernis Site Services,  Utilities, Materials and Facilities Agreement dated November 1, 2000  between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell  Epoxy Resins Nederland B.V.) and Shell Nederland Chemie B.V. (incorporated by  reference to Exhibit 10.22 to the Registrants’ Registration Statement on Form  S-4 dated March 16, 2001 (File No. 333-57170))       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.27  |   | Deer Park Ground Lease and Grant of Easements dated  as of November 1, 2000 between Shell Oil Company and Resolution  Performance Products LLC (incorporated by reference to Exhibit 10.23 to the  Registrants’ Registration Statement on Form S-4 dated March 16, 2001  (File No. 333-57170))                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.28  |   | Norco Ground Lease and Grant of Servitudes dated as  of November 1, 2000 between Shell Oil Company and Resolution Performance  Products LLC (incorporated by reference to Exhibit 10.24 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.29  |   | Amended and Restated Agreement of Sub-Lease (Pernis)  dated as of November 1, 2000 between Resolution Europe B.V. (f/k/a  Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell  Nederland Raffinaderij B.V. (incorporated by reference to Exhibit 10.25 to  the Registrants’ Registration Statement on Form S-4 dated March 16, 2001  (File No. 333-57170))                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.30  |   | Resolution Performance Products Inc. 2000 Stock  Option Plan (incorporated by reference to Exhibit 10.26 to the Registrants’  Registration Statement on Form S-4 dated March 16, 2001 (File No.  333-57170))                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.31  |   | Resolution Performance Products Inc. 2000  Non-Employee Directors Stock Option Plan (incorporated by reference to  Exhibit 10.27 to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.32  |   | Restricted Unit Plan (incorporated by reference to  Exhibit 10.28 to the Registrants’ Registration Statement on Form S-4 dated March 16,  2001 (File No. 333-57170))                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.33  |   | Separation Agreement dated as of March 9, 2001  between Resolution Performance Products Inc., Resolution Performance Products  LLC and David T. Preston (incorporated by reference to Exhibit 10.29 to the  Registrants’ Registration Statement on Form S-4 dated March 16, 2001  (File No. 333-57170))                                                                                                                  |

 

64

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| 10.34  |   | Amendment No. 1 dated March 15, 2002 to the  Management Consulting Agreement dated November 14, 2000 between  Resolution Performance Products LLC, a Delaware corporation, and Apollo  Management IV, L.P., a Delaware limited partnership (incorporated by  reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the  Quarter ended March 31, 2002 (File No. 333-57170))                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.35  |   | First Amendment dated March 15, 2002 to the  Employment Agreement dated November 14, 2000 between Resolution  Performance Products LLC, a Delaware corporation and Marvin O. Schlanger  (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form  10-Q for the Quarter ended March 31, 2002 (File No. 333-57170))                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.36  |   | Second Amendment dated June 30, 2002 to the  Credit Agreement dated November 6, 2001 (incorporated by reference to  Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarter ended June 30,  2002 (File No. 333-75172))                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.37  |   | Third Amendment dated December 2, 2002 to the  Credit Agreement dated November 6, 2001 (incorporated by reference to  Exhibit 10.1 to the Current Report on Form 8-K dated December 9, 2002  (File No. 333-57170))                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.38  |   | Mutual Settlement and Release of Claims Agreement  dated November 26, 2002 amending the Environmental Agreement dated as of  November 1, 2000 between Shell Oil Company and Resolution Performance  Products LLC (incorporated by reference to Exhibit 10.40 to the Registrants’  Registration Statement on Form S-4 dated January 14, 2003 (File No.  333-102505))                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.39  |   | Mutual Settlement and Release of Claims Agreement  dated November 26, 2002 amending the Environmental Agreement dated as of  November 1, 2000 between Shell Petroleum N.V. and Resolution Performance  Products LLC (incorporated by reference to Exhibit 10.41 to the Registrants’  Registration Statement on Form S-4 dated January 14, 2003 (File No.  333-102505))                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.40  |   | Release of Indemnity Agreement dated as of December 17,  2002 modifying the Environmental Agreement dated as of November 1, 2002  between Shell Oil Company and Resolution Performance Products LLC  (incorporated by reference to Exhibit 10.42 to the Registrants’ Registration  Statement on Form S-4 dated January 14, 2003 (File No. 333-102505))                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.41  |   | Amendment No. 2 dated as of January 1, 2003 to  the Employment Agreement dated November 14, 2000 between Resolution  Performance Products LLC, a Delaware limited liability company, and Marvin O.  Schlanger (incorporated by reference to Exhibit No. 10.44 to the Registrant’s  Amendment No. 1 to Registration Statement on Form S-4 dated February 12,  2003 (File No. 333-102505))                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.42  |   | Amendment No. 1 dated as of January 1, 2003 to  the Employment Agreement dated July 16, 2001 between Resolution  Performance Products LLC, a Delaware limited liability company, and Jeffrey  M. Nodland (incorporated by reference to Exhibit No. 10.45 to the Registrant’s  Amendment No. 1 to Registration Statement on Form S-4 dated February 12,  2003 (File No. 333-102505))                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.43  |   | Amendment No. 2 dated as of January 1, 2003 to  the Management Consulting Agreement dated November 14, 2000, as amended,  between Resolution Performance Products LLC, a Delaware limited liability  company, and Apollo Management IV, L.P., a Delaware limited partnership  (incorporated by reference to Exhibit No. 10.43 to the Registrant’s Amendment  No. 1 to Registration Statement on Form S-4 dated February 12, 2003  (File No. 333-57170)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.44  |   | Employment Agreement dated May 7, 2001 between  Resolution Performance Products LLC, a Delaware limited liability company,  and Mark S. Antonvich (incorporated by reference to Exhibit No. 10.46 to the  Annual Report on Form 10-K for the Year ended December 31, 2002 (File  No. 333-57170))                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.45  |   | Amendment No. 1 dated February 17, 2003 to the  Employment Agreement dated May 7, 2001 between Resolution Performance  Products LLC, a Delaware limited liability company, and Mark S. Antonvich (incorporated  by reference                                                                                                                                                                                                                                           |

 

65

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|   |   | to Exhibit No. 10.47 to the Annual Report on Form  10-K for the Year ended December 31, 2002 (File No. 333-57170))                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.46  |   | Amendment No. 3 dated February 17, 2003 to the  Employment Agreement dated November 14, 2000, as amended, between  Resolution Performance Products LLC, a Delaware limited liability company,  and Marvin O. Schlanger (incorporated by reference to Exhibit No. 10.48 to  the Annual Report on Form 10-K for the Year ended December 31, 2002  (File No. 333-57170))                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.47  |   | Amendment No. 2 dated February 17, 2003 to the  Employment Agreement dated July 16, 2001, as amended, between Resolution  Performance Products LLC and Jeffrey M. Nodland (incorporated by reference to  Exhibit No. 10.49 to the Annual Report on Form 10-K for the Year ended December 31,  2002 (File No. 333-57170))                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.48  |   | Amendment No. 3 dated February 17, 2003 to the  Management Consulting Agreement dated November 14, 2000, as amended,  between Resolution Performance Products LLC and Apollo Management IV, L.P., a  Delaware limited partnership (incorporated by reference to Exhibit No. 10.50  to the Annual Report on Form 10-K for the Year ended December 31, 2002  (File No. 333-57170))                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.49  |   | Amendment No. 1 dated October 15, 2002 to the  Phenol Supply Agreement between Shell Chemical LP d/b/a Shell Chemical  Company, a Delaware limited partnership and Resolution Performance Products  LLC, a Delaware corporation (incorporated by reference to Exhibit No. 10.51  to the Annual Report on Form 10-K for the Year ended December 31, 2002  (File No. 333-57170))                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.50  |   | Fourth Amendment dated as of April 1, 2003 to  the Credit Agreement dated November 6, 2001 (incorporated by reference  to Exhibit 10.52 to the Registrants’ Registration Statement on Form S-4 dated  April 25, 2003 (File No. 333-104750))                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.51  |   | Fifth Amendment dated as of December 15, 2003  to the Credit Agreement dated November 6, 2001. (incorporated by  reference to exhibit 10.53 to the Registrants’ Registration Statement on Form  S-4 dated January 20, 2004 (File No. 112106))                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.52  |   | Amended and Restated US Security Agreement dated as  of April 9, 2003 among Resolution Performance Products Inc., a Delaware  corporation, Resolution Performance Products LLC, a Delaware limited  liability company, RPP Capital Corporation, a Delaware corporation, and  Morgan Stanley & Co., Incorporated (incorporated by reference to Exhibit  10.53 to the Registrants’ Registration Statement on Form S-4 dated April 25,  2003 (File No. 333-104750))                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.53  |   | Amended and Restated US Pledge Agreement dated as of  April 9, 2003 among Resolution Performance Products Inc., a Delaware  corporation, Resolution Performance Products LLC, a Delaware limited  liability company, RPP Capital Corporation, a Delaware corporation, and  Morgan Stanley & Co., Incorporated (incorporated by reference to Exhibit  10.54 to the Registrants’ Registration Statement on Form S-4 dated April 25,  2003 (File No. 333-104750))                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.54  |   | Dutch Deed of Pledge dated as of April 9, 2003  among Resolution Performance Products LLC, a Delaware limited liability  company, RPP Capital Corporation, a Delaware corporation, Resolution Holdings  B.V., a private limited liability company organized and existing under the  laws of the Netherlands, Morgan Stanley & Co. Incorporated and Deutsche  Bank Trust Company Americas (incorporated by reference to Exhibit 10.55 to  the Registrants’ Registration Statement on Form S-4 dated April 25, 2003  (File No. 333-104750)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.55  |   | First Amendment dated as of December 22, 2003,  among Resolution Performance Products LLC, RPP Capital Corporation,  Resolution Performance Products Inc. and Morgan Stanley & Co.  Incorporated, as collateral agent to the Amended and Restated U.S. Security  Agreement dated as of April 9, 2003 (incorporated by reference to  Exhibit 10.57 to the Registrants’ Registration Statement on Form S-4 dated January 20,  2004 (File No. 333-112016))                                                                              |

 

66

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| 10.56  |   | First Amendment dated as of December 22, 2003,  among Resolution Performance Products LLC, RPP Capital Corporation,  Resolution Performance Products Inc., Morgan Stanley & Co. Incorporated,  as collateral agent, and the other parties thereto to the Amended and  Restated U.S. Pledge Agreement dated as of April 9, 2003 (incorporated  by reference to Exhibit 10.58 to the Registrants’ Registration Statement on  Form S-4 dated January 20, 2004 (File No. 333-112016))                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.57  |   | Inter-creditor Agreement dated as of December 22,  2003 among the The Bank of New York, as trustee, Morgan Stanley Senior  Funding, Inc., as administrative agent, Morgan Stanley & Co.  Incorporated, as collateral agent, and Citibank, N.A., as the overdraft  creditor (incorporated by reference to Exhibit 10.59 to the Registrants’  Registration Statement on Form S-4 dated January 20, 2004 (File No.  333-112016))                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.58  |   | First Deed of Pledge dated December 22, 2003  entered into by the Civil Law Attorney on behalf of Resolution Performance  Products LLC, Resolution Holdings B.V., Morgan Stanley & Co.  Incorporated, as collateral agent and the other parties thereto pursuant to  powers of attorney granted to the Civil Law Attorney by Resolution  Performance Products LLC, Resolution Holdings B.V., Morgan Stanley & Co.  Incorporated, as collateral agent and the other parties thereto (incorporated  by reference to Exhibit 10.60 to the Registrants’ Registration Statement on  Form S-4 dated January 20, 2004 (File No. 333-112016))  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.59  |   | Second Deed of Pledge dated December 22, 2003  entered into by the Civil Law Attorney on behalf of Resolution Performance  Products LLC, Resolution Holdings B.V., Morgan Stanley & Co.  Incorporated, as collateral agent and the other parties thereto pursuant to  powers of attorney granted to the Civil Law Attorney by Resolution  Performance Products LLC, Resolution Holdings B.V., Morgan Stanley & Co.  Incorporated, as collateral agent and the other parties thereto (incorporated  by reference to Exhibit 10.61 to the Registrants’ Registration Statement on  Form S-4 dated January 20, 2004 (File No. 333-112016)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.60  |   | Amendment No. 4 dated November 24, 2003 to the  employment agreement dated November 14, 2000 between Resolution  Performance Products, LLC, a Delaware limited liability company and Marvin O.  Schlanger (incorporated by reference to Exhibit 10.62 to the Registrants’  Amendment No.1 to the Registration Statement on Form S-4 dated January 20,  2004 (File No. 333-112016))                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.61  |   | Amendment No. 2 dated March 22, 2004 to  the Employment Agreement dated May 8, 2001, as amended by Amendment  No. 1 thereto dated February 17, 2003 by and between Resolution  Performance Products LLC and Mark S. Antonvich (incorporated by reference to  Exhibit 10.1 to the Registrants’ Quarterly Report on Form 10-Q for the  Quarter ended March 31, 2004 (file No. 333-571701)                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.62  |   | Separation Agreement dated as of May 10, 2004  among Resolution Performance Products Inc., Resolution Performance Products  LLC, and J. Travis Spoede (incorporated by reference to Exhibit 10.2 to the  Registrants’ Quarterly Report on Form 10-Q for the Quarter ended March 31,  2004 (file No. 333-571701))                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.63  |   | Employment Agreement dated as of May 10, 2004  by and between Resolution Performance Products LLC, and David S. Graziosi  (incorporated by reference to Exhibit 10.3 to the Registrants’ Quarterly  Report on Form 10-Q for the Quarter ended March 31, 2004 (file No.  333-571701))                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.64  |   | Management Services Agreement dated May 27, 2004,  between Resolution Performance Products LLC. A Delaware Corporation and Resolution  Specialty Materials Inc., a Delaware Corporation (incorporated by reference  to Exhibit 10.1 to the Registrants’ Quarterly Report on Form 10-Q for the  Quarter ended June 30, 2004 (file No. 333-571701))                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.65  |   | Employment agreement dated as of September 11,  2004 by and between Resolution Performance Products LLC and Layle K. Smith  (incorporated by reference to Exhibit 10.1 to the Registrants’ Current Report  on Form 8-K dated September 11, 2004 (file No. 333-571701))                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.66  |   | Credit Agreement dated as of January 24, 2005  among Resolution Performance Products Inc., Resolution Performance Products  LLC, RPP Capital Corporation, Resolution Europe B.V., the various lender  parties thereto, General Electric Capital Corporation, as a US Lender, Initial  US L/C Issuer, Collateral Agent and as US Agent, and GE Leveraged                                                                                                                                                                                                                                                                                                  |

 

67

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|   |   | Loans Limited, as Netherlands Agent, Netherlands L/C  Issuer, Netherlands Security Trustee and a Netherlands Lender (incorporated  by reference to Exhibit 10.1 to the Registrants’ Current Report on Form 8-K  dated January 24, 2005 (file No. 333-571701))                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.67  |   | US Guaranty dated as of January 24, 2005 among  Resolution Performance Products Inc., RPP Capital Corporation and General  Electric Capital Corporation, on behalf of itself and US Lenders  (incorporated by reference to Exhibit 10.2 to the Registrants’ Current Report  on Form 8-K dated January 24, 2005 (file No. 333-571701))                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.68  |   | Second Amended and Restated Security Agreement dated  as of January 24, 2005, by and among Resolution Performance Products  Inc., Resolution Performance Products LLC, RPP Capital Corporation and  General Electric Capital Corporation, on behalf of itself and Secured  Creditors (incorporated by reference to Exhibit 10.3 to the Registrants’  Current Report on Form 8-K dated January 24, 2005 (file No. 333-571701))                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.69  |   | Second Amended and Restated Pledge Agreement dated  as of January 24, 2005, by and among Resolution Performance Products  Inc., Resolution Performance Products LLC, RPP Capital Corporation and  General Electric Capital Corporation as Collateral Agent, on behalf of itself  a Secured Creditors (incorporated by reference to Exhibit 10.4 to the  Registrants’ Current Report on Form 8-K dated January 24, 2005 (file No.  333-571701))                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.70  |   | Amended and Restated Intercreditor Agreement dated  as of January 24, 2005, among General Electric Capital Corporation as  Collateral Agent for the benefit f the First Lien Creditors, General Electric  Capital Corporation, as Administrative Agent for the Benefit of the Bank  Lender Creditors, and The Bank of New York, as trustee for its benefit and  the benefit of the holders from time to time of the Additional Senior Secured  Notes, and acknowledged and agreed to by the US Credit Parties from time to  time party hereto (incorporated by reference to Exhibit 10.5 to the  Registrants’ Current Report on Form 8-K dated January 24, 2005 (file No.  333-571701)) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.71  |   | First Deed of Pledge of Shares in the capital of  Resolution Holdings B.V. by Resolution Performance Products LLC in favor of  General Electric Capital Corporation (incorporated by reference to Exhibit  10.6 to the Registrants’ Current Report on Form 8-K dated January 24,  2005 (file No. 333-571701))                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.72  |   | Second Deed of Pledge of Shares in the capital of  Resolution Holdings B.V. by Resolution Performance Products LLC in favor of  General Electric Capital Corporation (incorporated by reference to Exhibit  10.7 to the Registrants’ Current Report on Form 8-K dated January 24,  2005 (file No. 333-571701))                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.73  |   | Indemnity Agreement dated as of March 29, 2005,  among Resolution Performance Products Inc., Resolution Performance Products  LLC and the indemnified party, Carl S. Stutts (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 21.1   |   | Subsidiaries of the Registrants (incorporated by  reference to Exhibit 21.1 to the Registrants’ Registration Statement on Form  S-4 dated March 16, 2001 (File No. 333-57170))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | CFO Section 302 certification (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   |   | CEO Section 302 certification (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1   |   | CEO and CFO Section 906 certification (filed  herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

 

68

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**SIGNATURES**

 

**Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized on March 31, 2005.**

 
|   | RESOLUTION PERFORMANCE PRODUCTS LLC |
|--------|-------------------------------------|
|   | By:                                 | /s/Marvin O. Schlanger |   |
|   |                                | **Marvin O. Schlanger** |
|   |                                | **Chairman and Chief Executive Officer** |

 

**Pursuant to the requirements ofthe Securities Exchange Act of 1933, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacity indicated on March 31,2005**

 
|   | By:    | /s/Marvin O. Schlanger                                 |   |
|--------|--------|--------------------------------------------------------|--------|
|   |   | **Marvin O. Schlanger**                                |
|   |   | **Chairman and Chief Executive Officer**               |
|   |   | **(principal executive officer)**                      |
|   |   |                                                   |
|   | By:    | /s/Layle K. Smith                                      |   |
|   |   | **Layle K. Smith**                                     |
|   |   | **President and Chief Operating Officer**              |
|   |   |                                                   |
|   | By:    | /s/David S. Graziosi                                   |   |
|   |   | **David S. Graziosi**                                  |
|   |   | **Executive Vice President, Chief Financial  Officer** |
|   |   | **(principal financial and accounting officer)**       |
|   |   |                                                   |
|   | By:    | /s/Carl S. Stutts                                      |   |
|   |   | **Carl S. Stutts**                                     |
|   |   | **Manager**                                            |
|   |   |                                                   |
|   | By:    | /s/Laurence M. Berg                                    |   |
|   |   | **Laurence M. Berg**                                   |
|   |   | **Manager**                                            |
|   |   |                                                   |
|   | By:    | /s/Peter P. Copses                                     |   |
|   |   | **Peter P. Copses**                                    |
|   |   | **Manager**                                            |
|   |   |                                                   |
|   | By:    | /s/Joshua J. Harris                                    |   |
|   |   | **Joshua J. Harris**                                   |
|   |   | **Manager**                                            |
|   |   |                                                   |
|   | By:    | /s/Scott M. Kleinman                                   |   |
|   |   | **Scott M. Kleinman**                                  |
|   |   | **Manager**                                            |
|   |   |                                                   |
|   | By:    | /s/Heinn F. Tomfohrde,III                              |   |
|   |   | **Heinn F. Tomfohrde, III**                            |
|   |   | **Manager**                                            |
|        |        |                                                        |        |  |  |  |  |  |  |

 

69

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**SIGNATURES**

 

**Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized on March 31, 2005.**

 
|   | RPP CAPITAL CORPORATION |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | By:                     | /s/Marvin O. Schlanger |   |
|   |                    | **Marvin O. Schlanger** |
|   |                    | **Chairman and Chief Executive Officer** |
|   |                    | **(principal executive officer)** |

 

**Pursuant to the requirements ofthe Securities Exchange Act of 1933, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacity indicated on March 31,2005**

 
|   | By:    | /s/Marvin O. Schlanger                                 |   |
|--------|--------|--------------------------------------------------------|--------|
|   |   | **Marvin O. Schlanger**                                |
|   |   | **Chairman and Chief Executive Officer**               |
|   |   | **(principal executive officer)**                      |
|   |   | ** **                                             |
|   | By:    | /s/Layle K. Smith                                      |   |
|   |   | **Layle K. Smith**                                     |
|   |   | **President and Chief Operating Officer**              |
|   |   | ** **                                             |
|   | By:    | /s/David S. Graziosi                                   |   |
|   |   | **David S. Graziosi**                                  |
|   |   | **Executive Vice President, Chief Financial  Officer** |
|   |   | **(principal financial and accounting officer)**       |
|   |   |                                                   |   |
|   | By:    | /s/Joshua J. Harris                                    |   |
|   |   | **Joshua J. Harris**                                   |
|   |   | **Director**                                           |
|   |   | ** **                                             |
|   | By:    | /s/Scott M. Kleinman                                   |   |
|   |   | **Scott M. Kleinman**                                  |
|   |   | **Director**                                           |
|        |        |                                                        |        |  |  |  |  |

 

**SUPPLEMENTAL INFORMATION TO BE FURNISHED WITHREPORTS FILED PURSUANT TO SECTION 15 (d) OF THE ACT BY REGISTRANTS WHICHHAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.**

 

No annual report tosecurity holders covering Registrant’s last fiscal year or proxy statement,form of proxy or other proxy soliciting material has been sent to securityholders covering the 2004 fiscal year or will be sent to security holderssubsequent to the filing of this report.

 

70

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### **Reportof Independent Registered Public Accounting Firm**

 

To****the Board ofManagers and Owner of

Resolution Performance Products LLC:

 

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of income, of owner’s deficitand of cash flows present fairly, in all material respects, the financialposition of Resolution Performance Products LLC at December 31, 2004 and 2003,and the results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.  In addition, in our opinion the financialstatement schedule appearing on page 104 presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

As described under the heading “Restatement” in Note 2,the consolidated financial statements and the financial statement scheduleappearing on page 104, have been restated for the year ended December 31, 2003.

 

/s/ PricewaterhouseCoopers LLP

Houston, Texas

March 31, 2005

 

71

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**RESOLUTION PERFORMANCE PRODUCTS LLC**

 

**CONSOLIDATED BALANCE SHEETS**

 

**December 31, 2004 and 2003**

***(In millions of U.S.  Dollars)***

 
| ** **                                                                         | ** ** | **2004**   | ** ** | **2003**           | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | **(Restated****)** | ** ** |
| **Assets**                                                                         |       |       |       |               |       |
| Current assets:                                                                    |       |       |       |               |       |
| Cash and cash  equivalents                                                         |       | $          | 4          |               | $          | 49 |   |
| Receivables, less  allowance for doubtful accounts of $2 and $3, respectively      |       | 160        |       | 107                |       |
| Due from related  parties                                                          |       | 10         |       | 2                  |       |
| Prepaid assets                                                                     |       | 6          |       | 7                  |       |
| Inventories, less  allowance for inventory obsolescence of $3 and $1, respectively |       | 197        |       | 145                |       |
| Taxes receivable                                                                   |       | —     |       | 3                  |       |
| Deferred income taxes                                                              |       | 3          |       | 5                  |       |
| Total current assets                                                               |       | 380        |       | 318                |       |
|                                                                               |       |       |       |               |       |
| Property, plant and  equipment, at cost, less accumulated depreciation             |       | 446        |       | 449                |       |
| Investments                                                                        |       | 5          |       | 2                  |       |
| Intangible assets, at  cost, less accumulated amortization                         |       | 20         |       | 24                 |       |
| Deferred income taxes                                                              |       | 60         |       | 82                 |       |
| Total assets                                                                       |       | $          | 911        |               | $          | 875 |   |
|                                                                               |       |       |       |               |       |
| **Liabilities and Owner’s Deficit**                                           |       |       |       |               |       |
| Current liabilities:                                                               |       |       |       |               |       |
| Cash overdraft                                                                     |       | $          | 7          |               | $          | 6 |   |
| Accounts payable-trade                                                             |       | 168        |       | 102                |       |
| Other payables and  accruals                                                       |       | 30         |       | 31                 |       |
| Due to related parties                                                             |       | 3          |       | 1                  |       |
| Current portion of  long-term debt                                                 |       | —     |       | 1                  |       |
| Total current  liabilities                                                         |       | 208        |       | 141                |       |
|                                                                               |       |       |       |               |       |
| Capital lease  obligation                                                          |       | 1          |       | 1                  |       |
| Deferred revenue                                                                   |       | 4          |       | 5                  |       |
| Deferred income taxes                                                              |       | 89         |       | 93                 |       |
| Pensions and other  retirement plan obligations                                    |       | 15         |       | 23                 |       |
| Long-term debt                                                                     |       | 701        |       | 674                |       |
| Total liabilities                                                                  |       | 1,018      |       | 937                |       |
| Commitments and  contingencies (Notes 12 and 13)                                   |       | —     |       | —             |       |
| Owner’s deficit:                                                              |       |       |       |               |       |
| Member Interest-                                                                   |       |       |       |               |       |
| 1,000,000 units  authorized, 1,000,000 units issued                                |       | 102        |       | 102                |       |
| Accumulated deficit                                                                |       | (194       | )          | (127               | )          |
| Accumulated other  comprehensive loss                                              |       | (15        | )          | (37                | )          |
| Total owner’s deficit                                                         |       | (107       | )          | (62                | )          |
| Total liabilities and  owner’s deficit                                        |       | $          | 911        |               | $          | 875 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**RESOLUTION PERFORMANCE PRODUCTS LLC**

 

**CONSOLIDATED STATEMENTS OF INCOME**

 

**Years Ended December 31, 2004, 2003 and 2002**

***(In millions of U.S.  Dollars)***

 
| ** **                           | ** ** | **2004**   | ** ** | **2003**       | ** ** | **2002**   | ** ** |
|--------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Revenues, net                        |       | $          | 993        |           | $          | 781        |       | $ | 738 |   |
| Other revenues                       |       | 3          |       | 1              |       | 2          |       |
| Total                                |       | 996        |       | 782            |       | 740        |       |
|                                 |       |       |       |           |       |       |       |
| Cost and Expenses:                   |       |       |       |           |       |       |       |
| Purchase and variable  product costs |       | 715        |       | 558            |       | 438        |       |
| Operating expenses                   |       | 128        |       | 113            |       | 122        |       |
| Selling, general and  administrative |       | 56         |       | 53             |       | 59         |       |
| Depreciation and  amortization       |       | 47         |       | 46             |       | 36         |       |
| Research and  development            |       | 18         |       | 16             |       | 20         |       |
| Restructuring charges                |       | —     |       | —         |       | 6          |       |
| Special charges                      |       | —     |       | —         |       | 8          |       |
| Total                                |       | 964        |       | 786            |       | 689        |       |
|                                 |       |       |       |           |       |       |       |
| Operating income (loss)              |       | 32         |       | (4             | )          | 51         |       |
|                                 |       |       |       |           |       |       |       |
| Gain on sale of assets               |       | —     |       | 14             |       | 1          |       |
| Income from equity  investment       |       | —     |       | 2              |       | 1          |       |
| Interest expense, net                |       | 79         |       | 76             |       | 65         |       |
|                                 |       |       |       |           |       |       |       |
| Loss before income  taxes            |       | (47        | )          | (64            | )          | (12        | )          |
| Income tax expense  (benefit)        |       | 20         |       | (19            | )          | (5         | )          |
|                                 |       |       |       |           |       |       |       |
| Net loss                             |       | $          | (67        | )              | $          | (45        | )          | $ | (7 | ) |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**RESOLUTION PERFORMANCE PRODUCTS LLC**

 

**CONSOLIDATED STATEMENTS OF**

**OWNER’S DEFICIT**

 

**Years Ended December 31, 2004, 2003 and 2002**

***(In millions of U.S.  Dollars)***

 
| ** **                                        | ** ** | ** **   | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** **     | ** ** | ** **        | ** ** |
|---------------------------------------------------|------------|--------------|------------|-----------------|------------|-------------------|------------|----------------|------------|-------------------|------------|
| ** **                                        | ** ** | ** **   | ** ** | ** **      | ** ** | **Other**         | ** ** | ** **     | ** ** | ** **        | ** ** |
| ** **                                        | ** ** | **Member**   | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Comprehensive** | ** ** |
| ** **                                        | ** ** | **Interest** | ** ** | **Deficit**     | ** ** | **Loss(a)**       | ** ** | **Total**      | ** ** | **Income (Loss)** | ** ** |
| ** **                                        | ** ** | ** **   | ** ** | **(Restated)**  | ** ** | **(Restated)**    | ** ** | **(Restated)** | ** ** | **(Restated)**    | ** ** |
| Balance, January 1,  2002                    |       | $            | 101        |            | $          | (73               | )          | $              | (102       | )                 | $          | (74 | ) |   |   |
| Net loss                                          |       |         |       | (7              | )          |              |       | (7             | )          | $                 | (7         | ) |
| Capital Contribution                              |       | 1            |       |            |       |              |       | 1              |       |              |       |
| Currency translation  gain, net of tax            |       |         |       |            |       | 25                |       | 25             |       | 25                |       |
| Interest rate swap, net  of tax                   |       |         |       |            |       | 6                 |       | 6              |       | 6                 |       |
| Comprehensive income                              |       |         |       |            |       |              |       |           |       | $                 | 24         |   |
| Balance, December 31,  2002                  |       | 102          |       | (80             | )          | (71               | )          | (49            | )          |              |       |
| Net loss (Restated)                               |       |         |       | (45             | )          |              |       | (45            | )          | $                 | (45        | ) |
| Constructive  Distribution                        |       |         |       | (2              | )          |              |       | (2             | )          |              |       |
| Currency translation  gain, net of tax (Restated) |       |         |       |            |       | 33                |       | 33             |       | 33                |       |
| Interest rate swap, net  of tax                   |       |         |       |            |       | 1                 |       | 1              |       | 1                 |       |
| Comprehensive loss                                |       |         |       |            |       |              |       |           |       | $                 | (11        | ) |
| Balance, December 31,  2003(Restated)        |       | 102          |       | (127            | )          | (37               | )          | (62            | )          |              |       |
| Net loss                                          |       |         |       | (67             | )          |              |       | (67            | )          | $                 | (67        | ) |
| Currency translation  gain, net of tax            |       |         |       |            |       | 22                |       | 22             |       | 22                |       |
| Comprehensive loss                                |       |         |       |            |       |              |       |           |       | $                 | (45        | ) |
| Balance, December 31,  2004                  |       | $            | 102        |            | $          | (194              | )          | $              | (15        | )                 | $          | (107 | ) |   |   |

 

----

(a) Accumulated Other Comprehensive Loss at December 31,2004 and 2003 includes an $15 million and $37 million net loss for foreigncurrency translation, respectively. At December 31, 2002, AccumulatedOther Comprehensive Loss includes a $70 million net loss for foreign currencytranslation and $1 million loss on Interest rate swap.

 

The accompanying notes are an integral part of thesefinancial statements.

 

74

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**RESOLUTION PERFORMANCE PRODUCTS LLC**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**Years Ended December 31, 2004, 2003 and 2002**

***(In millions of U.S.  Dollars) ***

 
| ** **                                                                                  | ** ** | **2004**   | ** ** | **2003**       | ** ** | **2002**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                                                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Cash flows (used for) provided  by operating activities:                                    |       |       |       |           |       |       |       |
| Net loss                                                                                    |       | $          | (67        | )              | $          | (45        | )          | $ | (7 | ) |
| Adjustments to  reconcile net loss to net cash (used for) provided by operating activities: |       |       |       |           |       |       |       |
| Depreciation and  amortization                                                              |       | 47         |       | 46             |       | 36         |       |
| Amortization of  deferred finance costs                                                     |       | 4          |       | 10             |       | 2          |       |
| Gain on sale of assets                                                                      |       | —     |       | (14            | )          | (1         | )          |
| Equity earnings in  affiliates                                                              |       | —     |       | (2             | )          | (1         | )          |
| Deferred income taxes                                                                       |       | 20         |       | (19            | )          | (5         | )          |
| Deferred revenue                                                                            |       | (1         | )          | —         |       | 5          |       |
| Pension and other  retirement plan obligations                                              |       | (8         | )          | (1             | )          | (8         | )          |
| Changes in operating  assets and liabilities:                                               |       |       |       |           |       |       |       |
| Receivables, net                                                                            |       | (47        | )          | 9              |       | 14         |       |
| Due from and owing to  related parties                                                      |       | (6         | )          | 1              |       | 1          |       |
| Prepaid assets                                                                              |       | 3          |       | 3              |       | 1          |       |
| Inventories, net                                                                            |       | (45        | )          | 10             |       | (7         | )          |
| Income taxes                                                                                |       | 2          |       | 10             |       | 6          |       |
| Deferred credit                                                                             |       | —     |       | (5             | )          | 5          |       |
| Payables and accruals                                                                       |       | 59         |       | (46            | )          | 23         |       |
| Net cash (used for)  provided by operating activities                                       |       | (39        | )          | (43            | )          | 64         |       |
| Cash flows (used for) provided  by investing activities:                                    |       |       |       |           |       |       |       |
| Capital expenditures                                                                        |       | (26        | )          | (18            | )          | (48        | )          |
| Investment in joint  venture (Notes 3 and 7)                                                |       | (3         | )          | —         |       | —     |       |
| Proceeds from asset  disposals                                                              |       | —     |       | 23             |       | 2          |       |
| Distributions from  equity affiliates                                                       |       | —     |       | 2              |       | 1          |       |
| Net cash (used for)  provided by investing activities                                       |       | (29        | )          | 7              |       | (45        | )          |
| Cash flows provided by  (used for) financing activities:                                    |       |       |       |           |       |       |       |
| Proceeds from cash  overdrafts                                                              |       | 1          |       | (6             | )          | 5          |       |
| Payments of capital  lease obligations                                                      |       | (1         | )          | (1             | )          | —     |       |
| Constructive  distributions                                                                 |       | (1         | )          | (4             | )          | —     |       |
| Proceeds from long-term  debt                                                               |       | 172        |       | 577            |       | 223        |       |
| Payments of long-term  debt                                                                 |       | (146       | )          | (473           | )          | (247       | )          |
| Deferred finance costs                                                                      |       | (2         | )          | (13            | )          | (3         | )          |
| Capital contributions                                                                       |       | —     |       | —         |       | 1          |       |
| Net cash provided by  (used for) financing activities                                       |       | 23         |       | 80             |       | (21        | )          |
| Effect of exchange rate  change on cash and cash equivalents                                |       | —     |       | 1              |       | —     |       |
| Net (decrease) increase  in cash and cash equivalents                                       |       | (45        | )          | 45             |       | (2         | )          |
| Cash and cash  equivalents at beginning of year                                             |       | 49         |       | 4              |       | 6          |       |
| Cash and cash  equivalents at end of year                                                   |       | $          | 4          |           | $          | 49         |       | $ | 4 |   |
|                                                                                        |       |       |       |           |       |       |       |
| Supplemental  disclosures of cash flow information:                                         |       |       |       |           |       |       |       |
| Capital lease  obligation incurred                                                          |       | $          | —     |           | $          | —     |       | $ | 2 |   |
| Trade notes payable  incurred                                                               |       | —     |       | —         |       | 4          |       |
| Cash paid during the  period for interest expense                                           |       | 75         |       | 63             |       | 60         |       |
| Cash refunded, net  during the period for income taxes                                      |       |       | (1         | )              |       | (19        | )          |   | (10 | ) |

 

**The accompanying notes are anintegral part of these financial statements**.

** **

**75**

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**RESOLUTION PERFORMANCE PRODUCTS LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2004, 2003 and 2002**

***(In millions of U. S.  Dollars)***

 

**1.**                                      Organization

** **

The consolidatedfinancial statements include the consolidated operations of ResolutionPerformance Products LLC (“RPP LLC”, or the “Company”), and its wholly ownedsubsidiaries including RPP Capital Corporation (“RPP CC”).  RPP LLC is a wholly owned subsidiary of ResolutionPerformance Products, Inc. (“RPPI”).  RPPCC is a wholly owned subsidiary of RPP LLC that was formed to co-issue the 131⁄2% Senior Subordinated Notes jointly and severally with RPP LLC.  (See Note 10).  Prior to November 14, 2000, the Resins Businesswas owned by the Royal Dutch/Shell Group of Companies (“Shell”).  RPP LLC and its affiliates acquired theResins Business of Shell through a leveraged recapitalization and the excess ofthe purchase price over the carrying value of the net assets acquired wasrecorded in Owner’s Deficit.

 

The Company is engaged inmanufacturing and marketing resins in the U.S. and internationally.  Resins include epoxy resins, Versatic acidsand derivatives.  Epoxy resins arechemicals primarily used in the manufacture of coatings, adhesives, printedcircuit boards; fiber reinforced plastics and construction materials.

 

Products containing epoxyresins serve a wide range of end-users, including automotive, aerospace,electrical, construction and industrial maintenance.  Versatic acid and derivatives are specialtyproducts that complement epoxy resins product offerings in the coatings,adhesives and construction industries.

 

**2.****                                      SignificantAccounting Policies**

 

**Principles of Consolidation**

 

The accompanyingConsolidated Financial Statements are presented in conformity with generallyaccepted accounting principles in the United States (“U.S.”) and include theaccounts of RPP LLC and its subsidiaries. All significant inter-company transactions and accounts have beeneliminated in consolidation.

 

**Cash and Cash Equivalents**

 

Cash equivalents consistof highly liquid investments that are readily convertible into cash and have amaturity of three months or less at the date of acquisition.

 

**Receivables, less allowance fordoubtful accounts**

 

Receivables, less allowance for doubtful accounts primarily consist oftrade receivables and an allowance for doubtful accounts. Trade receivables arerecorded at the invoiced amount and do not bear interest.  We maintain allowances for anticipated discounts,rebates, and returns to customers that is based on historical experience. Wealso maintain an allowance for estimated bad debt expense that is based onhistorical write-off experience and specific accounts that we are aware asbeing doubtful of being fully collected.

 

**Inventories**

 

The inventories are statedat the lower of cost or market value. Cost is determined using the first-in, first-out (“FIFO”) method.

 

**Property, Plant and Equipment**

 

Property, plant andequipment are carried at cost, net of accumulated depreciation.  Depreciation is computed on a straight-linebasis over the estimated useful lives of the respective assets.  Estimated useful lives for plant and equipment,office buildings, tanks and pipelines are 20 years and range from five to tenyears for other assets.   Upon sale, theCompany removes the costs of the asset and the related accumulated depreciationfrom the accounts and reflects any resulting gain or loss in income.

 

76

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Retirements are fully depreciated and then the costsof the asset and the related accumulated depreciation is removed. Expendituresfor maintenance and repairs, including major plant maintenance (turnaround),are expensed as incurred.  Replacementsand improvements are capitalized.

 

**Intangible Assets**

 

Intangible assets consistprimarily of patents and deferred financing costs.  Patents are amortized on a straight-linebasis over 7 years.  Deferred financingcosts are amortized over 4 1/2 to 10 year financing terms and the amortizationis recorded as interest expense.  Deferredfinancing costs are writen-off upon early extinguishment of related debt.

 

**Impairment of Long-Lived Assets**

 

The carrying values oflong-lived assets and intangibles are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable.  Recoverability ofthe carrying value of an asset is assessed by reference to an estimate of theasset’s undiscounted future net cash flows. Measurement of any impairment would include a comparison of discountedestimated future net cash flows to the net carrying value of the relatedassets.   As an alternative, measurement of anyimpairment could include a comparison of a third party valuation to the netcarrying value of the related assets.

 

**Revenue Recognition**

 

Revenues associated with sales of chemical products are recorded whentitle and risk passes to the customer. Title generally passes to our customer when items are shipped and risk generallypasses when items reach their destination. The Company maintains a provision for distributor credits and creditmemos issues in the normal course of business based on historicalexperience.  In addition, a provision isalso maintained for discounts and rebates to customers based on respective contractualarrangements. Sales of by-products, primarily hydrochloric acid, generatedduring the manufacturing process are included as a reduction to purchases andvariable costs.

 

**Research and Development Costs**

 

Internal research anddevelopment costs are expensed as incurred unless they have alternative futureuses.

 

**Income Taxes**

 

The Company is organizedas a limited liability company and is not subject to U. S. income tax.   Income tax information presented in theconsolidated statements includes U.S. income taxes attributed to the Company’soperations that are the responsibility of RPP Holdings LLC, the parent of RPPI.

 

The Company provides forincome taxes in accordance with Statement of Financial Accounting Standards(“SFAS”) No.  109, “Accounting for IncomeTaxes” (“SFAS No. 109”).  SFAS No. 109requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the financialstatement carrying amounts and the tax bases of the assets and liabilities.

 

Deferred taxes resultfrom differences between the financial and tax bases of assets and liabilities,and are adjusted for changes in tax rates and tax laws when changes areenacted.  Valuation allowances arerecorded to reduce deferred tax assets when it is more likely than not that someor all of a tax benefit will not be realized.

 

**Stock-Based Compensation**

 

RPPI grants stock optionsto employees of the Company for a fixed number of shares with an exercise priceof $100 dollars or the fair value of the shares at the date of grant.  RPPI accounts for such stock option grants inaccordance with Statement of Financial Accounting Standards No. 123 (revised2004), “Shared-Based Payment” (“SFAS No. 123(R)”), which permits themeasurement of compensation expense in accordance with the “intrinsic valuebased method.”  Accordingly, nocompensation costs were recognized in connection with stock options granted in2004.

 

77

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The options granted werevalued using the fair value approach which represents the market valuecalculated in-house using reasonable and customary methods for determiningvalues when there is no established trading market.  Pro forma information regarding net incomeand earnings per share is required by SFAS 123(R), which also requires that theinformation be determined as if we had accounted for employee stock optionsgranted subsequent to December 31, 1994 under the fair value method of SFAS123(R).  We have determined that our proforma compensation expense for 2004, 2003 and 2002 was $0 million under thefair value method of SFAS 123(R) using the Black Scholes Option pricingmodel.  The Black Scholes option pricingmodel was used with the following weighted-average assumptions issued in eachyear.

 

Assumptions:

 
| ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Estimated fair value  per share of options* |       | $        | —     |     | $          | —   |       | $ | 145 |   |
| Risk-free interest rate                     |       | 4.50     | %          | 4.23     | %          | 5.54     | %          |
| Expected term                               |       | 7 years  |       | 6 years  |       | 6 years  |       |
| Volatility**                                |       | 0        | %          | 0        | %          | 0        | %          |
|                                             |            |          |            |          |            |          |            |  |  |  |

 

----

* The estimated marketvalue was calculated in-house by using reasonable and customary methodsfor      determining market values whenthere is no established trading market.

**Assumed to be zerosince RPPI is a private entity.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses and the disclosures of contingent assets and liabilities.  Although management believes these estimatesare reasonable, actual results could differ from those estimates.

 

**Risks and Uncertainties**

 

The Company hasoperations in various countries, and in each country, the business is subjectto varying degrees of risk and uncertainty. The Company insures its business and assets against insurable risks in amanner that it deems appropriate. Because of its diversity, the Company believes that the risk of lossfrom non-insurable events in any one business or country would not have amaterial, adverse effect on its operations as a whole.  Additionally, management believes there is nomaterial concentration of risk within any single customer or supplier, exceptfor Shell, or a small group of customers or suppliers, whose failure ornonperformance would materially affect the Company’s results.

 

**Foreign Currency Transactions**

 

For the Company’soperations outside the U.S., where the local currency is considered to be thefunctional currency, those operations are translated into U.S. dollars usingthe exchange rate at each balance sheet date for assets and liabilities; theaverage exchange rate is utilized for each period for revenues, expenses, gainsand losses and cash flows.  The effectsof translating such operations into U.S. dollars are included as a component ofowner’s  deficit.  A substantial amount of assets andliabilities outside the United States are denominated in the Euro.  The U. S. dollar to the Euro exchange ratewas .07331 and 0.7964 at December 31, 2004 and 2003, respectively.

 

The Company may utilizeforward exchange contracts to hedge foreign currency transactionexposures.  Gains and losses on hedgingcontracts are deferred and included in the measurement of the relatedtransaction. The Company did not enter into any 

 

78

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forward exchange contracts in 2004 or 2002; however,it did enter into one forward exchange contract during 2003.

 

**Environmental Costs**

 

Environmental costs relating to current operations are expensed orcapitalized, as appropriate, depending on whether such costs are incurred as a preventativemeasure or provide future economic benefits. Remediation liabilities are recognized when the costs are consideredprobable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws andregulations, existing technology and undiscounted site-specific costs.  Environmental liabilities in connection withproperties that are sold or closed are realized upon such sale or closure, tothe extent they are probable and estimable and not previously reserved.  In assessing environmental liabilities, noset-off is made for potential insurance recoveries.  Recognition of any joint and severalliabilities is based upon the Company’s best estimate of its final pro ratashare of the liability.

 

**Recent Accounting Pronouncements**

 

In December 2003,the Financial Accounting Standards Board (“FASB”) issued a revision to SFAS No.132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”.   The revision amends SFAS No’s. 87, 88 and106 and requires additional disclosures to those in the original SFAS No. 132to include information describing the types of plan assets, investmentstrategy, measurement date(s), plan obligations, cash flows, and components ofnet periodic benefit or costs recognized during interim periods.   The effective dates for the additionaldisclosure requirements are December 15, 2003 and June 15, 2004.  Adoption of the revisions did not have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

In December 2003,FASB Interpretation No. 46 (Revised December 2003), “Consolidation ofVariable Interest Entities” (“FIN 46R”), was issued primarily to clarify therequired accounting for interests in variable interest entities (“VIE’s”).  This standard replaces FASB FinancialInterpretation No. 46, Consolidation of Variable Interest Entities that wasissued in January 2003 to address certain situations in which a companyshould include in its financial statements the assets, liabilities andactivities of another entity.  For theCompany, application of FIN 46R is required for interest in certain VIEs thatare commonly referred to as special-purpose entities, or SPEs, as of December 31,2003 and for interests in all other types of VIEs as of March 31,2004.  The Company’s application of FIN46R did not have a material impact on our consolidated financial statements.

 

In January 2004, theFASB issued FASB Staff Position (“FSP”) FAS 106-1, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003”.  The FSPpermits a sponsor of retiree health benefit plans to make a one-time electionto defer recognition of the effects of the new Medicare legislation inaccounting for its plans under SFAS No. 106, “Employers Accounting forPostretirement Benefits Other Than Pensions”, or in making disclosures relatedto its plans required by SFAS No. 132 until the FASB develops and issuesauthoritative guidance on accounting for subsidies provided by the Act.  Such FASB guidance could require a change incurrently reported information.   The Company elected to make the one-timedeferral and is currently evaluating the effect of the FSP.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Shared-Based Payment”. SFAS No. 123(R) addresses the accountingfor share-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b)liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS 123(R) requires an entity to recognize the grant-date fair-value of stockoptions and other equity-based compensation issued to employees in the incomestatement. The revised Statement generally requires that an entity account forthose transactions using the fair-value-based method, and eliminates theintrinsic value method of accounting in APB Opinion No. 25, “Accounting for Stock Issued to Employees”,which was permitted under SFAS No. 123, as originally issued.  The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial statements.

 

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SFAS 123(R) is effective for public companies that donot file as small business issuers as of the beginning of the first interim orannual reporting period that begins after June 15, 2005 (i.e., fourthquarter 2005 for the Company). All public companies must use either themodified prospective or the modified retrospective transition method. Earlyadoption of this Statement for interim or annual periods for which financialstatements or interim reports have not been issued is encouraged. The Companyhas not yet evaluated the impact of adoption of this pronouncement.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to amend theguidance in Chapter 4, “InventoryPricing*”*, of FASBAccounting Research Bulletin No. 43, “Restatementand Revision of**AccountingResearch Bulletins*.”*SFAS No.151 clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). The Statement requiresthat those items be recognized as current-period charges. Additionally, SFAS No.151 requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFAS No.151 is effective for fiscal years beginning after June 15, 2005. TheCompany is currently evaluating the impact of the adoption of this Statementwhich is required to be adopted in our fiscal year 2005.

 

As part of its short-term international convergenceproject with the International Accounting Standards Board, on December 16,2004, the FASB issued SFAS No. 153 to address the accounting for non-monetaryexchanges of productive assets. SFAS No. 153 amends APB No. 29, “Accounting forNon-Monetary Exchanges”, which established a narrow exception for non-monetaryexchanges of similar productive assets from fair value measurement. ThisStatement eliminates that exception and replaces it with an exception forexchanges that do not have commercial substance. Under SFAS No. 153non-monetary exchanges are required to be accounted for at fair value,recognizing any gains or losses, if their fair value is determinable withinreasonable limits and the transaction has commercial substance. The Statementspecifies that a non-monetary exchange has commercial substance if future cashflows of the entity are expected to change significantly as a result of theexchange. An entity should apply the provisions of SFAS No. 153 prospectivelyfor non-monetary asset exchange transactions in fiscal periods beginning afterJune 15, 2005. The Company will adopt this Statement in fiscal 2005 andadoption is not expected to have a material impact on our consolidatedfinancial position or results of operations. 

 

**Reclassifications**

 

Certain reclassificationswere made to prior year amounts in order to conform with the current year’spresentation, including reclassification of cash overdrafts from operating tofinancing activities.

 

**Restatement**

 

The Company determinesits current and deferred income taxes on a separate company basis.  The Company previously recorded a fullvaluation allowance against certain foreign gross deferred tax asset balances.  In the fourth quarter of 2004, the Companydetermined that future reversals of deferred tax liabilities should have beenconsidered as a possible source of taxable income when evaluating the need fora valuation allowance against the deferred tax assets.  Upon consideration of the deferred taxliabilities as future possible sources of taxable income for financialreporting purposes, the Company has now determined that it had overstated itsdeferred tax asset valuation allowance and, thereby, understated its deferredtax assets at December 31, 2003.

 

As a result, the Companyhas recalculated the deferred income tax accounts and related valuationallowance at the end of December 31, 2003, March, 31, 2004, June 30, 2004 andSeptember 30, 2004 and has restated the related consolidated financialstatements and the accompanying notes to the consolidated financial statements,as applicable, to reflect the adjustments in the deferred income tax accountsand related valuation allowance.  Theseadjustments during the previous reporting periods had no impact on cash used byoperating activities, operating income, income before taxes or the Company’sability to realize ultimately the benefits from its deferred tax assets if itgenerates taxable income in future periods.

 

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The adjustments to theprior period financial statements are non-cash adjustments and do not changeprior period reported EBITDA amounts.  Asa result of the adjustments, the Company is decreasing the net loss by $17million, $1 million, and $1 million for the year ended December 31, 2003, andeach of the quarters ended March 31, 2004, and June 30, 2004, respectively.  The Company is increasing the net loss forthe quarter ended September 30, 2004 by $4 million.

 

The following tablespresent the impact of the restatement on the consolidated financial statementsof income and the consolidated balance sheets (in millions of U. S. dollars):

 

**Yearly Data**:

 
| ** **                              | ** ** | **For the year ended December 31,  2003** | ** ** |
|-----------------------------------------|------------|------------------------------------------------|------------|
| ** **                              | ** ** | **Amounts  previously  reported**              | ** ** | **Amounts  restated** | ** ** |
| **Consolidated  Statements of Income:** |       |                                           |       |   |   |
| Loss before income  taxes               |       | $                                              | (64        | ) | $ | (64 | ) |
| Income tax benefit                      |       | $                                              | (2         | ) | $ | (19 | ) |
| Net loss                                |       | $                                              | (62        | ) | $ | (45 | ) |

 
| ** **                        | ** ** | **December 31, 2003**        | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **Amounts  previously  reported** | ** ** | **Amounts  restated** | ** ** |
| **Consolidated  Balance Sheets:** |       |                              |       |   |   |
| Deferred income taxes             |       | $                                 | 63         |   | $ | 82 |   |
| Total assets                      |       | $                                 | 856        |   | $ | 875 |   |
| Owner’s deficit              |       | $                                 | (81        | ) | $ | (62 | ) |

 

**Quarterly Data:**

 
| ** **                              | ** ** | **For the three months ended March 31,  2004** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **Amounts  previously  reported**                   | ** ** | **Amounts  restated** | ** ** |
| ** **                              | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)** | ** ** |
| **Consolidated  Statements of Income:** |       |                                                |       |   |   |
| Loss before income  taxes               |       | $                                                   | (14        | ) | $ | (14 | ) |
| Income tax expense                      |       | $                                                   | 1          |   | — |   |
| Net loss                                |       | $                                                   | (15        | ) | $ | (14 | ) |

 
| ** **                        | ** ** | **March 31, 2004**           | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **Amounts  previously  reported** | ** ** | **Amounts  restated** | ** ** |
| ** **                        | ** ** | **(unaudited)**                   | ** ** | **(unaudited)** | ** ** |
| **Consolidated  Balance Sheets:** |       |                              |       |   |   |
| Deferred income taxes             |       | $                                 | 61         |   | $ | 80 |   |
| Total assets                      |       | $                                 | 856        |   | $ | 875 |   |
| Owner’s deficit              |       | $                                 | (102       | ) | $ | (84 | ) |

 

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| ** **                              | ** ** | **Three months ended June 30,  2004** | ** ** | **Six months ended June 30,  2004** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | **Amounts  previously  reported**          | ** ** | **Amounts  restated**                    | ** ** | **Amounts  previously  reported** | ** ** | **Amounts  restated** | ** ** |
| ** **                              | ** ** | **(unaudited)**                            | ** ** | **(unaudited)**                          | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Consolidated  Statements of Income:** |       |                                       |       |                                     |       |   |   |   |   |
| Loss before income  taxes               |       | $                                          | (15        | )                                        | $          | (15 | ) | $ | (29 | ) | $ | (29 | ) |
| Income tax expense  (benefit)           |       | $                                          | —     |                                     | $          | (1 | ) | $ | 1 |   | $ | (1 | ) |
| Net loss                                |       | $                                          | (15        | )                                        | $          | (14 | ) | $ | (30 | ) | $ | (28 | ) |

 
| ** **                        | ** ** | **June 30, 2004**            | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **Amounts  previously  reported** | ** ** | **Amounts  restated** | ** ** |
| ** **                        | ** ** | **(unaudited)**                   | ** ** | **(unaudited)** | ** ** |
| **Consolidated  Balance Sheets:** |       |                              |       |   |   |
| Deferred income taxes             |       | $                                 | 63         |   | $ | 82 |   |
| Total assets                      |       | $                                 | 841        |   | $ | 860 |   |
| Owner’s deficit              |       | $                                 | (119       | ) | $ | (100 | ) |

 
| ** **                             | ** ** | **Three months ended  September 30, 2004** | ** ** | **Nine months ended  September 30, 2004** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                             | ** ** | **Amounts  previously  reported**               | ** ** | **Amounts  restated**                          | ** ** | **Amounts  previously  reported** | ** ** | **Amounts  restated** | ** ** |
| ** **                             | ** ** | **(unaudited)**                                 | ** ** | **(unaudited)**                                | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Consolidated Statements of Income:** | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss before income  taxes              |       | $                                               | (12        | )                                              | $          | (12 | ) | $ | (41 | ) | $ | (41 | ) |
| Income tax expense                     |       | $                                               | —     |                                           | $          | 4 |   | $ | 1 |   | $ | 3 |   |
| Net loss                               |       | $                                               | (12        | )                                              | $          | (16 | ) | $ | (42 | ) | $ | (44 | ) |

 
| ** **                        | ** ** | **September 30, 2004**       | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **Amounts  previously  reported** | ** ** | **Amounts  restated** | ** ** |
| ** **                        | ** ** | **(unaudited)**                   | ** ** | **(unaudited)** | ** ** |
| **Consolidated  Balance Sheets:** |       |                              |       |   |   |
| Deferred income taxes             |       | $                                 | 61         |   | $ | 74 |   |
| Total assets                      |       | $                                 | 844        |   | $ | 860 |   |
| Owner’s deficit              |       | $                                 | (127       | ) | $ | (111 | ) |

 

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**3.****                                      Transactionswith Related and Certain Other Parties**

 

**Related Parties**

 

The Company hassignificant transactions and relationships with affiliated entities.  Because of these relationships, it ispossible that the terms of these transactions are not the same as those thatwould result from transactions among wholly unrelated parties.

 

Related party amounts areprimarily attributable to transactions with Japan Epoxy Resins joint venture,Apollo, and Apollo Affiliates. The aggregate amounts of related partytransactions were as follows for the years ended December 31, 2004, 2003and 2002 (in millions of U. S. dollars):

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues                                      |       | $        | 10         |     | $          | 15       |       | $ | 13 |   |
| Cost and expenses:                            |       |     |       |     |       |     |       |
| Purchases and variable  products costs        |       | 11       |       | 5        |       | 7        |       |
| Selling, general and  administrative expenses |       | (12      | )          | —   |       | 1        |       |
|                                               |            |          |            |          |            |          |            |  |  |  |

 

Revenues to relatedparties are derived largely from the sale of finished products.  Purchases and variable products costs attributableto related parties are primarily purchases of various raw materials.  Selling, general and administrative expenses relatedto related parties primarily result from reimbursements from a management servicesagreement with Resolution Specialty Materials LLC (“RSM”), an affiliate ofApollo Management IV, L.P. (“Apollo”), partially offset by fees paid to Apollo undera management agreement.

 

Amounts due from relatedparties were $10 million and $2 million at December 31, 2004 and 2003,respectively.  Amounts due to relatedparties were $3 million and $1 million at December 31, 2004 and 2003,respectively.

 

On November 14,2000, certain officers of the Company issued notes payable totaling $1 millionto the Company to purchase stock of RPPI. As of December 31, 2004 and 2003, the notes payable and accruedinterest amounted to $2 million and $2 million, respectively.

 

On November 12,2000, the Company entered into a consulting agreement, as amended, with Apollo.  Under the agreement, Apollo shall advise theCompany concerning such management matters that relate to proposed financialtransactions, acquisitions and other senior management matters related to thebusiness, administration and policies of the Company.  As consideration, the Company paid Apollo anannual fee of $1 million and $1 million in 2004 and 2002, respectively.   There were no payments made to Apollo in2003 under the agreement, as amended, below.

 

Effective January 1, 2003, the terms of themanagement consulting agreement were amended to waive payment of the annualmanagement fee to Apollo during 2003; provided, that if, during any twelvemonth period ending on the last day of any fiscal quarter during 2003 or 2004, theCompany and our subsidiaries’ consolidated earnings before interest, taxes,depreciation and amortization (as determined in accordance with our historicalpractices) is $116 million or more, we shall pay to Apollo (i) the quarterlyinstallments of the annual management fee for the remainder of 2003 andthereafter and (ii) 125% of the amount of the quarterly installments of theannual management fee which were waived during 2003.  In March 2004, the management consultingagreement was amended to extend the period for achieving such payment from December 31,2004 to December 31, 2005, to the extent permitted by the Credit Agreementand Indentures.

 

The Company paidapproximately $6 million, $5 million and $7 million related to certain freightcosts to Quality Distribution, Inc., an affiliate of Apollo in 2004, 2003 and2002, respectively.

 

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The Company paidapproximately $4 million related to various raw materials to Borden ChemicalInc., an affiliate of Apollo in 2004.  Borden Chemical Inc. paid the Company approximately $0.1 million on thesales of certain products.

 

In 2004 and 2003, theCompany paid a constructive cash distribution of $1 million and $4 million toShell on behalf of RPPI, of which $1 million and $2 million was previouslyaccrued, respectively.  RPPI made capitalcontributions of approximately $1 million during 2002 to us relating to pensioncosts.

 

During the secondquarter of 2004, we commenced providing outsourcing services to RSM under theManagement Services Agreement (“MSA”). The agreement was executed on May 27, 2004 and has an initial term ofthree years with automatic renewal for one-year periods thereafter unlesswritten notice is given by either party. Currently in progress is an information technology project that consistsof installing and configuring hardware and software as well as establishing aninternal telecommunications and information technology infrastructure.  In addition to the information technologyproject, RPP provides outsourcing services that include monitoring of servicesunder a transition services agreement, human resources, environmental, healthand safety, financial and treasury, information technology, legal, intellectualproperty sales/service, purchasing, logistics and any negotiated additionalservices or projects.  In exchange forproviding the mentioned outsourcing services, RPP bills RSM monthly and thecharges are composed of the following formula: 33 1/3% of the estimated totalsalary, bonus, travel reimbursement, benefits and other costs payable by RPP toits Chief Financial Officer, General Counsel, Director of Human Resources,Chief Information Officer, Chief Administrative Officer and Director ofEnvironmental Health and Safety, plus an amount equal to any incremental costincurred by RPP in connection with the provision of the services multiplied by1.075 and an amount equal to all out of pocket expenses incurred by RPP inproviding the services.  In addition, RSMgrants options to purchase common units of RSM to certain members of themanagement, employees or independent contractors of RPP who are involved in theprovision or oversight of the services.  As of December 31, 2004, RSM paid us $11 million related to the MSAand information technology project. The actual expenses incurred, offset by thereimbursements from RSM, are recorded in selling, general, and administrativeexpenses.  Therefore, the mark-up relatedto these costs is included as a reduction of selling, general, andadministrative expenses and have been insignificant to date.

 

On October 15, 2004,the Company entered into a joint venture with Resolution Specialty MaterialsLLC (“RSM”), an affiliate, with a contribution of $2.5 million in cashrepresenting a 20% interest in the Resolutions’ JV LLC (“RJV”).   RSM is the majority owner and managingmember with an 80% interest in the joint venture.

 

**Other Parties**

 

The Company purchases asignificant portion of its primary feedstocks from Shell.  In instances where the Company’s manufacturingfacilities are operated as part of a larger Shell petrochemical and refiningcomplex, Shell may also provide site services, utilities, materials, facilitiesand operator type services. Research and development activities are performedlargely by the Company’s employees at Shell’s technology centers in the UnitedStates and The Netherlands.

 

Other parties includethose parties that fall outside the definition of “related parties”, but withwhom the Company or its related parties have a relationship that enables theparties to negotiate terms of material transactions that may not be availablefrom other more clearly independent parties on an arm’s length basis. Shell isnot considered a related party as Shell owns less than 6.8% on a fully dilutedbasis of RPPI. We entered into numerous agreements with Shell, for example, topurchase feedstocks and to receive site services for: utilities, materials,facilities and operator type services that are significant to our operations.See Note 13 for more details on our commitments surrounding certain agreementswith Shell.  During 2004, 2003 and 2002,the Company paid Shell $349 million, $312 million and $343 million for thesevarious agreements and Shell paid us $24 million, $23 million and $16 millionfor certain site services that we provided to Shell, respectively.  At December 31, 2004, accounts payableand accounts receivable related to Shell

 

84

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were $21 million and $2 million, respectively.  At December 31, 2003, accounts payableand accounts receivable related to Shell were $1 million and $3 million,respectively.

 

 In the ordinary course of business, we disputecharges arising from our numerous agreements with Shell as well as with otherthird party vendors.  As with other thirdparty vendors, resolution of disputes may have a significant impact on ourfinancial results.  During 2004, theCompany was in a dispute regarding phenol pricing under the phenol contract,which was submitted to arbitration in accordance with the phenol contract.  In January 2005, the dispute was settledand the Company paid Shell $4.3 million which was previously accrued at December 31,2004.

 

**4.****                                      Inventoriesof Products**

 

Product inventories arevalued at the lower of cost or market with cost being determined using the FIFOmethod. Total inventories, net of allowance for obsolescence at December 31,2004 and 2003 were comprised of the following (in millions of U. S. dollars):

 

 
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Raw materials          |       | $        | 16         |     | $          | 12 |   |
| Finished products      |       | 171      |       | 120      |       |
| Materials and supplies |       | 10       |       | 13       |       |
| Total                  |       | $        | 197        |     | $          | 145 |   |

 

During the third quarter2003, we became aware that certain manufacturing costs had not been included infinished goods inventory.  The effect of not including such costs infinished goods inventory was not material to our historical financialstatements or to our expected full year 2003 financial position or results ofoperations.   To properly reflect these costs in inventory, anadjustment to the financial statements was made in third quarter 2003.  The impact of the adjustment was to increaseinventory by $3.6 million and pretax income for the year ended December 31,2003 by $3.6 million ($2.4 million after tax).  The adjustment is includedin purchases and variable product costs.

 

**5.****                                      Property,Plant and Equipment**

 

Property, plant andequipment at December 31, 2004 and 2003 consist primarily of manufacturingassets as follows (in millions of U. S. dollars):

 
| ** **                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Plant and equipment                            |       | $        | 1,275      |     | $          | 1,198 |   |
| Office buildings                               |       | 44       |       | 43       |       |
| Capital leases                                 |       | 2        |       | 4        |       |
| Other assets                                   |       | 68       |       | 64       |       |
| Total                                          |       | 1,389    |       | 1,309    |       |
| Less: accumulated  depreciation                |       | (941     | )          | (858     | )          |
| Less: accumulated  depreciation-capital leases |       | (2       | )          | (2       | )          |
| Net property, plant and  equipment             |       | $        | 446        |     | $          | 449 |   |

 

During 2004, 2003 and2002, the Company incurred approximately $35 million, $27 million and $26million, respectively, for repairs and maintenance related to property, plantand equipment.  Substantially all currentand future assets are pledged as security under the Credit Agreement.

 

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**6.****                                      IntangibleAssets**

 

Intangible assetsconsist of the following (in millions of U. S. dollars):

 
| ** **             | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **Gross**                  | ** ** | **Accumulated**            | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **             | ** ** | **Amount**                 | ** ** | **Amortization**           | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                   |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Deferred finance costs |       | $                          | 29         |                       | 9          |   | $ | 20 |   | $ | 29 |   | 5 |   | $ | 24 |   |
|                        |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| Aggregate Amortization  Expense:            |   |   |   |
|---------------------------------------------|--------|--------|--------|
| For year ended December 31,  2004      |   | $      | 4      |   |
|                                        |   |   |   |
| Estimated Amortization  Expense:            |   |   |   |
| For the year ending December 31,  2005 |   | $      | 4      |   |
| For the year ending December 31,  2006 |   | $      | 4      |   |
| For the year ending December 31,  2007 |   | $      | 4      |   |
| For the year ending December 31,  2008 |   | $      | 3      |   |
| For the year ending December 31,  2009 |   | $      | 3      |   |
| Thereafter                                  |   | $      | 2      |   |

 

**7.****                                      Investments**

 

Investments in affiliates,accounted for using the equity method or cost method, are as follows as of December 31,2004 (in millions of U. S. dollars):

 

**Investment in Equity Affiliate**

 

On October 15, 2004,the Company entered into a joint venture with RSM with a contribution of $2.5million in cash representing a 20% interest in the Resolutions’ JV LLC.   RSM is the majority owner and managing memberwith an 80% interest in the joint venture.

 
| ** **               | ** ** | **Country of  incorporation** | ** ** | **Percentage  holding** | ** ** | **2004** | ** ** |
|--------------------------|------------|-------------------------------|------------|-------------------------|------------|----------|------------|
| Resolutions’ JV LLC |       | U.S.                          |       | 20                      | %          | $        | 3          |   |
|                          |            |                               |            |                         |            |          |            |  |

 

**Investment at Cost**

 

On November 14,2003, a wholly owned subsidiary of the Company completed the sale of fortypercent of the outstanding shares in Japan Epoxy Resins Co., Ltd to its joint venture partner,Mitsubishi Chemical Company for a purchase price of $23 million.   A gain on the sale was recorded in theamount of $14 million after recognizing direct costs of $5 million andaccumulated foreign currency translation gain of $4 million.  The transaction was exempt from taxes as aresult of the structure of ownership.  Inconnection with the sale of its shares, a new joint venture agreement,technology license agreement and trademark license agreement were negotiated.

 

As a result of the abovetransaction, the Company can no longer exercise significant influence over theoperating and financial policies of Japan Epoxy Resins Co., Ltd.  Therefore the investment in affiliate, accountedfor using the cost method, is as follows as of December 31, 2004 and 2003(in millions of U. S. dollars):

 
| ** **                                           | ** ** | **Country of  incorporation** | ** ** | **Percentage  holding** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| Japan Epoxy Resins  (formerly Yuka Shell Epoxy K.K.) |       | Japan                         |       | 10                      | %          | $        | 2          |     | $          | 2 |   |
|                                                      |            |                               |            |                         |            |          |            |          |            |  |  |

 

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**8.****                                      IncomeTaxes**

 

The income tax expense(benefit) consists of the following (in millions of U. S. dollars):

 
| ** **                                       | ** ** | **2004**   | ** ** | **2003**       | ** ** | **2002**   | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| U.S. and other income taxes:                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| Current income tax—U.S.                     |       | $          | 1          |           | $          | —     |       | $ | — |   |
| Current income  tax—outside U.S.            |       | —     |       | —         |       | —     |       |
| Deferred income tax  (benefit)—U.S.         |       | —     |       | (8             | )          | 1          |       |
| Deferred income tax  (benefit)—outside U.S. |       | 19         |       | (11            | )          | (6         | )          |
| Total                                            |       | $          | 20         |           | $          | (19        | )          | $ | (5 | ) |

 

Deferred income taxes areprovided for the temporary differences between the book and tax bases of ourassets and liabilities.  Significantcomponents of deferred tax assets and liabilities as of December 31, 2004and 2003 are as follows (in millions of U. S. dollars):

 
| ** **                                | ** ** | **2004**   | ** ** | **2003**       | ** ** |
|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Deferred tax assets:                      | ** ** | ** ** | ** ** | ** **     | ** ** |
| Net operating loss  carry forwards        |       | $          | 93         |           | $          | 84 |   |
| Pension and  postretirement benefits      |       | 4          |       | 6              |       |
| Tax credit carryforward                   |       | 6          |       | 4              |       |
| Other                                     |       | 3          |       | 6              |       |
| Total gross deferred  tax assets          |       | 106        |       | 100            |       |
| Valuation allowance                       |       | (43        | )          | (13            | )          |
| Net deferred tax assets                   |       | 63         |       | 87             |       |
| Deferred tax  liabilities:                |       |       |       |           |       |
| Items associated with  capitalized costs: |       |       |       |           |       |
| Property, plant and  equipment            |       | (86        | )          | (86            | )          |
| Intangibles and other                     |       | (3         | )          | (7             | )          |
| Total deferred tax  liabilities           |       | (89        | )          | (93            | )          |
| Net deferred tax  liabilities             |       | $          | (26        | )              | $          | (6 | ) |

 

Deferred tax assets andliabilities are recorded in the accompanying Consolidated Balance Sheet asfollows (in millions of U. S. dollars):

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**       | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Current assets, net of valuation allowance      |       | $          | 3          |           | $          | 5 |   |
| Non-current assets, net  of valuation allowance |       | 60         |       | 82             |       |
| Current liabilities                             |       | —     |       | —         |       |
| Non-current liabilities                         |       | (89        | )          | (93            | )          |
|                                            |       | $          | (26        | )              | $          | (6 | ) |

 

87

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Total income tax expensefor the years 2004, 2003 and 2002 was equivalent to effective tax rates of 43%,30% and 42%, respectively.  Loss beforeincome taxes attributable to U.S. and non-U.S. operations was as follows (inmillions of U. S. dollars):

 
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S.                      |       | $        | (57        | )        | $          | (58      | )          | $ | 9 |   |
| Non-U.S.                  |       | 10       |       | (6       | )          | (21      | )          |
| Loss Before Income  Taxes |       | $        | (47        | )        | $          | (64      | )          | $ | (12 | ) |

 

Reconciliation of actualtax expense (benefit) to the expected tax expense (benefit) calculated at theU.S. Statutory rate (35%) is as follows (in millions of U. S. dollars):

 
| ** **                                                   | ** ** | **2004**   | ** ** | **2003**       | ** ** | **2002**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Tax expense (benefit)  at 35%                                |       | $          | (17        | )              | $          | (23        | )          | $ | (4 | ) |
| State taxes, net of  federal benefit                         |       | (4         | )          | (2             | )          | —     |       |
| Net effect of different  tax rates in non-U.S. jurisdictions |       | 3          |       | (8             | )          | 1          |       |
| Write-off of net  operating losses                           |       | 17         |       | —         |       | —     |       |
| Change in enacted tax  rate                                  |       | (4)        |       | —         |       | —     |       |
| Increase in valuation  allowance                             |       | 30         |       | 12             |       | 1          |       |
| Tax credits                                                  |       | (3         | )          | —         |       | (2         | )          |
| Other                                                        |       | (2         | )          | 2              |       | (1         | )          |
| Total                                                        |       | $          | 20         |           | $          | (19        | )          | $ | (5 | ) |

 

At December 31,2004, we had net operating loss carry forwards for income tax purposes invarious tax jurisdictions.  Of those carry forwards that are subject toexpiration, they will expire, if unused, over the years through 2024.  Weanticipate taxable income in future years will allow us to utilize the carryforwards that have not had a valuation allowance placed against them.  Itwas recognized that it is more likely than not that certain carry forwards incertain tax jurisdictions will not be realized as a result of current andfuture taxable income.  Accordingly, thevaluation allowance has been increased in the current year to reflect lowerthan anticipated net deferred tax asset realization.

 

Our legal and taxstructure reflects the global nature of our business.  Management performsa review of its global tax positions on an annual basis and reserve amounts forpotential tax contingencies.  We establish the reserves based uponmanagement’s assessment of exposure associated with permanent tax differences,tax credits and interest expense applied to temporary difference adjustments. Significant judgment is required in determining accruals for potential taxcontingencies.  In the ordinary course of a global business, there aremany transactions for which the ultimate tax outcome is uncertain.  Basedon the reviews by management and the result of discussions and resolutions ofproposed adjustments with certain tax authorities, including judicialprocedures as appropriate, and the closure of tax years subject to tax audit,reserves are adjusted as necessary.  The Netherlands tax authority iscurrently examining Resolution Holdings B.V.’s tax returns for the years 2000to 2002.  Net operating losses carried back during this period of timeresulted in $18 million of tax refunds in the fourth quarter of 2003.  TheNetherlands tax authority has not issued a formal notice of deficiency and theCompany will aggressively contest any proposed adjustments.  Although the final resolution of any proposedadjustments is uncertain and may involve unsettled areas of the law, based oncurrently available information, the Company has provided for the best estimateof the probable tax liability for such matters.  In the current year, thishas resulted in a reduction to the recorded amount of net operating losses toreflect the best estimate of the amount of net operating loss carryforwards theCompany believes will ultimately be sustained.  While the final resolution of these mattersmay result in tax assets and liabilities which are significantly higher orlower than the recorded amounts, management currently believes that the expectedresolution will not have a material effect on the Company’s financial positionor liquidity.  However, an unfavorable resolution could have a materialeffect on the Company’s results of operations or cash flows in the quarter inwhich an adjustment is recorded or the tax is due or paid.

 

88

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**9.****                                      PensionPlans, Other Post Retirement Benefits and 401(k) Plan**

 

The Company providesdefined pension plans and other post-retirement benefit plans (“OPEBs”) toemployees in the U.S. and internationally. The OPEBs primarily consist of retiree medical benefits.  As of December 31, 2004 and 2003approximately 449 and 456 employees in the U.S. and 393 and 383 employeesinternationally participate in these plans. The measurement date for the Company’s pension plans and other postretirement benefits is December 31, 2004. The following table provides a reconciliation of benefit obligations,plan assets, the funded status of the plans and the components of net periodicbenefit cost for the years ended December 31, 2004 and 2003 (in millionsof U. S. dollars):

 
| ** **                                                                              | ** ** | **2004**             | ** ** | **2003**           | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                              | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
| Change in benefits  obligation                                                          |       |                 |       |               |       |   |   |   |   |
| Benefits obligation at  beginning of year                                               |       | $                    | 111        |               | $          | 7 |   | $ | 81 |   | $ | 7 |   |
| Service cost                                                                            |       | 6                    |       | —             |       | 5 |   | — |   |
| Interest cost                                                                           |       | 6                    |       | 1                  |       | 5 |   | — |   |
| Benefits paid                                                                           |       | (3                   | )          | —             |       | (2 | ) | — |   |
| Actuarial (gain)loss                                                                    |       | 12                   |       | (2                 | )          | 9 |   | — |   |
| Plan amendments                                                                         |       | —               |       | —             |       | — |   | (1 | ) |
| Change in currency  exchange rate adjustment                                            |       | 8                    |       | —             |       | 13 |   | 1 |   |
| Benefits obligation at  end of year                                                     |       | $                    | 140        |               | $          | 6 |   | $ | 111 |   | $ | 7 |   |
|                                                                                    |       |                 |       |               |       |   |   |   |   |
| Change in plan assets                                                                   |       |                 |       |               |       |   |   |   |   |
| Fair value of plan  assets at beginning of year                                         |       | $                    | 102        |               | $          | — |   | $ | 80 |   | $ | — |   |
| Benefits paid                                                                           |       | (3                   | )          | —             |       | (2 | ) | $ | — |   |
| Actual return on plan  assets                                                           |       | 4                    |       | —             |       | 7 |   | — |   |
| Employer contributions                                                                  |       | 9                    |       | —             |       | 4 |   | — |   |
| Change in currency  exchange rate adjustment                                            |       | 8                    |       | —             |       | 13 |   | — |   |
| Fair value of plan  assets at end of year                                               |       | $                    | 120        |               | $          | — |   | $ | 102 |   | $ | — |   |
|                                                                                    |       |                 |       |               |       |   |   |   |   |
| Funded status                                                                           |       | $                    | (20        | )                  | (6         | ) | (9 | ) | (7 | ) |
| Unrecognized net prior  service cost                                                    |       | (4                   | )          | (4                 | )          | (4 | ) | (5 | ) |
| Unrecognized net  actuarial loss(gain)                                                  |       | 35                   |       | (16                | )          | 16 |   | (14 | ) |
| (Accrued)/Prepaid  benefit cost                                                         |       | $                    | 11         |               | $          | (26 | ) | $ | 3 |   | $ | (26 | ) |
|                                                                                    |       |                 |       |               |       |   |   |   |   |
| Amounts recognized in  the consolidated balance sheet consist of:                       |       |                 |       |               |       |   |   |   |   |
| Prepaid benefit cost                                                                    |       | $                    | 19         |               | $          | — |   | $ | 10 |   | $ | — |   |
| Accrued benefit  liability                                                              |       | (8                   | )          | (26                | )          | (7 | ) | (26 | ) |
| Net amount recognized                                                                   |       | $                    | 11         |               | $          | (26 | ) | $ | 3 |   | $ | (26 | ) |
|                                                                                    |       |                 |       |               |       |   |   |   |   |
| Weighted average  assumptions used to determine benefit obligations at December 31 |       |                 |       |               |       |   |   |   |   |
| Discount rate*                                                                          |       | 2.0-6.0              | %          | 5.0-6.0            | %          | 2.5-6.25 | % | 5.5-6.25 | % |
| Rate of compensation  increase                                                          |       | 2.0-4.42             | %          | N/A                |       | 2.0-3.75 | % | N/A |   |

 

----

*The range ofrates represents the applicable country’s assumed rates.

 

The accumulated benefitobligations for the defined pension plans at December 31, 2004 and December 31,2003 were $117 million and $71 million, respectively.

 

89

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The projected benefitobligation, accumulated benefit obligation, and fair value of plan assets forthe pension plans with accumulated benefit obligations in excess of plan assetswere $38, $32, and $27 million, respectively, as of December 31 2004, and$35, $29, and $25 million, respectively, as of December 31, 2003.

 
| ** **                                                                | ** ** | **2004**              | ** ** | **2003**            | ** ** | **2002**              | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| Components  of net periodic benefit cost                                  |       |                  |       |                |       |                  |       |   |   |   |   |   |   |
|                                                                      |       |                  |       |                |       |                  |       |   |   |   |   |   |   |
| Service  cost                                                             |       | $                     | 6          |                | $          | —                |       | $ | 5 |   | $ | — |   | $ | 5 |   | $ | — |   |
| Interest  cost                                                            |       | 6                     |       | —              |       | 5                     |       | — |   | 4 |   | 1 |   |
| Expected  return on assets                                                |       | (9                    | )          | —              |       | (7                    | )          | — |   | (5 | ) | — |   |
| Recognized  net actuarial gain                                            |       | —                |       | (1                  | )          | —                |       | (1 | ) | — |   | (1 | ) |
| Net  periodic cost                                                        |       | $                     | 3          |                | $          | (1                    | )          | $ | 3 |   | $ | (1 | ) | $ | 4 |   | $ | — |   |
|                                                                      |       |                  |       |                |       |                  |       |   |   |   |   |   |   |
| Weighted  average assumptions used to determine net periodic benefit cost |       |                  |       |                |       |                  |       |   |   |   |   |   |   |
| Discount  rate*                                                           |       | 2.5-6.25              | %          | 5.5-6.25            | %          | 3.5-6.75              | %          | 6.0-6.75 | % | 3.5-7.25 | % | 6.0-7.25 | % |
| Expected  return on plan assets                                           |       | 8.0-9.0               | %          | N/A                 |       | 8.0-9.0               | %          | N/A |   | 8.0-9.0 | % | N/A |   |
| Rate  of compensation increase                                            |       | 2.0-3.75              | %          | N/A                 |       | 2.0-4.00              | %          | N/A |   | 2.0-4.25 | % | N/A |   |

 

----

*The range of ratesrepresents the applicable country’s assumed rates.

 

**Asset Categories**

 

The Company maintainstarget allocation percentages among various asset classes based on aninvestment policy established for the pension plans which is designed to ensurethe assets will be sufficient to provide for benefits under the pension planswhile minimizing the risk for the necessary return.  In addition the policy is designed to ensuresufficient liquidity to meet ongoing cash flow requirements.  The Company’s pension plan asset allocationsat December 31, 2004 and 2003 by asset category were as follows:

 
| ** **         | ** ** | **2004** | ** ** | **2003**        | ** ** |
|--------------------|------------|----------|------------|-----------------|------------|
| **Asset Category** | ** ** | **U.S.** | ** ** | **Netherlands** | ** ** | **Belgium** | ** ** | **U.S.** | ** ** | **Netherlands** | ** ** | **Belgium** | ** ** |
| Equity securities  |       | 70       | %          | 0               | %          | 0 | % | 71 | % | 0 | % | 0 | % |
| Debt securities    |       | 29       | %          | 100             | %          | 0 | % | 28 | % | 100 | % | 0 | % |
| Other              |       | 1        | %          | 0               | %          | 100 | % | 1 | % | 0 | % | 100 | % |
| Total              |       | 100      | %          | 100             | %          | 100 | % | 100 | % | 100 | % | 100 | % |

 

For the U. S. Plan, theexpected long-term rate of return was chosen from the range of likely resultsof compound average annual returns over a 20-year time horizon based on theplan’s current investment policy (70% equity securities, 29% bonds, and 1%cash).  The expected return andvolatility for each asset class was based on historical equity, bond and cashmarket returns during the period 1926 to 2002 using a Monte CarloSimulation.  Increasing or decreasing theexpected return rate by one percentage point would not be material to ourconsolidated results of operations, cash flows or financial position.  For the international plans, we expect to transferto and maintain an 80% equity and 20% bond mix in investments in the nearfuture.

 

**Increase in the per capita cost of covered healthcare benefits**

 

The assumed annual rateof increase in the per capita cost of covered health care benefits as of December 31,2004 was 8% to 8 1/2% trending down through 2009 and 4% to 4.5%thereafter.  Increasing or decreasing theassumed health care cost trend rate by one percentage point in each year wouldchange the accumulated postretirement benefit liability as of December 31,2004 by less than $1 million and would not have a material effect on theaggregate service and interest cost components of the net periodicpostretirement benefit cost for the year then ended.

 

90

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**Future Expected Contributions**

 

The Company expects tocontribute approximately $12 million to its Netherlands pension plan in fiscal 2005.

 

**Future Expected Benefit Payments**

 

The following benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid as follows (in millions of U.S. dollars):

 
| ** **  | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|-------------|------------|-----------------------|------------|---------------------|------------|
| 2005        |       | $                     | 1          |                | $          | 0 |   |
| 2006        |       | 2                     |       | 0                   |       |
| 2007        |       | 2                     |       | 0                   |       |
| 2008        |       | 3                     |       | 0                   |       |
| 2009        |       | 4                     |       | 0                   |       |
| 2010 - 2014 |       | 33                    |       | 1                   |       |
|             |            |                       |            |                     |            |  |  |

 

The funded pension andunfunded other retirement obligations had the following activity (in millionsof U. S. dollars):

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Balance at beginning of  year    |       | $        | 23         |     | $          | 22 |   |
| Currency translation  adjustment |       | —   |       | 3        |       |
| Net periodic expense  accrual    |       | 1        |       | 2        |       |
| Cash contributions               |       | (9       | )          | (4       | )          |
| Balance at end of year           |       | $        | 15         |     | $          | 23 |   |

 

During 2003, the Companyrevised the average retirement age and average turn-over rate to age 60 and 7percent from age 58 and 5 percent. This revision in assumptions decreased theobligations for the other post retirement plan in the U. S. for 2003.

 

The Company provides anonqualified deferred compensation plan for U. S. employees who areparticipants in the RPPI stock option plan. Participants may elect to defer up to 50% of base wages and 100% ofbonus pay and stock option compensation. The participants’ deferredcompensation contributions are made to a rabbi trust. The Company’s obligationsunder this plan are unfunded; however, the Company must pay tax on compensationthat is deferred by the participant. The participant is required to reimbursethe Company for taxes once the funds are withdrawn from the plan.

 

The Company provides a401(k) plan to its employees as an additional retirement and income taxreduction facility.  Fulltime employeesare eligible to participate immediately. Employees may make pre-tax and after-tax contributions ranging from 1%to 60% subject to Internal Revenue Service limitation and 1% to 10%,respectively.   Company contributionsrange from 3 to 6 percent after completion of service of 1 and 5 years,respectively.  Company contributionsamounted to $1 million, $1 million and $2 million for each of the years ended December 31,2004, 2003 and 2002, respectively.

 

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**10.****                               Long-termDebt**

 

Long-term debt at December 31,2004 and 2003 consisted of the following (in millions of U. S. dollars):

 
| ** **                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| 13 1⁄2% Senior  Subordinated Notes                |       | $                     | 328        |                  | $          | 328 |   |
| 9 1⁄2% Senior Second  Secured Notes               |       | 200                   |       | 200                   |       |
| 8% Senior Secured Notes                              |       | 140                   |       | 140                   |       |
| Revolving Credit  Facility                           |       | 28                    |       | —                |       |
| Other                                                |       | —                |       | 1                     |       |
| Total long-term debt                                 |       | 696                   |       | 669                   |       |
| Net premium on 13 1⁄2%  Senior Subordinated Notes |       | 4                     |       | 5                     |       |
| Premium on 9 1⁄2% Senior  Second Secured Notes    |       | 1                     |       | 1                     |       |
| Less current portion of  long-term debt              |       | —                |       | (1                    | )          |
|                                                 |       | $                     | 701        |                  | $          | 674 |   |

 

The $328 millionaggregate principal amount of 13 1⁄2% Senior Subordinated Notes due 2010 wereissued in  private offerings pursuant toRule 144A and Regulation S under the Securities Act of 1933 in 2000, 2001 and2002 by RPP LLC and RPPCC.  These noteswere subsequently exchanged with registered identical series of notes with theSecurities and Exchange Commission in 2001, 2002 and 2003, respectively.  The $328 million of 13 1⁄2% Senior SubordinateNotes are senior subordinated unsecured obligations ranking junior in right ofpayment to all of our existing and future senior debt and all liabilities ofour subsidiaries that do not guarantee the notes. The proceeds from theissuance of $200 million of the 13 1⁄2% Senior Subordinated Notes in November 2000were used to finance in part the recapitalization and related transaction costsand expenses. The net proceeds from the issuance of $75 million of the 13 1⁄2%Senior Subordinated Notes issued in November 2001 and $53 million of thenotes issued in December 2002 were used to repay borrowings under theCredit Agreement (as defined below). Interest on the 13 1⁄2% Senior SubordinatedNotes is payable semi-annually in cash on each May 15 and November 15. The13 1⁄2% Senior Subordinated Notes mature on November 15, 2010 and may beredeemed in whole at any time or in part from time to time, on and after November 15,2005, at the specified redemption prices set forth under the related indenture.

 

On April 9, 2003, RPP LLC completed a privateoffering, together with RPP CC of $175 million aggregate principal amount of91⁄2% Senior Second Secured Notes Due 2010. The $175 million of 91⁄2% Senior SecondSecured Notes are senior secured obligations ranking equal in right of paymentto all of our existing and future senior debt and senior in right of paymentwith all of our existing and future subordinated indebtedness.  The 91⁄2% Senior Second Secured Notes aresecured by a junior lien, subject to permitted liens, on all of our domesticassets (subject to certain exceptions) that secure our obligations under theCredit Agreement (as defined below) and a portion of the capital stock of ourdirect and indirect domestic subsidiaries and direct foreign subsidiaries.   Interest is payable semi-annually in cash onApril 15 and October 15, beginning October 15, 2003.  The proceeds, net of $5 million debt issuecosts, from the offering were used to repay borrowings under the CreditAgreement among RPP LLC, RPP CC, RPPI, Resolution Europe B.V. (the “Borrowers”)and the various lenders party thereto, dated as of November 14, 2000 asamended, (the “Credit Agreement”) and for general corporate purposes, includingworking capital. The 91⁄2% Senior Second Secured Notes mature on April 15,2010 and may be redeemed in whole at any time or in part from time to time, onand after April 15, 2006, at the specified redemption prices set forthunder the related indenture.

 

The Company and the other Borrowers executed theFourth Amendment to the Credit Agreement dated as of April 1, 2003.  The Credit Agreement Amendment, among otherthings, (a) permitted the Borrowers to issue up to $200 million of the OriginalNotes and Additional Notes (as defined below) so long as they used at least thefirst $135 million of net proceeds from the offering of the Notes to prepay theterm loans outstanding under the Credit Agreement, (b) amended the financialcovenants by eliminating the consolidated interest coverage ratio covenant andthe adjusted total leverage ratio covenant and added an adjusted bank leverage

 

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ratio covenant, and (c) reduced the size of therevolving credit facility from $100 million to $75 million.

 

In May 2003, the Company and RPP CC registered an identical series of$175 million 9 1⁄2% Senior Second Secured Notes due 2010 with the Securities andExchange Commission and subsequently completed an offer to exchange theunregistered notes for the registered notes.

 

On May 22, 2003, theCompany completed a private offering, together with RPP CC as co-issuer, of anadditional $25 million aggregate principal amount of 91⁄2% Senior Second SecuredNotes Due 2010 (the “Additional Notes”). The Additional Notes, together withthe $175 million aggregate principal amount of notes that were originallyissued on April 9, 2003 (the “Original Notes”), are treated as a singleclass of securities under the Company’s existing indenture.  The proceeds, net of $2 million debt issuecosts from the offering, were used for general corporate purposes, includingworking capital.

 

In July 2003, theCompany and RPP CC registered an identical series of 9 1⁄2% Senior Second SecuredNotes Due 2010 with the Securities and Exchange Commission and subsequentlycompleted an offer to exchange all of the unregistered notes for registerednotes.  As a result of these two exchangeoffers, all of the outstanding $200 million of 9 1⁄2% Senior Second Secured Notesdue 2010 are registered notes.

 

On December 22,2003, RPP LLC completed a private offering, together with RPP CC as co-issuer,of $140 million aggregate principal amount of 8% Senior Secured Notes Due2009.  The $140 million of 8% SeniorSecured Notes are senior secured obligations ranking equal in right of paymentto all of our existing and future senior debt and senior in right of paymentwith all of our existing and future subordinated indebtedness.  The 8% Senior Secured Notes are secured by alien, subject to permitted liens, on all of our domestic assets (subject tocertain exceptions) that secure our obligations under the Credit Agreement anda portion of the capital stock of our direct and indirect domestic subsidiariesand direct foreign subsidiaries. Our obligations under the 8% Senior SecuredNotes and our obligations under the 91⁄2% Senior Second Secured Notes are securedby liens on the same collateral.  Byvirtue of the lien priority, the 8% Senior Secured Notes are effectively seniorto the obligations under the 91⁄2% Senior Second Secured Notes to the extent ofthe value of the collateral securing such notes. Interest is payablesemi-annually in cash on December 15 and June 15, beginning June 15,2004.   The proceeds, net of $4 million debtissue costs from the offering, were used to repay borrowings under the CreditAgreement or for general corporate purposes, including working capital.   The 8% Senior Secured Notes mature on December 15,2009 and may be redeemed in whole at any time or in part from time to time, onand after December 15, 2006, at the specified redemption prices set forthunder the related indenture.

 

In February 2004,RPP LLC and RPP CC registered an identical series of 8% Senior Secured NotesDue 2009 with the Securities and Exchange Commission and subsequently completedan offer to exchange all of the unregistered notes for registered notes.

 

The Company and the otherBorrowers executed the Fifth Amendment to the Credit Agreement with aneffective date as of December 22, 2003. The Fifth Amendment, among other things, (a) permitted the Company toissue the Notes so long as the net proceeds from the offering of the Notes wereused to repay all of the remaining term loans outstanding under the creditagreement, (b) eliminated the adjusted bank leverage ratio covenant, and (c)imposed an asset coverage test which will limit borrowings and letters ofcredit under our revolving credit facility to the sum (the “Borrowing Base”) of65% of the Company’s U. S. inventory, 85% of the net book value of the Company’sU. S. receivables and 20% of the net book value of the Company’s U. S. plant,property and equipment, which Borrowing Base the Company will be required toreport on a monthly basis.  If theutilization under the revolving credit facility exceeds the most recentlyreported Borrowing Base, the Company must repay outstanding borrowings and/orcash collateralize letters of credit in the amount equal to such excess.  Substantially all of our current and futureassets are pledged as security under the Company’s credit agreement.

 

93

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On November 14,2000, RPPI., RPP LLC, RPP CCl and Resolution Europe B.V. entered into a $600million credit agreement (“the Credit Agreement”) with a syndicate of financialinstitutions. The Credit Agreement provided for a six-year $75 millionrevolving credit facility, the euro equivalent of which was also available, tobe used for, among other things, working capital and general corporate purposesof the Company and its subsidiaries, including without limitation, certainpermitted acquisitions. The revolving credit facility also included a sub-limitfor letters of credit in an amount not to exceed $50 million. At December 31,2004, $28 million was outstanding under the revolving credit facility and $2million in letters of credit. At December 31, 2004, we had additionalborrowing capacity under the Credit Agreement of $45 million. During 2004, weborrowed $172 million and made payments of $146 million under the Credit Agreement.As of December 31, 2004, we were in compliance with the borrowing baselimit of the Credit Agreement.

 

Borrowings that weremaintained as dollar term loans or loans under the revolving credit facilitydenominated in dollars, accrued interest at either Citibank’s prime lendingbase rate or the eurodollar rate plus, in each case, a margin ranging from1.25% to 3.00%, which margin was dependent upon our leverage, as determined ona quarterly basis. Interest rates on loans under the revolving credit facilitydenominated in euros, accrued interest at the euro rate plus associated costsplus, a margin ranging from 2.25% to 3.00% which margin was dependent upon ourleverage, as determined on a quarterly basis.

 

Interest period electionsgenerally ranged from one to six months, or to the extent available, nine ortwelve months for eurodollar and euro rate loans. With respect to eurodollarloans and euro rate loans, interest was payable at the end of each interestperiod or, for interest periods longer than three months, at least every threemonths.

 

With respect to base rateloans under the credit agreement, interest was payable quarterly on the lastbusiness day of each fiscal quarter. Calculation of all interest was based onthe actual number of days elapsed in a year comprising 360 days. For each drawnletter of credit, we were required to pay a per annum fee equal to the spreadover the eurodollar rate for the revolving credit facility, a fronting feeequal to  1/4 of 1% on the aggregate daily statedamount of each letter of credit, plus administrative charges. Additionally, wewere required to pay a commitment fee ranging from 0.375% to 0.500% per annum,depending on our leverage ratio, which commitment fee was payable quarterly onthe unused available portion of the revolving credit facility.

 

The loans incurred underthe Credit Agreement by RPP LLC and RPP CC were guaranteed by RPPI and all ofour existing and future direct and indirect wholly-owned domesticsubsidiaries.  The U.S. loans under theCredit Agreement were secured by a perfected security interest in substantiallyall of our properties and assets and our direct and indirect wholly-owneddomestic restricted subsidiaries, now owned or acquired later, including apledge of all capital stock and notes owned by us and our domestic restrictedsubsidiaries; provided that no more than 65% of the stock of our foreignsubsidiaries were required to be pledged in respect of such loans.  In addition, loans incurred under the CreditAgreement by Resolution Europe B.V. were guaranteed by RPPI, us and all of ourexisting and future direct and indirect domestic and material foreignsubsidiaries (the “Non-U.S. Guarantors”), subject to exceptions andrestrictions.  The obligations ofResolution Europe B.V. and the Non-U.S. Guarantors were secured by a perfectedsecurity interest in the assets described above and in certain materialproperty and assets owned by Resolution Europe B.V. and the Non-U.S.Guarantors.

 

In January 2005, weentered into a new credit agreement to refinance the Credit Agreement that wasin existence at December 31, 2004. See Note 22 for more information on the new credit agreement.

 

During 2002, we enteredinto unsecured trade notes, totaling $3.9 million, that bear interest rangingfrom 6.75 to 8.18 percent, payable over thirty-six months with one of ourvendors for the purchase of computer equipment and related services. As of December 31,2004 and 2003, unsecured trade notes totalling $0.3 million and $2 million,respectively, were outstanding.

 

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Maturities of long-termdebt for the years ending December 31, 2004 are as follows (in millions ofU. S. dollars):

 
| 2005       |   | $      | — |   |
|------------|--------|--------|--------|--------|
| 2006       |   | — |   |
| 2007       |   | — |   |
| 2008       |   | — |   |
| 2009       |   | 140    |   |
| Thereafter |   | 561    |   |
|       |   | $      | 701    |   |

 

Our high level of debt may preclude us from borrowingany more funds beyond those available under the revolving credit agreement.  As a result of our high level of debt, wewill have to generate significant cash flows through operating activities,borrowings and asset sales to meet our current debt service requirements.  Based on our current level of operationsmanagement believes that our cash flow from operations, together with existingcash and cash equivalents on hand, net proceeds from the issuances of thenotes, future borrowings under our revolving credit facility and sales ofassets, if necessary, will be sufficient to fund our working capital needs andexpenditures for property, plant and equipment and debt service obligations inthe foreseeable future, although no assurance can be given in this regard.

 

**11.****                               ObligationsUnder Capital Leases**

 

The Company’s capitalleases range from three to eight year terms for equipment. The equipment hasbeen capitalized at its fair market value of $3.5 million, which approximatesthe present value of the minimum lease payments. The current maturity amountsare included in other payables and accruals of our Consolidated Balance Sheets.  At December 31, 2004 and 2003, totalamounts outstanding under capital leases totaled $1 and $2 million,respectively.

 

Future minimum paymentsunder capital leases will average approximately $0.3 for the next four years.

 

**12.****                               Contingenciesand Other Matters**

 

In the ordinary course ofbusiness, the Company is subject to various laws and regulations and, from timeto time, litigation.  In the opinion ofmanagement, compliance with existing laws and regulations will not materiallyaffect the financial position or results of operations of the Company.  Management is not aware of any pendingactions against the Company.

 

As mentioned above, our business is subject to various federal, state,local and foreign laws and regulations which govern environmental health andsafety (“EHS”) related matters. Compliance with these laws and regulationsrequires substantial continuing financial commitments and planning. Moreover,the laws and regulations directly affect how we operate our business.   The financial commitments consist ofenvironmental costs for normal day to day operations, voluntary and mandatorymatters as well as remediation issues.

 

We accrue for environmental liabilities when the liability is probableand the costs are reasonably estimable.  Asof December 31, 2004 and 2003, we have assessed that an environmentalremediation liability accrual is not needed based on the current availablefacts, present laws and regulations, and current technology.  This assessment is based on the lack ofevidence of any claims or possible claims against us from the closing date ofthe recapitalization.  For environmentalconditions that existed prior to the closing date, our environmentalremediation liability is influenced by agreements whereby Shell generally willindemnify us for environmental damages associated with environmental conditionsthat occurred or existed before the closing date of the recapitalization,subject to certain limitations. In addition, management believes that wemaintain adequate insurance coverage, subject to deductibles, for environmentalremediation activities.

 

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As mentioned above, the Company has substantial continuing financial commitmentsfor compliance of environmental matters.  During 2004 and 2003, the Company expended a total of $2 million and $6million in related mandatory EHS capital projects not reimbursed by Shell. Weexpect a similar operating environmental commitment to continue in futureyears; however, the level of financial commitment may increase if theenvironmental laws and regulations become more stringent.  During 2002, we received total proceeds of $22million, in connection with indemnified environmental projects pursuant to theenvironmental agreements as amended and we applied $17 million ($16 million forcapital projects and $1 million for expense projects) that reduced capitalexpenditures and operating expenses.  Thisresulted in a Deferred Credit balance of $5 million on the Consolidated BalanceSheets as of December 31, 2002. The remaining Deferred Credit balance wasapplied to  capital expenditures in 2003.

 

**13.****                               Leasesand Other Commitments**

 

The Company entered intocontractual agreements with Shell and other third parties for the supply ofsite services, utilities, materials and facilities (“SUMF services”) and foroperation and maintenance services (“OMS services”) necessary to operate theCompany on a stand-alone basis.  Theduration of the contracts range from one year, or less, to 20 years, dependingon the nature of services.  Suchcontracts may be terminated by either party under certain conditions asprovided for in the respective agreements; generally, 90 days notice isrequired for short-term contracts and three years notice is required forlonger-term contracts (generally in excess of five years).  Contractual pricing generally includes afixed and variable component.

 

In addition, the Companyentered into contractual agreements with Shell and other third parties for thepurchase of feedstocks.  The terms of theagreements vary from three to ten years, extendable at the Company’s requestand cancelable by either party as provided for in the respectiveagreements.  Feedstock prices are basedon market prices less negotiated volume discounts or cost input formulas.  See Note 3 for more details on ourcommitments surrounding certain agreements with Shell.

 

We rely on long-term supply agreements with Shell andother key suppliers for most of our raw material supply. The loss of a keysource of supply or a delay in shipments could have an adverse effect on ourbusiness. Should any of our suppliers fail to deliver or should any of our keylong-term supply contracts be canceled, we would be forced to purchase rawmaterials in the open market, and no assurances can be given that we would beable to make these purchases or make them at prices that would allow us toremain competitive. Some of our raw materials are provided to us by onesupplier and we could incur significant time and expense if we had to replacethe supplier. In addition, several of our feedstocks at various facilities aretransported through a pipeline from one supplier. If we were unable toreceive these feedstocks through these pipeline arrangements, we may not beable to obtain them from other suppliers at competitive prices or in a timelymanner.

 

Future minimum paymentsunder non-cancelable operating leases with initial or remaining terms of oneyear or more consisted of the following at December 31, 2004 (in millionsof U. S. dollars):

 
| 2005                          |   | $  | 10     |   |
|-------------------------------|--------|----|--------|--------|
| 2006                          |   | 10 |   |
| 2007                          |   | 10 |   |
| 2008                          |   | 9  |   |
| 2009 and thereafter           |   | 29 |   |
| Total minimum lease  payments |   | $  | 68     |   |

 

Rental expense underoperating leases was $10 million, $10 million and $10 million in 2004, 2003 and2002, respectively.

 

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**14.****                               Segmentand Related Information**

 

Using guidelines setforth in Statement of Financial Accounting Standards No.131, Disclosures aboutSegments of an Enterprise and Related Information, the Company has identifiedthree reportable segments based on geographic information:  (i) U. S., (ii) Europe and Africa, and (iii)Asia Pacific and Middle East.  Managementoperates its business through geographic regions and is not organized nor doesit prepare discreet financial information by product line within the geographicregions.

 

Selected financial databy geographic region are presented below (in millions of U. S. dollars):  

 
| ** **                                                         | ** ** | **U. S.** | ** ** | **Europe  and  Africa** | ** ** | **Asia  Pacific  and  Middle  East** | ** ** | **Elim’s** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|-----------|------------|-------------------------|------------|--------------------------------------|------------|-----------------|------------|-----------|------------|
| As of and for the year  ended December 31, 2004:              |       |      |       |                    |       |                                 |       |            |       |      |       |
| Revenues from external  customers                                  |       | $         | 431        |                    | $          | 563                                  |       | $               | 2          |      | $          | — |   | $ | 996 |   |
| Inter-segment revenues                                             |       | 45        |       | 3                       |       | 2                                    |       | (50             | )          | —    |       |
| Depreciation and  amortization expense                             |       | 30        |       | 17                      |       | —                               |       | —          |       | 47        |       |
| Total costs                                                        |       | 461       |       | 499                     |       | 4                                    |       | —          |       | 964       |       |
| Operating income (loss)                                            |       | (30       | )          | 64                      |       | (2                                   | )          | —          |       | 32        |       |
| Total assets                                                       |       | 484       |       | 426                     |       | 1                                    |       | —          |       | 911       |       |
| Expenditures for  long-lived assets                                |       | 17        |       | 9                       |       | —                               |       | —          |       | 26        |       |
|                                                               |       |      |       |                    |       |                                 |       |            |       |      |       |
| As of and for the year  ended December 31, 2003:              |       |      |       |                    |       |                                 |       |            |       |      |       |
| Revenues from external  customers                                  |       | $         | 349        |                    | $          | 430                                  |       | $               | 3          |      | $          | — |   | $ | 782 |   |
| Inter-segment revenues                                             |       | 9         |       | 10                      |       | —                               |       | (19             | )          | —    |       |
| Depreciation and  amortization expense                             |       | 32        |       | 14                      |       | —                               |       | —          |       | 46        |       |
| Total costs                                                        |       | 335       |       | 449                     |       | 2                                    |       | —          |       | 786       |       |
| Operating income (loss)                                            |       | 14        |       | (19                     | )          | 1                                    |       | —          |       | (4        | )          |
| Total assets (Restated)                                            |       | 488       |       | 386                     |       | 1                                    |       | —          |       | 875       |       |
| Expenditures for  long-lived assets                                |       | 12        |       | 5                       |       | 1                                    |       |            |       | 18        |       |
|                                                               |       |      |       |                    |       |                                 |       |            |       |      |       |
| As of and for the year  ended December 31, 2002:              |       |      |       |                    |       |                                 |       |            |       |      |       |
| Revenues from external  customers                                  |       | $         | 367        |                    | $          | 364                                  |       | $               | 9          |      | $          | — |   | $ | 740 |   |
| Inter-segment revenues                                             |       | 19        |       | 142                     |       | 4                                    |       | (165            | )          | —    |       |
| Depreciation and  amortization expense                             |       | 24        |       | 12                      |       | —                               |       | —          |       | 36        |       |
| Special charges                                                    |       | 5         |       | 3                       |       | —                               |       | —          |       | 8         |       |
| Total costs                                                        |       | 299       |       | 381                     |       | 9                                    |       | —          |       | 689       |       |
| Operating income (loss)                                            |       | 68        |       | (17                     | )          | —                               |       | —          |       | 51        |       |
| Total assets                                                       |       | 462       |       | 329                     |       | 2                                    |       | —          |       | 793       |       |
| Equity investments in  and advances to unconsolidated subsidiaries |       | —    |       | 11                      |       | —                               |       | —          |       | 11        |       |
| Expenditures for  long-lived assets                                |       | 39        |       | 9                       |       | —                               |       | —          |       | 48        |       |

 

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Revenues from external customers for each productgroup are presented below (in millions of U. S. dollars):

 
| ** **      | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------|------------|-------------------------------------------|------------|
| ** **      | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Resins          |       | $                                         | 627        |   | $ | 499 |   | $ | 488 |   |
| Bisphenol-A     |       | 178                                       |       | 129 |   | 125 |   |
| Versatics       |       | 149                                       |       | 116 |   | 91 |   |
| Epichlorohydrin |       | 16                                        |       | 34 |   | 32 |   |
| Other           |       | 26                                        |       | 4 |   | 4 |   |
| Total Revenues  |       | $                                         | 996        |   | $ | 782 |   | $ | 740 |   |

 

Selected country informationis presented below (in millions of U. S. dollars):

 
| ** **                     | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| **Revenues:**                  | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| U.S.                           |       | $                                        | 476        |   | $ | 358 |   | $ | 386 |   |
| Netherlands                    |       | 566                                      |       | 440 |   | 371 |   |
| Germany                        |       | —                                   |       | — |   | 60 |   |
| Other(1)                       |       | 4                                        |       | 3 |   | 88 |   |
| Inter-company                  |       | (50                                      | )          | (19 | ) | (165 | ) |
| Total                          |       | $                                        | 996        |   | $ | 782 |   | $ | 740 |   |
|                           |       |                                     |       |   |   |   |   |
| ** **                     | ** ** | **As of December 31,**              | ** ** |
| **Net Long-Lived Assets: (2)** | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| U.S.                           |       | $                                        | 243        |   | $ | 259 |   | $ | 270 |   |
| Netherlands                    |       | 206                                      |       | 202 |   | 186 |   |
| Germany                        |       | 6                                        |       | 5 |   | 5 |   |
| Other(1)                       |       | 16                                       |       | 9 |   | 10 |   |
| Total                          |       | $                                        | 471        |   | $ | 475 |   | $ | 471 |   |

 

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(1) Other consists of other foreign countries thatindividually account for less than 10% of the total revenues.

(2) Net long-lived assets include property, plant andequipment, intangibles and investment in equity affiliates or investment atcost.

 

For 2004 and 2003, salesrevenues are on single billing entities in the U. S. and in the Netherlands.  For 2002, sales revenues are attributed togeographic regions based on the location of the manufacturing facility and/ormarketing company, and are not based on location of customer.  Inter-segment amounts represent salestransactions within and between geographic regions.

 

**15.****                               RestructuringCharges**

 

The Company accrued acharge for employee severance and other exit costs of $6 million in the fourthquarter of 2002 related to a cost reduction program implemented in response toa significant decline in profitability. The global reduction in work forceaffected approximately 90 employees or 9% of the global work force.  Other exit costs relate to a modification ofthe OMS services agreement previously entered into with Shell covering employeetermination expenses to be absorbed by the Company. As of December 31,2003, all the employees related to the reduction in work force have beenterminated.

 

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**16.****                               FairValue of Financial Instruments**

 

The Company does not holdor issue financial instruments for trading purposes.

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate the value.  Potential income tax ramifications related tothe realization of unrealized gains and losses that would be incurred in anactual sale or settlement have not been taken into consideration.

 

Management believes thatthe carrying amounts for cash and cash equivalents, accounts receivable andcurrent liabilities are reasonable estimates of their fair values, principallydue to the short-term maturities of these instruments.  The estimated fair value of the long-termdebt is based on the most recently available trading prices.

 

The estimated fair valuesof financial instruments are as follows (in millions of U. S. dollars):

 
| ** **                             | ** ** | **2004**              | ** ** | **2003**        | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------|------------|
| ** **                             | ** ** | **Carrying  Amounts** | ** ** | **Fair  Value** | ** ** | **Carrying  Amounts** | ** ** | **Fair  Value** | ** ** |
| Financial assets:                      |       |                  |       |            |       |   |   |   |   |
| Cash and cash  equivalents             |       | $                     | 4          |            | $          | 4 |   | $ | 49 |   | $ | 49 |   |
| Accounts receivable,  net              |       | 160                   |       | 160             |       | 107 |   | 107 |   |
| Financial liabilities:                 |       |                  |       |            |       |   |   |   |   |
| Current liabilities                    |       | 208                   |       | 208             |       | 141 |   | 141 |   |
| Long-term  debt-principal:             |       |                  |       |            |       |   |   |   |   |
| 13 1⁄2% Senior  Subordinated Notes  |       | 328                   |       | 357             |       | 328 |   | 290 |   |
| 9 1⁄2% Senior Second Secured  Notes |       | 200                   |       | 217             |       | 200 |   | 201 |   |
| 8% Senior Secured Notes                |       | 140                   |       | 151             |       | 140 |   | 144 |   |
| Revolver loans                         |       | 28                    |       | 28              |       | — |   | — |   |
| Other debt                             |       | —                |       | —          |       | 1 |   | 1 |   |
|                                        |            |                       |            |                 |            |  |  |  |  |  |  |  |  |

 

**17.****                               StockOption Plan**

 

***RPPI has adoptedstock option plans pursuant to which options with respect to a total of 69,000shares of RPPI’s common stock are available for grant to employees of,consultants to, or directors of RPPI or RRP LLC.  The board of directors of RPPI or acompensation committee appointed from time to time by the board of directorsadministers the option plan.  The rightto grant options under the option plan will expire on the tenth anniversary ofthe closing date of the recapitalization. Options granted under the plan are or will be either nonqualified orincentive stock options.***

*** ***

Options are granted inamounts and at such times and to such eligible persons as determined by theboard of directors of RPPI or the compensation committee. Options will vest inaccordance with a schedule as determined by the Board of directors of RPPInc.  or the compensation committeeand  this vesting  schedule  will  be outlined  in  the optionee’s  option  agreement. We expect options to vest as follows:

 

a)              One-third of theoptions will be time vesting options and will vest in equal increments overfive years, ending on November 14, 2005. However, upon termination of a grantee’s employment without cause or forgood reason within six months following the sale of RPPI for cash or anytransaction in which RPP Holdings sells at least fifty percent of its shares ofcommon stock of RPPI  acquired by it, allof  the time  vesting  options allocated  to  such terminated  employee  shall vest  immediately  on such  termination.

b)             Two-thirds of theoptions will be performance options and will vest on November 14,2008.  The amount vested will be based onthe operating results achieved by the business. However, vesting of all or a portion of the performance options will beaccelerated upon the consummation of a sale of RPPI  for cash, or any transaction in which Apollo sellsat

 

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least fiftypercent of shares of common stock of RPPI acquired by it.

 

The vesting of optionswill occur only during an employee’s, consultants’, or director’s term ofrelationship with RPPI.  All unvestedoptions will be forfeited upon a termination of relationship.

 

The board of directors ofRPPI or the compensation committee will determine the exercise price for theoptions at $100 or based on reasonable and customary methods for determiningfair values when there is no established trading market.  The initial exercise price was the same asthe per share price being paid by RPP Holdings, the parent of RPPI, in the recapitalization.  The options will expire on the thirtieth dayimmediately following the eighth anniversary of issuance.

 

Upon a termination of relationship,RPPI and RPP Holdings have certain repurchase rights.  Upon a sale of RPPI  for cash or the occurrence  of any  transaction  in which  RPP  Holdings sells  at  least 50%  of  the shares  of  common stock  acquired  by it,  RPPI also has certain repurchaserights.  The repurchase rights generallyinclude buying the vested options from the grantee within a specified period oftime at the fair value calculated in-house using reasonable and customarymethods for determining market values when there is no established tradingmarket.

 

A summary of the OptionPlans as of December 31, 2004, and changes during the years ended December 31,2004 and 2003 are presented below:

 
| ** **                             | ** ** | **Number of shares  covered by options** | ** ** | **Weighted average  exercise price** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|
| Outstanding at January 1,  2002   |       | 59,859                                   |       | $                                    | 128        |   |
| Granted                                |       | 1,820                                    |       | $                                    | 169        |   |
| Exercised                              |       | —                                   |       | —                               |       |
| Cancelled                              |       | 1,320                                    |       | $                                    | 202        |   |
| Outstanding at December 31,  2002 |       | 60,359                                   |       | $                                    | 127        |   |
| Granted                                |       | 1,420                                    |       | $                                    | 100        |   |
| Exercised                              |       | 8                                        |       | $                                    | 100        |   |
| Cancelled                              |       | 5,206                                    |       | $                                    | 135        |   |
| Outstanding at December 31,  2003 |       | 56,565                                   |       | $                                    | 126        |   |
| Granted                                |       | 15,920                                   |       | $                                    | 100        |   |
| Exercised                              |       | —                                   |       | —                               |       |
| Cancelled                              |       | 10,185                                   |       | $                                    | 171        |   |
| Outstanding at December 31,  2004 |       | 62,300                                   |       | $                                    | 113        |   |
|                                   |       |                                     |       |                                 |       |
| Exercisable at December 31,  2003 |       | 8,606                                    |       | $                                    | 122        |   |
| Exercisable at December 31,  2004 |       | 10,556                                   |       | $                                    | 128        |   |

 

**18.****                               SupplementalCash Flow Information**

 

The Company translatesits foreign subsidiaries’ financial statements for consolidation in accordancewith SFAS No. 52 using the current rate method. As a result, the statement of cash flows is affected by the non-cashforeign currency translation adjustments that are pervasive in the ConsolidatedBalance Sheets.  The statement of cashflows has been adjusted to exclude the non-cash effects of the foreign currencytranslation adjustments.

 

**19**.                              **OtherRevenue**

 

In 2002 and 2001, theCompany entered into bisphenol-A (“BPA”) technology license agreements whereinthe Company granted non-exclusive licenses to third parties to use RPP LLC’stechnology to construct, operate and maintain and/or repair

 

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one licensed plant for the manufacture of BPA.  In addition to the grant to use the license,the Company will also provide technical assistance in the design, engineering,procurement, training, commissioning and/or start-up of the licensedplant.  Revenues from the sale of the BPAtechnology license and related support services are recognized using thepercentage of completion method.   In 2004and 2003, the Company, recognized $2 million and $1 million as Other Revenuesrelated to the sale of the BPA technology licenses.

 

In May 2002, the Companyentered into an exclusive and irrevocable option with a third party to executea long-term supply contract, wherein the Company received $4.2 million.  In June 2002, the Company executed acalcium chloride supply agreement with the third party for fifteen years.  Revenues from the sale of the option will berecognized on a straight line basis over fifteen years consistent with durationof the supply agreement.   In 2004 and2003, the Company recognized an insignificant amount as Other Revenues relatedto the sale of the option.

 

In December 2004,the Company sold all its remaining BPA technology and related patents for $1million.  The sale of these intangibleswas recognized as Other Revenues.

 

**20.****                              DeferredRevenue**

 

Deferred revenue includesthe unamortized balances related to the sale of the BPA technology licenses andthe sale of the exclusive and irrevocable option to execute a long-term supplycontract. As of December 31, 2004 and 2003, the balance included inDeferred Revenue for the sale of BPA technology licenses was $1 million and $1million, respectively.

 

**21.****                               CapitalContributions and Constructive Distribution**

 

During 2004 and 2003, theCompany paid constructive cash distributions of $1 million and $4 million toShell.  Of the $4 million, $2 million waspreviously accrued, relating to the same reimbursements of certain pensioncosts in accordance with the Master Sales Agreement dated November 14,2000 and related ancillary agreements.  During2002 and 2001, RPPI made a capital contribution of approximately $1 million tothe Company relating to reimbursements of certain pension costs for eachrespective year under the Master Sales Agreement dated November 14, 2000and related ancillary agreements.

 

**22.****                               SubsequentEvent**

 

**On January 24, 2005, RPP LLC and RPP Capital enteredinto a $150 million revolving credit facility pursuant to a credit agreementamong Resolution Performance Products Inc., Resolution Europe B.V., the othercredit parties party thereto, General Electric Capital Corporation, GELeveraged Loans Limited and the other lenders party thereto (the “New CreditAgreement”).**

 

The proceeds ofthe initial loans under the New Credit Agreement were used to refinanceindebtedness under the former Credit Agreement.

 

The New CreditAgreement currently provides for the extension of revolving loans to RPP LLC(and any other entity approved to be a US borrower) of up to $100 million inaggregate principal amount at any time outstanding (“U.S. Credit Facility”),and for the extension of revolving loans to Resolution Europe B.V. (and anyother entity approved to be a Netherlands borrower) of up to the Euroequivalent of $50 million in aggregate principal amount at any time outstanding(“Netherlands Credit Facility”).  Loansunder the U.S. Credit Facility and the Netherlands Credit Facility may be usedfor, among other things, working capital and general corporate purposes of RPPLLC and its direct and indirect subsidiaries (including, without limitation,Resolution Europe B.V.), including, without limitation, certain permittedacquisitions.  The U.S. Credit Facilityincludes a sub-limit for letters of credit in an amount not to exceed $30million.  The Netherlands Credit Facilityincludes a sub-limit for letters of credit in an amount not to exceed the Euroequivalent of $10 million.  The extensionof revolving loans under the U.S. Credit Facility and the Netherlands CreditFacility terminates on June 24, 2009.

 

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**Borrowings by RPP LLC under the U.S. Credit Facilitydenominated in dollars accrue interest at either a U.S. index rate or theeurodollar rate plus, in each case, a margin ranging from 1.00% to 2.50%,depending on RPP LLC’s consolidated fixed charge coverage ratio, as calculatedunder the New Credit Agreement and determined on a quarterly basis.  Borrowings by RPP LLC under the U.S. CreditFacility denominated in Euros accrue interest at the euro rate plus a marginranging from 2.00% to 2.50% depending on RPP LLC’s consolidated fixed chargecoverage ratio, as calculated under the New Credit Agreement and determined ona quarterly basis.  Borrowings byResolution Europe B.V. under the Netherlands Credit Facility accrue interest ateither the euro rate plus associated costs or a euro base rate plus, in eachcase, a margin ranging from 2.00% to 2.50% depending on RPP LLC’s consolidatedfixed charge coverage ratio, as calculated under the New Credit Agreement anddetermined on a quarterly basis.**

** **

**Interest period elections generally range from one to sixmonths for eurodollar and euro rate loans. With respect to eurodollar loans and euro rate loans, interest ispayable at the end of each interest period or, for interest periods longer thanthree months, at least every three months. With respect to euro base rate loans and US index rate loans, interestis payable monthly on the last business day of each month.  Calculation of all interest is based on theactual number of days elapsed in a year comprising 360 days.  For each drawn letter of credit, we are requiredto pay a per annum fee equal to the margin over the eurodollar rate for the revolvingcredit facility, plus administrative charges (including a 0.125% per annumissuing fee).  In addition, RPP LLC willpay a commitment fee of 0.75% per annum of the average daily balance of theunused portion of the U.S. Credit Facility, payable monthly in arrears, if lessthan half of the total commitments under the U.S. Credit Facility are utilized,or 0.50% per annum if greater than or equal to half of such total commitmentsare utilized.  Resolution Europe B.V.will pay a commitment fee of 0.75% per annum of the average daily balance ofthe unused portion of the Netherlands Credit Facility, payable monthly inarrears, if less than half of the total commitments under the NetherlandsCredit Facility are utilized, and 0.50% per annum if greater than or equal tohalf of such total commitments are utilized.**

** **

**The amount of availability for borrowings and letters ofcredit under the U.S. Credit Facility is limited to the sum (the “U.S.Borrowing Base”) of (1) 85% of the net book value of RPP LLC’s receivables, (2)the lesser of 65% of the book value of RPP LLC’s inventory consisting of rawmaterials and finished goods and 85% of the net orderly liquidation value ofsuch inventory, and (3) the lesser of 100% of the net orderly liquidation valueof RPP LLC’s U.S. plant, property and equipment and $25 million (lessamortization), which U.S. Borrowing Base RPP LLC will be required to report ona monthly basis.  If the utilizationunder the U.S. Credit Facility exceeds the most recently reported U.S.Borrowing Base, RPP LLC must repay outstanding borrowings and/or cashcollateralize letters of credit in the amount equal to such excess.**

** **

**The amount of availability for borrowings and letters ofcredit under the Netherlands Credit Facility is limited to the sum (the“Netherlands Borrowing Base”) of (1) 85% of the net book value of ResolutionEurope B.V.’s receivables originating from customers located in Austria,Australia, Belgium, Canada, Switzerland, Czech Republic, Germany, Denmark,Spain, Finland, France, the UK, Greece, Hungary, Ireland, Italy, theNetherlands, Norway, New Zealand, Poland, Portugal, Sweden, Slovakia and theU.S. and (2) 65% of the net book value of Resolution Europe B.V.’s receivablesoriginating from customers located in China, Hong Kong, Japan, Romania,Singapore, Slovenia and Taiwan, which Netherlands Borrowing Base ResolutionEurope B.V. will be required to report on a monthly basis.  If the utilization under the NetherlandsCredit Facility exceeds the most recently reported Netherlands Borrowing Base,Resolution Europe B.V. must repay outstanding borrowings and/or cashcollateralize letters of credit in the amount equal to such excess.**

** **

The loans incurred underthe U.S. Credit Facility are guaranteed by RPP Inc., RPP Capital Corporationand all of RPP Inc.’s existing and future direct and indirect domesticsubsidiaries other than RPP LLC (the “U.S. Guarantors”).  The loans incurred under the U.S. CreditFacility are secured by a security interest in substantially all of RPP LLC’sand the U.S. Guarantors’ properties and assets, including a pledge of allcapital stock and notes owned by them and their subsidiaries; provided that nomore than 65% of the voting stock of their first-tier foreign subsidiaries isrequired to be pledged in respect of such loans under the U.S. CreditFacility.  As part of the security forthe U.S. Credit Facility, the lenders have control agreements over the bankaccounts into which RPP LLC’s customers remit payment.  Loans incurred under the Netherlands CreditFacility are guaranteed by Resolution Holdings B.V. and all of its existing andfuture direct and indirect material foreign subsidiaries other than ResolutionEurope B.V. (the “Non-U.S. 

 

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Guarantors”), subject to exceptions andrestrictions.  The obligations ofResolution Europe B.V. and the Non-U.S. Guarantors are secured by a securityinterest in substantially all of the properties and assets owned by ResolutionEurope B.V. and the Non-U.S. Guarantors, including by a pledge of all capitalstock and notes owned by such entities.  As part of the security for the NetherlandsCredit Facility, the lenders maintain bank accounts into which ResolutionEurope B.V.’s customers remit payment. Such receipts are transferred to Resolution Europe B.V. once anyoutstanding revolver balances are repaid. The Credit Agreement contains customary representations and warranties,affirmative and negative covenants and events of default.

 

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**RESOLUTION PERFORMANCE PRODUCTS LLC**

 

**SCHEDULE OF VALUATION ANDQUALIFYING ACCOUNTS AND RESERVES**

**(In millions of U. S. Dollars)**

 
| ** **                                         | ** ** | ** **                            | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|----------------|------------|
| **Description**                                    | ** ** | **Balance at  January 1,  2004** | ** ** | **Charges to  costs and  expenses** | ** ** | **Charged  to other  accounts** | ** ** | **Deductions** | ** ** | **Balance at  December 31,  2004** | ** ** |
| ** **                                         | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Allowance for doubtful  accounts                   |       | $                                     | 3          |                                | —     |                            | —     |           | 1          |   | $ | 2 |   |
| Allowance for inventory  obsolescence              |       | $                                     | 1          |                                | 3          |                            | —     |           | 1          |   | $ | 3 |   |
| Deferred tax asset  valuation allowance            |       | $                                     | 13         |                                | 30         |                            | —     |           | —     |   | $ | 43 |   |
|                                               |       |                                  |       |                                |       |                            |       |           |       |   |   |
| ** **                                         | ** ** | ** **                            | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
| **Description**                                    | ** ** | **Balance at  January 1,  2003** | ** ** | **Charges to  costs and  expenses** | ** ** | **Charged  to other  accounts** | ** ** | **Deductions** | ** ** | **Balance at  December 31,   2003** | ** ** |
| ** **                                         | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Allowance for doubtful  accounts                   |       | $                                     | 2          |                                | 1          |                            | —     |           | —     |   | $ | 3 |   |
| Allowance for inventory  obsolescence              |       | $                                     | 1          |                                | —     |                            | —     |           | —     |   | $ | 1 |   |
| Deferred tax asset  valuation allowance (Restated) |       | $                                     | 1          |                                | 14         |                            | (2         | )              | —     |   | $ | 13 |   |
|                                               |       |                                  |       |                                |       |                            |       |           |       |   |   |
| ** **                                         | ** ** | ** **                            | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
| **Description**                                    | ** ** | **Balance at  January 1,  2002** | ** ** | **Charges to  costs and  expenses** | ** ** | **Charged  to other  accounts** | ** ** | **Deductions** | ** ** | **Balance at  December 31,  2002** | ** ** |
| ** **                                         | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Allowance for doubtful  accounts                   |       | $                                     | 3          |                                | —     |                            | —     |           | 1          |   | $ | 2 |   |
| Allowance for inventory  obsolescence              |       | $                                     | 3          |                                | 1          |                            | —     |           | 3          |   | $ | 1 |   |
| Deferred tax asset  valuation allowance            |       | $                                     | 0          |                                | 1          |                            | —     |           | —     |   | $ | 1 |   |

 

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