##### Table of Contents



Securities and Exchange Commission

Washington, D.C. 20549


FORM 10-K

(Mark One)

|[x] |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------
|    |  |                                                                                     
|    |  | For the fiscal year ended December 31, 2003                                         

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-57170

Resolution Performance Products LLC

(Exact name of registrant as specified in charter)


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

Commission File Number 333-57170-01

RPP Capital Corporation

(Exact name of registrant as specified in charter)


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

1600 Smith Street, Suite 2400
Houston, Texas 77002
(888) 949-2502
(Address of principal executive offices and telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

| |  |                                     |  |         |  |        
| |  | ----------------------------------- |  | ------- |  | -------
| |  | RESOLUTION PERFORMANCE PRODUCTS LLC |  | YES [x] |  | NO [  ]
| |  |                                     |  |         |  |        
| |  | RPP CAPITAL CORPORATION             |  | YES [x] |  | NO [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [  ]  No [X]

At February 1, 2004, there were 1,000,000 outstanding membership units of
Resolution Performance Products LLC and 1,000 outstanding shares of common
stock of RPP Capital Corporation, none of which was
held by non-affiliates of the Registrants. At June 30, 2003, the market value
of the common equity of each of Resolution Performance Products LLC and RPP
Capital Corporation held by non-affiliates was zero.

Documents Incorporated by Reference: None





---

TABLE OF CONTENTS



|                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                               
|                                      | ITEM 1. BUSINESS                                                                             
|                                      | ITEM 2. PROPERTIES                                                                           
|                                      | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                      | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS                                   
|PART II                              
|                                      | ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK 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                                                             
|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, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                           
|EXHIBIT INDEX                        
|CFO Section 302 Certification        
|CEO Section 302 Certification        
|CEO and CFO Section 906 Certification



---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC

RPP CAPITAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

|           |  |                                                                                       |  |  |    |          |  | 
|---------- |  | ------------------------------------------------------------------------------------- |  |  | -- | -------- |  | 
|           |  |                                                                                       |  |  |    | Page No.
|           |  |                                                                                       |  |  |    |         
|PART I     |  |                                                                                       |  |  |    |         
|Item 1.    |  | Business                                                                              |  |  | 4  |         
|Item 2.    |  | Properties                                                                            |  |  | 14 |         
|Item 3.    |  | Legal Proceedings                                                                     |  |  | 14 |         
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 14 |         
|PART II   
|Item 5.    |  | Market for the Registrants Common Equity and Related
Stockholder Matters             |  |  | 15 |         
|Item 6.    |  | Selected Financial Data                                                               |  |  | 16 |         
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition
and Results of
Operations |  |  | 18 |         
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 34 |         
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  |  | 35 |         
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosures |  |  | 35 |         
|Item 9A.   |  | Controls and Procedures                                                               |  |  | 35 |         
|PART III   |  |                                                                                       |  |  |    |         
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  |  | 37 |         
|Item 11.   |  | Executive Compensation                                                                |  |  | 41 |         
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 46 |         
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  |  | 48 |         
|Item 14.   |  | Principal Accounting Fees and Services                                                |  |  | 56 |         
|PART IV    |  |                                                                                       |  |  |    |         
|Item 15.   |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |  | 57 |         
|SIGNATURES |  |                                                                                       |  |  | 65 |         

2



---



##### Table of Contents



This report contains certain forward-looking statements that involve risks and
uncertainties, including statements about our plans, objectives, goals,
strategies, future events, future revenues or performance, capital
expenditures, financing needs, plans or intentions relating to acquisitions and
other information that is not historical in nature. When used in this report,
the words estimates, expects, anticipates, forecasts, plans,
intends, believes and variations of these words or similar expressions are
intended to identify forward-looking statements. All forward-looking
statements, including without limitation, managements examination of operating
trends, are based upon our current expectations and various assumptions. Our
expectations, beliefs and projections are expressed in good faith and we
believe there is a reasonable basis for them. However, there can be no
assurance that managements expectations, beliefs and projections will result
or be achieved. Our actual results could differ materially from the results
anticipated in these forward-looking statements. Some of the factors that
could negatively affect our performance are discussed in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
under the caption Risk Factors in our Registration Statement on Form S-4
(File No. 333-112016), which was declared effective by the SEC on February 4,
2004, and elsewhere in this report.

Unless otherwise indicated in this report, (1) the terms RPP LLC, we,
our, ours and us refer to Resolution Performance Products LLC and its
subsidiaries, including the non-U.S. subsidiaries acquired in connection with
or following the recapitalization described below, or, where the context
requires, the operations of our predecessor, the epoxy resins and Versatic
acids and derivatives business of the Royal Dutch/Shell Group of Companies
(together with its affiliates, Shell), (2) the term RPP Capital refers to
RPP Capital Corporation, our wholly-owned subsidiary and a co-obligor on our 13
1/2% Senior Subordinated Notes due 2010, 9 1/2% Senior Second Secured Notes
due 2010 and 8% Senior Secured Notes due 2009, (3) the term Issuers refers to
RPP LLC and RPP Capital, (4) the term RPP Inc. refers to Resolution
Performance Products Inc., 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-owned subsidiary. The financial data included in this report
relating to the period prior to the November 2000 recapitalization come from
the financial statements of the epoxy resins and Versatic acids and derivatives
business of Shell.

3



---



##### Table of Contents






PART I




ITEM 1. BUSINESS

Overview

We are the leading worldwide manufacturer and developer of epoxy resins
and are also the leading global manufacturer of Versatic acids and derivatives.
Epoxy resins are chemicals primarily used in the manufacture of coatings,
adhesives, printed circuit boards, fiber reinforced plastics and construction
materials due to their excellent adhesion, effective corrosion resistance,
strong electrical insulation and mechanical strength properties. Products
containing epoxy resins serve a wide range of end-use industries, including
automotive, aerospace, electrical, construction and industrial maintenance and
food and beverage container coatings. Versatic acids and derivatives are
specialty products which complement our epoxy resin product offerings in the
coatings, adhesives and construction industries. We focus on providing our
customers with specialty systems and solutions, which are packages of basic
and specialty epoxy resins combined with curing agents and other materials that
are designed to meet the specific technical requirements of our customers. Many
of our products are developed and formulated for specific end-customer products
and applications, where the purchasing decisions are driven primarily by
product performance, technical specifications and the ability to deliver
customized service and solutions rather than solely by price.

We are a global business with customers in multiple geographic regions.
Regional sales based on segment information are comprised of the following:
the Americas 45% and Europe/Asia Pacific 55% of revenues for the year ended
December 31, 2003. Geographic segment information is contained in Note 14 to
the consolidated financial statements included elsewhere in this filing. These
customers are served by our global sales and customer service network and by
manufacturing facilities in all regions. We manufacture the two principal
components, or intermediates, of epoxy resins, which are bisphenol-A, or BPA,
and epichlorohydrin, or ECH, and we operate two of the three largest liquid
epoxy resins manufacturing plants in the world. This backward integration and
world-scale manufacturing capability provides us with a low cost, reliable
supply of intermediates for the production of epoxy resins. We believe that our
market leadership in the epoxy resins and Versatics and derivatives industries
is primarily attributable to our strategy of offering our customers a broad
line of products, technical expertise and product applications support along
with being a low cost producer of epoxy resins.

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

We are also the leading manufacturer and marketer of Versatic acids and
derivatives, taking advantage of our manufacturing economies of scale and low
cost ECH supply. Versatic acids and derivatives can be divided into three
groups: basic Versatic acids, VeoVa and Cardura. Basic Versatic acids are used
mainly in pharmaceuticals, peroxides and agrochemicals, whereas VeoVa and
Cardura are used 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 our excess production of BPA and ECH to third parties. BPA is
a critical component of polycarbonate plastics, which are primarily used in the
growing electrical and electronics market, including computer and business
equipment and optical disk applications. Polycarbonate is also used in the
automotive and lighting industries. In addition to being used in the
manufacture of epoxy resins and Versatic acids and derivatives, ECH is used in
water treatment applications.

On November 14, 2000, with an effective date of November 1, 2000, RPP LLC
acquired the Resins Business from Shell (the Transaction). On the same
dates, simultaneous with the above acquisition, RPP Inc. was acquired

4



---



##### Table of Contents



by RPP
Holdings LLC, an affiliate of Apollo Management IV, L.P. (Apollo) in a
recapitalization transaction.
RPP Inc., our parent company, was recapitalized in a transaction financed in
part by the proceeds from a senior secured credit facility, and a private
placement of 13 1/2% senior subordinated notes. Prior to the recapitalization,
RPP Inc. was a wholly-owned subsidiary of Shell.

Industry Overview

We are one of three global producers of liquid epoxy resins, who together
accounted for more than half of the 2003 global capacity for LER, which is the
foundation product of the industry. The U.S. and Europe accounted for a
significant portion of the industrys global LER demand and capacity in 2003,
with the U.S. being a significant exporter 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 2003,
these three global producers account for the majority of LER capacity in the
United States and Europe. There are also several other companies, predominantly
in Asia and Eastern Europe, most of whom usually participate locally and do not
have the world-scale manufacturing and logistics capabilities or cost structure
to compete as effectively in the epoxy resins industry on a global basis.
However, several other producers recently have developed the capability to
export to the U.S. and Europe and compete effectively for a portion of the
markets.

During the year ended December 31, 2003, prices of our major feedstocks
(acetone, chlorine, propylene, and phenol) increased significantly relative to
2002. Historically, feedstock pricing has been an important factor in
profitability as there is a lag between feedstock price changes and product
price changes. This lag has typically ranged from three to twelve months
depending on the magnitude of the feedstock cost change and market dynamics.

After a significant decline in demand for epoxy resins in 2001, demand in
2002 and 2003 remained relatively flat. Similarly, the pricing environment for
epoxy resins continues to be negatively impacted by excess production capacity
as compared to demand. Overall average prices for the year ended December 31,
2003 also remained flat. However, our feedstock costs increased significantly
resulting in compressed margins. We also experienced margin compression in our
ECH and BPA businesses. Our versatics business experienced volume growth while
maintaining unit margins.

We believe the Versatic acids and derivatives market had worldwide sales
in excess of $120 million in 2003. Furthermore, we believe that we are the
largest supplier of Versatic acids and derivatives in the world with an
estimated 74% global market share. Although we currently have one principal
direct competitor, the major competition for our Versatic acids and derivatives
business is from alternative products which provide similar, though not exactly
comparable, functionality. Cardura and the basic Versatic acids have a
particular niche in their competitive markets through their unique performance
attributes. For VeoVa, there is a large market of competitive products, most
importantly, butyl acrylate. In the markets in which VeoVa directly competes
with alternative products, VeoVa attains varying market shares which we believe
range from 5% to 30%. The Versatic acids and derivatives business has
traditionally been focused in the European and Japanese markets. However, we
are in the process of developing sales and customer support in other regions,
including the U.S., to promote the use of Versatic acids and derivatives.

BPA is produced and consumed globally and we believe there are three
leading producers of BPA that account for approximately 60% of global capacity.
Most major BPA producers are forward integrated into either or both
polycarbonate and epoxy resins and at times will sell excess BPA to third
parties. We believe that we are one of the largest suppliers of BPA to third
parties and the third largest producer of BPA in the world. From 1994 to 2000,
demand for BPA grew by approximately 10% per year driven primarily by the
polycarbonate end-uses (electronics, computer, telecommunications and data
equipment), whereas from 2000 to 2003, the average growth rate was
approximately 5%.

Competition

We compete primarily with Dow Chemical and Huntsman Advanced Materials
(formerly Vantico Group S.A.) in the epoxy resins industry. In 2003, we,
together with Dow and Huntsman Advanced Materials, were the major producers of
liquid epoxy resins, which are the foundation product of this industry, and
accounted for a majority of

5



---



##### Table of Contents



LER capacity in the United States and Europe. Due
to import tariffs, transportation costs, customer preferences in
performance and applications and industry structure, industry dynamics vary by
region. Nanya is a significant competitor in Asia. Nanya and Thai Epoxy, among
others, have established export capabilities and now compete for a portion of
the markets in Europe and the U.S. There are also other smaller competitors,
primarily in Asia and Eastern Europe, who participate locally and in the export
market to a limited extent but do not have the world class manufacturing
capabilities or cost structure to effectively compete in the epoxy resins
industry worldwide over the long term.

We believe the significant capital required to construct a world scale
manufacturing facility, the production volumes required to maintain low unit
costs, the need to secure a broad range of reliable raw material and
intermediate material supplies, the significant technical knowledge required to
develop high performance products, applications and processes, and the need to
develop close, integrated relationships with customers serve as barriers to
entry for new competitors. We and Dow are the only two global epoxy resins
companies that are backward integrated into BPA and ECH and have
technologically advanced manufacturing facilities. We believe that our
strengths in product breadth, technical/sales expertise and cost-advantaged
production technology allow us to effectively compete in a broad range of
segments characterized by different buying criteria.

In the production and sale of BPA, we compete with companies who are
backward integrated into phenol such as Aristech (a subsidiary of Sunoco) and
Mitsui Chemical, and those who are forward integrated into polycarbonate, such
as General Electric and Bayer. Forward integrated polycarbonate manufacturers
have captive demand but also may sell excess BPA to third parties. Both Mitsui
Chemical and Aristech do not have captive demand but sell to third parties.
Competition in the BPA market is based primarily on price, product quality and
security of supply.

In the Versatic acids and derivatives product line, which is a small but
growing niche market, a direct competitor is Exxon/Mobil, who produces a broad
range of carboxylic acids. The main competition for Versatic products comes
from other monomers, such as acrylate esters, which are also used as a monomer
with vinyl acetate for the production of emulsions polymers. For Cardura, the
main competition is from hydroxy acrylic monomers for use in
automotive/industrial coatings applications.

Business Strategy

We are pursuing a strategy designed to increase our revenues and cash flow
and enhance our global leadership position. Key elements of our strategy
include improving profitability, expanding our presence in specialty products,
and improving operating efficiency and cash flow.

Products

We manufacture and sell epoxy resins and related products, versatic acids
and derivatives, and BPA and ECH, the intermediate materials used in epoxy
resins. Our primary products are epoxy resins and related products. In
addition, as part of our strategy to provide a range of complementary products
which meet our customers needs, we manufacture and sell versatic acids and
derivatives. As a backward integrated manufacturer of epoxy resins, we also
manufacture BPA and ECH, the two principal intermediate materials of epoxy
resins, for our internal use and sell the excess to third parties.

Epoxy Resins and Related Products

Epoxy resins are a family of synthetic thermoset polymers. Epoxy resins
are generally combined with other chemical additives to create inert,
chemically-stable, or cured, products. Once cured, epoxy resins have
attractive attributes such as outstanding adhesion, corrosion and chemicals
resistance, high strength and toughness, temperature stability, electrical
insulation and easy processability.

Liquid epoxy resins are the foundation of the industry since most epoxy
resins are initially produced as liquid and can then be modified into solid
epoxy resins or solutions through the addition of incremental BPA or solvents.
In addition to these resins, there are other specialty epoxy resins based on
other raw materials. Epoxy resins are used in applications such as coatings,
electrical and electronics, construction, adhesives and composites in a variety
of

6



---



##### Table of Contents



end-use industries. Epoxy resins accounted for 64%, 66% and 64% of our
revenues for the years ended December 31, 2003, 2002 and 2001.

Versatic Acids 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 VeoVa and
Cardura range from decorative and protective coatings to personal care products
(such as hair spray). Versatic acids and derivatives are specialty products. We
anticipate increasing our sales of Versatic acids and derivatives significantly
over the coming years by expanding our sales efforts geographically. One of the
primary end-uses of these products is in polymers and additives for the
coatings industry. Within this segment there is a wide spectrum of polymer
systems, usually coating binders, which provide significant benefits to the
finished coating, including adhesion, gloss, flexibility, outdoor durability
and ease of application. These products are alternatives to other products and
are distinguished by their unique branched molecular structure. We manufacture
Versatic acids and derivatives using our integrated manufacturing sites and our
internally produced ECH.

Our customers use Cardura as an intermediate for the production 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 latex paints. We
are also developing additional applications beyond the traditional coatings
market in order to broaden the customer base for these products, such as the
use of VeoVa in adhesive and paper coatings and Cardura for flow improvement of
pigment in epoxy paints. In addition, we completed construction of an advanced
manufacturing facility for Cardura at our Pernis facility in December 2001 and
expanded our production capacity for Cardura.

Versatic acids and derivatives accounted for approximately 15%, 12% and
10% of our revenues for the years ended December 31, 2003, 2002 and 2001,
respectively.

Bisphenol-A

BPA is produced in a molten state and is either used in a molten or
pelletized form in our production process for epoxy resins or is flaked or
pelletized for sale to third parties. BPA is used primarily for producing
polycarbonate and epoxy resins as well as for the production of other products,
including flame-retardants. End-uses of polycarbonate resins include
electricals and electronics (including computer and business equipment and
optical disks), glazing and sheeting, automobiles and appliances and power
tools, as well as recreational products, packaging and medical devices, films,
signs and ophthalmic lenses. BPA is also used in the production of
tetrabromobisphenol (TBBPA) which is 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 for resale. By producing our
own BPA, we maintain a low cost position for production of epoxy resins. We
produce and sell excess BPA in order to achieve economies of scale and thereby
lower our manufacturing costs. We currently use approximately 50% of our total
BPA production capacity to produce epoxy resins and use the excess capacity for
merchant sales. We believe that we are one of the largest suppliers of BPA to
third parties and one of the largest producers of BPA in the world. Because
the largest end-use segment for BPA is the manufacture of polycarbonate resins,
we focus on sales to polycarbonate producers, who desire the high quality
product yielded by our process. In addition, because we do not compete in the
polycarbonate market, we believe our position as a supplier to non-integrated
polycarbonate customers is enhanced.

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

Sales of BPA to third parties accounted for 16%, 17% and 21% of our
revenues for the years ended December 31, 2003, 2002 and 2001, respectively.

7



---



##### Table of Contents



Other Products

Sales of ECH and other products to third parties accounted for 5% of our
revenues for each of the years ended December 31, 2003, 2002 and 2001,
respectively.

Customers

Our top twenty and fifty customers accounted for approximately 54% and 73%
of our revenues in 2003. No one customer accounted for 10% or more of our
revenues in 2003. Of our top 50 customers, 82% have been with us the last 5
years or more. Many of our customers are in mature industries, which have
undergone consolidation. As a result, in many end-use markets, such as
aerospace, automotive and heavy electrical equipment manufacture, there are
only a few large potential customers for our products.

Sales and Marketing

We market an extensive product line to meet a wide variety of customer
needs. We focus on selecting customers who are or have the potential to be
leaders in their industries and who have growth objectives which support our
own. In addition, we focus on customers who value our systems and solutions
package. This package includes high-quality, reliable products backed by local
sales support and technical expertise offered at an attractive price. Through
our customer relationships, we have established important cost and performance
requirements for each customer application. In the coatings industry, for
example, once we establish a strong position as a supplier of high quality,
high volume basic resin to our customers, we are often able to learn of their
other needs for specialty products, such as performance resins, curing agents
and/or modifiers, and supply these value-added products to them as well. As a
result, we have been able to expand the range of products purchased by larger
customers.

We sell and support our products in over 73 countries throughout the world
through our sales and customer service network. We use a direct sales force for
sales to our larger customers and third-party distributors to serve our smaller
customers, where it is more cost efficient to do so. Our direct sales force,
customer service and support network consists of 30 employees in the Americas,
38 employees in Europe/Africa/Middle East and 20 employees in Asia Pacific. We
have consolidated our customer service and support network into key regional
customer service centers in order to reduce overhead costs. We have global
account teams that focus on coordination for major global customers, including
technical service, supply and commercial terms. In addition, technical
professionals are assigned to each of the three regions to support the sales
effort. In the Americas, we also have a telephone resource for technical advice
and support for our customers.

Our distributors are compensated through a discount from the list price of
our products they purchase. We have also been consolidating the number of
distributors we use in order to reduce our logistics and supervisory costs. We
have routine distributor evaluations and incentive programs which are designed
to reinforce the systems and solutions sales approach. We choose our
distributors based on reputation, flexibility and capability to bring the
systems and solutions marketing strategy to their customers. Each distributor
carries our entire line of resins and related products, as well as versatic
acids and derivatives. Our broad product line provides our distributors with a
competitive advantage over competing distributors with more limited product
lines or who must source from multiple suppliers to achieve the same product
breadth.

Sales to many of our customers in the United States are made under written
contracts with an initial term of one year or longer and have either evergreen
provisions or automatic renewal. These contracts are generally for the supply
of products based on targeted amounts or a specified percentage of the
customers requirements. Prices in contracts for epoxy resins are generally
negotiated based on market prices and often include volume discounts. Prices in
contracts for BPA are either established using multi-variable formulas based on
underlying chemical benchmark prices, cost of production and a margin based on
published market indicators or negotiated for set periods of time  usually
quarterly. In 2003, distributors accounted for approximately 14% of our
sales.

8



---



##### Table of Contents



Research and Development

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



| | a) |  | developing new or improved epoxy and specialty chemical
applications based on our existing product line and identified customer
needs; 
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | developing new resin or Versatic products for customers in order to
improve their competitive advantage and profitability;             
|
| | c) |  | providing premier technical service for customers of specialty
products;                                                               
|
| | d) |  | providing technical support for manufacturing locations and
assisting in plant optimization;                                           
|
| | e) |  | ensuring that our products are manufactured in accordance with our
global environmental, health and safety policies and objectives; and
|
| | f) |  | developing lower cost manufacturing processes globally.                                                                                

We emphasize a customer driven, systems and solutions approach in
discovering new applications and processes and providing excellent customer
service through our technical staff. Through regular direct contact with our
key customers, our research and development personnel can become aware of
evolving customer needs in advance and can anticipate their requirements in
planning customer programs. We also focus on on-going improvement of plant
yields, fixed costs and capacity. For example, our continuous LER manufacturing
process is fed from an integration of continuous feedstock streams from our BPA
and ECH plants located on the same site. These continuous integrated streams
are characterized by exceptional product consistency, low cost economics, and
high quality resin that is valued by the customer for demanding applications.
We estimate that this process provides us with a sustainable cost advantage
over conventional batch technology, which is the traditional method of
manufacturing epoxy resins.

We have approximately 88 scientists and technicians worldwide. We conduct
research and development activities at our facilities in Pernis, The
Netherlands; Houston, Texas; and Louvain la Neuve, Belgium. Our research and
development facilities include a broad range of epoxy synthesis, testing and
formulating equipment, and small scale versions of customer manufacturing
processes for applications development and demonstration.

Our research and development expenditures were $16 million, $20 million
and $25 million in 2003, 2002 and 2001, respectively. We centrally manage all
these activities to ensure an adequate investment return and to globally share
ideas within our business.

Intellectual Property

Our most significant intellectual property rights are our patents and
related proprietary rights. As of December 31, 2003, we owned or 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 United States and Asia.
We anticipate that we will apply for additional patents in the future as we
develop new products and processes. Our intellectual property rights include
know-how and patents covering analytical tests, extensive applications testing
capability and industry-leading processing and formulating knowledge of
thermoset resin systems for specific end-uses such as protective and decorative
coatings, electrical laminates, electronics, composites, adhesives, fibers and
textiles and civil engineering. We have a broad portfolio of patents, know-how
and intellectual property agreements relating to our products.

As of December 31, 2003, we owned or had licensing rights to a number of
trademarks. Our most significant trademarks are RESOLUTION, EPIKOTE Resins,
EPON Resins, EPIKURE Curing Agents, EPI-REZ Waterborne Resins, HELOXY
Modifiers, CARDURA Glycidyl Ester, VEOVA Monomers and VERSATIC acids.

9



---



##### Table of Contents



Shell has retained rights in some of the intellectual property acquired by
us as part of the recapitalization. See Item 13. Certain Relationships and
Related TransactionsOngoing Relationship with ShellIntellectual Property
Agreements.

Raw Materials

We manufacture BPA and ECH, the two key intermediate materials for epoxy
resins, at both the Deer Park and Pernis plants. This reduces logistics costs
and assures long-term and reliable supply. We currently use our BPA for the
production of our epoxy resins and sell the remainder to third parties. We
produce our own ECH but also maintain a position in the merchant market both as
a buyer and as a seller to assure supply flexibility and improve plant
operating rates.

We purchase chlorine, a primary raw material for ECH, under long-term
supply contracts with third parties which provide us with producer-like
economics by allowing us to buy this raw material at a margin above production
cost and thereby lower our manufacturing costs. We also purchase propylene, the
other primary raw material for ECH, under long-term supply agreements with
Shell that are based on market price less negotiated volume discounts. We
purchase phenol and acetone, the primary raw materials for BPA, under supply
contracts with Shell and other third parties that are based on discounted
market prices and input-cost formulae. Because we are co-located with Shell at
several of our facilities, our transportation and logistics costs for certain
raw materials which Shell provides us are minimized.

Raw materials for Versatic acids consist of carbon monoxide, propylene
trimer and di-isobutylene. Carbon monoxide is supplied by pipeline under a
long-term contract from a production facility near our Pernis plant, propylene
trimer is obtained via price formula based contracts and spot purchases and
di-isobutylene is obtained from third parties under multi-year supply
agreements. At our Pernis site, Versatic acids are combined with ECH to produce
Cardura and at our Moerdijk site they are combined with acetylene, which is
purchased from Shell under long-term supply agreements, to produce VeoVa.

The majority of our raw materials used in manufacturing our products are
available from more than one source and are readily available on the open
market. Those materials that are single sourced generally have long-term supply
contracts as a basis to guarantee a maximum of supply reliability. Prices for
most of our main feedstocks are driven by underlying petrochemical benchmark
prices and energy costs. We are in the process of consolidating purchases and
contract sharing for other major feedstocks as well as process chemicals,
packaging materials and services.

Manufacturing and Facilities

We manufacture our products in the United States and Europe. Our major
manufacturing operations take place at two world-scale sites in Pernis, The
Netherlands and Deer Park, Texas. To be world-scale, we believe an LER plant
must produce over 80kt per year of resins, achieving the threshold for major
economies of scale. Deer Park currently has 133kt capacity and Pernis has 100kt
capacity, making Deer Park the largest epoxy resin plant in the world and
Pernis one of the three largest plants in the world. We believe the Deer Park
plant is the only continuous resins plant in the world in which BPA and ECH
are manufactured and reacted continuously to make epoxy all in one site. Based
on our estimates, this plant, which produces some of the most consistent
quality liquid epoxy resins, provides us with a cost advantage over
conventional batch technology, which is the traditional method of manufacturing
epoxy resins, and, we believe, provides us with the lowest manufacturing cost
in the world.

The manufacturing process for LER requires access to sophisticated
technology and experience to make consistent quality product from batch to
batch. ECH is difficult to handle, especially the disposal of by-products from
its production. Backward integration into both ECH and BPA and world-scale
plants are needed to achieve low manufacturing costs. Epoxy production requires
that product be manufactured to meet narrow ranges of molecular weight and
product reactivity. These properties are then aligned with performance
properties for customers, such as filler settling, adhesion and color
stability.

10



---



##### Table of Contents



Employees

At December 31, 2003, we had approximately 900 employees worldwide
(excluding Shell employees who operate certain of our facilities under
operating and maintenance agreements). Of our employees, approximately 50% are
based in the Americas, 45% in Europe, Middle East and Africa, and 5% in Asia
Pacific.

At December 31, 2003, approximately 70 employees at our Deer Park plant
were subject to a collective bargaining agreement which expires in November
2006. At December 31, 2003, approximately 50 employees at our Norco plant were
subject to a collective bargaining agreement which expires on June 30, 2007. At
December 31, 2003, approximately 200 employees at our Pernis plant were
subject to a collective bargaining agreement which expires in October 2004. In
several locations outside the United States, employees are represented by local
Staff Councils as required by local laws or customs. When necessary, we have
completed the required consultation process with these entities. Management
generally considers its relationships with its employees to be satisfactory.

Environmental/Occupational Health and Safety Matters

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

We are subject to extensive regulation under the environmental and
occupational health and safety laws by federal, state and local governmental
entities and foreign authorities, such as the European Union. These laws are
designed to protect workers and the public from exposure to certain hazardous
chemicals and dangerous work conditions, to protect natural resources and to
limit discharges of hazardous substances to the environment from ongoing
operations. They provide for substantial fines and potential criminal sanctions
for violations. They also establish requirements to remediate contamination.
The laws are complex, change frequently and have tended to become more
stringent over time.

For example, statutes such as the federal Comprehensive Environmental
Response, Compensation and Liability Act and comparable state and foreign laws
impose strict, joint and several liability for investigating and remediating
the consequences of spills and other releases of hazardous materials,
substances and wastes at current and former facilities, and at third-party
disposal sites. In addition, other laws permit individuals to seek recovery of
damages for alleged personal injury or property damage due to exposure to
hazardous substances and conditions at our facilities or to hazardous
substances otherwise owned, sold or controlled by us. Therefore,
notwithstanding our commitment to environmental management, we cannot assure
you that environmental, health and safety liabilities will not be incurred in
the future, nor that such liabilities will not result in a material adverse
effect on our financial condition, results of operations or business
reputation.

Our sites have an extended history in the manufacture of epoxy resins and
other industrial chemical processes. Shell has performed site assessments at
the major manufacturing facilities. The assessments have identified soil and
groundwater contamination associated with historical operations and on-site
waste disposal practices at a majority of the sites. Liabilities associated
with these matters generally are covered under our environmental indemnity from
Shell. These conditions are currently being investigated, remediated and/or
monitored by Shell, some at the direction of governmental authorities. With two
exceptions, Lakeland and Barbastro, the manufacturing 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 the environmental agreements. See Item 13. Certain
Relationships and Related TransactionsOngoing Relationship with
ShellEnvironmental Agreements.

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

11



---



##### Table of Contents



financial responsibility for all contamination issues that are or become
subject to the consent order and any existing or future amendments thereto.

As a general matter, notwithstanding the indemnity provided by Shell,
certain liabilities for environmental and occupational health and safety
matters fall outside the scope of the protections offered in the environmental
agreements, including liabilities and costs resulting from future laws, permit
conditions and other requirements. These liabilities may result in the
incurrence of material costs and/or impact our future operations. They include
the following:



| |  |  | The permit for the hazardous waste incinerators at the Norco facility
expired in January 2001 although we are permitted to continue to
operate the incinerators pending the permit renewal. We have submitted
the renewal application and the Louisiana Department of Environmental
Quality (LDEQ) is currently reviewing the submission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Affecting the renewal process described above are emission control
upgrades that have been recently installed on the incinerator to
satisfy maximum achievable control technology requirements recently
imposed under the federal Clean Air Act. The installation is complete
and all required activities necessary for validation of new system
performance are scheduled for early 2004. However, in the event the
new incinerator hardware does not meet the emission control regulatory
performance requirements, we may be required to incur significant
additional waste disposal costs, curtail operations, and/or make
additional material expenditures for emissions control equipment. Such
potential costs will no longer be subject to financial contribution
from Shell.                                         
|
| |  |  | Certain chemicals have been alleged to interact with the endocrine
systems of humans and wildlife and disrupt normal processes (i.e.
endocrine disrupters). BPA is under evaluation as a potential
endocrine disrupter. BPA is used as an intermediate at the Deer Park
and Pernis manufacturing facilities and is also sold directly to third
parties. Proposed legislation in Europe may classify BPA as a category
3 reprotoxin (endocrine disrupter). Such proposed legislation may
require that we label the product to state that it poses possible
risk of harm to the unborn child. Industry groups and governmental
agencies continue to evaluate this matter. In the event that BPA is
further regulated, additional operating costs would likely be incurred
to meet more stringent regulation of the chemical.

Industry Regulatory Matters

The production and marketing of chemical substances are regulated by
national and international laws. Although almost every country has its own
legal procedure for registration and import, laws and regulations in the
European Union and the United States are most significant to our business,
including the European inventory of existing commercial chemical substances,
the European list of notified chemical substances, and the United States Toxic
Substances Control Act inventory. Chemicals which are on one or more of the
above lists can usually be registered and imported without additional testing
in other countries, although additional administrative hurdles may exist.

We also actively seek approvals from the U.S. Food and Drug Administration
for certain specialty chemicals produced by us, principally where we believe
that these specialty chemicals will or may be used by our customers in the
manufacture of products that will come in direct or indirect contact with food.

Insurance

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

We currently have in force insurance policies covering property, general
liability, excess liability, workers compensation/employers liability, and
environmental liability. All of these policies are in amounts that we believe
are consistent with industry practices and provide that we pay a deductible on
each claim. However, there can be

12



---



##### Table of Contents



no assurance that the insurance will adequately protect us and, if we are only
partially insured or were to be completely uninsured, a related claim could
result in a material adverse effect on our financial condition and results of
operation.

Working Capital

As a leading worldwide manufacturer and developer of epoxy resins, our
working capital requirements principally include accounts receivable, product
and raw materials inventory, labor, equipment and debt service costs.
Management believes that we maintain adequate working capital to meet our needs
in the current business environment.

13



---



##### Table of Contents






ITEM 2. PROPERTIES

We are headquartered in Houston, Texas and operate through a network of
nine manufacturing facilities. We own the plants and equipment at all of our
facilities. We lease the underlying real property at all of our facilities
under long-term leases with Shell, other than those located in Barbastro, Spain
and Lakeland, Florida, which we own. All of our manufacturing facilities are
co-located within Shell or Shell affiliate facilities, other than our
facilities in Barbastro, Spain and Lakeland, Florida. All of our facilities
which are co-located within a Shell site share utilities with the Shell site
through operating agreements, and generally such utilities and related assets
are not owned by us. Our manufacturing facilities with associated principal
manufacturing capacities (which may vary based on product mix in some
locations) are listed below.

|                        |  |                                 |  |                 |     | 
|----------------------- |  | ------------------------------- |  | --------------- | --- | 
|                        |  |                                 |  | 2003 Capacities
|Plant Location          |  | Product                         |  | (in kilotons)  
|                        |  |                                 |  |                
|Argo (IL, USA)          |  | WB                              |  |                 | 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)* |  | 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 and derivatives* |  |                 | 88  | 
|Stanlow (UK)*           |  | SER, Solutions and Other        |  |                 | 16  | 
|Wesseling (Germany)*    |  | SER, Solutions and Other        |  |                 | 24  | 



---

|* |  | These facilities are operated by Shell or its affiliates on our behalf
pursuant to contractual arrangements.
|- |  | ------------------------------------------------------------------------------------------------------------




ITEM 3. LEGAL PROCEEDINGS

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




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

On November 5, 2003, at the Annual Meeting of the Securityholders, RPP
Inc., as sole member of RPP LLC approved the following: the re-election of
Marvin O. Schlanger as Chairman of the Board of Managers and (ii) the
re-election of each of Laurence M. Berg, Peter P. Copses, Joshua J. Harris,
Scott M. Kleinman, Joel A. Asen and Heinn F. Tomfohrde, III, as a Manager.
Also, on November 5, 2003, through Unanimous Written Consent of Sole
Stockholder in Lieu of Annual Meeting, RPP LLC, as sole stockholder of RPP
Capital Corporation, approved the re-election of Marvin O. Schlanger, Joshua J.
Harris and Scott M. Kleinman as directors of RPP Capital Corporation.

14



---



##### Table of Contents






PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

At February 1, 2004, RPP LLC had 1,000,000 units outstanding and one
holder of record, which was RPP Inc. At February 1, 2004, RPP Capital had 1,000
shares of common stock outstanding and one holder of record, which was RPP LLC.
There is no established trading market for the units or the shares.

During 2003, RPP LLC paid a constructive cash distribution to RPP Inc. in
the amount of $4 million for certain pension payments, which RPP Inc. in turn
paid to Shell in accordance with the Master Sales Agreement dated November 14,
2000 and related ancillary agreements. RPP Capital did not declare or pay any
cash dividends during 2003. The ability of RPP LLC to make distributions with
respect to its membership interests is limited by contractual restrictions
contained in the credit agreement and the indentures 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, 2003, neither RPP LLC nor RPP Capital had any compensation
plans (or individual compensation arrangement) pursuant to which their
respective membership interests or common equity were authorized for issuance.

15



---



##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial information.
The historical statement of income data for the years ended December 31, 2003,
2002 and 2001 and the historical balance sheet data as of December 31, 2003 and
2002 are derived from our audited consolidated financial statements included
elsewhere in this filing. The historical statement of income data for the years
ended December 31, 2000 and 1999 and the historical balance sheet data as of
December 31, 2001, 2000 and 1999 are derived from our audited consolidated and
combined financial statements that are not included herein.

|                                                       |  |                                   |     |      |  |      |     |      |  |      |     |   |  |   |     |   |  |   |      |  
|------------------------------------------------------ |  | --------------------------------- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | - |  | - | ---- | -
|                                                       |  | Historical (1)                   
|                                                       |  | (in millions, except percentages)
|                                                       |  | For the years ended December 31, 
|                                                       |  |                                  
|                                                       |  | 2003                              |     | 2002 |  | 2001 |     | 2000 |  | 1999
|                                                       |  |                                   |     |      |  |      |     |      |  |     
|Statement of Income Data:                              |  |                                   |     |      |  |      |     |      |  |      |     |   |  |   |     |   |  |   |      |  
|Revenues                                               |  | $                                 | 782 |      |  | $    | 740 |      |  | $    | 863 |   |  | $ | 949 |   |  | $ | 942  |  
|Purchases and variable product costs(2)                |  |                                   | 558 |      |  |      | 438 |      |  |      | 483 |   |  |   | 579 |   |  |   | 510  |  
|Operating expenses                                     |  |                                   | 113 |      |  |      | 122 |      |  |      | 152 |   |  |   | 166 |   |  |   | 182  |  
|Selling, general and administrative
expenses           |  |                                   | 53  |      |  |      | 59  |      |  |      | 61  |   |  |   | 54  |   |  |   | 59   |  
|Depreciation and amortization                          |  |                                   | 46  |      |  |      | 36  |      |  |      | 34  |   |  |   | 34  |   |  |   | 34   |  
|Research and development expenses                      |  |                                   | 16  |      |  |      | 20  |      |  |      | 25  |   |  |   | 26  |   |  |   | 31   |  
|Restructuring charges(3)                               |  |                                   |    |      |  |      | 6   |      |  |      |    |   |  |   |    |   |  |   |     |  
|Special charges(4)                                     |  |                                   |    |      |  |      | 8   |      |  |      | 15  |   |  |   | 49  |   |  |   | 6    |  
|Operating income (loss)(2)                             |  |                                   | (4  | )    |  |      | 51  |      |  |      | 93  |   |  |   | 41  |   |  |   | 120  |  
|Interest expense, net                                  |  |                                   | 76  |      |  |      | 65  |      |  |      | 68  |   |  |   | 9   |   |  |   |     |  
|Income from equity investment                          |  |                                   | 2   |      |  |      | 1   |      |  |      |    |   |  |   | 3   |   |  |   | 2    |  
|Gain on sale of assets(5)                              |  |                                   | 14  |      |  |      | 1   |      |  |      | 1   |   |  |   |    |   |  |   |     |  
|Net income (loss)                                      |  |                                   | (62 | )    |  |      | (7  | )    |  |      | 15  |   |  |   | 19  |   |  |   | 77   |  
|Other Financial Data:                                  |  |                                   |     |      |  |      |     |      |  |      |     |   |  |   |     |   |  |   |      |  
|Cash flows (used for) provided by operating
activities |  | $                                 | (49 | )    |  | $    | 69  |      |  | $    | 95  |   |  | $ | 126 |   |  | $ | 134  |  
|Cash flows provided by (used for) investing
activities |  |                                   | 7   |      |  |      | (45 | )    |  |      | (23 | ) |  |   | (17 | ) |  |   | (103 | )
|Cash flows provided by (used for) financing
activities |  |                                   | 86  |      |  |      | (26 | )    |  |      | (85 | ) |  |   | (90 | ) |  |   | (31  | )
|Capital expenditures(6)                                |  | $                                 | 18  |      |  | $    | 48  |      |  | $    | 24  |   |  | $ | 18  |   |  | $ | 34   |  
|Non-Gaap Financial Data:                               |  |                                   |     |      |  |      |     |      |  |      |     |   |  |   |     |   |  |   |      |  
|EBITDA(7)                                              |  |                                   | 58  |      |  |      | 89  |      |  |      | 128 |   |  |   | 78  |   |  |   | 156  |  
|EBITDA margin(8)                                       |  |                                   | 7   | %    |  |      | 12  | %    |  |      | 15  | % |  |   | 8   | % |  |   | 17   | %
|Balance Sheet Data (at period end):                    |  |                                   |     |      |  |      |     |      |  |      |     |   |  |   |     |   |  |   |      |  
|Total assets                                           |  | $                                 | 856 |      |  | $    | 793 |      |  | $    | 734 |   |  | $ | 792 |   |  | $ | 743  |  
|Total debt                                             |  |                                   | 675 |      |  |      | 566 |      |  |      | 575 |   |  |   | 681 |   |  |   |     |  
|Capital leases                                         |  |                                   | 1   |      |  |      | 2   |      |  |      | 1   |   |  |   |    |   |  |   |     |  



---

|(1) |  | Historical financial information for the fiscal year ended December 31,
1999 has been restated to reflect the retroactive effect of the change in
our method of accounting for our inventories in the United States from
LIFO (last-in, first-out) method to FIFO (first-in, first-out) method,
effective November 1, 2000.                                                                                                                                                                                                                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For the year ended December 31, 2003, these line items were each improved
by $3.6 million due to a one-time non-cash adjustment in our accounting
for inventory. See Note 4 to the audited consolidated financial
statements for the year ended December 31, 2003 included elsewhere in this
filing.                                                                                                                                                                                                                                            
|   
|(3) |  | Restructuring charges consist of employee related severance expenses and
other exit costs incurred in connection with cost reduction programs.                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) |  | Special charges 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 indenture dated November 14, 2000 between RPP LLC
and The Bank of New York, as trustee, the indenture dated April 9, 2003
between RPP LLC, RPP Capital, and Deutsche Bank Trust Company Americas, as
trustee, the indenture dated December 22, 2003 between RPP LLC, RPP
Capital and The Bank of

16



---



##### Table of Contents



|    |  | New York, as trustee, and as determined by
management, are expenses incurred outside the ordinary course of
business that relate to the activities required to establish RPP LLC as an
independent company. Special charges also include $3.0 million and $6.0
million of employee severance costs for the fiscal years ended December 31,
2001 and 1999, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | On November 14, 2003, a wholly owned subsidiary of the Company completed
the sale of 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 gain on the sale was recorded in the
amount of $14 million after recognizing direct costs of $5 million and
accumulated foreign currency translation gain of $4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(6) |  | The capital expenditure amounts for the year ended December 31, 1999
exclude the repurchase of certain equipment held under a synthetic
lease for $71 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(7) |  | EBITDA represents income (loss) before income taxes, interest expense and
depreciation and amortization. EBITDA is presented because it is used by
investors to analyze and compare operating performance, which includes a
companys ability to service and/or incur debt. In addition, management
focuses on EBITDA because it is used as an internal performance measure.
However, EBITDA should not be considered in isolation or as a substitute
for net income, cash flows or other income or cash flow data prepared in
accordance with generally accepted accounting principles in the United
States (GAAP) or as a measure of a companys profitability or liquidity.
EBITDA is not calculated under GAAP and therefore is not necessarily
comparable to similarly titled measures of other companies. The following
table reconciles the differences between net income (loss), as determined
under GAAP and EBITDA (in millions):

|                              |  |                            |     |      |  |      |    |      |  |      |     |  |  |   |    |  |  |   |     | 
|----------------------------- |  | -------------------------- | --- | ---- |  | ---- | -- | ---- |  | ---- | --- |  |  | - | -- |  |  | - | --- | 
|                              |  | For the Fiscal Years Ended
|                              |  | December 31,              
|                              |  |                           
|                              |  | 2003                       |     | 2002 |  | 2001 |    | 2000 |  | 1999
|                              |  |                            |     |      |  |      |    |      |  |     
|Net income (loss)             |  | $                          | (62 | )    |  | $    | (7 | )    |  | $    | 15  |  |  | $ | 19 |  |  | $ | 77  | 
|Income tax expense (benefit)  |  |                            | (2  | )    |  |      | (5 | )    |  |      | 11  |  |  |   | 16 |  |  |   | 45  | 
|Interest expense, net         |  |                            | 76  |      |  |      | 65 |      |  |      | 68  |  |  |   | 9  |  |  |   |    | 
|Depreciation and amortization |  |                            | 46  |      |  |      | 36 |      |  |      | 34  |  |  |   | 34 |  |  |   | 34  | 
|                              |  |                            |     |      |  |      |    |      |  |      |     |  |  |   |    |  |  |   |     | 
|EBITDA                        |  | $                          | 58  |      |  | $    | 89 |      |  | $    | 128 |  |  | $ | 78 |  |  | $ | 156 | 
|                              |  |                            |     |      |  |      |    |      |  |      |     |  |  |   |    |  |  |   |     | 



|    |  | EBITDA for the periods shown above includes special charges, restructuring
charges, severance costs and gain on sale of assets.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------
|   
|(8) |  | EBITDA margin is calculated as a percentage of revenue.                                                                        

17



---



##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Item 6.
Selected Financial Data, and the audited consolidated financial statements,
including the notes thereto, included elsewhere in this report. In addition to
historical information, the following discussion contains forward looking
statements that are subject to a number of risks and uncertainties. Our actual
results may differ materially from the results discussed in these
forward-looking statements. Important factors that could cause our actual
results to differ materially from the results referred to in the
forward-looking statements made below are discussed below or under the heading
Risk Factors in our Registration Statement on Form S-4 declared effective on
February 4, 2004 (File No. 333-112106). There may be other factors that may
cause our actual results to differ materially from the results referred to in
the forward-looking statements. All forward-looking statements attributable to
us or persons acting on our behalf apply only as of the date of this filing and
are expressly qualified in their entirety by the cautionary statements included
in this filing. We undertake no obligation to publicly update or revise
forward-looking statements which may be made to reflect events or circumstances
after the date made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires us to use our
judgment to make estimates and assumptions that affect certain amounts reported
in our financial statements. As additional information becomes available,
these estimates and assumptions are subject to change and thus impact amounts
reported in the future. Critical accounting polices are those accounting
policies that involve judgment and uncertainties affecting the application of
those policies and the likelihood that materially different amounts would be
reported under different conditions or using differing assumptions. We
periodically update our estimates used in the preparation of the financial
statements based on our latest assessment of the current and projected business
and general economic environment. Our significant accounting policies are
summarized in Note 2 to the audited consolidated financial statements included
elsewhere in this filing. Below are accounting policies that we consider to be
critical due to the amount of judgment and uncertainty inherent in the
application of these policies.

Revenue Recognition and Accounts Receivable. Revenues are recognized in
accordance with Staff Accounting Bulleting No. 104, Revenue Recognition
issued by the Securities and Exchange Commission. Revenues associated with
sales of chemical products are recorded when title and risk passes to the
customer. We maintain allowances for anticipated discounts, rebates, and
returns to customers that is based on historical experience. We also maintain
an allowance for estimated bad debt expense that is based on historical
experience.

Inventories. Inventories are valued at the lower of cost or market. Cost
is determined on the first-in first-out method. We record an allowance for
estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value based upon
assumption about future demand and market conditions or expected future product
sales.

Long-Lived Assets and Depreciation and Amortization. With respect to
long-lived assets, key assumptions include the estimate of useful lives and the
recoverability 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 the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset, which is subject to considerable judgment. If the
useful 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 Net Periodic Pension
Expense. Pension expense, as well as the existing liabilities for pensions and
other postretirement benefits are determined in accordance with SFAS 87,
Employers Accounting for Pension and SFAS 106, Employers Accounting for
Postretirement Benefits other than Pension. The application of these
accounting principles requires the use of statistical actuary models and
numerous assumptions and estimates ranging from discount rates, rate of return
on pension assets, the annual rate of

18



---



##### Table of Contents



inflation of health care costs, retiree life expectancies, increase rates of
compensation and the general interest rate environment. Changes in these
assumptions could increase or decrease the expense and liabilities related to
these plans currently and in the future.

Income Taxes. Income tax expense and income tax liabilities are accounted
for using SFAS 109, Accounting for Income Taxes. The application of this
accounting principle involves various uncertainties regarding the
interpretation of complex tax regulations, both federal and foreign. We
currently have significant deferred tax assets resulting primarily from net
operating loss carry forwards and deductible temporary differences, which will
reduce taxable income in future periods. We provided a valuation allowance on
future tax benefits for certain net operating losses. A valuation allowance
is required when it is more likely than not that all or a portion of a deferred
tax asset will not be realized. Forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses and losses in the most recent year. Cumulative losses weigh
heavily in the overall assessment.

Contingencies and Other Matters. In the ordinary course of business, we
are subject to various law and regulations and, from time to time, litigations.
Losses and related liabilities are accounted for by applying the criteria of
SFAS 5, Accounting for Contingencies. Management is required to assess the
likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is judgmental and is based
on a careful analysis of each individual issue with the assistance of outside
legal counsel. The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters.

Overview

As the leading manufacturer and global supplier of epoxy resins, our
results of operation have been negatively impacted by external factors such as
high energy costs and weak global economies. High energy costs such as the
increasing price of crude oil and related petrochemical products and the higher
cost of natural gas have translated into significant increases of our raw
material costs. Weak global economies and the related slow recovery has
resulted in over capacity in the industry and therefore softened the demand for
our products. In addition, the soft demand has limited our ability to raise
prices on most of our epoxy resin products. As a result, our gross profit
margins have been depressed.

Our liquidity and capital resources have also been negatively impacted by
our sustained depressed margins. To provide relief and financial flexibility
under our Credit Agreement, we issued $340 million of senior secured and senior
second secured notes, repaid the term loan bank debt, and amended the Credit
Agreement.

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

19



---



##### Table of Contents



Results of Operations

The following table sets forth certain information derived from the
audited consolidated statements of operations of RPP LLC for the years ended
December 31, 2003, 2002 and 2001 expressed as a percentage of revenues. The
following table and discussion should be read in conjunction with the
information contained in our consolidated financial statements and the notes
thereto included elsewhere in this report. There can be no assurance that the
trends in the operating results will continue in the future.

|                                     |       |  |              |     |      |  |      |    |  |  |     |    | 
|------------------------------------ | ----- |  | ------------ | --- | ---- |  | ---- | -- |  |  | --- | -- | 
|                                     |       |  | Year Ended  
|                                     |       |  | December 31,
|                                     |       |  |             
|                                     |       |  | 2003         |     | 2002 |  | 2001
|                                     |       |  |              |     |      |  |     
|Revenue                              |       |  | 100          | %   |      |  | 100  | %  |  |  | 100 | % 
|Cost and expenses:                   |       |  |              |     |      |  |      |    |  |  |     |   
|Purchases and variable product costs |       |  | 71           |     |      |  | 59   |    |  |  | 56  |   
|Operating expenses                   |       |  | 14           |     |      |  | 16   |    |  |  | 18  |   
|Selling, general and administrative  |       |  | 7            |     |      |  | 8    |    |  |  | 7   |   
|Depreciation and amortization        |       |  | 6            |     |      |  | 5    |    |  |  | 4   |   
|Research and development             |       |  | 2            |     |      |  | 3    |    |  |  | 3   |   
|Restructuring charges                |       |  |             |     |      |  | 1    |    |  |  |    |   
|Special charges                      |       |  |             |     |      |  | 1    |    |  |  | 1   |   
|                                     |       |  |              |     |      |  |      |    |  |  |     |   
|                                     | Total |  |              | 100 |      |  |      | 93 |  |  |     | 89 | 
|Operating income                     |       |  |             |     |      |  | 7    |    |  |  | 11  |   
|Gain on sale of asset                |       |  | 2            |     |      |  |     |    |  |  |    |   
|Income from equity investment        |       |  |             |     |      |  |     |    |  |  |    |   
|Interest expense, net                |       |  | 10           |     |      |  | 9    |    |  |  | 8   |   
|                                     |       |  |              |     |      |  |      |    |  |  |     |   
|Income (loss) before income taxes    |       |  | (8           | )   |      |  | (2   | )  |  |  | 3   |   
|Income tax expense (benefit)         |       |  |             |     |      |  | (1   | )  |  |  | 1   |   
|                                     |       |  |              |     |      |  |      |    |  |  |     |   
|Net income (loss)                    |       |  | (8           | )%  |      |  | (1   | )% |  |  | 2   | % 
|                                     |       |  |              |     |      |  |      |    |  |  |     |   

The following is a discussion of significant financial statement items
related to our audited consolidated statements of income. See Note 14 to the
consolidated financial statements included elsewhere in this filing for segment
information.

Revenues

Our revenue is primarily generated through the sale of our 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 of ECH to
third parties. Revenue has historically been driven by volumes, market prices
and foreign currency fluctuations. Revenue also includes other income derived
primarily from royalty income and commission income.

Other Revenue

Other revenue consists mainly of the sale of a BPA technology license and
related support services.

Purchases and Variable Product Costs

Purchases and variable product costs are primarily comprised of feedstock
costs. Feedstock costs are driven primarily by market conditions. Volumes
fluctuate with production. The significant feedstocks for which we are highly
sensitive to the market prices are phenol, acetone, propylene and chlorine. We
purchase chlorine, a primary

20



---



##### Table of Contents



raw material for ECH, under long-term supply contracts with third parties
which provide us with producer-like economics by allowing us to buy this raw
material at a margin above production cost and thereby lower our manufacturing
costs. We also purchase propylene, the other primary raw material for ECH,
under long-term supply agreements with Shell that are based on market price
less negotiated volume discounts. We purchase phenol and acetone, the primary
raw materials for BPA, under supply contracts with Shell and other third
parties that are based on discounted market prices and input-cost formulae.
Because we are co-located with Shell at several of our facilities, our
transportation and logistics costs for certain raw materials which Shell
provides us are reduced. Variable manufacturing costs, which are primarily
utilities, are also a significant component of this line item. Purchases and
variable costs are reduced by the sale of by-products generated during the
manufacturing process, primarily hydrochloric acid.

Operating Expenses

Operating expenses represents the costs associated with the non-variable
operations of our manufacturing facilities. Included in operating costs are
personnel related costs, manufacturing overhead, periodic maintenance,
turnaround costs and environmental costs. Depreciation relating to
manufacturing assets is included within depreciation and amortization.

Selling, General and Administrative Expenses

Selling, general and administrative expenses are comprised primarily of
costs associated with non-manufacturing, non-research and development
operations, including management, accounting, treasury, information technology,
marketing and sales, and legal. This includes costs associated with health,
safety and environmental projects.

Depreciation and Amortization

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

Research and Development Expenses

Research and development expenses are costs associated with product or
customer specific initiatives and costs associated with projects that seek
improvements in manufacturing processes. Primarily all of our research and
development expenses are generated from our three research facilities.

Restructuring Charges

Restructuring charges consist of employee related severances expenses and
other exit costs incurred in connection with our cost reduction programs.

Special Charges

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

Gain on sale of assets

On November 14, 2003, a wholly owned subsidiary completed the sale of
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 gain on the sale was recorded in the amount of $14 million after
recognizing direct costs of $5 million and accumulated foreign currency
translation gain of $4 million.

21



---



##### Table of Contents



Income from Equity Investment

Income from equity investment is related to an unconsolidated equity
investment, which was significantly reduced in November 2003 as a result of the
sale mentioned above related to the gain on sale of assets.

Interest Expense, net

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

Income Tax Expense

We are organized as a limited liability company and are not subject to
U.S. income tax. Income tax information presented includes U.S. income taxes
and foreign income taxes attributed to our operations that are the
responsibility of our sole owner, RPP Inc.

We accrue for income taxes, including both deferred and current income tax
provisions. Additionally, we have made a Section 338(h) (10) election to allow
our recapitalization in November 2000 to be treated as an acquisition of assets
for tax purposes. Accordingly, for tax purposes the bases of our U.S. assets
were stepped-up to their fair market values, and we are able to depreciate our
assets using higher bases than the historical amount.

EBITDA

EBITDA represents income (loss) before income taxes, interest expense and
depreciation and amortization. EBITDA is presented because it is used by
investors to analyze and compare operating performance, which includes a
companys ability to service and/or incur debt. In addition, management
focuses on EBITDA and adjustments to EBITDA because they are used as internal
performance measures. However, EBITDA should not be considered in isolation or
as a substitute for net income, cash flows or other income or cash flow data
prepared in accordance with generally accepted accounting principles, (GAAP)
or as a measure of a companys profitability or liquidity. EBITDA is not
calculated under GAAP and therefore is not necessarily comparable to similarly
titled measures of other companies.

Comparison of 2003 results to 2002

Revenues

Total revenues increased by $42 million, or 6%, to $782 million compared
to the prior year. The increase in revenues is a result of increased average
prices, partially offset by lower volumes. The increase in average prices was
primarily attributable to the impact of a weaker dollar on our Euro-related
sales and to a lesser extent due to modest price increases on certain products.
Overall average prices increased by 10% from the prior year, however,
excluding the impact of a weaker dollar on our Euro-related sales, overall
average prices were flat. Overall volumes decreased by 3% from the prior 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 lower volumes and flat prices. Volumes decreased by 8% from the
prior year.

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

22



---



##### Table of Contents



Purchases and Variable Product Costs

Purchases and variable product costs increased by $120 million, or 27%, to
$558 million. This increase was largely driven by higher prices for feedstocks
due to the increasing price of crude oil and related petrochemical products and
the higher cost of natural gas, partially offset by lower sales volume and the
inventory adjustment discussed in Note 4 of the consolidated 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 of
higher feedstock prices, partially offset by lower sales volumes.

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

Operating Expenses

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

Selling, General and Administrative Expenses

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

Depreciation and Amortization

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

Research and Development Expenses

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

Restructuring Charges

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

Special Charges

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

23



---



##### Table of Contents



Operating Income

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

Gain on sale of assets

Gain on sale of asset increased by $13 million from prior year. On
November 14, 2003, one of our wholly owned subsidiaries completed the sale of
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 gain on the sale was recorded in the amount of $14 million after
recognizing direct costs of $5 million and accumulated foreign currency
translation gain of $4 million. The transaction was exempt from taxes as a
result of the structure of ownership. In connection with the sale of its
shares, a new joint venture agreement, technology license agreement and
trademark license agreement were negotiated and agreed. We continue to hold
through our wholly owned subsidiary, 10% of the outstanding shares in Japan
Epoxy Resins Co.

Income from Equity Investment

Income from equity investment increased by $1 million to $2 million. The
increase was due to higher earnings recognized from our 50% equity joint
venture, Japan Epoxy Resins Co., Ltd. As discussed above, a substantial
portion of the equity investment was sold and the remaining 10% equity
investment will be accounted for using the cost method.

Interest expense, net

Interest expense, net increased by $11 million, or 17%, to $76 million.
The increase is primarily due to a $7 million write-off of deferred financing
costs related to the prepayments, refinancing and credit agreement amendment.
In addition, the increase is also due to higher average outstanding debt
balances and higher average interest rates. The current period does not include
bank fees related to a credit agreement amendment in the prior year of
approximately $1 million.

Income (loss) before Income Taxes

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

Income Tax Expense (Benefit)

Income tax benefit decreased by $3 million to a $2 million benefit in
2003. The decrease in benefit is primarily related to an increase in the
valuation allowance for our deferred tax assets, partially offset by the
decreased income (loss) before income taxes. The increase in the valuation
allowance results from recognizing that it is more likely than not that certain
carryforwards in certain tax jurisdictions will not be realized as a result of
current and future taxable income. Accordingly, the valuation allowance has
been increased in the current year to reflect lower than anticipated net
deferred tax asset realization.

Net Income (Loss)

Net loss increased by $55 million to a $62 million net loss in 2003. The
increase was due to increased loss before income taxes and decreased income tax
benefit.

24



---



##### Table of Contents



EBITDA

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

Comparison of 2002 results to 2001

Revenues

Total revenues decreased by $123 million, or 14%, to $740 million for the
year ended December 31, 2002. The decrease in revenue was a result of decreased
average prices and lower volumes. The decrease in average prices was
attributable to decreases across all product lines. Overall average prices
decreased by 9% from the prior year due to the supply/demand of our various
product lines. Overall volumes decreased by 6% from the prior year period as
a result of lower demand related to the slowdown of the global economy. The
decrease in total revenue was partially offset by the sale of a BPA technology
license and related support services totaling $2 million recognized as other
revenue in 2002.

Revenues in the U. S. decreased by $77 million, or 17%, to $367 million
for the year ended December 31, 2002. The decrease in revenue was a result of
lower volume, partially offset by increased prices. Average prices in the U.
S. increased 3% while volumes decreased 20%.

Revenues in Europe decreased by $35 million, or 9%, to $364 million for
the year ended December 31, 2002. The decrease in revenue was a result of
lower prices. Average prices in Europe decreased by 12%, while volumes were
flat. Volumes were also affected by a forced shut-down of our Pernis plant
from an electrical power failure in the city of Rotterdam during the fourth
quarter of 2002. The duration of the shut-down was approximately three to
seven days depending upon the operating unit affected and we estimate lost
sales primarily in BPA of approximately 5,000 tons.

Purchases and Variable Product Costs

Total purchases and variable product costs decreased by $45 million, or
9%, to $438 million. This decrease was largely driven by lower sales volume
and a one-time cash payment received from Shell in the third quarter of 2002 in
the amount of $1.9 million related to a product rebate, partially offset by
higher feedstock prices due to the increasing price of crude oil and related
petrochemical products. As a percentage of revenue, purchases and variable
product costs increased from 56% to 59%.

Purchases and variable product costs in the US decreased by $88 million,
or 34% to $174 million. The decrease was primarily a result of lower sales
volume and lower feedstock prices.

European purchases and variable product costs increased by $57 million, or
28% to $262 million. The increase was a result of higher feedstock prices.

Operating Expenses

Operating expenses decreased by $30 million, or 20%, to $122 million. The
decrease is principally related to lower site services, utilities, materials,
maintenance and facilities costs. Operating expenses also decreased due to a
change in estimates with our postretirement medical benefit obligation and due
to the reimbursement of environmental expenses from Shell.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $2 million, or
3%, to $59 million. The decrease was primarily a result of lower service and
administrative costs related to the establishment of an independent

25



---



##### Table of Contents



information
technology system and accounting function, and a change in estimates with our
postretirement medical benefit obligation and capitalization of personnel
expense to the information technology project.

Depreciation and Amortization

Depreciation and amortization increased by $2 million, or 6%, to $36
million. The increase is primarily due to higher depreciation expense related
to higher capital expenditures.

Research and Development Expenses

Research and development costs decreased by $5 million, or 20%, to $20
million. The decrease was primarily due to decreased personnel and lower rental
expense.

Restructuring Charges

Restructuring charges increased by $6 million. We accrued a charge for
employee severance and other exit costs of $6 million in the fourth quarter of
2002 related to a cost reduction program implemented in response to a
significant decline in profitability. The reduction in work force affected
approximately 90 employees or 9% of the work force.

Special Charges

Special charges decreased by $7 million, or 47%, to $8 million. The
decrease is primarily related to lower transition costs incurred in 2002.
Transition activities for 2002 primarily consisted of $8 million of
non-recurring transition expenses related to the migration from the
predecessors IT systems and accounting function that was previously
outsourced. Transition activities for 2001 consisted of $3 million for
severance costs and $12 million for exit and relocation costs related to
transitioning from the predecessors organization structure.

Operating Income

Operating income decreased by $42 million to $51 million. The decrease was
primarily due to the decreased revenue and increased depreciation and
amortization and restructuring charges, partially offset by decreases in
purchase and other variable cost, operating expenses, selling, general and
administrative, research and development costs and special charges.

Income from Equity Investment

Income from equity investment increased by $1 million to $1 million. The
increase was due to higher earnings recognized from our 50% equity joint
venture, Japan Epoxy Resins.

Interest Expense, Net

Interest expense, net, decreased by $3 million, or 4%, to $65 million.
The decrease is primarily due to the reduced amount outstanding under our
credit agreement as a result of the aggregate voluntary prepayments of $30
million we made in 2002, partially offset by increased interest rates related
to the additional $128 million of 13 1/2% Senior Subordinated Notes issued in
November 2001 and December 2002 to finance a portion of the prepayments under
the credit agreement.

Income (Loss) Before Income Taxes

Income (loss) before income taxes decreased by $38 million to a $12
million loss in 2002. The decrease was due to decreased operating income,
partially offset by increased income from our equity affiliate and decreased
interest expense, net.

26



---



##### Table of Contents



Income Tax Expense (Benefit)

Income tax expense (benefit) decreased by $16 million to a $5 million
benefit in 2002. The decrease was primarily related to a taxable loss in 2002.

Net Income (Loss)

Net income (loss) decreased by $22 million to a $7 million net loss in
2002. The net loss was due to the loss before income taxes, partially offset by
income tax benefit.

EBITDA

EBITDA decreased $39 million, or 30%, to $89 million. The decrease was
primarily due to decreased revenue and increased severance costs, partially
offset by decreases in purchase and other variable costs, operating expenses,
selling, general and administrative expenses, research and development costs
and special charges. EBITDA has not been adjusted for the special charges or
restructuring charges discussed above. In addition, for the year ended December
31, 2002, EBITDA has not been adjusted by $4 million of cost savings that
management estimates would have been achieved assuming that the comprehensive
information technology project we announced in 2001 to establish our own
systems and infrastructure in order to transition from the predecessor IT and
accountings systems had been completely in effect as of January 1, 2002. See
Item 6. Selected Financial Data for a reconciliation of EBITDA to net loss.

Liquidity and Capital Resources

General

During the year ended December 31, 2003, our operating cash flow was less
than our working capital needs. However, we obtained additional cash from the
issuance of $200 million aggregate principal amount of 9 1/2%
Senior Second
Secured Notes and the issuance of $140 million aggregate principal amount of 8%
Senior Secured Notes, and liquidated the amounts of long-term debt outstanding
under our credit agreement, resulting in an increase of cash and cash
equivalents for the period in the amount of $45 million. In addition, during
2003 we sold a significant interest in our investment in an equity affiliate
for gross proceeds of $23 million. Also, during 2003, we received income tax
refunds totaling $19 million. Our working capital requirements principally
include accounts receivable, product and raw materials inventory, labor,
equipment and debt service costs. We expect to continue to finance our
operations through net cash provided by operating activities, existing cash and
cash equivalents on hand, other refinancing vehicles and borrowings under our
revolving credit facility and, to 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 operating activities, borrowings and asset sales
to meet our current debt service requirements. For a discussion of factors
affecting our operating cash flows, see Outlook for 2004 below.

Our high level of debt may preclude us from borrowing any more funds
beyond those available under the revolving credit agreement. Based on our
current level of operations, anticipated recovery and cost reductions,
management believes that our cash flow from operations, together with existing
cash and cash equivalents on hand, net proceeds from the issuances of the
notes, future borrowings under our revolving credit facility and sales of
assets, if necessary, will be sufficient to fund our working capital needs and
expenditures, for property, plant and equipment and debt service obligations in
the foreseeable future, although no assurance can be given in this regard.

27



---



##### Table of Contents



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 and Regulation S under the Securities Act of 1933 in 2000, 2001 and 2002
by RPP LLC and RPP Capital. These notes were subsequently exchanged with
registered identical series of notes with the Securities and Exchange
Commission in 2001, 2002 and 2003, respectively. The $328 million of 13 1/2%
Senior Subordinated Notes are senior subordinated unsecured obligations ranking
junior in right of payment to all of our existing and future senior debt and
all liabilities of our subsidiaries that do not guarantee the notes. The
proceeds from the issuance of $200 million of the 13 1/2% Senior Subordinated
Notes in November 2000 were used to finance in part the recapitalization and
related transaction costs and 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 the notes 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 payable semi-annually in cash on each May
15 and November 15. The 13 1/2% Senior Subordinated Notes mature on November
15, 2010 and may be redeemed 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 private offering, together with RPP
Capital, its wholly-owned subsidiary, of $175 million aggregate principal
amount of 9 1/2% Senior Second Secured Notes Due 2010. The $175 million of
9 1/2% Senior Second Secured Notes are senior secured obligations ranking
equal in right of payment to all of our existing and future senior debt and
senior in right of payment with all of our existing and future subordinated
indebtedness. The 9 1/2% Senior Second Secured Notes are secured by a junior
lien, subject to permitted liens, on all of our domestic assets (subject to
certain exceptions) that secure our obligations under the Credit Agreement (as
defined below) and a portion of the capital stock of our direct and indirect
domestic subsidiaries and direct foreign subsidiaries. Interest is payable
semi-annually in cash on April 15 and October 15, beginning October 15, 2003.
The proceeds, net of $5 million debt issue costs, from the offering were used
to repay borrowings under the Credit Agreement 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 working capital. The 9 1/2% 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, on and after April 15, 2006, at the
specified redemption prices set forth under the related indenture.

We and the other Borrowers executed the Fourth Amendment to the Credit
Agreement dated as of April 1, 2003. The Fourth Amendment, among other things,
(a) permitted the Borrowers to issue up to $200 million of 9 1/2% 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 term loans
outstanding under the Credit Agreement, (b) amended the financial covenants by
eliminating the consolidated interest coverage ratio covenant and the adjusted
total leverage ratio covenant and added an adjusted bank leverage ratio
covenant, and (c) reduced the size of the revolving credit facility from $100
million to $75 million.

In May 2003, RPP LLC and RPP Capital registered an identical series of
$175 million 9 1/2% Senior Second Secured Notes due 2010 with the Securities
and Exchange Commission and subsequently completed an offer to exchange the
unregistered notes for the registered notes.

On May 22, 2003, RPP LLC completed a private offering, together with RPP
Capital, its wholly-owned subsidiary, as co-issuer, of an additional $25
million aggregate principal amount of 9 1/2% Senior Second Secured Notes Due
2010. These notes, together with the $175 million aggregate principal amount
of 9 1/2% Senior Second Secured Notes due 2010 that were originally issued on
April 9, 2003, are treated as a single class of securities under our existing
indenture. The proceeds, net of $2 million debt issue costs from the offering,
were used for general corporate purposes, including working capital.

In July 2003, the RPP LLC and RPP Capital registered an identical series
of 9 1/2% Senior Second Secured Notes Due 2010 with the Securities and
Exchange Commission and subsequently completed an offer to exchange all of the
unregistered notes for registered notes. As a result of these two exchange
offers, all of the outstanding $200 million of 9 1/2% Senior Second Secured
Notes due 2010 are registered notes.

28



---



##### Table of Contents



On December 22, 2003, RPP LLC completed a private offering, together with
RPP CC, its wholly-owned subsidiary, as co-issuer, of $140 million aggregate
principal amount of 8% Senior Secured Notes Due 2009. The $140 million of 8%
Senior Secured Notes are senior secured obligations ranking equal in right of
payment to all of our existing and future senior debt and senior in right of
payment with all of our existing and future subordinated indebtedness. The 8%
Senior Secured Notes are secured by a lien, subject to permitted liens, on all
of our domestic
assets (subject to certain exceptions) that secure our obligations under the
Credit Agreement and a portion of the capital stock of our direct and indirect
domestic subsidiaries and direct foreign subsidiaries. Our obligations under
the 8% Senior Secured Notes and our obligations under the 9 1/2% Senior Second
Secured Notes are secured by liens on the same collateral. By virtue of the
lien priority, the 8% Senior Secured Notes are effectively senior to the
obligations under the 9 1/2% Senior Second Secured Notes to the extent of the
value of the collateral securing such notes. Interest is payable semi-annually
in cash on December 15 and June 15, beginning June 15, 2004. The proceeds,
net of $4 million debt issue costs from the offering of the 8% Senior Secured Notes, were used to
repay borrowings under the Credit Agreement and 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, on
and after December 15, 2006, at the specified redemption prices set forth under
the related indenture.

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

We and the other borrowers executed the Fifth Amendment to the Credit
Agreement with an effective date as of December 22, 2003. The Fifth Amendment,
among other things, (a) permitted us to issue the 8% Senior Secured Notes so
long as the net proceeds from the offering of the notes were used to repay all
of the remaining term loans outstanding under the Credit Agreement, (b)
eliminated the adjusted bank leverage ratio covenant, and (c) imposed an asset
coverage test which will limit borrowings and letters of credit under our
revolving credit facility 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 of our U. S. plant, property and equipment, which Borrowing Base
we will be required to report on a monthly basis. If the utilization under the
revolving credit facility exceeds the most recently reported Borrowing Base, we
must repay outstanding borrowings and/or cash collateralize letters of credit
in the amount equal to such excess. Substantially all of our current and
future assets are pledged as security under our Credit Agreement.

Credit Agreement

On November 14, 2000, RPP Inc., RPP LLC, RPP Capital and Resolution
Nederland B.V. entered into a $600 million Credit Agreement with a syndicate of
financial institutions. The Credit Agreement currently provides for a six-year
$75 million revolving credit facility, the euro equivalent of which is also
available, to be used for, among other things, working capital and general
corporate purposes of RPP LLC and its subsidiaries, including without
limitation, certain permitted acquisitions. The revolving credit facility also
includes a sub-limit for letters of credit in an amount not to exceed $50
million. At December 31, 2003, there were no amounts outstanding under the
revolving credit facility and $8 million in outstanding letters of credit. At
December 31, 2003, we had additional borrowing capacity under the Credit
Agreement of $67 million. During 2003, we borrowed $236 million and made
payments of $473 million under the Credit Agreement. As of December 31, 2003,
we were in compliance with the borrowing base limit of the Credit Agreement.

Borrowings that are maintained as dollar term loans or loans under the
revolving credit facility denominated in dollars, accrue interest at either
Citibanks prime lending base rate or the eurodollar rate plus, in each case, a
margin ranging from 1.25% to 3.00%, which margin is dependent upon our
leverage, as determined on a quarterly basis. Interest rates on loans under the
revolving credit facility denominated in euros accrue interest at the euro rate
plus associated costs plus, in each case, a margin ranging from 2.25% to 3.00%
depending on our leverage, as determined on a quarterly basis.

Interest period elections generally range from one to six months, or to
the extent available, nine or twelve months for eurodollar and euro rate loans.
With respect to eurodollar loans and euro rate loans, interest is payable at
the end of each interest period or, for interest periods longer than three
months, at least every three months.

29



---



##### Table of Contents



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

The loans incurred under the Credit Agreement by RPP LLC and RPP Capital
are guaranteed by RPP Inc. and all of our existing and future direct and
indirect wholly-owned domestic subsidiaries. The U.S. loans under the Credit
Agreement are secured by a perfected security interest in substantially all of
our properties and assets and our direct and indirect wholly-owned domestic
restricted subsidiaries, now owned or acquired later, including a pledge of all
capital stock and notes owned by us and our domestic restricted subsidiaries;
provided that no more than 65% of the stock of our foreign subsidiaries is
required to be pledged in respect of such loans. In addition, loans incurred
under the Credit Agreement by Resolution Europe B.V. (f/k/a Resolution
Nederland B.V.), a subsidiary of RPP B.V., are guaranteed by RPP Inc., us and
all of our existing and future direct and indirect 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
Nederland B.V.) and the Non-U.S. Guarantors are secured by a perfected security
interest in the assets described above and in certain material property and
assets owned by Resolution Europe B.V. (f/k/a Resolution Nederland B.V.) and
the Non-U.S. Guarantors.

Equipment Leases

During 2001, we entered into five to seven year leases for equipment at an
aggregate annual rental of $0.3 million. The equipment has been
capitalized at its fair market value of $1.2 million, which approximates the
present value of the minimum lease payments. During 2002, we entered into a
number 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 lease
payments. As of December 31, 2003, $2 million of these capital leases was
outstanding. We will continue to review entering into capital lease agreements
as alternate sources of financing with favorable interest rates as
opportunities arise.

Equipment Notes

We entered into unsecured trade notes, totaling $3.9 million,
payable over thirty-six months with one of our vendors for the purchase of
computer equipment and related services. As of December 31, 2003, $2 million of
these unsecured trade notes was outstanding. Annual principal payments for
other long-term debt will average approximately $1.3 million for 2003.

Insurance Notes

Each year we enter into trade notes with a funding corporation to finance
our insurance coverage. Payments on these trade notes were approximately $9
million in 2003 and there was $6 million outstanding as of December 31, 2003
under this 2003 trade note. We plan to enter into a similar arrangement for a
similar amount to finance our insurance needs in 2004.

Cash Flows

For the year ended December 31, 2003, we used net cash for operating
activities of $49 million, provided cash in investing activities of $7 million
and provided cash in financing activities of $86 million. Investing activities
primarily consisted of expenditures for property, plant and equipment of $18
million offset by the proceeds of $23 million on the sale of forty percent of
the outstanding shares in Japan Epoxy Resins Co., Ltd to our joint venture
partner, Mitsubishi Chemical Company. In connection with the financing
activities, we paid a constructive distribution related to certain pension
costs to Shell on RPPIs behalf. For the year ended December 31, 2002, we
generated net cash provided by operating activities of $69 million, used cash
in investing activities of $45 million and used cash in financing activities of
$26 million. Investing activities primarily consisted of expenditures for

30



---



##### Table of Contents



property, plant and equipment and proceeds from the sale of non-productive
assets. For the year ended December 31, 2001, we generated net cash provided by
operating activities of $95 million, used cash in investing activities of $23
million and used cash in financing activities of $85 million. In connection
with the financing activities, we received
a capital contribution related to a purchase price adjustment per the
recapitalization transaction in the amount of $19 million in the year ended
December 31, 2001.

Our management uses EBITDA 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, 2003, our EBITDA was $58 million, but our cash flow from
operations was negative $49 million and our interest expense, net, was $76
million.

Capital Expenditures

Capital expenditures for property, plant and equipment totaled $18
million, $48 million and $24 million for the years ending December 31, 2003,
2002 and 2001, respectively. Capital expenditures for 2003 consisted of $1
million for information technology projects, a net $6 million for mandatory
environmental projects (gross $11 million before indemnification recovery of $5
million from Shell), $6 million for growth and improved profitability and $5
million to maintain capital projects. Of the $48 million spent in 2002, $30
million was related to the information technology project, a net $10 million
was for mandatory environmental projects (gross $26 million before
indemnification recovery of $16 million from Shell), $6 million was for
projects related to growth and improved profitability, and $2 million was for
maintenance. Of the $24 million in 2001, $9 million was related to
maintenance, $3 million for mandatory environmental projects, and $12 million
was for projects related to growth and improved profitability, primarily
related to an investment in our Versatics business to improve the quality of
these manufacturing assets. In addition, in January 2001 we spent $1 million in
connection with the purchase of Shell Epoxy Resins France SAS.

Because we have an established infrastructure in place, our capital
expenditures are generally not for the building of new plants but for their
maintenance, mandatory environmental projects, occasional incremental expansion
or cost reduction/efficiency improvement where justified by the expected return
on investment. We expect our capital expenditures for 2004 to be
approximately $20 million.

Contractual Obligations and Other

We do not have any arrangements or relationships with unconsolidated
entities or special purpose entities. Related party transactions are limited to
those described in Note 3 of the consolidated financial statements. Off-balance
sheet arrangements are limited to operating leases described in Note 13 of the
consolidated financial statements. The following is a summary of our material
contractual cash payment obligations as of December 31, 2003 (in millions):

|                                |       |      |     |      |  |      |     |      |  |            |    |       |  |   |    |    |  |   |     |     |  |   |     |       | 
|------------------------------- | ----- | ---- | --- | ---- |  | ---- | --- | ---- |  | ---------- | -- | ----- |  | - | -- | -- |  | - | --- | --- |  | - | --- | ----- | 
|Contractual Obligation          |       | 2004 |     | 2005 |  | 2006 |     | 2007 |  | Thereafter |    | Total
|                                |       |      |     |      |  |      |     |      |  |            |    |      
|Long-term debt obligations*     |       | $    | 1   |      |  | $    | 1   |      |  | $          |   |       |  | $ |   |    |  | $ | 668 |     |  | $ | 670 |      
|Capital lease obligations       |       |      | 1   |      |  |      | 1   |      |  |            |   |       |  |   |   |    |  |   |    |     |  |   | 2   |      
|Other contractual
obligations** |       |      | 134 |      |  |      | 105 |      |  |            | 85 |       |  |   | 68 |    |  |   | 138 |     |  |   | 530 |      
|Operating lease obligations     |       |      | 6   |      |  |      | 6   |      |  |            | 6  |       |  |   | 4  |    |  |   | 12  |     |  |   | 34  |      
|                                |       |      |     |      |  |      |     |      |  |            |    |       |  |   |    |    |  |   |     |     |  |   |     |      
|                                | Total |      | $   | 142  |  |      | $   | 113  |  |            | $  | 91    |  |   | $  | 72 |  |   | $   | 818 |  |   | $   | 1,236 | 
|                                |       |      |     |      |  |      |     |      |  |            |    |       |  |   |    |    |  |   |     |     |  |   |     |      



---

* The revolving credit facility also includes a sub-limit for letters of credit
in an amount not to exceed $50 million.
At December 31, 2003, there were no amounts outstanding under the
revolving credit facility and $8 million in outstanding letters of credit.


** Other contractual obligations are comprised of the fixed or minimum amounts
of goods and/or services under long-term contracts and assumes that certain
contracts are terminated in accordance with their terms after giving the
requisite notice which is generally two to three years for most of these
contracts; however, under certain

31



---



##### Table of Contents



circumstances, some of these minimum
commitment term periods could be further reduced which would significantly
decrease these contractual obligations.

We currently anticipate that a contribution for the 2004 U. S. pension
plan year in the amount of $1.3 million will be required. However, the 2004 U.
S. pension plan year funding will not be required until September 2005. At the
earliest, we will be required to fund this pension obligation in April 2005.

Outlook for 2004

While the global economy remains in a low growth mode, we have begun to
experience signs of improvement in demand from the end markets we serve. Once a
global recovery takes hold, volumes are expected to rebound. Return of normal
supply/demand fundamentals should result in a reduction in average raw material
prices, which increased in 2003 due to political instability in the Middle
East (including the conflict in Iraq), and supply disruptions elsewhere. There
can be no assurances that (a) any global recovery will occur during 2004, (b)
we will be able to realize margins we have historically achieved as feedstock
costs decline, or (c) our feedstock costs will not rise faster than our product
prices and, therefore, reduce our margins.

We believe that demand for epoxy resins will improve in 2004 from 2003
levels, as described above. Also, we have recently announced significant
increases of epoxy resins prices for second quarter 2004 in North America,
Europe and Asia. We believe increases will be announced and implemented in
subsequent quarters to help offset the increase in raw material costs. During
2003 and the first quarter of 2004, the industry generally had been unable to
successfully achieve price increases on epoxy resin products. Additionally,
during that period, the major domestic epoxy resin producers had often not
supported such announced price increases.

In addition, we have instituted a new cost reduction program, focused
primarily on variable costs, to improve our margins. These cost reductions
relate to (i) improvements in the contractual price of certain of our
feedstocks which we have negotiated or expect to be implemented, and (ii)
specific projects at each of our plants which will result in higher efficiency
in the consumption of raw materials and the lower usage of utilities, thereby
reducing the cost of production independent of changes in the markets for our
feedstocks or energy. In addition, as part of our cost reduction program, we
have taken and will continue to take actions to eliminate certain additional
fixed costs. The benefits of the cost reduction program, expected to represent
$20 million to $30 million annually, are expected to be realized in 2004. The
implementation costs of this program are not expected to be material.

There can be no assurances that (i) demand for our products will increase
during 2004, (ii) the announced price increases by us or our competitors will
be accepted by our customers or that we will not lose any significant customers
or volumes in the future as a result of these price increases, (iii) the cost
reductions described above will be achieved or (iv) the expected benefits of
the cost reduction program will not be offset by increases in other expenses.

Environmental, Health and Safety

Our business is subject to various federal, state, local and foreign laws
and regulations which govern environmental health and safety (EHS) related
matters. Compliance with these laws and regulations requires substantial
continuing financial commitments and planning. Moreover, the laws and
regulations directly affect how we operate our business. The financial
commitments consist of environmental costs for normal day to day operations,
voluntary and mandatory matters as well as remediation issues.

As of December 31, 2003 and 2002, we assessed that an environmental
remediation liability accrual was not needed based on the current available
facts, present laws and regulations, and current technology. We accrue for
environmental liabilities when the liability is probable and the costs are
reasonably estimable. This assessment was based on the lack of evidence of any
claims or possible claims against us from the closing date of the
recapitalization. For environmental conditions that existed prior to the
closing date, our environmental remediation liability is influenced by
agreements associated with the transactions whereby Shell generally will
indemnify us for environmental damages associated with environmental conditions
that occurred or existed before the closing date of the recapitalization,
subject to certain limitations. In addition, for incidents occurring after the
closing date of the

32



---



##### Table of Contents



recapitalization transaction, management believes that we
maintain adequate insurance coverage, subject to deductibles, for environmental
remediation activities.

As mentioned above, we have substantial continuing financial commitments
for compliance with environmental matters. During the year ended December 31,
2003, we expended a total of $11 million in related mandatory environmental
capital projects and we applied $5 million from the deferred credit balance to
offset these expenditures. The deferred credit balance resulted from the 2002
settlement with Shell with regard to environmental matters covered by Shells
indemnity to us. As of December 31, 2003, the deferred credit balance was zero.
We expect a similar operating environmental commitment to continue in future
years, however, the level of financial commitment may increase if the
environmental laws and regulations become more stringent.

Research and Development

Our research and development activities are aimed at developing and
enhancing products, processes, applications and technologies on a global basis.
We emphasize a customer driven, systems and solutions approach in
discovering new applications and processes and providing customer service
through our technical staff. We also focus on on-going improvement of plant
yields, fixed costs and capacity. Our research and development expenditures
were $16 million, $20 million and $25 million for the years ended December 31,
2003, 2002 and 2001, respectively. In order to continue to find alternate
applications for our products and to continue to seek efficiencies in our
manufacturing efforts, we expect to spend similar amounts in the future on
product development and process development over the next few years.

Effects of Currency Fluctuations

We conduct operations in countries around the world. Therefore, our
results of operations are subject to both currency transaction risk and
currency translation risk. We incur currency transaction risk whenever we enter
into either a purchase or sales transaction using a currency other than the
local currency of the transacting entity. With respect to currency translation
risk, our financial condition and results of operations are measured and
recorded in the relevant domestic currency and then translated into U.S.
dollars for inclusion in our consolidated financial statements. Exchange
rates between these currencies and U.S. dollars in recent years have fluctuated
significantly and may do so in the future. For the year ended December 31,
2003, 55% of our total revenues and 57% of our total expenses were from
companies incorporated outside the United States. For the year ended December
31, 2002, 50% of our total revenues and 56% of our total expenses were from
companies incorporated outside the United States. For the year ended December
31, 2001, 49% of our total revenues and 54% of our total expenses were from
companies incorporated outside the United States. A substantial amount of
assets and liabilities outside the United States are currently denominated in
the Euro. Historically, we have not undertaken hedging strategies to minimize
the effect of currency fluctuations. Significant changes in the value of the
Euro relative to the U.S. dollar could also have an adverse effect on our
financial condition and results of operations and our ability to meet interest
and principal payments on Euro-denominated debt, including certain borrowings
under the credit agreement, and U.S. dollar denominated debt, including the
notes and certain borrowings under the credit agreement.

Inflation and Seasonality

Certain of our expenses, used in the production of final products, such as
supplies, maintenance and repairs and compensation and benefits, are subject to
normal inflationary pressures. Although to date we have been able to offset
inflationary cost increases through operating efficiencies and cost reductions,
there can be no assurance that we will be able to offset any future
inflationary cost increases through these or similar means. Our revenues and
earnings are moderately seasonal, with the second and third quarters generally
providing stronger results. Such seasonality has also been customary in the
chemical industry in general, and we expect this trend to continue in future
periods.

33



---



##### Table of Contents



Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS 149,Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
the accounting guidance on (1) derivative instruments (including certain
derivative instruments embedded in other contracts) and (2) hedging activities
that fall within the scope of SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 149 is effective (1) for contracts entered into
or modified after June 30, 2003, with certain exceptions, and (2) for hedging
relationships
designated after June 30, 2003. Adoption of the standard did not have a
material impact on our consolidated financial position, results of operations
or cash flows.

In May 2003, SFAS 150, Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity was issued. The standard
establishes how an issuer classifies and measures certain freestanding
financial instruments with characteristics of liabilities and equity and
requires that such instruments be classified as liabilities. The standard is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of the standard did not have a
material impact on our consolidated financial position, results of operations
or cash flows.

In December 2003, the FASB issued a revision to SFAS 132 (Employers
Disclosures about Pensions and Other Postretirement Benefits). The revision
amends SFAS 87, 88 and 106 and requires addition disclosures including
information describing the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit or costs recognized during interim periods. The effective
dates for the additional disclosure requirements are December 15, 2003 and June
15, 2004. Adoption of the revisions did not have a material effect on our
consolidated results of operations, cash flows or financial position.

In December 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities (FIN46R), primarily to clarify the required accounting for
interests in variable interest entities (VIEs). This standard replaces FASB
Financial Interpretation No. 46, Consolidation of Variable Interest Entities
that was issued in January 2003 to address certain situations in 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 VIEs that are 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. Our application of FIN 46R, as of December 31,
2003 and as of March 31, 2004, did not and is not expected to have a material
impact on our financial statements.

In January 2004, the FASB issued FASB Staff Position (FSP) FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of
retiree health benefit plans to make a one-time election to defer recognition
of the effects of the new Medicare legislation in accounting for its plans
under SFAS 106, Employers Accounting for Postretirement Benefits Other Than
Pension, or in making disclosures related to its plans required by SFAS 132
(Revised 2003), Employers Disclosures about Pension and Other Postretirement
Benefits, until the FASB develops and issues authoritative guidance on
accounting for subsidies provided by the Act. Such FASB guidance could require
a change in currently reported information. We elected to make the one-time
deferral and are currently evaluating the effect of the FSP.




Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are engaged in manufacturing and marketing resins and other chemicals
in the U.S. and internationally. As a result, we are exposed to certain market
risks which include financial instruments such as foreign currency, short-term
investments, trade receivables, and long-term debt. The adverse effects of
potential changes in these market risks are discussed below. The sensitivity
analyses presented do not consider the effects that such adverse changes may
have on overall economic activity nor do they consider additional actions
management may take to mitigate our exposure to such changes. The notes to our
audited consolidated financial statements provide a description of our
accounting policies and other information related to these financial
instruments. We do not engage in speculative transactions and typically do not
engage in hedging activities, except for the interest rate swaps which were put
in place subsequent to December 31, 2000 in connection with our credit
agreement and which have since expired or were terminated. In December 2002,
we entered into an interest rate cap agreement for

34



---



##### Table of Contents



the notional amount of $150
million to replace the interest rate swaps. The interest rate swaps and the
interest rate cap protected us against interest rate fluctuation by changing
the interest rate payable on borrowings under the credit agreement from a
variable interest rate to a fixed interest rate.

A substantial amount of assets and liabilities outside the U.S. are
denominated in Euros. The exchange rate of the U.S. dollar to the Euro was
approximately 0.7964 and 0.9541 at December 31, 2003 and 2002, respectively. We
may utilize forward exchange contracts to hedge foreign currency
transaction exposures. There were no foreign exchange contracts outstanding at
December 31, 2003.

We place our short-term investments, which generally have a term of less
than 90 days, with high quality financial institutions. We also limit the
amount of credit exposure to any one institution, and have investment
guidelines concerning diversification and maturities designed to maintain
safety and liquidity. Due to the short-term nature of these instruments, their
carrying value approximates market value. Management does not believe that a
decrease of 1.0% from 2003 average investment rates would be material during
2004.

Management evaluates the creditworthiness of our customers and monitors
accounts on a regular basis, but typically does not require collateral. Our
trade receivables are primarily denominated in U.S. dollars and Euros. In
addition, trade receivables are generally 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s expectations. Management believes timely
collection of trade receivables minimizes associated credit risk.

As of December 31, 2003, our outstanding long-term debt consisted of the
notes, a revolver credit facility that includes a letter of credit facility.
The aggregate notes, which mature in 2009 and 2010, totaled $668 million, bear
interest at a fixed rate of 13 1/2%, 91/2% and 8%. As of December 31, 2003,
their fair value was estimated to be $635 million in the aggregate. Borrowings
that are denominated in the U.S. dollar bear interest at either Citibanks
prime lending rate or the eurodollar rate plus, in each case, a margin ranging
from 1.25% to 3.00%, depending upon our leverage, as determined quarterly.
Borrowings that are denominated in euros bear interest at the euro rate
(Euribor) plus a margin ranging from 2.25% to 3.00% depending on our leverage,
as determined quarterly. We periodically review various alternatives to protect
long-term debt against interest rate fluctuations.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 15(a) below.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 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 and procedures for financial
reporting (Internal Controls) will prevent all error 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

35



---



##### Table of Contents



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.

Management is aware that certain internal controls are dynamic and
consequently continue to be refined and improved. For example, we have
implemented an internal control steering committee and commenced the
implementation of an internal control software tool to enhance internal
controls that will continue to provide us with reasonable assurance that the
identified controls operated as intended have not limited the effectiveness of
our disclosure controls and procedures.

Based upon the Controls Evaluation, the CEO and CFO have concluded that,
to the best of their knowledge and subject to the limitations noted above, the
Disclosure Controls are effective to timely alert management to material
information relating to us during the period when our periodic reports are
being prepared. There have been no changes in our Internal Controls that
occurred during the fourth fiscal quarter in 2003 that have materially
affected, or are reasonably likely to materially affect, our Internal Controls.

36



---



##### Table of Contents






PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information as of January 1, 2004
with respect to the members of our Board of Managers and our executive
officers, who also hold the same positions with our parent RPP Inc.

|                        |  |     |    |          |  |                                                                            
|----------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Marvin O. Schlanger     |  |     | 55 |          |  | Chairman and Chief Executive Officer                                       
|Jeffrey M. Nodland      |  |     | 48 |          |  | President and Chief Operating Officer                                      
|J. Travis Spoede        |  |     | 52 |          |  | Executive Vice President and Chief Financial Officer                       
|Mark S. Antonvich       |  |     | 43 |          |  | Senior Vice President, General Counsel and Corporate Secretary             
|Wouter W. Jongepier     |  |     | 41 |          |  | Vice President, Major Resins                                               
|Hanna M. Lukosavich     |  |     | 47 |          |  | Vice President and Chief Information Officer                               
|Dennis F. White         |  |     | 52 |          |  | Vice President, Human Resources                                            
|Douglas B. Rahrig       |  |     | 53 |          |  | Vice President, Performance Products, Technology and Development           
|Edward Guetens          |  |     | 62 |          |  | Vice President, Environment, Health & Safety, Manufacturing and
Engineering
|Francois Vleugels       |  |     | 55 |          |  | Vice President and Chief Administrative Officer, Europe                    
|Laurence M. Berg        |  |     | 37 |          |  | Director                                                                   
|Peter P. Copses         |  |     | 45 |          |  | Director                                                                   
|Joshua J. Harris        |  |     | 39 |          |  | Director                                                                   
|Scott M. Kleinman       |  |     | 30 |          |  | Director                                                                   
|Joel A. Asen            |  |     | 52 |          |  | Director                                                                   
|Heinn F. Tomfohrde, III |  |     | 70 |          |  | Director                                                                   

Marvin O. Schlangerbecame Chairman of the Board of Managers of RPP LLC on
November 14, 2000. Mr. Schlanger was appointed Chairman and Chief Executive
Officer of RPP Capital on March 2, 2001 and served as President of RPP LLC and
RPP Capital until July 2001. Since October 1998, Mr. Schlanger has been a
principal in the firm of Cherry Hill Chemical Investments, L.L.C., which
provides management services and capital to the chemical and allied industries.
From 1999 to 2000, he also served as interim president of OneChem, Ltd. From
1988 to October 1998, Mr. Schlanger held various positions with ARCO Chemical
Company, serving most recently as President and Chief Executive Officer from
May 1998 to October 1998 and as Executive Vice President and Chief Operating
Officer from 1994 to May 1998. Mr. Schlanger is also a director of RPP Capital,
UGI Corporation and Wellman, Inc.

Jeffrey M. Nodlandbecame President and Chief Operating Officer of RPP LLC
and RPP Capital in July 2001. Prior thereto since 2000, Mr. Nodland was Vice
President and General Manager, Coatings, Ink, Textiles and Composites for
Eastman Chemical Company. From 1994 to 2000, he was President and Chief
Executive Officer of McWhorter Technologies, Inc. Prior thereto since 1977, Mr
Nodland held various positions at Valspar Corporation, serving most recently as
President of the McWhorter division.

J. Travis Spoedebecame Executive Vice President and Chief Financial
Officer of RPP LLC and RPP Capital in March 2001. Prior thereto since 1974, Mr.
Spoede held various positions with Union Carbide Corporation, serving most
recently as Director of Strategic Development, Joint Ventures from 1999 to 2001
and as Chief Financial Officer of EQUATE Petrochemical Company, a joint venture
between Union Carbide Corporation and Petrochemical Industries Company of
Kuwait, from 1994 to 1999.

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

37



---



##### Table of Contents



Mark S. Antonvichbecame Senior Vice President, General Counsel and
Corporate Secretary of RPP LLC on January 1, 2004 and prior thereto had been
our Vice President and General Counsel since May 8, 2001. Prior thereto, from
August 2000 to May 2001, he had been Senior Counsel for Enron Global
Exploration & Production Inc., where he was responsible for international oil
and gas transactions and providing legal support to operating assets in India.
From 1995 to 2000, Mr. Antonvich represented Magma Copper Company and BHP
Minerals in Tucson, Arizona and Houston, Texas, most recently serving as Senior
Corporate Counsel, advising those companies on international mineral
acquisitions and divestments, commercial and general corporate matters,
operational and environmental issues related to mining and mineral processing
activities, and complex litigation. From 1987 to 1995, he was in private
practice in the Washington, D.C. area, following graduation from the Georgetown
University Law Center.

Hanna M. Lukosavichbecame Vice President and Chief Information Officer of
RPP LLC and RPP Capital in March 2001. From 1983 to 2000, Ms. Lukosavich held
various positions with Mannesmann Pipe & Steel Corporation, including Director
of Information Technology.

Dennis F. Whitebecame Vice President, Human Resources of RPP LLC on
November 14, 2000. Prior thereto, Mr. White had been the Vice President of
Human Resources of Shells Resins/Versatics Products since late 1999. Mr. White
had previously been Director of Employee Resources for Criterion Catalyst
Company from 1989 to 1999, and prior to that had spent 16 years in various
human resource positions with Shell.

Douglas B. Rahrigbecame Vice President, Performance Products, Technology
and Development of RPP LLC on January 1, 2004 and prior thereto had been our
Director of Product and Applications Development since October 2, 2001. From
1994 to 2001, Mr. Rahrig served as a Vice President in various marketing and
technical development roles at McWhorter Technologies.

Edward Guetensbecame Vice President, Environment, Health & Safety,
Manufacturing and Engineering on 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 in various positions with Arco Chemical
Company, most recently as Director of Engineering, Environment, Health & Safety
and Manufacturing Programs.

Francois Vleugelsbecame Vice President and Chief Administrative
OfficerEurope of RPP LLC on January 1, 2004. From 1981 until 2003, Mr.
Vleugels served in various positions with Eastman Chemical Company, most
recently as the Vice President and General Manager of Coatings, Adhesives and
Specialty Polymers.

Laurence M. Bergbecame a director of RPP Inc. on November 14, 2000 and a
member of the Board of Managers of RPP LLC and a director of RPP Capital on
March 2, 2001. Mr. Berg is a partner in Apollo Management, L.P., where he has
worked since 1992. Prior to that time, Mr. Berg was a member of the Mergers and
Acquisitions Department of Drexel Burnham Lambert Incorporated. Mr. Berg is
also a director of Sylvan Inc., AMC Entertainment, Inc. and Rent-A-Center, Inc.

Peter P. Copsesbecame a director of RPP Inc. on November 14, 2000 and a
member of the Board of Managers of RPP LLC and a director of RPP Capital on
March 2, 2001. 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 Drexel Burnham Lambert Incorporated, and subsequently at Donaldson,
Lufkin Jenrette Securities Corporation, concentrating on the structuring,
financing and negotiation of mergers and acquisitions. Mr. Copses is also a
director of Rent-A-Center, Inc., Zale Corporation, Compass Minerals
International, Inc. and General Nutrition Centers, Inc.

Joshua J. Harrisbecame a director of RPP Inc., a member of 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. and has served
as an officer of certain affiliates of Apollo since 1990. Prior to that time,
Mr. Harris was a member of the Mergers and Acquisitions Department of Drexel
Burnham Lambert Incorporated. Mr. Harris is also a director of Breuners Home
Furnishings Corporation, Pacer International, Inc., Quality Distribution Inc.,
Compass Minerals International, Inc., Nalco Company, United Agri Products, Inc.
and UAP Holding Corp.

Scott M. Kleinmanbecame a director of RPP Inc., a member of the Board of
Managers of RPP LLC and a director of RPP Capital on November 14, 2000. Mr.
Kleinman is a principal of Apollo Management, L.P., where he

38



---



##### Table of Contents



has worked since February 1996. Prior to that time, Mr. Kleinman was
employed by Smith Barney Inc. in its Investment Banking division from July 1994
through January 1996. Mr. Kleinman is also a director of Compass Minerals
International, Inc.

Joel A. Asenbecame a director of RPP Inc. on November 14, 2000 and a
member of the Board of Managers of RPP LLC and a director of RPP Capital on
March 2, 2001. Since June of 2003, Mr. Asen has been a Managing Director of
PLASE Capital Group, L.P., an affiliate of Apollo Management L.P. Since May
1992, Mr. Asen has been President of Asen Advisory, which provides strategic
and financial advisory services. He was Managing Director at Whitehead Sterling
from 1991 to 1992, at Paine Webber, Inc. from 1990 to 1991 and at Drexel
Burnham Lambert Incorporated from 1988 to 1990. From 1985 to 1988 he was a
Senior Vice President at GAF Corporation. Prior to that time, Mr. Asen was a
Manager of Business Development at GE and Manager of Marketing and Business
Development at GECC. Mr. Asen is also a director of Compass Minerals
International, Inc and Anchor Glass Container Corporation.

Heinn F. Tomfohrde, IIIbecame a director of RPP Inc. on November 14, 2000
and a member of the Board of Managers of RPP LLC and a director of RPP Capital
on March 2, 2001. Mr. Tomfohrde has served the chemicals industry in a variety
of leadership positions for 44 years. He served as President and Chief
Operating Officer of International Specialty Products, Inc. and its predecessor
company, GAF Chemicals Corp. from 1987 to 1993. Prior to that time, Mr.
Tomfohrde spent 31 years with Union Carbide Corp., rising from positions in
research and development and marketing to senior management, serving as
President of Union Carbides Consumer and Industrial Products Group from 1983 to
1986. Mr. Tomfohrde is also a director of Compass Minerals International, Inc

Compensation of Board of Managers

In 2004, we will pay each non-employee director a retainer of $1,500 per
month plus $1,500 for each Board meeting attended.

Furthermore, in the event that RPP LLC and its subsidiaries consolidated
earnings before interest, taxes, depreciation and amortization (as determined
by our historical practices) is $116 million or more during any twelve month
period ending the last day of any fiscal quarter during 2004 and 2005, each
director will receive 125% of the amount that would have been received had the
2004 plan been in effect in 2003.

Each of the members of the Board of Managers of RPP LLC also serves as a
director of RPP Inc. and is compensated for such services by RPP Inc. RPP Inc.
adopted a non-employee director stock option plan, effective as of November 14,
2000, pursuant to which options with respect to a total of 15,000 shares of RPP
Inc.s common stock will be available for grant to directors of RPP Inc. or any
of its subsidiaries, including us, who are not also employees of RPP Inc. or
any of its subsidiaries. The option plan will be administered by the board of
directors of RPP Inc. or a compensation committee appointed from time to time
by the board of directors. The right to grant options under the plan will
expire on November 14, 2010 unless earlier terminated by the board of directors
of RPP Inc. Options granted under the plan will be nonqualified stock options.
As of December 31, 2002, RPP Inc. granted options covering 6,000 shares to its
non-employee directors, each of whom also serves as a member of the Board of
Managers of RPP LLC.

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

 One-third of the options will time vest in equal increments over five
years, ending on November 14, 2005. However, vesting of all of these options
will be accelerated immediately upon the consummation of a sale of RPP Inc. for
cash, or any transaction in which Apollo Management sells at least fifty
percent of its shares of common stock of RPP Inc.

 Two-thirds of the options will be performance options and will vest on
November 14, 2008. However, vesting of all or a portion of the performance
options will be accelerated upon the consummation of a sale of RPP Inc. for
cash, or any transaction in which Apollo Management sells at least fifty
percent of its shares of common stock of RPP Inc. The amount vested will be
based on the operating results achieved by the business.

39



---



##### Table of Contents



The vesting of options will cease when the grantee is no longer a director
of RPP Inc. or any of its subsidiaries, and all unvested options will be
forfeited at such time.

The exercise price for the options will be determined by the board of
directors of RPP Inc. or the compensation committee. All options granted under
the plan will expire thirty days after the eighth anniversary of the date of
grant.

Committees of the Board of Managers

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

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

The compensation committee reviews and makes recommendations regarding our
compensation policies and forms of compensation provided to our board of
managers and officers. The compensation committee also reviews and determines
bonuses for our officers and other employees. In addition, the compensation
committee reviews and determines stock-based compensation for our board of
managers, officers, employees and consultants and administers our option plan.
The members of the compensation committee are Messrs. Harris, Tomfohrde and
Schlanger.

The audit committee provides assistance to the Board of Managers in
fulfilling its legal and fiduciary obligations in matters involving our
accounting, auditing, financial reporting, internal control and legal
compliance functions. The audit committee also oversees the audit efforts of
our independent accountants and takes those actions it deems necessary to
satisfy itself that the auditors are independent of management. The members of
the audit committee are Messrs. Kleinman, Asen and Schlanger.

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

Audit Committee Financial Expert

The Board of Managers has determined that Mr. Kleinman, who is the
Chairman of the Audit Committee, serves as the current audit committee
financial expert as such term is defined under the SEC rules. In addition, Mr
Schlanger and Mr. Asen qualify as audit committee financial experts. None of
Mr. Kleinman, Mr. Schlanger, nor Mr. Asen qualify as independent as such term
is used in Item 7(d)(d)(iv) of Schedule 14A under the Exchange Act assuming
that the listing standards of the National Association of Securities dealers,
Inc. applied.

Code of Conduct and Ethics Policy

We have adopted a code of conduct and ethics policy, which applies to all
of our employees, including our chief executive officer and chief financial
officer. Our code of conduct and ethics policy are posted on our website at
www.resins.com under the heading Corporate Information. We will also provide
a copy of the code of conduct and ethics policy to securityholders upon
request. Any amendments to or waivers from any provision of our code of
conduct and ethics policy will be disclosed by posting such information on our
website.

40



---



##### Table of Contents






ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of
our Chairman and each of our other four most highly compensated executive
officers (including former officers) for the years ended December 31, 2003,
2002 and 2001.

Summary Compensation Table

|                            |                                              |                       |      |        |      |          |         |                     |         |           |        |        |   |   |        |        |   | 
|--------------------------- | -------------------------------------------- | --------------------- | ---- | ------ | ---- | -------- | ------- | ------------------- | ------- | --------- | ------ | ------ | - | - | ------ | ------ | - | 
|                            |                                              |                       |      |        |      |          |         | Annual Compensation |         | All Other
|Name and Principal Position |                                              | Year                  |      | Salary |      | Bonus(1) |         | Compensation(2)    
|                            |                                              |                       |      |        |      |          |         |                    
|Marvin O. Schlanger         |                                              |                       | 2003 |        |      | $        | 150,000 |                     |         | $         |       |        |   | $ |       |       
|                            | Chairman and Chief Executive Officer         |                       |      | 2002   |      |          |         | 300,000             |         |           |        | 500    |   |   |        |       |  
|                            |                                              |                       | 2001 |        |      |          | 400,000 |                     |         |           |       |        |   |   |       |       
|Jeff M. Nodland(3)          |                                              |                       | 2003 |        |      | $        | 225,000 |                     |         | $         | 5,000  |        |   | $ |       |       
|                            | President and Chief Operating Officer        |                       |      | 2002   |      |          |         | 250,000             |         |           |        | 500    |   |   |        |       |  
|                            |                                              |                       | 2001 |        |      |          | 114,583 |                     |         |           |       |        |   |   |       |       
|J. Travis Spoede            |                                              |                       | 2003 |        |      | $        | 180,000 |                     |         | $         | 5,000  |        |   | $ |       |       
|                            | Executive Vice President and Chief Financial |                       |      | 2002   |      |          |         | 201,190             |         |           |        | 50,500 |   |   |        |       |  
|                            |                                              | Officer and Secretary |      |        | 2001 |          |         |                     | 213,755 |           |        |        |  |   |        |        |  | 
|Mark S. Antonvich(3)        |                                              |                       | 2003 |        |      | $        | 175,499 |                     |         | $         | 7,500  |        |   | $ | 12,367 |       
|                            | Vice President and General Counsel           |                       |      | 2002   |      |          |         | 195,000             |         |           |        | 500    |   |   |        | 15,000 |  
|                            |                                              |                       | 2001 |        |      |          | 126,375 |                     |         |           |       |        |   |   | 10,000 |       
|Hanna M. Lukosavich(3)      |                                              |                       | 2003 |        |      | $        | 157,500 |                     |         | $         | 5,000  |        |   | $ |       |       
|                            | Vice President and Chief Information Officer |                       |      | 2002   |      |          |         | 176,190             |         |           |        | 68,000 |   |   |        |       |  
|                            |                                              |                       | 2001 |        |      |          | 137,196 |                     |         |           | 20,400 |        |   |   |       |       



---

|(1) |  | In 2002, each employee of the Company was paid the equivalent of
$500 as bonus for the year 2001, except for Mr. Spoede and Ms.
Lukosavich who were paid an information technology project bonus for
individual performance. In 2001, Ms. Lukosavich was paid an
information technology project bonus.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consists of benefit payments in lieu of matching contribution and
participation in the Companys 401(k) program for Mr. Antonvich.                                                                                                                                                                    
|   
|(3) |  | Mr. Nodland, Mr. Antonvich and Ms. Lukosavich joined us on varying
dates in 2001 and the respective 2001 compensation is reported only
from the start date to year-end.                                                                                                                               

The following table provides information as to the value of options held
by each of the named executive officers at the end of fiscal year 2003. None of
the named executive officers exercised any options during the last fiscal year.
There were no stock options granted to any of the named executive officers
during 2003.

Option Values as of December 31, 2003

|                    |  |                             |       |                                              |  |                 |        |                  |  |   |   |  |  |   |   | 
|------------------- |  | --------------------------- | ----- | -------------------------------------------- |  | --------------- | ------ | ---------------- |  | - | - |  |  | - | - | 
|                    |  | Number of Securities        |       |                                              |  |                 |        |                  |  |  
|                    |  | Underlying Unexercised      |       | Value of Unexercised In-the Money Options at
|                    |  | Option at December 31, 2003 |       | December 31, 2003 (in thousands)            
|                    |  |                             |       |                                             
|Name                |  | Exercisable                 |       | Unexercisable                                |  | Exercisable (1) |        | Unexercisable(1)
|                    |  |                             |       |                                              |  |                 |        |                 
|Marvin O. Schlanger |  |                             | 2,400 |                                              |  |                 | 18,600 |                  |  | $ |  |  |  | $ |  | 
|Jeff M. Nodland     |  |                             | 680   |                                              |  |                 | 4,420  |                  |  |   |  |  |  |   |  | 
|J. Travis Spoede    |  |                             | 280   |                                              |  |                 | 1,820  |                  |  |   |  |  |  |   |  | 
|Mark S. Antonvich   |  |                             | 160   |                                              |  |                 | 1,040  |                  |  |   |  |  |  |   |  | 
|Hanna M. Lukosavich |  |                             | 160   |                                              |  |                 | 1,040  |                  |  |   |  |  |  |   |  | 

41



---



##### Table of Contents





---

|(1) |  | There is no established trading market for the stock of RPP Inc., but
based on its estimated fair value at December 31, 2003, no options have
been designated to be in-the-money. The estimated market value was
calculated in-house by using reasonable and customary methods for
determining market values when there is no established trading market.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2000 Option Plan

RPP Inc. has adopted a stock option plan, effective as of November 14,
2000, pursuant to which options with respect to a total of 54,000 shares of RPP
Inc.s common stock will be available for grant to employees of, consultants
to, or directors of RPP Inc. or us. The option plan is administered by the
board of directors of RPP Inc. or a compensation committee appointed from time
to time by the board of directors. The right to grant options under the option
plan will expire on November 14, 2010. Options granted under the plan are
either nonqualified or incentive stock options.

Options are granted in amounts and at such times and to such eligible
persons as determined by the board of directors of RPP Inc. or the compensation
committee. As of December 31, 2003, RPP Inc. granted nonqualified options
covering 53,672 shares, representing approximately 8% of its total common stock
outstanding on a fully diluted basis. Options will vest in accordance with a
schedule as determined by the board of directors of RPP Inc. or the
compensation committee and this vesting schedule will be outlined in the
optionees option agreement. We generally expect options to vest as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) One-third of the options will be time vesting options and will
vest in equal increments over five years. However, upon termination of a
grantees employment without cause or for good reason within six months
following the sale of RPP Inc. for cash or any transaction in which RPP
Holdings sells at least fifty percent of its shares of common stock of RPP
Inc. acquired by it, all of the time vesting options allocated to such
terminated employee shall vest immediately on such termination.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Two-thirds of the options will be performance options and will
vest on November 14, 2008. The amount vested will be based on the operating
results achieved by the business. However, vesting of all or a portion of
the performance options will be accelerated upon the consummation of a sale
of RPP Inc. for cash, or any transaction in which Apollo sells at least
fifty percent of shares of common stock of RPP Inc. acquired by it.

The vesting of options will occur only during an employees term of
employment. All unvested options will be forfeited upon a termination of
employment.

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

Upon a termination of employment, RPP Inc. and RPP Holdings have
repurchase rights. Upon a sale of RPP Inc. 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, RPP Inc. also has repurchase rights. The repurchase
rights generally include buying the vested options from the grantee within a
specified period of time at the fair value calculated in-house using reasonable
and customary methods for determining market values when there is no
established trading market.

Employment Agreements

On November 14, 2000, we entered into an employment agreement with Marvin
O. Schlanger to act as our Chairman of the Board. Mr. Schlanger receives an
annual base salary of $400,000 per year, subject to any increase as determined
by the compensation committee of the board of directors. In addition, Mr.
Schlanger is entitled to receive an annual cash bonus based upon achievement of
certain operating and/or financial goals, 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.s common stock under the RPP Inc. stock option plan.
Mr. Schlanger will be entitled to participate in our benefit plans.

42



---



##### Table of Contents



The term of Mr. Schlangers employment agreement is initially three years,
with automatic extensions for additional two year periods if neither party
gives notice that the term will not be so extended. We may 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 employment agreement, Mr.
Schlanger has also agreed to non-competition provisions. In consideration of
this non-competition agreement, we have agreed to make payments to Mr.
Schlanger following the termination of his employment. If we terminate Mr.
Schlangers employment without cause or Mr. Schlanger resigns for good reason
(including any material diminution of his duties), Mr. Schlanger 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 months following the termination date and (b) the period
between the termination date and November 14, 2003. If any such payments
constitute a parachute payment, 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. Schlanger will be reduced to the largest amount such that the
provisions of 280G of the Code relating to excess parachute payments shall no
longer be applicable. However, in the event Mr. Schlanger is terminated for
cause or resigns without good reason, we will not be obligated to make those
payments.

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

Effective January 1, 2003, Mr. Schlangers employment agreement was
amended to (i) reduce his annual base salary to $150,000, subject to any
increase as determined by the compensation committee of our Board of Managers;
provided, that if, during any twelve month period ending on the last day of any
fiscal quarter during 2003 and 2004 (such day, the Salary Reimbursement
Date), our and our subsidiaries consolidated adjusted earnings before
interest, taxes, depreciation and amortization (as determined in accordance
with our historical practices) is $116 million or more, 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 if his annual base salary had been
$300,000, (ii) provide that in the event of his death, long-term disability,
retirement or a Realization Event (as defined in our 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 amount equal to 100% of his highest
annual base salary during the term of his employment agreement and (iv) provide
that in the event we terminate his employment without cause or he resigns for
good reason (including any material diminution of his duties), he will be
entitled to receive, in addition to earned but unpaid amounts under our salary
or benefit plans or programs, his highest annual base salary during the term of
his employment agreement for a period equal to the greater of (a) 12 months
following the termination date and (b) the period between the termination date
and November 14, 2003. The effective date for achieving $116 million as
related to (1) above has been extended to December 31, 2005 by action of the
Compensation Committee and the employment agreement is expected to be amended
accordingly.

Effective February 17, 2003, Mr. Schlangers employment agreement was
amended to increase his base salary to $300,000 on January 1, 2004. Effective
November 24, 2003, Mr. Schlangers employment agreement was amended to increase
his base salary to $400,000 on January 1, 2004 and extend the term of his
employment through November 14, 2005. Further, the November 2003 amendment
states that in addition to his base salary and bonus, Mr. Schlanger shall
receive $500,000 payable in eight quarterly installments commencing with the
quarter beginning on January 1, 2004 (the Extension Bonus), provided that on
the first day of such quarter he is still employed by us. In the event of Mr.
Schlangers death, long-term disability or the occurrence of a Realization
Event (as defined in our stock option plan) prior to the Extension Bonus being
paid in full, we shall pay Mr. Schlanger a lump sum (to be considered
pensionable wages) equal to the remaining unpaid balance of the Extension
Bonus.

On July 16, 2001, we entered into an employment agreement with Jeffrey M.
Nodland to act as our President and Chief Operating Officer. Mr. Nodland
receives an annual base salary of $250,000 per year, subject to any increase as
determined by the Board or its compensation committee. In addition, Mr. Nodland
is entitled to receive an annual cash bonus based upon achievement of certain
operating and/or financial goals, with an annual target
bonus amount equal to fifty percent of Mr. Nodlands then-current annual
base salary. On August 10, 2001, Mr. Nodland also was granted options effective
as of July 16, 2001 to purchase 5,100 shares of RPP Inc.s common stock under
the RPP Inc. stock option plan. Mr. Nodland is entitled to participate in our
benefit plans.

43



---



##### Table of Contents



The term of Mr. Nodlands employment agreement is initially three years,
with automatic extensions for additional one year periods if neither party
gives notice that the term will not be so extended. We may 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 employment agreement, Mr. Nodland has
also agreed to non-competition provisions. In consideration of this
non-competition agreement, we have agreed to make payments to Mr. Nodland
following the termination of his employment. If we terminate Mr. Nodlands
employment without cause or Mr. Nodland resigns for good reason (including any
material diminution of his duties), Mr. Nodland 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 months
following the termination date and (b) the period between the termination date
and July 16, 2003. If any such payments constitute a parachute payment, 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. Nodland will be reduced
to the largest amount such that the provisions of 280G of the Code relating to
excess parachute payments shall no longer be applicable. However, in the
event Mr. Nodland is terminated for cause or resigns without good reason, we
will not be obligated to make those payments.

Effective January 1, 2003, Mr. Nodlands employment agreement was amended
to (i) reduce his annual base salary to $225,000, subject to any increase as
determined by the compensation committee of our Board of Managers; provided,
that if, during any twelve month period ending on the last day of any fiscal
quarter during 2003 and 2004 (such day, the Salary Reimbursement Date), our
and our subsidiaries consolidated adjusted earnings before interest, taxes,
depreciation and amortization (as determined in accordance with our historical
practices) is $116 million or more, his annual base salary will increase to
$250,000 and he will receive 125% of the amount he otherwise would have
received since January 1, 2003 if his annual base salary had been $250,000,
(ii) provide that in the event of his death, long-term disability, retirement
or a Realization Event (as defined in our 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 11.11% 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 amount equal to fifty percent of his
highest annual base salary during the term of his employment agreement and (iv)
provide that in the event we terminate his employment without cause or he
resigns for good reason (including any material diminution of his duties), he
will be entitled to receive, in addition to earned but unpaid amounts under our
salary or benefit plans or programs, his highest annual base salary during the
term of his employment agreement for a period equal to the greater of (a) 12
months following the termination date and (b) the period between the
termination date and July 16, 2003. The effective date for achieving $116
million as related to (1) above has been extended to December 31, 2005 by
action of the Compensation Committee and the employment agreement is expected
to be amended accordingly.

On June 18, 2001, we entered into an employment agreement with Mark S.
Antonvich to act as our Vice President and General Counsel. Mr. Antonvich
receives an annual base salary of $195,000 per year, subject to any increase as
determined by the Board or its compensation committee. In addition, Mr.
Antonvich is entitled to receive an annual cash bonus based upon achievement of
certain operating and/or financial goals, with an annual target bonus amount
equal to thirty-five percent 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 to purchase 1,200 shares of RPP Inc.s common stock under the
RPP Inc. stock option plan. Mr. Antonvich is entitled to participate in our
benefit plans.

The term of Mr. Antonvichs employment agreement is initially three years,
with automatic extensions for additional two year periods if neither party
gives notice that the term will not be so extended. We may 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 employment agreement, Mr.
Antonvich has also agreed to non-competition provisions. In consideration of
this non-competition agreement, we have agreed to make payments to Mr.
Antonvich following the termination of his employment. If we terminate Mr.
Antonvichs employment without cause or Mr. Antonvich resigns for good reason
(including any material diminution of his duties), Mr. Antonvich 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 months following the termination date and (b) the period
between the termination date and May 7, 2003. If any such payments constitute a
parachute payment, 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. Antonvich will be reduced to the
largest amount such that the provisions of 280G of the Code relating to

44



---



##### Table of Contents



excess
parachute payments shall no longer be applicable. However, in the event Mr.
Antonvich is terminated for cause or resigns without good reason, we will not
be obligated to make those payments.

Effective January 1, 2003, Mr. Antonvichs employment agreement was
amended to (i) reduce his annual base salary to $175,500, subject to any
increase as determined by the compensation committee of our Board of Managers;
provided, that if, during any twelve month period ending on the last day of any
fiscal quarter during 2003 and 2004 (such day, the Salary Reimbursement
Date), our and our subsidiaries consolidated adjusted earnings before
interest, taxes, depreciation and amortization (as determined in accordance
with our historical practices) is $116 million or more, his annual base salary
will increase to $195,000 and he will 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 the event of his death, long-term disability,
retirement or a Realization Event (as defined in our 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 11.11%
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 amount equal to thirty five
percent of his highest annual base salary during the term of his employment
agreement and (iv) provide that in the event we terminate his employment
without cause or he resigns for good reason (including any material diminution
of his duties), he will be entitled to receive, in addition to earned but
unpaid amounts under our salary or benefit plans or programs, his highest
annual base salary during the term of his employment agreement for a period
equal to the greater of (a) 12 months following the termination date and (b)
the period between the termination date and May 7, 2003. The effective date for
achieving $116 million as related to (1) above has been extended to December
31, 2005 by action of the Compensation Committee and the employment agreement
is expected to be amended accordingly.

Restricted Unit Plan

On November 14, 2000, RPP Inc. established a restricted unit plan under
which it issued to Marvin O. Schlanger restricted stock units, representing a
conditional right to receive 6,000 shares of common stock of RPP Inc., and
restricted note units, representing a conditional right to receive $1,400,000
principal amount of junior subordinated notes. Mr. Schlanger will be entitled
to receive the underlying shares of RPP Inc. common stock and junior
subordinated notes upon the earliest to occur of (1) Mr. Schlangers achieving
the age of 65, (2) the termination of Mr. Schlangers employment or (3) upon a
sale of control in which RPP Holdings sells at least fifty percent of its
shares of RPP Inc. or any merger or consolidation in which RPP Inc. is not the
surviving entity.

Separation Agreement with Former President

On March 9, 2001, we entered into a separation agreement with our then
President, David T. Preston, under which he resigned his positions as a
director, officer and employee effective as of March 17, 2001. Pursuant to the
separation agreement, we paid Mr. Preston all salary and benefits due to him
through March 17, 2001 as well as medical coverage through June 30, 2001. In
addition, we paid to Mr. Preston additional severance in equal monthly
installments of $18,333.33 each, commencing on March 17, 2001 and ending on
February 9, 2002. Mr. Preston has agreed not to compete with us until March 17,
2003.

Pursuant to the separation agreement, Mr. Preston forfeited all options
previously granted to him. On April 9, 2001, our parent, RPP Inc., repurchased
at their original cost of $250,000 all shares of its common stock and junior
subordinated notes that were held by Mr. Preston and pledged to RPP Inc. Mr.
Preston repaid in full all principal outstanding on the promissory note that he
gave to us on November 14, 2000 as consideration for our loan to him of
$125,000 in connection with his original purchase of the shares and the junior
subordinated notes. Pursuant to an investor rights agreement dated November 14,
2000, the repurchase amount payable to Mr. Preston was applied to the
outstanding principal on the promissory note, and all accrued and unpaid
interest on that note was forgiven.

2004/2005 Executive Supplemental Bonus Plan

In late December of 2003, we adopted a supplemental bonus plan (effective
January 1, 2004) that authorizes our Chairman and Chief Executive Officer to
award special bonuses to certain key executives who have made important past
contributions to us and who are expected to be important contributors in the
future. The majority of
each individual award will not be paid until December of 2005 and the
aggregate amount of the individual awards will not exceed $350,000 for the
two-year period of 2004-2005.

45



---



##### Table of Contents



Compensation Committee Interlocks and Insider Participation

No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as members of our Board of Managers or compensation
committee.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

All of our membership units are owned by RPP Inc. and all of RPP Capitals
equity securities are owned by us. The following table sets forth information
with respect to the ownership of the capital stock of RPP Inc., as of January
1, 2004 (based on 601,130.4545 shares of common stock outstanding), by

 each person who owns beneficially more than 5% of the capital stock of
RPP Inc.,

 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 LLC as a group.

|                                                                |  |                           |         |       |  |         |      |  
|--------------------------------------------------------------- |  | ------------------------- | ------- | ----- |  | ------- | ---- | -
|                                                                |  | RPP Inc. Common Stock (1)
|                                                                |  |                          
|                                                                |  |                           |         |       |  | Percent
|                                                                |  | Number of                 |         | of   
|Name and Address of Beneficial Owner                            |  | Shares                    |         | Class
|                                                                |  |                           |         |      
|Apollo Management IV, L.P. (2)                                  |  |                           | 546,720 |       |  |         | 90.9 | %
|Shell Oil Company (3)                                           |  |                           | 45,000  |       |  |         | 7.5  |  
|Marvin O. Schlanger (4)                                         |  |                           | 2,400   |       |  |         | *    |  
|Jeff M. Nodland (5)                                             |  |                           | 1,225   |       |  |         | *    |  
|J. Travis Spoede (6)                                            |  |                           | 880     |       |  |         | *    |  
|Mark Antonvich (7)                                              |  |                           | 760     |       |  |         | *    |  
|Hanna M. Lukosavich (8)                                         |  |                           | 460     |       |  |         | *    |  
|Joel A. Asen (9)                                                |  |                           | 200     |       |  |         | *    |  
|Laurence M. Berg (2)(10)                                        |  |                           | 546,920 |       |  |         | 91.0 |  
|Peter P. Copses (2)(10)                                         |  |                           | 546,920 |       |  |         | 91.0 |  
|Joshua J. Harris (2)(10)                                        |  |                           | 546,920 |       |  |         | 91.0 |  
|Scott M. Kleinman (2)(10)                                       |  |                           | 546,920 |       |  |         | 91.0 |  
|Heinn F. Tomfohrde, III (11)                                    |  |                           | 200     |       |  |         | *    |  
|All managers and executive officers as a group (17 persons)(12) |  |                           | 555,047 |       |  |         | 92.3 |  



---

|* |  | Less than one percent.
|- |  | ----------------------

(1)  The amounts and percentages of common stock beneficially owned are reported
on the basis of regulations of the SEC governing the determination of
beneficial ownership of securities. Under the rules of the SEC, a person is
deemed to be a beneficial owner of a security if that person has or shares
voting power, which includes the power to vote or direct the voting of such
security, or investment power, which includes the power to dispose of or to
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Securities that can be so acquired are
deemed to be outstanding for purposes of computing such persons ownership
percentage, but not for purposes of computing any other persons percentage.
Under these rules, more than one person may be deemed beneficial owner of the
same securities and a person may be deemed to be a beneficial owner of
securities as to which such person has no
economic interest. Except as otherwise indicated in these footnotes, each of
the beneficial owners has, to our knowledge, sole voting and investment power
with respect to the indicated shares of common stock.

(2)  Represents all shares held of record by RPP Holdings. RPP Holdings is an
affiliate of, and is controlled by, Apollo Management through its 79.1%
beneficial ownership of RPP Holdings membership interests. The address of each
of RPP Holdings and Apollo Management and of Messrs. Berg, Copses, Harris and
Kleinman is c/o Apollo Management, L.P., 1301 Avenue of the Americas, New York,
New York 10019.

46



---



##### Table of Contents



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

(4)  Represents 2,400 shares of common stock issuable upon exercise of options
granted to Mr. Schlanger under the RPP Inc. stock option plan that were vested
as of January 1, 2004. Does not include options to purchase 18,600 shares of
common stock that 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. The
options are subject to time and performance vesting conditions. See
Management2000 Option Plan. The restricted stock units represent a
conditional right to receive 6,000 shares of common stock of RPP Inc. upon the
occurrence of the events 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s indirect ownership interest in the common stock of RPP Inc. through
his direct ownership of 6,000 membership units of RPP Holdings.

(5)  Includes 680 shares of common stock issuable upon exercise of options
granted to Mr. Nodland under the RPP Inc. stock option plan that were vested as
of January 1, 2004. Does not include options to purchase 4,420 shares of common
stock that RPP Inc. issued to Mr. Nodland under the RPP Inc. stock option plan.
These options are subject to time and performance vesting conditions. See
Management2000 Option Plan. The address of Mr. Nodland is c/o Resolution
Performance Products Inc., 1600 Smith Street, Houston, Texas 77002.

(6)  Includes 280 shares of common stock issuable upon exercise of options
granted to J. Travis Spoede under the RPP Inc. stock option plan that were
vested as of January 1, 2004. Does not include options to purchase 1,820 shares
of common stock that RPP Inc. issued to Mr. Spoede under the RPP Inc. stock
option plan. These options are subject to time and performance vesting
conditions. See Management2000 Option Plan. The address of Mr. Spoede is c/o
Resolution Performance Products Inc., 1600 Smith Street, Houston, Texas 77002.

(7)  Includes 160 shares of common stock issuable upon exercise of options
granted to Mr. Antonvich under the RPP Inc. stock option plan that were vested
as of January 1, 2004. Does not include options to purchase 1,040 shares of
common stock that RPP Inc. issued to Mr. Antonvich under the RPP Inc. stock
option plan. These options are subject to time and performance vesting
conditions. See Management2000 Option Plan. The address of Mr. Antonvich is
c/o Resolution Performance Products Inc., 1600 Smith Street, Houston, Texas
77002.

(8)  Includes 160 shares of common stock issuable upon exercise of options
granted to Ms. Lukosavich pursuant to the RPP Inc. stock option plan that were
vested on January 1, 2004. Does not include options to purchase 1,040 shares of
common stock that RPP Inc. issued to Ms. Lukosavich pursuant to the RPP Inc.
stock option plan. The options are subject to time and performance vesting
conditions. See Management2000 Option Plan. The address of Ms. Lukosavich is
c/o Resolution Performance Products, Inc., 1600 Smith Street, Houston, Texas
77002.

(9)  Includes 200 shares of common stock issuable upon exercise of options
granted to Mr. Asen pursuant to the RPP Inc. non-employee director stock option
plan that were vested on January 1, 2004. Does not include options to purchase
800 shares of common stock that RPP Inc. issued to Mr. Asen pursuant to the RPP
Inc. non-employee director stock option plan. The options are subject to time
and performance vesting conditions. See Management
Compensation of Board of Managers. The address of Mr. Asen is 445 Old Academy
Road, Fairfield, Connecticut 06824.

(10)  Includes 546,720 shares owned by RPP Holdings. Each of Messrs. Berg,
Copses, Harris and Kleinman may be deemed the beneficial owner of shares of RPP
Inc. owned by RPP Holdings and membership units of RPP Holdings due to his
status as a partner (in the case of Messrs. Berg, Copses and Harris) and
principal (in the case of Mr. Kleinman) of Apollo Management, which controls
RPP Holdings. Each such person disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest. Includes 200 shares of
common stock issuable upon exercise of options granted to each of Messrs. Berg,
Copses, Harris and Kleinman pursuant to the RPP Inc. non-employee director
stock option plan that were vested January 1, 2004. Does not include options to
purchase 800 shares of common stock that RPP Inc. issued to 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 and performance
vesting conditions. See ManagementCompensation of Board of Managers.

47



---



##### Table of Contents



(11)  Includes 200 shares of common stock issuable upon exercise of options
granted to Mr. Tomfohrde pursuant to the RPP Inc. non-employee director stock
option plan that were vested on January 1, 2004. Does not include options to
purchase 800 shares of common stock that RPP Inc. issued to Mr. Tomfohrde
pursuant to the RPP Inc. non-employee director stock option plan. The options
are subject to time and performance vesting conditions. See
ManagementCompensation of Board of Managers. The address of Mr. Tomfohrde is
9 Sea Robin Court, Hilton Head, South Carolina 29926.

(12)  Includes 5,532 shares of common stock issuable upon exercise of options
granted to the managers and executive officers under the RPP Inc. stock option
plan that were vested on January 1, 2004. Does not include options to purchase
35,616 shares of common stock that RPP Inc. issued to the managers and
executive officers 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.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Agreements with Stockholders of RPP Inc.

Apollo Management Agreement

On November 14, 2000, we entered into a management consulting agreement
with Apollo Management IV, L.P. Under the terms of the management consulting
agreement, we retained Apollo Management to provide management consulting and
financial advisory services to us and pay Apollo Management an annual
management fee of $1.0 million for providing those services. In particular,
Apollo Management will provide at our request consulting and advisory services
relating to proposed financial transactions, acquisitions and other senior
management matters relating to our business. In addition, as consideration for
arranging the recapitalization and the related financing 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 we engage in any merger,
acquisition or similar transaction unless we and Apollo Management are unable
to mutually agree upon the terms of Apollo Managements engagement, 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 the members of our Board of
Managers are affiliated with Apollo, it has the power, through its
representatives and equity ownership, to approve on our behalf and set the
terms of Apollo Managements engagement, even if the independent members of the
Board of Managers were opposed. However, the members of the Board of Managers
of RPP LLC who are affiliated with Apollo Management are aware that they have
fiduciary obligations to RPP LLC, not Apollo, and RPP LLC expects that each
member of its Board of Managers will comply with his fiduciary duties under
Delaware 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 contrary is
given by either party at least thirty, but no more than sixty, days prior to
the end of any such year commencing on November 14, 2005.

On March 15, 2002, the terms of the management consulting agreement were
amended to reduce the annual management fee payable to Apollo from $1 million
to $750,000. In addition, RPP LLC agreed to pay Apollo Management an advisory
fee of $1.05 million (i) immediately prior to 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 Apollo Management or any of its affiliates sells at
least 50% of the shares of common stock of RPP Inc. that they acquired and at
least 50% in the aggregate of their investment 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 the aggregate at least 50% of the outstanding
shares of common stock of RPP Inc. on a fully diluted basis.

Effective January 1, 2003, the terms of the management consulting
agreement were amended to waive payment of the annual management fee to Apollo
during 2003 only; provided, that if, during any twelve month period ending on
the last day of any fiscal quarter during 2003 or 2004, RPP LLC and its
subsidiaries consolidated adjusted earnings before interest, taxes,
depreciation and amortization (as determined in accordance with our historical
practices) is $116 million or more, we shall pay to Apollo (i) the quarterly
installments of the annual management fee for the remainder of 2003 and
thereafter and (ii) 125% of the amount of the quarterly installments of the
annual management fee which were waived during 2003. It is expected that the
management consulting

48



---



##### Table of Contents



agreement will be amended to extend the period for
achieving such from December 31, 2004 to December 31, 2005, to the extent
permitted by the Credit Agreement and Indentures.

Shareholders Agreement

On November 14, 2000, RPP Inc. entered into a shareholders agreement with
RPP Holdings and Shell which governs certain aspects 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 RPP Inc. to RPP Holdings or its affiliates in the amounts required to
maintain Shells percentage ownership;

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

 rights of Shell to participate in certain transfers of common stock by
RPP Holdings other than to an affiliate;

 rights of Shell to receive financial information; and

 prohibitions on transactions between RPP Inc. and its affiliates,
subject to certain exceptions.

The shareholders agreement terminates upon the earlier of a sale of RPP
Inc. and the consummation of a public equity offering that raises gross
proceeds of at least $100 million.

Investor Rights Agreement

On November 14, 2000, RPP Inc. entered into an investor rights agreement
with RPP Holdings and members of management who own stock, options and/or
junior subordinated notes of RPP Inc. which governs certain aspects of the
relationship among RPP Inc., RPP Holdings and the management holders. The
investor rights agreement contains, among other matters:

 restrictions on the transfer of shares of common stock, options and
junior subordinated notes by the management holders;

 rights of RPP Inc. and RPP Holdings to purchase common stock and junior
subordinated notes in the event of certain permitted transfers by the
management holders;

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

 rights of the management holders to participate in certain transfers of
common stock 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 of employment of the management holders; and

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

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

49



---



##### Table of Contents



Shell Registration Rights Agreement

On November 14, 2000, RPP Inc. entered into a registration rights
agreement with Shell pursuant to which Shell has incidental registration rights
to include its RPP Inc. common stock in the same or concurrent registration
statement filed by RPP Inc. for the registration of RPP Inc. common stock under
the Securities Act. RPP Inc. will bear all expenses, other than selling
expenses, incurred in the registration process. The registration rights
agreement also contains customary provisions with respect to registration
procedures, underwritten offerings and indemnification and contribution rights.

RPP Holdings Registration Rights Agreement

On November 14, 2000, RPP Inc. entered into a registration rights
agreement with RPP Holdings pursuant to which RPP Holdings has demand and
incidental registration rights. As a result, at RPP Holdings request, RPP Inc.
will be obliged to prepare and file a registration statement covering the
securities so requested to be registered by RPP Holdings. In addition, should
RPP Inc. propose to register any of its common stock for sale to the public,
RPP Holdings will have the right to include its RPP Inc. common stock in the
same or concurrent registration statement filed by RPP Inc. for the
registration of RPP Inc. common stock under the Securities Act. RPP Inc. will
bear all expenses, other than selling expenses, incurred in the registration
process. The registration rights agreement also contains customary provisions
with respect to registration procedures, underwritten offerings and
indemnification and contribution rights.

Management Promissory Notes and Other Indebtedness

On November 14, 2000, we loaned $925,000 in the aggregate 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 connection with their purchases of RPP
Inc.s common stock and junior subordinated notes in the recapitalization. In
particular, we made loans to each of our then executive officers in the
following amounts:

 David T. Preston$125,000 loaned to finance in part his purchase of 750
shares of RPP Inc. stock and $175,000 principal amount of RPP Inc. junior
subordinated notes, which loan was repaid on April 9, 2001 as described below;
and

 Dany Subrata$100,000 loaned to finance in part his purchase of 600
shares of RPP Inc. stock and $140,000 principal amount of RPP Inc. junior
subordinated notes.

In March 2001, we loaned $100,000 to J. Travis Spoede Trust on behalf of
J. Travis Spoede, our Executive Vice President, Chief Financial Officer and
Secretary, to finance in part his purchase of 600 shares of RPP Inc. stock and
$140,000 principal amount of RPP Inc. junior subordinated notes.

From June to September 2001, we made additional loans to new employees to
finance in part their purchase of RPP Inc.s common stock and RPP Inc. junior
subordinated notes, including:

 Mark Antonvich$100,000 loaned to finance in part his purchase of 600
shares of RPP Inc. stock and $140,000 principal amount of RPP Inc. junior
subordinated notes; and

 Jeffrey M. Nodland$250,000 loaned to finance in part his purchase of
545.4545 shares of RPP Inc. stock and $350,000 principal amount of RPP Inc.
junior subordinated notes.

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

In connection with the termination of Mr. Prestons employment with us, on
April 9, 2001, Mr. Preston repaid his loan to us with the proceeds from the
repurchase of his securities by RPP Inc. and the accrued and unpaid interest of
$4,480 on his promissory note was forgiven by us. For a discussion of the
terms of Mr. Prestons severance arrangements, see Item 11. Executive
Compensation-Separation Agreement with Former President.

50



---



##### Table of Contents



In February 2002, we made an interest-free loan in the principal
amount of $175,000 to Douglas Rahrig, then our Director of Product and
Applications Development and now Vice President of Global Resins Business, to
assist him in relocating to Houston, Texas as part of his employment with us.
In September 2002, Mr. Rahrig repaid the loan in full. Securities Indemnification Agreement On November 14, 2000, we entered into a securities indemnification
agreement with Shell and RPP Holdings. Under the agreement, we agreed to
indemnify Shell, RPP Holdings and their respective affiliates and each of their
respective directors and officers and other related persons against liabilities
arising under the Securities Act in connection with the private placement
offering of the $200 million of existing notes issued on November 14, 2000, and
we also granted contribution rights to such persons. Other Payments or Dividends to Affiliates We paid approximately $5 million and $4 million to related to certain
freight costs to Quality Distribution, an affiliate of Apollo, for the year
ended December 31, 2003 and 2002, respectively. We believe the amounts paid to
Quality Distribution were fair and at arms length terms. During 2003, we paid approximately $4 million to Shell on behalf of RPP
Inc., of which $2 million was previously accrued, for certain pension costs in
accordance the Master Sales Agreement and related ancillary agreements. During
2001, we paid $0.6 million for legal and external audit services rendered in
the ordinary course of business on behalf of RPP Inc. for legal and external
audit services rendered in the ordinary course of business. During 2003 and 2002, we made payments to Cherry Hill Chemical Investments
LLC, an affiliate of Mr. Schlanger, in the amount of $0.1 million 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, our parent, RPP Inc., and
Shell or their respective affiliates entered into several additional agreements
providing for the continuation or transfer and transition of certain aspects of
our business operations. These agreements were the result of arms-length
negotiations in connection with the recapitalization, and we believe they are
on terms at least as favorable to us as those we could have obtained from
unaffiliated third parties at that time. Set forth below are descriptions of
the material agreements that we or RPP Inc. have entered into with Shell. For the year ended December 31, 2003, 2002 and 2001 we paid Shell
approximately $289 million, $227 million, $340 million, respectively, under the
various agreements described below, net of payments made by Shell to us. SUMF, OMS and Supply Agreements Several of our operations are located within or adjacent to sites occupied
by Shells refinery business and its chemical business. In the United States,
these shared sites are in: Deer Park, Texas; Norco, Louisiana; Argo, near
Chicago, Illinois; and a laboratory facility in Westhollow, Texas. Shared sites
in Europe are in: Pernis and Moerdijk, near Rotterdam, The Netherlands; Stanlow
in the United Kingdom; Wesseling, Germany; and laboratory facilities in Pernis,
The Netherlands and Louvain-La-Neuve, Belgium. At most of the shared sites, we and Shell supply to each other certain
site services, utilities, materials and facilities, or SUMF items. The
substantial majority of the SUMF items are provided by Shell to us. These SUMF
items include electricity, gas, water, steam, sewer systems, waste water
systems, waste management services, and environmental facilities, such as
incinerators and biotreaters, which are used to treat waste products generated
by 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 SUMF
items supplied by Shell are critical to the continued operations of our
business and cannot easily be obtained from third parties. Other SUMF items,
however, we believe can be readily obtained from parties other than Shell. 51




---



##### Table of Contents



Effective as of November 1, 2000, Shell and RPP Inc. or their affiliates
entered into various new or amended and restated agreements dealing with the
shared sites, including SUMF agreements, ground leases from Shell to us for the
ground under several of our plants and other improvements purchased by us,
office and space leases and operation and maintenance services agreements (OMS
agreements). In addition, the parties entered into a SUMF agreement relating to our
Lakeland, Florida site. Under this agreement, we will supply groundwater
recovery and biotreater systems services to facilitate compliance with the
consent order issued by the Florida Department of Environmental Protection. See
BusinessEnvironmental/Occupational Health and Safety Matters. SUMF Agreements.In consideration for each SUMF item provided under a
SUMF agreement, the purchaser of the SUMF item is required in most cases to pay
the supplier an amount comprised of three basic components:  its share of the suppliers variable costs for the SUMF item based on
the purchasers consumption of such SUMF item;  its share of the suppliers direct site costs and operating costs for
the SUMF item based on the purchasers reserved capacity of the SUMF item or an
allocation 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 agreements for certain other
charges, such as taxes levied or imposed on the supplier with respect to SUMF
items consumed by the purchaser. In a few cases, charges for the SUMF items are
based on commercial rates for similar products or services. The SUMF agreements allocate liability for loss or damage to a partys
property or employees or to third parties either to Shell or to us based upon
certain factors, including the presence of a partys negligence in causing the
loss or damage. In addition, the SUMF agreements provide for indemnification by
one party to the other in certain instances. We have obtained insurance to
cover losses and damages for which we may be responsible under the SUMF
agreements. To the extent the environmental damages are recoverable under the
SUMF agreements and under the environmental agreements, we are required to make
our claims under the environmental agreements. SUMF items that we believe can be easily obtained from a third party other
than Shell or that Shell believes can be easily obtained by it from a third
party other than us, such as warehouse management and office services, are
generally provided under the SUMF agreements on a short-term basis, typically
less than five years. Certain other SUMF items, such as provision of utilities
such as steam, are generally provided on a long-term basis 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 for various reasons,
including bankruptcy and payment or performance defaults of the other party and
upon three years notice at the expiration of the initial term or any renewal
term. In addition, a party has the right to terminate a SUMF agreement in its
entirety if it is terminating the operations of all or substantially all of its
SUMF assets at the relevant site. Either party has the right to terminate
individual SUMF items (other than sole supplier SUMF items which can be
terminated by terminating the SUMF agreement in its entirety) for various
reasons, including bankruptcy and payment or certain limited performance
defaults of the other party. In addition, the supplier of a SUMF item can
generally terminate the supply of that SUMF item to the purchaser if it is
ceasing to supply the SUMF item to the entire site; and the purchaser of SUMF
items can generally terminate individual short-term SUMF items on 90 days
notice (but, in the case of sites in Europe, termination must generally occur
at the end of each year) and individual long-term SUMF items on three years
notice. Lease Agreements.Shell has provided us ground leases in the United
States for the business facilities in Deer Park, Norco and Argo and in Europe
for our facilities in Pernis, Moerdijk, Stanlow and Wesseling on a long-term
basis for lease terms at least as long as the terms of the SUMF or equivalent
agreements related to those sites. Shell has also provided to us space leases
for laboratory space in Westhollow and laboratory, office and warehouse space
in Norco in the United States and for laboratory space in Amsterdam and
Louvain-La-Neuve in Europe. The term of the Westhollow lease is ten years from
the closing date of the recapitalization and can be terminated by us any time
after the effective date with proper notice (with Shell having the right to
terminate at the end of 2005). The basic term of each of the Amsterdam and
Louvain-La-Neuve leases is six years, subject to certain conditions. Rent 52




---



##### Table of Contents



under
all the ground leases is either de minimis or included as part of the SUMF or
equivalent agreement, except that rent payable by us to Shell under the Pernis
lease is equal to the payments required to be made by Shell under its original
lease with the Port of Rotterdam and additional payments are required at Deer
Park and 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
we occupy. The rental payments for space at Norco escalate based on increases
in the producer price index. Shell is subleasing back space from us at our
Norco facility at the same rental rate per square foot that we pay Shell for
the space we lease from it at Norco. The ground leases impose certain
responsibilities on us with respect to environmental matters at or relating to
the business facilities, from November 1, 2000 and allocate liability for
environmental damages to the properties. Generally, to the extent environmental
damages are recoverable under a lease and under the Environmental Agreement,
the claims will be made under the Environmental Agreements. OMS Agreements.Our versatics facility in Pernis, The Netherlands, is
situated within Shells refinery and chemical site and is operated on our
behalf by Shell pursuant to an OMS agreement. Shells solvents and
demineralized water plants in Pernis are located within our facility and are
operated by us on behalf of Shell pursuant to two OMS agreements. Shell
operates our Moerdijk, The Netherlands, and Stanlow, England, facilities under
OMS agreements and our Wesseling, Germany facility is operated by a joint
venture between Shell and BASF AG, under a production agreement that is similar
to an OMS agreement. In consideration for the services provided under an OMS agreement, the
owner of the facility is generally required to pay the operator of the facility
an amount comprised of three basic components: (1) the fixed costs of the
operator in supplying the operation services; (2) maintenance, parts and
materials costs; and (3) depreciation and capital charges for certain shared
assets. The OMS agreements contain liability and indemnification provisions
similar to those contained in the SUMF agreements. We have obtained insurance
to cover losses and damages for which we may be responsible under the OMS
agreements. Operation and maintenance services under the OMS agreements are generally
provided on a long-term basis. However, the parties have termination rights
under these agreements that are similar to their termination rights under the
SUMF agreements. Incinerator Agreement.In addition to shared services provided under
the SUMF agreements, we operate for ourselves and for Shell two incinerators
located at our Norco facility under a shared incinerator agreement. These
incinerators are owned jointly by Shell and us (6% and 94%, respectively). Shell is required to pay us an amount comprised of two basic components:
(1) its share of our variable costs relating to the incinerators based on
Shells use of the incinerators; and (2) its share of our fixed operating costs
relating to the incinerators based on Shells capacity right in the
incinerators. Shells initial capacity right in the incinerators is 6%. We and
Shell are also required to pay our respective shares of any required capital
improvements to the incinerators based on our relative capacity rights and, in
order to receive any of the benefits of discretionary capital improvements to
the incinerators, to pay our respective shares of any such improvements. The incinerator agreement contains liability provisions similar to those
contained in the SUMF Agreements. We have obtained insurance to cover losses
and damages for which we may be responsible under the Incinerator Agreement. Supply Agreements.We have contracted with Shell for our U.S. and
European facilities to purchase chemical ingredients, or feedstocks, to produce
our 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 from
Shell include phenol and acetone, acetylene, propylene and various solvents. We
also provide waste-stream propylene to Shell from our Norco facility under a
twenty year contract. The price we pay to Shell for feedstocks varies depending upon the item.
However, we believe that the prices Shell is charging us are generally at or
below the prices we can obtain from third persons. Some contracts require us to
purchase all of our requirements for a particular feedstock from Shell. Those
contracts generally permit us to 53




---



##### Table of Contents



obtain a lower price elsewhere and, if Shell
does not match the lower price, we can purchase at the lower price from a third
party. We can also purchase from third parties if a force majeure event
prevents Shell from delivering feedstocks to us. Shell will make its
distribution facilities available for those third party purchases. Pricing for
propylene is based on market price less negotiated volume discounts. Pricing
for phenol and acetone is based on discounted market prices and input-cost
formulae. Non-U.S. Human Resources Agreements Pursuant to the Non-U.S. human resources agreement with Shell, RPP Inc.
has agreed to fulfill all Shells obligations under any local agreements or
arrangements with the staff councils and any other relevant employee
representatives in connection with the recapitalization. RPP Inc. has also
agreed to offer employment to each expatriate non-U.S. employee and, if such
employee elects to accept employment, RPP Inc. will maintain such employees
pay and benefits package. With respect to the non-U.S. employees who were
previously employed by Shell or its affiliates but have become employees of RPP
Inc., RPP Inc. had agreed to:  provide each such employee with a severance package if no reasonably
comparable position is available with RPP Inc. or if such employee is
terminated for any reason (except cause) on or prior to November 14, 2003; and  either maintain the value of the total pay and benefits package for all
such employees or provide transitional payments to all such employees in order
to compensate them in full for any difference in value between the old and new
packages; Shell will indemnify RPP Inc. against any losses arising out of certain
claims by non-U.S. employees that relate to their employment prior to November
14, 2000 or their employment date, as the case may be, with, or termination by,
Shell or its affiliates and the failure by Shell or its affiliates to perform
their obligations to inform or consult with employee representatives under any
trade union or works council agreement. RPP Inc. will indemnify Shell against
any losses arising out of claims by non-U.S. employees that arise after
November 14, 2000 or their employment date, as the case may be, and relate to
their employment with, or termination by, RPP Inc. This agreement was
terminated on November 13, 2003. Environmental Agreements Shell and we entered into two environmental agreements dated as of
November 1, 2000, one for our U.S. business and one for our non-U.S. business,
setting forth Shells indemnification obligations with respect to health,
safety and environmental matters. Except as disclosed below, Shell will
generally remain liable for environmental conditions that occurred or existed
before November 14, 2000. The indemnity extends to damages associated with
third-party claims (including those by a governmental entity) for (1) exposure
or injury to persons or third-party property caused by hazardous substances at
our property, off-site disposal locations and pre-close toll manufacturing
facilities; (2) the transportation, treatment, storage, handling or disposal of
hazardous materials at off-site locations, our property and pre-close toll
manufacturing facilities; and (3) the remediation of contamination at or
migrating from our property and pre-close toll manufacturing facilities. Claims
relating to any of the above matters are subject to an aggregate deductible of
$1.0 million, which has been satisfied. Special provision is also made for existing groundwater contamination at
and migrating from the facility in Lakeland, Florida, which is currently
subject to a consent order issued by the Florida Department of Environmental
Protection. Indemnity claims for site contamination issues at the Lakeland
facility, which relate to the consent order and any amendments thereto, are not
subject to any deductible, nor are they limited in time or amount. Shell also will indemnify us for environmental damages relating to site
contamination issues at (a) the Lakeland, Florida facility which are not the
subject of the consent order and (b) the facility in Barbastro. Claims for
these matters are limited to$10.0 million in the aggregate, are subject to the
$1.0 million deductible and must be asserted within five years of November
2000. Shell also has agreed to provide a limited indemnity where, in the absence
of a third-party claim and where we are not required by law or regulation to
report, we elect to investigate and remediate environmental conditions for
which a third-party claim, although not pending, would likely be brought if
such a condition were brought to the 54




---



##### Table of Contents



attention of the relevant governmental
agency. In such instance, Shell will indemnify us for 75% of any costs
incurred. With respect to environmental conditions at the Yokkaichi facility, RPP,
Inc. and Shell have agreed that any environmental damages shall be reduced to
reflect proportionate interest of RPP B.V. in the joint venture and its
exposure to environmental damages of the joint venture. In addition to those noted above, the environmental agreements impose some
limitations on Shells indemnification obligations, the primary of which
include the following:  we are not entitled to seek indemnity for environmental damages at a
site that result from or are increased by any material change in use of that
site;  we have certain restrictions on performing sub-surface investigations at
the properties after November 14, 2003 (except that those restrictions apply to
the Pernis facility as of November 14, 2000); and  Shell has no obligation for most environmental damages if such damages
result from or are increased by a post-closing requirement of any permit or
environmental law, or any environmental laws or changes to applicable standards
that come into force after November 14, 2000. This limitation applies only to  site contamination issues at the Lakeland facility (other than known
Lakeland site contamination issues) and  site contamination issues at the Barbastro facility. RPP Inc., in turn, has agreed to indemnify and hold Shell harmless for
environmental damages that result from any environmental condition that arises
on or after November 14, 2000, unless Shell has agreed to assume responsibility
for the matter under the terms of the environmental agreements. In November 2002, Shell and we amended each of the U.S. and non-U.S.
environmental agreements. Pursuant to the amendments, we and Shell agreed to
mutually release each other from certain of the indemnity and other obligations
contained in the environmental agreements entered into in November 2000.
Specifically, we have released Shell from its obligation to indemnify us for
damages associated with third party claims (including those by a governmental
entity) for (a) compliance issues specifically identified in the November 2000
environmental agreements and (b) general non-compliance with respect 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 to Shell 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 the U.S. environmental
agreement. Pursuant to the amendment, we and Shell agreed to mutually release
each other from certain of the indemnity and other obligations contained in the
U.S. environmental agreement entered into in November 2000. Specifically, we
have released Shell from its obligations to indemnify us for damages 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 a
conveyance of Shells mineral rights reservation and access easement with
respect to the portion of the Lakeland facility that we sold. Intellectual Property Agreements As part of the recapitalization, we entered into two intellectual property
transfer and license agreements, one for our U.S. business and one for our
non-U.S. business, pursuant to which Shell contributed to us by assignment or
license intellectual property of all types used in Shells resins business
worldwide. Certain of the intellectual property rights that we have acquired
from Shell are subject to pre-existing licenses to third parties. In addition,
Shell retained some rights to the transferred intellectual property. For
example, many patents and know-how are currently shared among Shells other
divisions and our business. Where these shared rights are used in our business,
they have either been acquired by us subject to licenses back to Shell to use
these rights for their other businesses, or licensed from Shell. Our licenses
from Shell are royalty-free licenses and their duration is generally linked to
the life of the relevant licensed rights. The licenses are freely assignable
and include the right to sublicense, with the exception of certain rights used
principally by Shell that may be transferred only to affiliates or successors
of our business. Pursuant to the intellectual property transfer and license
agreements, we have also acquired the worldwide 55




---



##### Table of Contents



trademarks that are used
exclusively in our business, and rights in the copyright to all technical
information used in our business. In addition, Shell assigned to us, and we
have assumed the obligations under, intellectual property agreements to which
Shell is a party and which are used exclusively in our business. To the extent
any such material agreements are not transferable by their terms, Shell has
agreed to cooperate with us to obtain the necessary third party consents to
such transfer. We and Shell have also agreed to indemnify each other for claims
by a third party arising out of or in connection with the exercise of the
licenses and rights granted under these agreements. Tax Agreement and Tax Deed As part of the recapitalization, we entered into a tax agreement for our
U.S. business and a tax deed for our non-U.S. business dated as of November 1,
2000. The tax agreement provides, among other things, that Shell will be
responsible for, and will indemnify us against, any liability for taxes that
were payable, or accrued, as a result of business activities during the period
prior to November 14, 2000. The tax deed provides, among other things, that
Shell Petroleum N.V. will indemnify us against any liability for taxes arising
as a result of business activities occurring 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 after the closing that had retrospective effect.
The tax agreement and tax deed also provide that we will be responsible for,
and will indemnify Shell Chemical against any liability for taxes that become
payable after November 14, 2000 and November 1, 2000, respectively, except to
the extent that the liability relates to an event occurring during, or to
income that was earned or accrued during, a pre-closing period. Pursuant to the tax agreement, both Shell Chemical and we have made an
election under Section 338(h)(10) of the Internal Revenue Code of 1986, as
amended, to treat the recapitalization, for federal income tax purposes, as a
purchase of all of the assets of the epoxy resins business that we now own
after the recapitalization. Making this election allows us to increase our
depreciation and amortization deductions for U.S. Federal income tax purposes
with respect to the U.S. assets we now own. 
 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The following table reflects amounts billed for accounting fees and
services rendered by PricewaterhouseCoopers LLP (in million of U. S. dollars): 2003
    
    2002Audit fees
    
    $
    1
    
    
    $
    1Audit related fees
    
    
    1
    
    
    
    1Tax fees
    
    
    1
    
    
    
    2Total fees and services
    
    $
    3
    
    
    $
    4
 All of the accounting fees and services reflected in the above table were
approved by the Audit Committee at the beginning of each respective year in
accordance with the Audit Committees pre-approval procedures. The audit fees
in the above table are related to the audit of our year end financial
statements and the review of our interim financial statements. Audit related
fees are those fees related to our note issuances, audits of our benefit plans,
and consultation as to the accounting or disclosure treatment of transactions
or events. Tax fees are billed for tax compliance services and transfer
pricing consulting. 56




---



##### Table of Contents






PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: PageResolution Performance Products LLCConsolidated Financial StatementsAs of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003Report of PricewaterhouseCoopers LLP, Independent Auditors
    
    
    68Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    69Consolidated Statements of Income for each
of the three years in the period ended December 31, 2003
    
    
    70Consolidated
Statements of Owners Deficit
for each of the three years in the period ended December 31, 2003
    
    
    71Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2003
    
    
    72Notes to Consolidated Financial Statements
    
    
    73(a)(2) Financial Statement Schedule:Schedule II-Valuation and Qualifying Accounts and Reserves
    
    
    96
 57




---



##### Table of Contents



(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))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))
 58




---



##### Table of Contents



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 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. 333-112016))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 David T. Preston in favor of Resolution Performance Products LLC
(incorporated by reference to Exhibit 10.3 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 David T. Preston (incorporated by reference
to Exhibit 10.4 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 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))10.7
    
    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))
 59




---



##### Table of Contents



10.8
    
    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))10.9
    
    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))10.10
    
    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))10.11
    
    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))10.12
    
    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))10.13
    
    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))10.14
    
    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))10.15
    
    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))10.16
    
    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))10.17
    
    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))10.18
    
    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))10.19
    
    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))10.20
    
    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)).10.21
    
    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))10.22
    
    Interim Agreement for Information Technology Services (Non-US) dated as of November 1, 2000
 60




---



##### Table of Contents



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))10.23
    
    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))10.24
    
    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))10.25
    
    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))10.26
    
    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))10.27
    
    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))10.28
    
    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))10.29
    
    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))10.30
    
    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))10.31
    
    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))10.32
    
    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))10.33
    
    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))10.34
    
    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))10.35
    
    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))
 61




---



##### Table of Contents



10.36
    
    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))10.37
    
    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))10.38
    
    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))10.39
    
    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))10.40
    
    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))10.41
    
    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))10.42
    
    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))10.43
    
    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))10.44
    
    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))10.45
    
    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))10.46
    
    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))10.47
    
    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 to Exhibit No. 10.47 to the Annual Report on Form 10-K for the Year ended December 31, 2002
(File No. 333-57170))10.48
    
    Amendment No. 3 dated February 17, 2003 to the Employment Agreement dated November 14, 2000,
 62




---



##### Table of Contents



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))10.49
    
    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))10.50
    
    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))10.51
    
    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))10.52
    
    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))10.53
    
    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. 333-112016))10.54
    
    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))10.55
    
    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))10.56
    
    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 organised 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))10.57
    
    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))10.58
    
    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))10.59
    
    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
 63




---



##### Table of Contents



10.59 to the Registrants
Registration Statement on Form S-4 dated January 20,
2004 (File No. 333-112016))10.60
    
    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))10.61
    
    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))10.62
    
    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))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)
 (b) Reports on Form 8-K On December 15, 2003, the Registrants filed a Current Report on Form 8-K
to disclose the private placement offering of $125 million of
Senior Secured
Notes due 2009 and credit agreement amendment under Item 5. Other Events. On November 14, 2003, the Registrants filed a Current Report on Form 8-K
to announce their financial results for the 2003 third quarter earnings and
the sale of 40% of the outstanding shares of Japan Epoxy Resins Co., to its
joint venture partner under Item 12. Results of Operations and Financial
Condition. On October 7, 2003, the Registrants filed a Current Report on Form 8-K to
disclose that Mr. Marvin O. Schlanger, Chairman and CEO, was a presenter at the
Deutsche Bank Eleventh Annual Global High Yield Conference on Thursday, October
9, 2003 under Item 9. Regulation FD Disclsoure. 64




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or15(d)of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 16, 2004. Resolution Performance Products LLCBy:
    
    /s/ Marvin O. SchlangerMarvin O. SchlangerChairman and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1933,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on March 16, 2004 By:
    
    /s/ Marvin O. SchlangerMarvin O. SchlangerChairman and Chief Executive Officer(principal executive officer)By:
    
    /s/ Jeffrey M. NodlandJeffrey M. NodlandPresident and Chief Operating OfficerBy:
    
    /s/ J. Travis SpoedeJ. Travis SpoedeExecutive Vice President, Chief Financial Officer(principal financial and accounting officer)By:
    
    /s/ Joel A. AsenJoel A. AsenManagerBy:
    
    /s/ Laurence M. BergLaurence M. BergManagerBy:
    
    /s/ Peter P. CopsesPeter P. CopsesManagerBy:
    
    /s/ Joshua J. HarrisJoshua J. HarrisManagerBy:
    
    /s/ Scott M. KleinmanScott M. KleinmanManagerBy:
    
    /s/ Heinn F. Tomfohrde, IIIHeinn F. Tomfohrde, IIIManager
 65




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or15(d)of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 16, 2004. RPP Capital CorporationBy:
    
    /s/ Marvin O. SchlangerMarvin O. SchlangerChairman and Chief Executive Officer(principal executive officer)
 Pursuant to the requirements of the Securities Exchange Act of 1933, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on March 16, 2004 By:
    
    /s/ Marvin O. SchlangerMarvin O. SchlangerChairman and Chief Executive Officer(principal executive officer)By:
    
    /s/ Jeffrey M. NodlandJeffrey M. NodlandPresident and Chief Operating OfficerBy:
    
    /s/ J. Travis SpoedeJ. Travis SpoedeExecutive Vice President, Chief Financial Officer(principal financial and accounting officer)By:
    
    /s/ Joshua J. HarrisJoshua J. HarrisDirectorBy:
    
    /s/ Scott M. KleinmanScott M. KleinmanDirector
 66




---



##### Table of Contents



SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT. No annual report to security holders covering Registrants last fiscal
year or proxy statement, form of proxy or other proxy soliciting material has
been sent to security holders covering the 2003 fiscal year or will be sent to
security holders subsequent to the filing of this report. 67




---



##### Table of Contents



Report of Independent Auditors To the Board of Managers and Owner of
Resolution Performance Products LLC In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of owners equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
Resolution Performance Products LLC at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule appearing on page 96 presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of
Resolution Performance Products LLC management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether 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 by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP
Houston, Texas
February 24, 2004 68




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002(In millions of U.S. Dollars) 2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    49
    
    
    $
    4Receivables, less allowance for doubtful accounts of $3 and $2, respectively
    
    
    107
    
    
    
    105Due from related parties
    
    
    2
    
    
    
    3Prepaid assets
    
    
    7
    
    
    
    10Inventories,
less allowance for inventory obsolescence of $1 and $1, respectively
    
    
    145
    
    
    
    145Taxes receivable
    
    
    3
    
    
    
    3Deferred income taxes
    
    
    5
    
    
    
    11Total current assets
    
    
    318
    
    
    
    281Property, plant and equipment, at cost, less accumulated depreciation
    
    
    449
    
    
    
    441Investment at cost, and in equity affiliate, respectively
    
    
    2
    
    
    
    11Intangible assets, at cost, less accumulated amortization
    
    
    24
    
    
    
    19Deferred income taxes
    
    
    63
    
    
    
    41Total assets
    
    $
    856
    
    
    $
    793Liabilities and Owners DeficitCurrent liabilities:Accounts payabletrade
    
    $
    108
    
    
    $
    156Other payables and accruals
    
    
    31
    
    
    
    17Deferred credit
    
    
    
    
    
    
    5Due to related parties
    
    
    1
    
    
    
    1Taxes payable
    
    
    
    
    
    
    2Current portion of long-term debt
    
    
    1
    
    
    
    1Total current liabilities
    
    
    141
    
    
    
    182Capital lease obligation
    
    
    1
    
    
    
    2Deferred revenue
    
    
    5
    
    
    
    5Deferred income taxes
    
    
    93
    
    
    
    66Pensions and other retirement plan obligations
    
    
    23
    
    
    
    22Long-term debt
    
    
    674
    
    
    
    565Total liabilities
    
    
    937
    
    
    
    842Commitments and contingencies (Notes 12 and 13)
    
    
    
    
    
    
    Owners deficit:Member Interest-
1,000,000 units authorized, 1,000,000 units issued
    
    
    102
    
    
    
    102Accumulated deficit
    
    
    (144
    )
    
    
    (80
    )Accumulated other comprehensive loss
    
    
    (39
    )
    
    
    (71
    )Total owners deficit
    
    
    (81
    )
    
    
    (49
    )Total liabilities and owners deficit
    
    $
    856
    
    
    $
    793
 The accompanying notes are an integral part of these financial statements. 69




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2003, 2002 and 2001(In millions of U.S. Dollars) 2003
    
    2002
    
    2001Revenues
    
    $
    781
    
    
    $
    738
    
    
    $
    863Other revenues
    
    
    1
    
    
    
    2
    
    
    
    Total
    
    
    782
    
    
    
    740
    
    
    
    863Cost and Expenses:Purchase and variable product costs
    
    
    558
    
    
    
    438
    
    
    
    483Operating expenses
    
    
    113
    
    
    
    122
    
    
    
    152Selling, general and administrative
    
    
    53
    
    
    
    59
    
    
    
    61Depreciation and amortization
    
    
    46
    
    
    
    36
    
    
    
    34Research and development
    
    
    16
    
    
    
    20
    
    
    
    25Restructuring charges
    
    
    
    
    
    
    6
    
    
    
    Special charges
    
    
    
    
    
    
    8
    
    
    
    15Total
    
    
    786
    
    
    
    689
    
    
    
    770Operating income (loss)
    
    
    (4
    )
    
    
    51
    
    
    
    93Gain on sale of assets
    
    
    14
    
    
    
    1
    
    
    
    1Income from equity investment
    
    
    2
    
    
    
    1
    
    
    
    Interest expense, net
    
    
    76
    
    
    
    65
    
    
    
    68Income (loss) before income taxes
    
    
    (64
    )
    
    
    (12
    )
    
    
    26Income tax expense (benefit)
    
    
    (2
    )
    
    
    (5
    )
    
    
    11Net income (loss)
    
    $
    (62
    )
    
    $
    (7
    )
    
    $
    15
 The accompanying notes are an integral part of these financial statements. 70




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED STATEMENTS OF OWNERS EQUITY (DEFICIT)
 Years Ended December 31, 2003, 2002 and 2001(In millions of U.S. Dollars) AccumulatedOtherMember
    
    Accumulated
    
    Comprehensive
    
    
    
    
    
    ComprehensiveInterest
    
    Deficit
    
    Loss(a)
    
    Total
    
    Income (loss)Balance, January 1, 2001
    
    $
    112
    
    
    $
    (87
    )
    
    $
    (91
    )
    
    $
    (66
    )Net income
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    $
    15Constructive Distribution
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Capital Contributions
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Tax effect of Section 338(h)(10) election
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )Currency translation loss, net of tax
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )
    
    
    (4
    )Interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )
    
    
    (7
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4Balance, December 31, 2001
    
    
    101
    
    
    
    (73
    )
    
    
    (102
    )
    
    
    (74
    )Net loss
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    $
    (7
    )Capital Contribution
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Currency translation gain, net of tax
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    25
    
    
    
    25Interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    6Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24Balance, December 31, 2002
    
    
    102
    
    
    
    (80
    )
    
    
    (71
    )
    
    
    (49
    )Net loss
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )
    
    $
    (62
    )Constructive Distribution
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Currency translation gain, net of tax
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    31
    
    
    
    31Interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (30
    )Balance, December 31, 2003
    
    $
    102
    
    
    $
    (144
    )
    
    $
    (39
    )
    
    $
    (81
    )
   (a)
    
    Accumulated Other Comprehensive Loss at December 31, 2003 includes a $39
million net loss for foreign currency translation. At December 31, 2002,
Accumulated Other Comprehensive Loss includes a $70 million net loss for
foreign currency translation and $1 million loss on Interest rate swap. At
December 31, 2001, Accumulated Other Comprehensive Loss includes a $95 million
net loss for foreign currency translation and $7 million loss on Interest rate
swap. The accompanying notes are an integral part of these financial statements. 71




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002 and 2001(In millions of U.S. Dollars) 2003
    
    2002
    
    2001Cash flows provided by (used for) operating activities:Net income (loss)
    
    $
    (62
    )
    
    $
    (7
    )
    
    $
    15Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization
    
    
    46
    
    
    
    36
    
    
    
    34Amortization of deferred finance costs
    
    
    10
    
    
    
    2
    
    
    
    3Gain on sale of assets
    
    
    (14
    )
    
    
    (1
    )
    
    
    (1
    )Equity earnings in affiliates
    
    
    (2
    )
    
    
    (1
    )
    
    
    Deferred income taxes
    
    
    (2
    )
    
    
    (5
    )
    
    
    11Deferred revenue
    
    
    
    
    
    
    5Pensions and other retirement plans obligations
    
    
    (1
    )
    
    
    (8
    )
    
    
    5Changes in operating assets and liabilities:Receivables, net
    
    
    9
    
    
    
    14
    
    
    
    36Due from and owing to related parties
    
    
    1
    
    
    
    1
    
    
    
    Prepaid assets
    
    
    3
    
    
    
    1
    
    
    
    (5
    )Inventories
    
    
    10
    
    
    
    (7
    )
    
    
    18Income taxes
    
    
    10
    
    
    
    6
    
    
    
    (10
    )Deferred credit
    
    
    (5
    )
    
    
    5
    
    
    
    Payables and accruals
    
    
    (52
    )
    
    
    28
    
    
    
    (11
    )Net cash (used for) provided by operating activities
    
    
    (49
    )
    
    
    69
    
    
    
    95Cash flows provided by (used for) investing activities:Capital expenditures
    
    
    (18
    )
    
    
    (48
    )
    
    
    (24
    )Purchase of France subsidiary
    
    
    
    
    
    
    
    
    
    
    (1
    )Proceeds from asset disposals
    
    
    23
    
    
    
    2
    
    
    
    1Distributions from equity affiliates
    
    
    2
    
    
    
    1
    
    
    
    1Net cash provided by (used for) investing activities
    
    
    7
    
    
    
    (45
    )
    
    
    (23
    )Cash flows provided by (used for) financing activities:Decrease in capital lease obligation
    
    
    (1
    )
    
    
    
    
    
    
    Constructive distributions
    
    
    (4
    )
    
    
    
    
    
    
    Proceeds from long-term debt
    
    
    577
    
    
    
    223
    
    
    
    252Payments of long-term debt
    
    
    (473
    )
    
    
    (247
    )
    
    
    (353
    )Deferred finance costs
    
    
    (13
    )
    
    
    (3
    )
    
    
    (3
    )Capital contributions
    
    
    
    
    
    
    1
    
    
    
    19Net cash provided by (used for) financing activities
    
    
    86
    
    
    
    (26
    )
    
    
    (85
    )Effect of exchange rate change on cash and cash equivalents
    
    
    1
    
    
    
    
    
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    45
    
    
    
    (2
    )
    
    
    (13
    )Cash and cash equivalents at beginning of year
    
    
    4
    
    
    
    6
    
    
    
    19Cash and cash equivalents at end of year
    
    $
    49
    
    
    $
    4
    
    
    $
    6Supplemental disclosures of cash flow information:Capital lease obligation incurred
    
    $
    
    
    
    $
    2
    
    
    $
    1Trade notes payable incurred
    
    
    
    
    
    
    4
    
    
    
    Cash paid during the period for interest expense
    
    
    63
    
    
    
    60
    
    
    
    71Cash paid (refunded) during the period for income taxes
    
    $
    (19
    )
    
    $
    (10
    )
    
    $
    12
 The accompanying notes are an integral part of these financial statements. 72




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars)  1.
    
    Organization The consolidated financial statements include the consolidated operations
of Resolution Performance Products LLC (RPP LLC, or the Company), and its
wholly owned subsidiaries including RPP Capital Corporation (RPP CC). RPP
LLC is a wholly owned subsidiary of Resolution Performance Products, Inc.
(RPPI). RPP CC is a wholly owned subsidiary of RPP LLC that was formed to
co-issue the 13 1/2% Senior Subordinated Notes jointly and severally with RPP
LLC. (See Note 10). Prior to November 14, 2000, the Resins Business was owned
by the Royal Dutch/Shell Group of Companies (Shell). RPP LLC and its
affiliates acquired the Resins Business of Shell through a leveraged
recapitalization and the excess of the purchase price over the carrying value
of the net assets acquired was recorded in Owners Deficit. The Company is engaged in manufacturing and marketing resins in the U.S.
and internationally. Resins include epoxy resins, Versatic acids and
derivatives. Epoxy resins are chemicals primarily used in the manufacture of
coatings, adhesives, printed circuit boards; fiber reinforced plastics and
construction materials. Products containing epoxy resins serve a wide range of end-users,
including automotive, aerospace, electrical, construction and industrial
maintenance. Versatic acid and derivatives are specialty products that
complement epoxy resins product offerings in the coatings, adhesives and
construction industries.  2.
    
    Significant Accounting Policies Principles of Consolidation The accompanying Consolidated Financial Statements are presented in
conformity with generally accepted accounting principles in the United States
(U.S.) and include the accounts of RPP LLC and its subsidiaries. All
significant inter-company transactions and accounts have been eliminated in
consolidation. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments that are readily
convertible into cash and have a maturity of three months or less at the date
of acquisition. Inventories The inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method. (See Note 4) Property, Plant and Equipment Property, plant and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on a straight-line basis 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 three to ten years for other assets. Upon retirement or sale, the
Company removes the costs of the asset and the related accumulated depreciation
from the accounts and reflects any resulting gain or loss in income.
Expenditures for maintenance and repairs, including major plant maintenance
(turnaround), are expensed as incurred. Replacements and improvements are
capitalized. Intangible Assets Intangible assets consist primarily of patents and deferred financing
costs. Patents are being amortized on a straight-line basis over periods
ranging from 7 to 15 years. Deferred financing costs are being amortized over
5 to 10
year financing terms and the amortization is recorded as interest expense.
Deferred financing costs are reviewed for write-off upon early extinguishment
of related debt. 73




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) Impairment of Long-Lived Assets The carrying values of long-lived assets and intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of the
carrying value of an asset is assessed by reference to an estimate of the
assets undiscounted future net cash flows. Measurement of any impairment
would include a comparison of discounted estimated future net cash flows to the
net carrying value of the related assets. As an alternative, measurement of
any impairment could include a comparison of a third part valuation to the net
carrying value of the related assets. Revenue Recognition Revenues associated with sales of chemical products are recorded when
title and risk passes to the customer. Title and risk generally passes to our
customer when items are shipped. The Company maintains a provision for
discounts and rebates to customers and returns that is based on historical
experience. Sales of by-products, primarily hydrochloric acid, generated during
the manufacturing process are included as a reduction to purchases and variable
costs. Research and Development Costs Internal research and development costs are expensed as incurred unless
they have alternative future uses. Income Taxes The Company is organized as a limited liability company and is not subject
to U. S. income tax. Income tax information presented in the consolidated
statements includes U. S. income taxes attributed to the Companys operations
that are the responsibility of the Companys sole-owner, RPPI. The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statement carrying amounts and the tax bases of the
assets and liabilities. Deferred taxes result from differences between the financial and tax bases
of assets and liabilities, and are adjusted for changes in tax rates and tax
laws when changes are enacted. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that some or all of a tax
benefit will not be realized. Stock-Based Compensation RPPI grants stock options to employees of the Company for a fixed number
of shares with an exercise price of $100 dollars or the fair value of the
shares at the date of grant. RPPI accounts for such stock option grants in
accordance with Statement of Financial Accounting Standard No. 123, Accounting
for Stock-Based Compensation (FAS 123), which permits the measurement of
compensation expense in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25). We have elected to
follow the intrinsic value based method prescribed by APB 25. Accordingly,
no compensation costs was recognized in connection with stock options granted
in 2003 The options granted were valued using the fair value approach which
represents the market value calculated in-house using reasonable and customary
methods for determining values when there is no established trading market.
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if we had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of FAS 123. We have determined
that our pro forma 74




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) compensation expense for 2003, 2002 and 2001 was $0 under
the fair value method of FAS 123 using the Black Scholes Option pricing model.
The Black Scholes option pricing model was used with the following
weighted-average assumptions issued in each year. Assumptions: 2003
    
    2002
    
    2001Estimated fair value per share of options*
    
    $
    
    
    
    $
    145
    
    
    $
    310Risk-free interest rate
    
    
    4.23
    %
    
    
    5.54
    %
    
    
    5.28
    %Expected term
    
    6 years
    
    6 years
    
    6 yearsVolatility**
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  *
    
    The estimated market value was calculated in-house by using reasonable and
customary methods for determining market values when there is no
established trading market.**
    
    Assumed to be zero since RPPI is a private entity. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosures of contingent assets and
liabilities. Although management believes these estimates are reasonable,
actual results could differ from those estimates. Risks and Uncertainties The Company has operations in approximately 8 countries, and in each
country, the business is subject to varying degrees of risk and uncertainty.
The Company insures its business and assets against insurable risks in a manner
that it deems appropriate. Because of its diversity, the Company believes that
the risk of loss from non-insurable events in any one business or country would
not have a material, adverse effect on its operations as a whole.
Additionally, management believes there is no material concentration of risk
within any single customer or supplier, except for Shell, or small group of
customers or suppliers, whose failure or nonperformance would materially affect
the Companys results. Foreign Currency Transactions For the Companys operations outside the U.S., where the local currency is
considered to be the functional currency, those operations are translated into
U.S. dollars using the exchange rate at each balance sheet date for assets and
liabilities; the average exchange rate is utilized for each period for
revenues, expenses, gains and losses and cash flows. The effects of
translating such operations into U.S. dollars are included as a component of
owners equity (deficit). A substantial amount of assets and liabilities
outside the United States are denominated in the Euro. The U. S. dollar to the
Euro exchange rate was 0.7964 and 0.9541 at December 31, 2003 and 2002,
respectively. The Company may utilize forward exchange contracts to hedge foreign
currency transaction exposures. Gains and losses on hedging contracts are
deferred and included in the measurement of the related transaction. The
Company entered into one forward exchange contract during 2003 and none in
2002. Environmental Costs Environmental costs relating to current operations are expensed or
capitalized, as appropriate, depending on whether such costs are incurred as
preventative measure or provide future economic benefits. Remediation
liabilities are recognized when the costs are considered probable and can be reasonably
estimated. Measurement of liabilities is based on currently enacted laws and
regulations, existing technology and undiscounted site-specific costs.
Environmental 75




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) liabilities in connection with properties that are sold or closed
are realized upon such sale or closure, to the extent they are probable and
estimable and not previously reserved. In assessing environmental liabilities,
no set-off is made for potential insurance recoveries. Recognition of any
joint and several liabilities is based upon the Companys best estimate of its
final pro rata share of the liability. Derivatives Commencing January 1, 2001, the Company adopted SFAS 133 (Accounting for
Derivative Instruments and Hedging Activities). SFAS 133, as amended by SFAS
138, requires that derivative instruments be recorded on the balance sheet at
their fair value. The Company does not enter into derivative instruments for
trading purposes. Changes in the fair value of derivatives designated as hedges
are recorded each period in current earnings or other comprehensive income,
depending on the type of derivative and the effectiveness of the hedge. The Company entered into interest rate swap agreements related to the B
term loan for notional amounts of $50 million, $75 million, $100 million, $25
million and $50 million that fix the LIBOR portion of our interest rates at
5.41%, 5.25%, 5.41%, 4.61% and 4.39%, respectively. The consolidated statement
of income for the year ended December 31, 2001 includes interest expense at the
fixed rates stated above. For the year ended December 31, 2001, the Company
recognized a $7 million charge in other comprehensive income relating to the
interest rate swaps. This charge was due to the change in the fair value of the
Companys interest rate swaps as a result of declining interest rates. In
2002, our remaining interest rate swap agreements expired or were terminated
and we entered into an interest rate cap agreement for the notional amount of
$150 million. The cost of terminating the interest rate swap agreements was
$1.5 million and this cost has been charged to interest expense. The interest
rate cap agreement caps the floating rate at 3% and expires on February 28,
2004. The cost of the interest rate cap agreement was $183,750 and has been
expensed. No other income or expense has been recorded in 2003 related to the
interest rate cap agreement. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS 149,Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
the accounting guidance on (1) derivative instruments (including certain
derivative instruments embedded in other contracts) and (2) hedging activities
that fall within the scope of SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 149 is effective (1) for contracts entered into
or modified after June 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. Adoption of the standard did not
have a material impact on the Companys consolidated financial position,
results of operations or cash flows. In May 2003, SFAS 150, Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity was issued. The standard
establishes how an issuer classifies and measures certain freestanding
financial instruments with characteristics of liabilities and equity and
requires that such instruments be classified as liabilities and in some
instances, assets. The standard is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of the
standard did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows. In December 2003, the FASB issued a revision to SFAS 132 (Employers
Disclosures about Pensions and Other Postretirement Benefits). The revision
amends SFAS 87, 88 and 106 and requires additional disclosures to those in the
original SFAS 132 to include information describing the types of plan assets,
investment strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit or costs recognized during interim periods.
The effective dates for the additional disclosure requirements are December
15, 2003 and
June 15, 2004. Adoption of the revisions will not have a material effect on
our consolidated results of operations, cash flows or financial position. In December 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities (FIN46R), primarily to clarify the required 76




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) accounting for
interests in variable interest entities (VIEs). This standard replaces FASB
Financial Interpretation No. 46, Consolidation of Variable Interest Entities
that was issued in January 2003 to address certain situations in which a
company should include in its financial statements the assets, liabilities and
activities of another entity. For the Company, application of FIN 46R is
required for interest in certain VIEs that are 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 FIN
46R, as of December 31, 2003 and as of March 31, 2004, did not and is not
expected to have a material impact on our financial statements. In January 2004, the FASB issued FASB Staff Position (FSP) FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. The FSP permits a sponsor of
retiree health benefit plans to make a one-time election to defer recognition
of the effects of the new Medicare legislation in accounting for its plans
under SFAS 106, Employers Accounting for Postretirement Benefits Other Than
Pension, or in making disclosures related to its plans required by SFAS 132
(Revised 2003), Employers Disclosures about Pension and Other Postretirement
Benefits, until the FASB develops and issues authoritative guidance on
accounting for subsidies provided by the Act. Such FASB guidance could require
a change in currently reported information. The Company elected to make the
one-time deferral and is currently evaluating the effect of the FSP. Reclassifications Certain reclassifications were made to prior year amounts in order to
conform with the current years presentation.  3.
    
    Transactions with Related and Certain Other Parties Related Parties The Company has significant transactions and relationships with affiliated
entities. Because of these relationships, it is possible that the terms of
these transactions are not the same as those that would result from
transactions among wholly unrelated parties. Related party amounts are primarily attributable to transactions with
Japan Epoxy Resins joint venture. (See Note 7). The aggregate amounts of
related party transactions were as follows for the years ended December 31,
2003, 2002 and 2001 (in millions of U. S. dollars): 2003
    
    2002
    
    2001Revenues
    
    $
    15
    
    
    $
    13
    
    
    $
    19Cost and expenses:Purchases and variable products costs
    
    
    5
    
    
    
    7
    
    
    
    5Selling, general and administrative expenses
    
    
    
    
    
    
    1
    
    
    
    1
 Sales to related parties are derived largely from the sale of finished
products. Amounts due from related parties were $2 million and $3 million at
December 31, 2003 and 2002, respectively. Amounts due to related parties were
$1 million at December 31, 2003 and 2002, respectively. The Company purchases a significant portion of its primary feed stocks
from Shell. In instances where the Companys manufacturing facilities are
operated as part of a larger Shell petrochemical and refining complex, Shell
may also provide site services, utilities, materials, facilities and operator
type services. Research and development activities are performed largely by the
Companys employees at Shells technology centers in the United States and The
Netherlands. 77




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) On November 14, 2000, certain officers of the Company issued notes payable
totaling $1 million to the Company to purchase stock of RPPI. As of December
31, 2003 and 2002, the notes payable and accrued interest amounted to $2
million and $1 million, respectively. The Company entered into a management agreement, as amended, with Apollo
Management IV, L.P. (Apollo) for management consulting services. Under the
agreement, Apollo shall advise the Company concerning such management matters
that relate to proposed financial transactions, acquisitions and other senior
management matters related to the business, administration and policies of the
Company. As consideration, the Company paid Apollo an annual fee of $1 million
and $1 million in 2002 and 2001, respectively. There were no payments made to
Apollo in 2003 under the agreement, as amended, below. Effective January 1, 2003, the terms of the management consulting
agreement were amended to waive payment of the annual management fee to Apollo
during 2003; provided, that if, during any twelve month period ending on the
last day of any fiscal quarter during 2003 or 2004, the Company and our
subsidiaries consolidated earnings before interest, taxes, depreciation and
amortization (as determined in accordance with our historical practices) is
$116 million or more, we shall pay to Apollo (i) the quarterly installments of
the annual management fee for the remainder of 2003 and thereafter and (ii)
125% of the amount of the quarterly installments of the annual management fee
which were waived during 2003. It is expected that the management consulting
agreement will be amended to extend the period for achieving such from December
31, 2004 to December 31, 2005, to the extent permitted by the Credit Agreement
and Indentures. The Company paid approximately $5 million, $7 million and $5 million
related to certain freight costs to Quality Distribution, Inc., an affiliate of
Apollo in 2003, 2002 and 2001, respectively. The Company paid approximately $1 million during 2001 on behalf of RPP
Inc. for legal and external audit services rendered in the ordinary course of
business that have been recognized as a constructive cash distribution. In
addition, in 2003 the Company paid a constructive cash distribution of
$4 million to Shell on behalf of RPPI, of which
$2 million was previously accrued. RPPI made capital
contributions of approximately $1 million during 2002 and 2001 to us relating
to pension costs. Other Parties Other parties include those parties that fall outside the definition of
related parties, but with whom the Company or its related parties have a
relationship that enables the parties to negotiate terms of material
transactions that may not be available from other more clearly independent
parties on an arms length basis. Shell is not considered a related party;
however, Shell owns less than 6.8% on a fully diluted basis of RPPI. We entered
into numerous agreements with Shell, for example, to purchase feed stocks 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 agreements with Shell. During
2003, 2002 and 2001, the Company paid Shell $312 million, $343 million and $361
million for these various agreements and Shell paid us $23 million, $16 million
and $21 million for certain site services that we provided to Shell,
respectively. At December 31, 2003, accounts payable and accounts receivable
related to Shell were $1 million and $3 million, respectively. At December
31, 2002, accounts payable and accounts receivable related to Shell were $18
million and $4 million, respectively. During 2002, we received total proceeds of $22 million from Shell under
the environmental agreements through indemnity payments and as part of the
November 2002 amendments (see Note 12), and we applied $16 million for capital
projects and $1 million for expense projects. This resulted in a Deferred
Credit balance of $5 million on the Consolidated Balance Sheets as of December
31, 2002. The remaining Deferred Credit balance was applied to applicable
capital expenditures in 2003. 78




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars)  4.
    
    Inventories of Products Product inventories are valued at the lower of cost or market with cost
being determined using the FIFO method. Total inventories, net of allowance for
obsolescence at December 31, 2003 and 2002 were comprised of the following (in
millions of U. S. dollars): 2003
    
    2002Raw materials
    
    $
    12
    
    
    $
    10Finished products
    
    
    120
    
    
    
    122Materials and supplies
    
    
    13
    
    
    
    13Total
    
    $
    145
    
    
    $
    145
 During the third quarter 2003, we became aware that certain manufacturing
costs had not been included in finished goods inventory. The effect of not
including such costs in finished goods inventory was not material to our
historical financial statements or to our expected full year 2003 financial
position or results of operations. To properly reflect these costs in
inventory, an adjustment to the financial statements was made in third quarter
2003. The impact of the adjustment was to increase inventory 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 included in purchases and variable
product costs.  5.
    
    Property, Plant and Equipment Property, plant and equipment at December 31, 2003 and 2002 consisted
primarily of manufacturing assets as follows (in millions of U. S. dollars): 2003
    
    2002Plant and equipment
    
    $
    1,198
    
    
    $
    1,084Office buildings
    
    
    43
    
    
    
    33Other assets
    
    
    68
    
    
    
    65Total
    
    $
    1,309
    
    
    $
    1,182Less: accumulated depreciation
    
    
    (860
    )
    
    
    (741
    )Net property, plant and equipment
    
    $
    449
    
    
    $
    441
     6.
    
    Intangible Assets Intangible assets consist of the following (in millions of U. S. dollars): December 31, 2003
    
    December 31, 2002Gross
    
    Accumulated
    
    Net
    
    Gross
    
    Accumulated
    
    NetAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountPatents and trademarks
    
    $
    12
    
    
    $
    12
    
    
    $
    
    
    
    $
    12
    
    
    $
    11
    
    
    $
    1Deferred finance costs
    
    
    38
    
    
    
    14
    
    
    
    24
    
    
    
    23
    
    
    
    5
    
    
    
    18Total
    
    $
    50
    
    
    $
    26
    
    
    $
    24
    
    
    $
    35
    
    
    $
    16
    
    
    $
    19
 79




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) Aggregate Amortization Expense:For year ended December 31, 2003
    
    $
    10Estimated Amortization Expense:For the year ended December 31, 2004
    
    $
    4For the year ended December 31, 2005
    
    $
    4For the year ended December 31, 2006
    
    $
    4For the year ended December 31, 2007
    
    $
    4For the year ended December 31, 2008
    
    $
    3Thereafter
    
    $
    5
  7.
    
    Investment in Equity Affiliate Investment in affiliate, accounted for using the equity method, is as
follows as of December 31, 2002 (in millions of U. S. dollars): Country of
    
    PercentageJoint venture
    
    incorporation
    
    holding
    
    2002Japan Epoxy Resins (formerly Yuka Shell Epoxy K.K.)
    
    Japan
    
    
    50
    %
    
    $
    11
 Investment at Cost On November 14, 2003, a wholly owned subsidiary of the Company completed
the sale of 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 gain on the sale was recorded in the amount of $14
million after recognizing direct costs of $5 million and accumulated foreign
currency translation gain of $4 million. The transaction was exempt from taxes
as a result of the structure of ownership. In connection 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 above transaction, the Company can no longer exercise
significant influence over the operating and financial policies of Japan Epoxy
Resins Co., Ltd. Therefore the investment in affiliate, accounted for using
the cost method, is as follows as of December 31, 2003 (in millions of U. S.
dollars): Country of
    
    Percentageincorporation
    
    holding
    
    2003Japan Epoxy Resins (formerly Yuka Shell Epoxy K.K.)
    
    Japan
    
    
    10
    %
    
    $
    2
  8.
    
    Income Taxes The income tax expense (benefit) consists of the following (in millions of
U. S. dollars): 2003
    
    2002
    
    2001U.S. and other income taxes:Current income taxU.S
    
    $
    
    
    
    $
    
    
    
    $
    Current income taxoutside U.S
    
    
    
    
    
    
    
    
    
    
    Deferred income tax (benefit)U.S
    
    
    (8
    )
    
    
    1
    
    
    
    10Deferred income tax (benefit)outside U.S.
    
    
    6
    
    
    
    (6
    )
    
    
    1Total
    
    $
    (2
    )
    
    $
    (5
    )
    
    $
    11
 80




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) Deferred income taxes are provided for the temporary differences between
the book and tax bases of our assets and liabilities. Significant components
of deferred tax assets and liabilities as of December 31, 2003 and 2002 are as
follows (in millions of U. S. dollars): 2003
    
    2002Deferred tax assets:Net operating loss carry forwards
    
    $
    88
    
    
    $
    48Pension and
postretirement benefits
    
    
    6
    
    
    
    3Other
    
    
    6
    
    
    
    2Total gross deferred tax assets
    
    
    100
    
    
    
    53Valuation allowance
    
    
    (32
    )
    
    
    (1
    )Net deferred tax assets
    
    
    68
    
    
    
    52Deferred tax liabilities:Items associated with capitalized costs:Property, plant and equipment
    
    
    (86
    )
    
    
    (61
    )Intangibles
and other
    
    
    (7
    )
    
    
    (5
    )Total deferred tax liabilities
    
    
    (93
    )
    
    
    (66
    )Net deferred tax liabilities
    
    $
    (25
    )
    
    $
    (14
    )
 Deferred tax assets and liabilities are recorded in the accompanying
Consolidated Balance Sheet as follows (in millions of U. S. dollars): 2003
    
    2002Current assets
    
    $
    5
    
    
    $
    11Non-current assets, net of $32 million valuation allowance
    
    
    63
    
    
    
    41Current liabilities
    
    
    
    
    
    
    Non-current liabilities
    
    
    (93
    )
    
    
    (66
    )$
    (25
    )
    
    $
    (14
    )
 Total income tax expense for the years 2003, 2002 and 2001 was equivalent
to effective tax rates of 3.1%, 42% and 43%, respectively. Income before
income taxes attributable to U.S. and non-U.S. operations was as follows (in
millions of U. S. dollars): 2003
    
    2002
    
    2001U.S.
    
    $
    (58
    )
    
    $
    9
    
    
    $
    29Non-U.S.
    
    
    (6
    )
    
    
    (21
    )
    
    
    (3
    )$
    (64
    )
    
    $
    (12
    )
    
    $
    26
 Reconciliation of actual tax expense (benefit) to the expected tax expense
(benefit) calculated at the U.S. Statutory rate (35%) is as follows (in
millions of U. S. dollars): 2003
    
    2002
    
    2001Tax expense (benefit) at 35%
    
    $
    (23
    )
    
    $
    (4
    )
    
    $
    9State taxes, net of federal benefit
    
    
    (2
    )
    
    
    
    
    
    
    1Net effect of different tax rates
in non-U.S. jurisdictions
    
    
    (8
    )
    
    
    1
    
    
    
    2Increase in valuation allowance
    
    
    31
    
    
    
    1
    
    
    
    Tax credits
    
    
    
    
    
    
    (2
    )
    
    
    Other
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Total
    
    $
    (2
    )
    
    $
    (5
    )
    
    $
    11
 81




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) At December 31, 2003, we had net operating loss carry forwards for income
tax purposes in various tax jurisdictions. Of those carry forwards that are
subject to expiration, they will expire, if unused, over the years through
2023. We anticipate taxable income in future years will allow us to utilize
the carry forwards that have not had a valuation allowance placed against them.
It was recognized that it is more likely than not that certain carry forwards
in certain tax jurisdictions will not be realized as a result of current and
future taxable income. Accordingly, the valuation allowance has been increased
in the current year to reflect lower than anticipated net deferred tax asset
realization.  9.
    
    Pension Plans, Other Post Retirement Benefits and401(k)Plan The Company provides a defined pension and other post-retirement benefit
plans (OPEBs) to employees in the U.S. and internationally. The OPEBs
primarily consist of retiree medical benefits. As of December 31, 2003 and
2002 approximately 456 and 511 employees in the U.S. and 383 and 369 employees
internationally participate in these plans. The measurement date for the
Companys pension plans and other post retirement benefits is December 31,
2003. The following table provides a reconciliation of benefit obligations,
plan assets and the funded status of the plans for the years ended December 31,
2003 and 2002 (in millions of U. S. dollars): 2003
    
    2002Pension Benefits
    
    Other Benefits
    
    Pension Benefits
    
    Other BenefitsChange in benefits obligationBenefits obligation at beginning of year
    
    $
    81
    
    
    $
    7
    
    
    $
    64
    
    
    $
    17Service cost
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    1Interest cost
    
    
    5
    
    
    
    
    
    
    
    4
    
    
    
    1Actuarial (gain)loss
    
    
    7
    
    
    
    
    
    
    
    5
    
    
    
    (8
    )Plan amendments
    
    
    
    
    
    
    (1
    )
    
    
    (5
    )
    
    
    (4
    )Change in currency exchange rate adjustment
    
    
    13
    
    
    
    1
    
    
    
    8
    
    
    
    Benefits obligation at end of year
    
    $
    111
    
    
    $
    7
    
    
    $
    81
    
    
    $
    7Change in plan assetsFair value of plan assets at beginning of year
    
    $
    80
    
    
    $
    
    
    
    $
    52
    
    
    $
    Actual return on plan assets
    
    
    5
    
    
    
    
    
    
    
    4
    
    
    
    Employer contributions
    
    
    4
    
    
    
    
    
    
    
    15
    
    
    
    Change in currency exchange rate adjustment
    
    
    13
    
    
    
    
    
    
    
    9
    
    
    
    Fair value of plan assets at end of year
    
    $
    102
    
    
    $
    
    
    
    $
    80
    
    
    $
    Funded status
    
    
    (9
    )
    
    
    (7
    )
    
    
    (1
    )
    
    
    (7
    )Unrecognized net prior service cost
    
    
    (4
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    (4
    )Unrecognized net actuarial loss(gain)
    
    
    16
    
    
    
    (14
    )
    
    
    7
    
    
    
    (12
    )Accrued cost
    
    $
    3
    
    
    $
    (26
    )
    
    $
    1
    
    
    $
    (23
    )Discount rate*
    
    
    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/ARate of compensation increase
    
    
    2.0-4.00
    %
    
    
    N/A
    
    
    
    2.0-4.25
    %
    
    
    N/AService cost
    
    $
    5
    
    
    $
    
    
    
    $
    5
    
    
    $
    Interest cost
    
    
    5
    
    
    
    
    
    
    
    4
    
    
    
    1Expected return on assets
    
    
    (7
    )
    
    
    
    
    
    
    (5
    )
    
    
    Recognized net actuarial gain
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Net periodic cost
    
    $
    3
    
    
    $
    (1
    )
    
    $
    4
    
    
    $
    
   *
    
    The range of rates represents the applicable countrys assumed rates. 82




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) The Company maintains target allocation percentages among various asset
classes based on an investment policy established for the U. S. Pension Plan
which is designed to ensure the assets will be sufficient to provide for
benefits under the U. S. Pension Plan while minimizing the risk for the
necessary return. In addition the policy is designed to ensure sufficient
liquidity to meet ongoing cash flow requirements. The current weighted-average
target asset allocation is as follows: equity securities 70%, debt securities
29%, cash or cash-equivalents 1%. The policy is reviewed at least annually.
The actual asset allocations at December 31, 2003 and 2002 by asset category
were as follows: Asset Category
    
    2003
    
    2002Equity securities
    
    
    71
    %
    
    
    69
    %Debt securities
    
    
    28
    %
    
    
    30
    %Other
    
    
    1
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
 For the U. S. Plan, the expected long-term rate of return was chosen from
the range of likely results of compound average annual returns over a 20-year
time horizon based on the plans current investment policy (70% equity
securities, 29% bonds, and 1% cash). The expected return and volatility for
each asset class was based on historical equity, bond and cash market returns
during the period 1926 to 2002 using a Monte Carlo Simulation. Increasing or
decreasing the expected return rate by one percentage point would not be
material on our consolidated results of operations, cash flows or financial
position. We currently anticipate that a contribution for the 2004 U. S. pension
plan year in the amount of $1.3 million will be required. However, the 2004 U.
S. pension plan year funding will not be required until September 2005. At the
earliest, we will be required to fund this pension obligation in April 2005. The accumulated benefit obligation for the pension plans in the U. S. was
$28 million and $24 million at December 31, 2003, and 2002, respectively. The assumed annual rate of increase in the per capita cost of covered
health care benefits as of December 31, 2003 was 9% trending down through 2008
and 4.5% thereafter. Increasing or decreasing the assumed health care cost
trend rate by one percentage point in each year would change the accumulated
postretirement benefit liability as of December 31, 2003 by less than $1
million and would not have a material effect on the aggregate service and
interest cost components of the net periodic postretirement benefit cost for
the year then ended. The funded pension and unfunded other retirement obligations had the
following activity (in millions of U. S. dollars): 2003
    
    2002Balance at beginning of year
    
    $
    22
    
    
    $
    31Currency translation adjustment
    
    
    3
    
    
    
    2Net periodic expense accrual
    
    
    2
    
    
    
    4Cash contributions
    
    
    (4
    )
    
    
    (15
    )Balance at end of year
    
    $
    23
    
    
    $
    22
 During 2003, the Company revised the average retirement age and average
turn-over rate to age 60 and 7 percent from age 58 and 5 percent. This revision
in assumptions decreased the obligations for the other post retirement plan in
the U. S. for 2003. During 2002, with respect to long-term employee benefit
costs, key assumptions include the long-term rate of return on pension assets,
the annual rate of inflation of health care costs, retiree life expectancies
and the general interest rate environment. Due to a change in estimates in
connection with 83




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(in millions of U.S. Dollars) our postretirement medical benefit obligation for our European
region, we experienced a reduction in our unfunded obligation of approximately
$11 million to be recognized over the expected life of the participants.
Starting in 2002, $11 million benefit will reduce our postretirement expense
over a 14 year amortization period by approximately $0.8 million annually. The Company provides a nonqualified deferred compensation plan for U. S.
employees who are participants in the RPP Inc. stock option plan. Participants
may elect to defer up to 50% of base wages and 100% of bonus pay and stock
option compensation. The participants deferred compensation contributions are
made to a rabbi trust. The Companys obligations under this plan are unfunded;
however, the Company must pay tax on compensation that is deferred by the
participant. The participant is required to reimburse the Company for taxes
once the funds are withdrawn from the plan. The Company provides a 401(k) plan to its employees as an additional
retirement and income tax reduction facility. Full time employees are 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 contributions range from 3 to
6 percent after completion of service of 1 and 5 years, respectively. Company
contributions amounted to $1 million, $2 million and $2 million for each of the
years ended December 31, 2003, 2002 and 2001, respectively.  10.
    
    Long-term Debt Long-term debt at December 31, 2003 and 2002 consisted of the following
(in millions of U. S. dollars): December 31,
    
    December 31,2003
    
    200213 1/2 % Senior Subordinated Notes
    
    $
    328
    
    
    $
    3289 1/2 % Senior Second Secured Notes
    
    
    200
    
    
    
    8% Senior Secured Notes
    
    
    140
    
    
    
    Term Loan A
    
    
    
    
    
    
    69Term Loan B
    
    
    
    
    
    
    155Revolver
    
    
    
    
    
    
    6Other
    
    
    1
    
    
    
    3Total long-term debt
    
    
    669
    
    
    
    561Net premium
on 13 1/2% Senior Subordinated Notes
    
    
    5
    
    
    
    5Premium on 9
1/2% Senior Second Secured Notes
    
    
    1
    
    
    
    Less current portion of long-term debt
    
    
    (1
    )
    
    
    (1
    )$
    674
    
    
    $
    565
 The $328 million aggregate principal amount of 13 1/2% Senior
Subordinated Notes due 2010 were issued in private offerings pursuant to Rule
144A and Regulation S under the Securities Act of 1933 in 2000, 2001 and 2002
by RPP LLC and RPP Capital. These notes were subsequently exchanged with
registered identical series of notes with the Securities and Exchange
Commission in 2001, 2002 and 2003, respectively. The $328 million of 13 1/2%
Senior Subordinate Notes are senior subordinated unsecured obligations ranking
junior in right of payment to all of our existing and future senior debt and
all liabilities of our subsidiaries that do not guarantee the notes. The
proceeds from the issuance of $200 million of the 13 1/2% Senior Subordinated
Notes in November 2000 were used to finance in part the recapitalization and
related transaction costs and 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 the notes 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 payable semi-annually in cash on each May 15 and November
15. The 13 1/2% Senior Subordinated Notes mature on November 15, 2010 and may
be redeemed 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. 84




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) On April 9, 2003, RPP LLC completed a private offering, together with RPP
Capital, its wholly-owned subsidiary, of $175 million aggregate principal
amount of 9 1/2% Senior Second Secured Notes Due 2010. The $175 million of
9 1/2% Senior Second Secured Notes are senior secured obligations ranking
equal in right of payment to all of our existing and future senior debt and
senior in right of payment with all of our existing and future subordinated
indebtedness. The 9 1/2% Senior Second Secured Notes are secured by a junior
lien, subject to permitted liens, on all of our domestic assets (subject to
certain exceptions) that secure our obligations under the Credit Agreement (as
defined below) and a portion of the capital stock of our direct and indirect
domestic subsidiaries and direct foreign subsidiaries. Interest is payable
semi-annually in cash on April 15 and October 15, beginning October 15, 2003.
The proceeds, net of $5 million debt issue costs, from the offering were used
to repay borrowings under the Credit Agreement 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 working capital. The 9 1/2% 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, on and after April 15, 2006, at the
specified redemption prices set forth under the related indenture. The Company and the other Borrowers executed the Fourth Amendment to the
Credit Agreement dated as of April 1, 2003 (the Credit Agreement Amendment).
The Credit Agreement Amendment, among other things, (a) permitted the Borrowers
to issue up to $200 million of the Original Notes and Additional Notes (as
defined below) so long as they used at least the first $135 million of net
proceeds from the offering of the Notes to prepay the term loans outstanding
under the Credit Agreement, (b) amended the financial covenants by eliminating
the consolidated interest coverage ratio covenant and the adjusted total
leverage ratio covenant and added an adjusted bank leverage ratio covenant, and
(c) reduced the size of the revolving credit facility from $100 million to $75
million. In May 2003, the Company and RPP Capital registered an identical series of
$175 million 9 1/2% Senior Second Secured Notes due 2010 with the Securities
and Exchange Commission and subsequently completed an offer to exchange the
unregistered notes for the registered notes. On May 22, 2003, the Company completed a private offering, together with
RPP Capital, its wholly-owned subsidiary, as co-issuer, of an additional $25
million aggregate principal amount of 9 1/2% Senior Second Secured Notes Due
2010 (the Additional Notes). The Additional Notes, together with the $175
million aggregate principal amount of Original Notes that were originally
issued on April 9, 2003, are treated as a single class of securities under the
Companys existing indenture. The proceeds, net of $2 million debt issue costs
from the offering, were used for general corporate purposes, including working
capital. In July 2003, the Company and RPP Capital registered an identical series
of 9 1/2% Senior Second Secured Notes Due 2010 with the Securities and
Exchange Commission and subsequently completed an offer to exchange all of the
unregistered notes for registered notes. As a result of these two exchange
offers, all of the outstanding $200 million of 9 1/2% Senior Second Secured
Notes due 2010 are registered notes. On December 22, 2003, RPP LLC completed a private offering, together with
RPP CC, its wholly-owned subsidiary, as co-issuer, of $140 million aggregate
principal amount of 8% Senior Secured Notes Due 2009. The $140 million of 8%
Senior Secured Notes are senior secured obligations ranking equal in right of
payment to all of our existing and future senior debt and senior in right of
payment with all of our existing and future subordinated indebtedness. The 8%
Senior Secured Notes are secured by a lien, subject to permitted liens, on all
of our domestic assets (subject to certain exceptions) that secure our
obligations under the Credit Agreement and a portion of the capital stock of
our direct and indirect domestic subsidiaries and direct foreign subsidiaries.
Our obligations under the 8% Senior Secured Notes and our obligations under the
9 1/2% Senior Second Secured Notes are secured by liens on the same
collateral. By virtue of the lien priority, the 8% Senior Secured Notes are
effectively senior to the obligations under the 9 1/2% Senior Second Secured
Notes to the extent of the value of the collateral securing such notes.
Interest is payable semi-annually in cash on December 15 and June 15, beginning
June 15, 2004. The
proceeds, net of $4 million debt issue costs from the offering, were used to
repay borrowings under the Credit Agreement or for general corporate purposes,
including working capital. The 8% Senior Secured Notes mature on 85




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) December 15,
2009 and may be redeemed in whole at any time or in part from time to time, on
and after December 15, 2006, at the specified redemption prices set forth under
the related indenture. In February 2004, RPP LLC and RPP Capital registered an identical series
of 8% Senior Secured Notes Due 2009 with the Securities and Exchange Commission
and subsequently completed an offer to exchange all of the unregistered notes
for registered notes. The Company and the other Borrowers executed the Fifth Amendment to the
Credit Agreement with an effective date as of December 22, 2003 (the Credit
Agreement Amendment). The Fifth Amendment, among other things, (a) permitted
the Company to issue the Notes so long as the net proceeds from the offering of
the Notes were used to repay all of the remaining term loans outstanding under
the credit agreement, (b) eliminated the adjusted bank leverage ratio covenant,
and (c) imposed an asset coverage test which will limit borrowings and letters
of credit under our revolving credit facility to the sum (the Borrowing Base)
of 65% of the Companys U. S. inventory, 85% of the net book value of the
Companys U. 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 to report on a monthly basis. If the utilization under the revolving
credit facility exceeds the most recently reported Borrowing Base, the Company
must repay outstanding borrowings and/or cash collateralize letters of credit
in the amount equal to such excess. Substantially all of our current and
future assets are pledged as security under the Companys credit agreement. On November 14, 2000, RPP Inc., RPP LLC, RPP Capital and Resolution
Nederland B.V. entered into a $600 million credit agreement (the Credit
Agreement) with a syndicate of financial institutions. The Credit Agreement
provides for a six-year $75 million revolving credit facility, the euro
equivalent of which is also available, to be used for, among other things,
working capital and general corporate purposes of the Company and its
subsidiaries, including without limitation, certain permitted acquisitions. The
revolving credit facility also includes a sub-limit for letters of credit in an
amount not to exceed $50 million. At December 31, 2003, there were no amounts
outstanding under the revolving credit facility and $8 million in letters of
credit. At December 31, 2003, we had additional borrowing capacity under the
Credit Agreement of $67 million. During 2003, we borrowed $236 million and made
payments of $473 million under the credit agreement. As of December 31, 2003,
we were in compliance with the borrowing base limit of the Credit Agreement. Borrowings that are maintained as dollar term loans or loans under the
revolving credit facility denominated in dollars, accrue interest at either
Citibanks prime lending base rate or the eurodollar rate plus, in each case, a
margin ranging from 1.25% to 3.00%, which margin is dependent upon our
leverage, as determined on a quarterly basis. Interest rates on loans under the
revolving credit facility denominated in euros, accrue interest at the euro
rate plus associated costs plus, in each case, a margin ranging from 2.25% to
3.00% depending on our leverage, as determined on a quarterly basis. Interest period elections generally range from one to six months, or to
the extent available, nine or twelve months for eurodollar and euro rate loans.
With respect to eurodollar loans and euro rate loans, interest is payable at
the end of each interest period or, for interest periods longer than three
months, at least every three months. With respect to base rate loans under the credit agreement, interest is
payable quarterly on the last business day of each fiscal quarter. Calculation
of all interest is based on the actual number of days elapsed in a year
comprising 360 days. For each drawn letter of credit, we are required to pay a
per annum fee equal to the spread over the eurodollar rate for the revolving
credit facility, a fronting fee equal to 1/4 of 1% on the aggregate daily
stated amount of each letter of credit, plus administrative charges.
Additionally, we will pay a commitment fee ranging from 0.375% to 0.500% per
annum, depending on our leverage ratio, which commitment fee is payable
quarterly on the unused available portion of the revolving credit facility. The loans incurred under the Credit Agreement by RPP LLC and RPP Capital
are guaranteed by RPP Inc. and all of our existing and future direct and
indirect wholly-owned domestic subsidiaries. The U.S. loans under the Credit
Agreement are secured by a perfected security interest in substantially all of
our properties and assets and our direct and indirect wholly-owned domestic
restricted subsidiaries, now owned or acquired later, including a pledge 86




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) of all
capital stock and notes owned by us and our domestic restricted subsidiaries;
provided that no more than 65% of the stock of our foreign subsidiaries is
required to be pledged in respect of such loans. In addition, loans incurred
under the Credit Agreement by Resolution Europe B.V. (f/k/a Resolution
Nederland B.V.), a subsidiary of RPP B.V., are guaranteed by RPP Inc., us and
all of our existing and future direct and indirect 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
Nederland B.V.) and the Non-U.S. Guarantors are secured by a perfected security
interest in the assets described above and in certain material property and
assets owned by Resolution Europe B.V. (f/k/a Resolution Nederland B.V.) and
the Non-U.S. Guarantors. During 2002, we entered into unsecured trade notes, totaling $3.9 million,
that bear interest ranging from 6.75 to 8.18 percent, payable over thirty-six
months with one of our vendors for the purchase of computer equipment and
related services. As of December 31, 2003 and 2002, unsecured trade notes
totalling $2 million and $3 million, respectively, were outstanding. Maturities of long-term debt for the years ending December 31, are as
follows (in millions of U. S. dollars): 2004
    
    $
    12005
    
    
    12006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    668$
    670
 Our high level of debt may preclude us from borrowing any more funds
beyond those available under the revolving credit agreement. As a result of
our high level of debt, we will have to continue 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 operations,
anticipated economic recovery and cost reductions, management believes that our
cash flow from operations, together with existing cash and cash equivalents on
hand, net proceeds from the issuances of the notes, future borrowings under our
revolving credit facility and sales of assets, if necessary, will be sufficient
to fund our working capital needs and expenditures for property, plant and
equipment and debt service obligations in the foreseeable future, although no
assurance can be given in this regard. 11. Obligations Under Capital Leases The Companys capital leases range from three to seven year terms for
equipment at an aggregate annual rental of $1 million. The equipment has been
capitalized at its fair market value of $3.5 million, which approximates the
present value of the minimum lease payments. The current maturity amounts are
included in other payables and accruals of our Consolidated Balance Sheets. At
December 31, 2003 and 2002, total amounts outstanding under capital leases
totaled $2 and $3 million, respectively. Future minimum payments under capital leases with initial or remaining
terms of one year or more are $1 million for each of the years 2004 and 2005. 12. Contingencies and Other Matters In the ordinary course of business, the Company is subject to various laws
and regulations and, from time to time, litigation. In the opinion of
management, compliance with existing laws and regulations will not materially
affect the financial position or results of operations of the Company.
Management is not aware of any pending actions against the Company. 87




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) As mentioned above, our business is subject to various federal, state,
local and foreign laws and regulations which govern environmental health and
safety (EHS) related matters. Compliance with these laws and regulations
requires substantial continuing financial commitments and planning. Moreover,
the laws and regulations directly affect how we operate our business. The
financial commitments consist of environmental costs for normal day to day
operations, voluntary and mandatory matters as well as remediation issues. We accrue for environmental liabilities when the liability is probable and
the costs are reasonably estimable. As of December 31, 2003 and 2002, we have
assessed that an environmental remediation liability accrual is not needed
based on the current available facts, present laws and regulations, and current
technology. This assessment is based on the lack of evidence of any claims or
possible claims against us from the closing date of the recapitalization. For
environmental conditions that existed prior to the closing date, our
environmental remediation liability is influenced by agreements whereby Shell
generally will indemnify us for environmental damages associated with
environmental conditions that occurred or existed before the closing date of
the recapitalization, subject to certain limitations. In addition, management
believes that we maintain adequate insurance coverage, subject to deductibles,
for environmental remediation activities. As mentioned above, the Company has substantial continuing financial
commitments for compliance of environmental matters. During 2003 and 2002,
the Company expended a total of $6 million and $10 million in related mandatory
EHS capital projects not reimbursed by Shell. Also during 2003 and 2002, the
Company expensed zero and approximately $1 million of mandatory EHS costs not
reimbursed by Shell. We expect a similar operating environmental commitment to
continue in future years; however, the level of financial commitment may
increase if the environmental laws and regulations become more stringent.
During 2002, we received total proceeds of $22 million, in connection with
indemnified environmental projects pursuant to the environmental agreements as
amended and we applied $17 million ($16 million for capital projects and $1
million for expense projects) that reduced capital expenditures and operating
expenses. This resulted in a Deferred Credit balance of $5 million on the
Consolidated Balance Sheets as of December 31, 2002. The remaining Deferred
Credit balance was applied to capital expenditures in 2003. 13. Leases and Other Commitments The Company entered into contractual agreements with Shell and other third
parties for the supply of site services, utilities, materials and facilities
(SUMF services) and for operation and maintenance services (OMS services)
necessary to operate the Company on a stand-alone basis. The duration of the
contracts range from one year, or less, to 20 years, depending on the nature of
services. Such contracts may be terminated by either party under certain
conditions as provided for in the respective agreements; generally, 90 days
notice is required for short-term contracts and three years notice is required
for longer-term contracts (generally in excess of five years). Contractual
pricing generally includes a fixed and variable component. In addition, the Company entered into contractual agreements with Shell
and other third parties for the purchase of feedstocks. The terms of the
agreements vary from three to ten years, extendable at the Companys request
and cancelable by either party as provided for in the respective agreements.
Feedstock prices are based on market prices less negotiated volume discounts or
cost input formulas. See Note 3 for more details on our commitments
surrounding certain agreements with Shell. We rely on long-term supply agreements with Shell and other key suppliers
for most of our raw material supply. The loss of a key source of supply or a
delay in shipments could have an adverse effect on our business. Should any of
our suppliers fail to deliver or should any of our key long-term supply
contracts be canceled, we would be forced to purchase raw materials in the open
market, and no assurances can be given that we would be able to make these
purchases or make them at prices that would allow us to remain competitive.
Some of our raw
materials are provided to us by one supplier and we could incur
significant time and expense if we had to replace the supplier. In addition,
several of our feedstocks at various facilities are transported through a
pipeline from one 88




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) supplier. If we were unable to receive these feedstocks
through these pipeline arrangements, we may not be able to obtain them from
other suppliers at competitive prices or in a timely manner. Future minimum payments under non-cancelable operating leases with initial
or remaining terms of one year or more consisted of the following at December
31, 2003 (in millions of U. S. dollars): 2004
    
    $
    62005
    
    
    62006
    
    
    62007
    
    
    42008 and thereafter
    
    
    12Total minimum lease payments
    
    $
    34
 Rental expense under operating leases was $6, $6 and $5 in 2003, 2002 and
2001, respectively. 89




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) 14. Segment and Related Information Using guidelines set forth in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, the Company has identified three
reportable segments based on geographic information: (i) U. S., (ii) Europe
and Africa, and (iii) Asia Pacific and Middle East. Management operates its
business through geographic regions and is not organized nor does it prepare
discreet financial information by product line within the geographic regions. Selected financial data by geographic region are presented below (in
millions of U. S. dollars): AsiaPacificEurope
    
    andand
    
    MiddleU. S.
    
    Africa
    
    East
    
    Elims
    
    TotalAs of and for the year ended December 31, 2003:Revenues from external customers
    
    $
    349
    
    
    $
    430
    
    
    $
    3
    
    
    $
    
    
    
    $
    782Inter-segment revenues
    
    
    9
    
    
    
    10
    
    
    
    
    
    
    
    (19
    )
    
    
    Depreciation and amortization expense
    
    
    32
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    46Total costs
    
    
    335
    
    
    
    449
    
    
    
    2
    
    
    
    
    
    
    
    786Operating income (loss)
    
    
    14
    
    
    
    (19
    )
    
    
    1
    
    
    
    
    
    
    
    (4
    )Total assets
    
    
    488
    
    
    
    367
    
    
    
    1
    
    
    
    
    
    
    
    856Expenditures for long-lived assets
    
    
    12
    
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    18As of and for the year ended December 31, 2002:Revenues from external customers
    
    $
    367
    
    
    $
    364
    
    
    $
    9
    
    
    $
    
    
    
    $
    740Inter-segment revenues
    
    
    19
    
    
    
    142
    
    
    
    4
    
    
    
    (165
    )
    
    
    Depreciation and amortization expense
    
    
    24
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    36Special charges
    
    
    5
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    8Total costs
    
    
    299
    
    
    
    381
    
    
    
    9
    
    
    
    
    
    
    
    689Operating income (loss)
    
    
    68
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    51Total assets
    
    
    462
    
    
    
    329
    
    
    
    2
    
    
    
    
    
    
    
    793Equity investments in and advances to unconsolidated subsidiaries.
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Expenditures for long-lived assets
    
    
    39
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    48As of and for the year ended December 31, 2001:Revenues from external customers
    
    $
    444
    
    
    $
    399
    
    
    $
    20
    
    
    $
    
    
    
    $
    863Inter-segment revenues
    
    
    29
    
    
    
    274
    
    
    
    3
    
    
    
    (306
    )
    
    
    Depreciation and amortization expense
    
    
    23
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    34Special charges
    
    
    10
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    15Total costs
    
    
    355
    
    
    
    394
    
    
    
    21
    
    
    
    
    
    
    
    770Operating income (loss)
    
    
    89
    
    
    
    5
    
    
    
    (1
    )
    
    
    
    
    
    
    93Total assets
    
    
    423
    
    
    
    305
    
    
    
    6
    
    
    
    
    
    
    
    734Equity investments in and advances to unconsolidated subsidiaries
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Expenditures for long-lived assets
    
    
    11
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    24
 90




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) Revenues from external customers for each product group are presented below (in
millions of U. S. dollars): December 31,2003
    
    2002
    
    2001Resins
    
    $
    499
    
    
    $
    488
    
    
    $
    550BPA
    
    
    129
    
    
    
    125
    
    
    
    183Versatics
    
    
    116
    
    
    
    91
    
    
    
    87ECH
    
    
    34
    
    
    
    32
    
    
    
    39Other
    
    
    4
    
    
    
    4
    
    
    
    4Total Revenues
    
    $
    782
    
    
    $
    740
    
    
    $
    863
 Selected information on a per domicile country basis is presented below
(in millions of U. S. dollars): December 31,2003
    
    2002
    
    2001Revenues:U.S.
    
    $
    358
    
    
    $
    386
    
    
    $
    474Netherlands
    
    
    440
    
    
    
    371
    
    
    
    390Germany
    
    
    
    
    
    
    60
    
    
    
    112Other(1)
    
    
    3
    
    
    
    88
    
    
    
    193Inter-company
    
    
    (19
    )
    
    
    (165
    )
    
    
    (306
    )Total
    
    $
    782
    
    
    $
    740
    
    
    $
    863
 December 31,2003
    
    2002
    
    2001Net Long-Lived Assets:(2)U.S.
    
    $
    259
    
    
    $
    270
    
    
    $
    233Netherlands
    
    
    202
    
    
    
    186
    
    
    
    156Germany
    
    
    5
    
    
    
    5
    
    
    
    4Other(1)
    
    
    9
    
    
    
    10
    
    
    
    10Inter-company
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    475
    
    
    $
    471
    
    
    $
    403
 (1) Other consists of other foreign countries that individually account for
less than 10% of the total revenues. (2) Net long-lived assets include property, plant and equipment, intangibles
and investment in equity affiliates or investments at costs. Sales revenues are attributed to geographic regions based on the location
of the manufacturing facility and/or marketing company, and are not based on
location of customer. Inter-segment amounts represent sales transactions
within and between geographic regions. Bayer AG accounted for approximately 9% in 2001. Bayer AG developed its
own internal capability for producing BPA and has been reducing its purchases
of BPA from us. Sales of BPA to Bayer AG have ceased as the contract with
Bayer AG expired on December 31, 2002. 15. Restructuring Charges The Company accrued a charge for employee severance and other exit costs
of $6 million in the fourth quarter of 2002 related to a cost reduction program
implemented in response to a significant decline in profitability. The global
reduction in work force affected approximately 90 employees or 9% of the global
work force. Other exit costs relate to a modification of the OMS agreement
previously entered into with Shell covering 91




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) employee termination expenses to be
absorbed by the Company. As of December 31, 2003, all the employees related to
the reduction in work force have been terminated. The following is a reconciliation of the severance liability (in millions
of U. S. dollars): December 31, 2002
    
    Additions
    
    Deduction
    
    December 31, 2003Severance
    
    $
    6
    
    
    
    
    
    
    $
    6
    
    
    $
    
 16. Special Charges 2002 Transition Costs Transition activities for 2002 primarily consisted of $8 million of
non-recurring transition expenses related to the migration from the
predecessors IT systems and the implementation of an accounting function that
were previously outsourced. 2001 Transition Costs For the year ended December 31, 2001, the Company expensed certain costs
totaling $15 million for the year. These costs were primarily transitional
costs that are non-recurring in nature that relate to $3 million of severance
costs and $12 million of exit/relocation costs. The Company previously
announced a restructuring program which covers the relocation or termination of
employees, closing of foreign offices, and cancellation of Service Level
Agreements and certain other agreements in place prior to the
recapitalization. As a result of the restructuring program, 35 employees were
terminated in 2001 and seven foreign locations were closed in 2002. The Company
completed the restructuring program by the end of 2002. Also included in the
special charges is approximately $1 million related to environmental expenses
that relate to pre-acquisition period. The following is a reconciliation of the exit/relocation and severance
liability (in millions of U. S. dollars): December 31, 2001
    
    Additions
    
    Deductions
    
    December 31, 2002Transition expenses
    
    $
    
    
    
    $
    8
    
    
    $
    8
    
    
    $
    Severance
    
    $
    3
    
    
    $
    
    
    
    $
    3
    
    
    $
    $
    3
    
    
    $
    8
    
    
    $
    11
    
    
    $
    
 17. Fair Value of Financial Instruments The Company does not hold or issue financial instruments for trading
purposes. The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale or
settlement have not been taken into consideration. Management believes that the carrying amounts for cash and cash
equivalents, accounts receivable and current liabilities are reasonable
estimates of their fair values, principally due to the short-term maturities of
these instruments. The estimated fair value of the Senior Subordinated Notes
is based on the most recently available trading prices. Management believes
the carrying amounts for the Term Loans are reasonable estimates of fair
values, principally due to their floating interest rates. 92




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) The estimated fair values of financial instruments are as follows (in
millions of U. S. dollars): 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmounts
    
    Value
    
    Amounts
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    49
    
    
    $
    49
    
    
    $
    4
    
    
    $
    4Accounts receivable, net
    
    
    107
    
    
    
    107
    
    
    
    105
    
    
    
    105Financial liabilities:Current liabilities
    
    
    141
    
    
    
    141
    
    
    
    182
    
    
    
    182Long-term debtprincipal:13 1/2 % Senior Subordinated Notes.
    
    
    328
    
    
    
    290
    
    
    
    328
    
    
    
    3469 1/2 % Senior Second Secured Notes
    
    
    200
    
    
    
    201
    
    
    
    
    
    
    
    8 % Senior Secured Notes
    
    
    140
    
    
    
    144
    
    
    
    
    
    
    
    Term loan A
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    69Term loan B
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    155Revolver loans
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Other debt
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3
 18. Stock Option Plan RPP Inc. has adopted stock option plans pursuant to which options with
respect to a total of 69,000 shares of RPP Inc.s common stock are available
for grant to employees of, consultants to, or directors of RPP Inc. or RRP LLC.
The board of directors of RPP Inc. or a compensation committee appointed from
time to time by the board of directors administers the option plan. The right
to grant options under the option plan will expire on the tenth anniversary of
the closing date of the recapitalization. Options granted under the plan are
or will be either nonqualified or incentive stock options. Options are granted in amounts and at such times and to such eligible
persons as determined by the board of directors of RPP Inc. or the compensation
committee. Options will vest in accordance with a schedule as determined by the
Board of directors of RPP Inc. or the compensation committee and this
vesting schedule will be outlined in the optionees option agreement.
We expect options to vest as follows:  a)
    
    One-third of the options will be time vesting options and will vest
in equal increments over five years, ending on November 14, 2005.
However, upon termination of a grantees employment without cause or
for good reason within six months following the sale of RPP Inc. for
cash or any transaction in which RPP Holdings sells at least fifty
percent of its shares of common stock of RPP Inc. acquired by it, all
of the time vesting options allocated to such terminated
employee shall vest immediately on such termination.b)
    
    Two-thirds of the options will be performance options and will vest
on November 14, 2008. The amount vested will be based on the operating
results achieved by the business. However, vesting of all or a portion
of the performance options will be accelerated upon the consummation of
a sale of RPP Inc. for cash, or any transaction in which Apollo
sells at least fifty percent of shares of common stock of
RPP Inc. acquired by it. The vesting of options will occur only during an employees, consultants,
or directors term of relationship with RPP Inc. All unvested options will be
forfeited upon a termination of relationship. 93




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) The board of directors of RPP Inc. or the compensation committee will
determine the exercise price for the options at $100 or based on reasonable and
customary methods for determining fair values when there is no established
trading market. The initial exercise price was the same as the per share price
being paid by RPP Holdings in the recapitalization. The options will expire on
the thirtieth day immediately following the eighth anniversary of issuance. Upon
a termination of relationship, RPP Inc. and RPP Holdings, the parent
of RPPI, have certain
repurchase rights. Upon a sale of RPP Inc. 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, RPP Inc. also has certain
repurchase rights. The repurchase rights generally include buying the vested
options from the grantee within a specified period of time at the fair value
calculated in-house using reasonable and customary methods for determining
market values when there is no established trading market. A summary of the Option Plans as of December 31, 2003, and changes during
the years ended December 31, 2003 and 2002 are presented below: Number of shares
    
    Weighted averagecovered by options
    
    exercise priceOutstanding at January 1, 2002
    
    
    59,172
    
    
    $
    128Granted
    
    
    1,820
    
    
    $
    169Exercised
    
    
    
    
    
    
    Cancelled
    
    
    1,320
    
    
    $
    202Outstanding at December 31, 2002
    
    
    59,672
    
    
    $
    127Granted
    
    
    1,420
    
    
    $
    100Exercised
    
    
    8
    
    
    $
    100Cancelled
    
    
    5,206
    
    
    $
    135Outstanding at December 31, 2003
    
    
    55,878
    
    
    $
    125Exercisable at December 31, 2002
    
    
    5,625
    
    
    $
    139Exercisable at December 31, 2003
    
    
    7,917
    
    
    $
    214
 19. Supplemental Cash Flow Information The Company translates its foreign subsidiaries financial statements for
consolidation in accordance with SFAS 52 (Foreign Currency Translation), using
the current rate method. As a result, the statement of cash flows is affected
by the non-cash foreign currency translation adjustments that are pervasive in
the Consolidated Balance Sheets. The statement of cash flows has been adjusted
to exclude the non-cash effects of the foreign currency translation
adjustments. 20. Other Revenue In 2002 and 2001, the Company entered into BPA technology license
agreements wherein the Company granted non-exclusive licenses to third parties
to use RPP LLCs technology to construct, operate and maintain and/or repair
one licensed plant for the manufacture of BPA. Other than 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
licensed plant. Revenues from the sale of the BPA technology license and
related support services are recognized using the percentage of completion
method. In 2003 and 2002, the Company, recognized $1 million and $2 million
as Other Revenues related to the sale of the BPA technology licenses. In May 2002, the Company entered into an exclusive and irrevocable option
with a third party to execute a long-term supply contract, wherein the Company
received $4.2 million. In June 2002, the Company executed a 94




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001(In millions of U. S. Dollars) calcium chloride
supply agreement with the third party for fifteen years. Revenues from the
sale of the option will be recognized on a straight line basis over fifteen
years consistent with duration of the supply agreement. In 2003 and 2002,
the Company, recognized an insignificant amount as Other Revenues related to
the sale of the option. 21. Deferred Revenue Deferred revenue includes the unamortized balances related to the sale of
the BPA technology licenses and the sale of the exclusive and irrevocable
option to execute a long-term supply contract. As of December 31, 2003 and
2002, the balance included in Deferred Revenue for the sale of BPA technology
licenses and the sale of the option was $1 million and $4 million,
respectively. 22. Capital Contributions and Constructive Distribution In connection with the recapitalization transaction described in Note 1, a
working capital settlement in the amount of $16 million was received in 2001.
Of the $16 million, $15 million was related to a purchase price adjustment for
a working capital true up at date of acquisition in accordance with the
purchase agreement. The acquisition has been accounted for as a leveraged
recapitalization and the excess of the purchase price over the net carrying
value of the assets acquired was recorded in Owners Equity (Deficit). In
addition, included in the purchase price adjustments is $4 million that
represents additional amounts recorded in connection with the January 2001
purchase of the French subsidiary. Also, during 2002 and 2001, RPPI made a capital contribution of
approximately $1 million to the Company relating to reimbursements of certain
pension costs for each respective year under the Master Sales Agreement dated
November 14, 2000 and related ancillary agreements. During 2003, the Company
paid a constructive cash distribution of $4 million to Shell, of
which $2 million was previously accrued, relating to the same reimbursements of
certain pension costs in accordance with the Master Sales Agreement dated
November 14, 2000 and related ancillary agreements. 95




---



##### Table of Contents



RESOLUTION PERFORMANCE PRODUCTS LLC SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions of U. S. Dollars) AdditionsBalance at
    
    Charges to
    
    Charged
    
    
    
    
    
    Balance atJanuary 1,
    
    costs and
    
    to other
    
    
    
    
    
    December 31,Description
    
    2003
    
    expenses
    
    accounts
    
    Deductions
    
    2003Allowance for doubtful accounts
    
    $
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    $
    3Allowance for inventory obsolescence
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1Deferred tax asset valuation allowance
    
    $
    1
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    $
    32
 AdditionsBalance at
    
    Charges to
    
    Charged
    
    
    
    
    
    Balance atJanuary 1,
    
    costs and
    
    to other
    
    
    
    
    
    December 31,Description
    
    2002
    
    expenses
    
    accounts
    
    Deductions
    
    2002Allowance for doubtful accounts
    
    $
    3
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    $
    2Allowance for inventory obsolescence
    
    $
    3
    
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    $
    1Deferred tax asset valuation allowance
    
    $
    0
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    $
    1
 AdditionsBalance at
    
    Charges to
    
    Charged
    
    
    
    
    
    Balance atJanuary 1,
    
    costs and
    
    to other
    
    
    
    
    
    December 31,Description
    
    2001
    
    expenses
    
    accounts
    
    Deductions
    
    2001Allowance for doubtful accounts
    
    $
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3Allowance for inventory obsolescence
    
    $
    7
    
    
    
    1
    
    
    
    
    
    
    
    5
    
    
    $
    3
 96




---



##### Table of Contents








EXHIBIT INDEX

Exhibits
    
    Description of Exhibits31.1
    
    CFO Section 302 certification (filed herewith)31.2
    
    CEO Section 302 certification (filed herewith)32.1
    
    CEO and CFO Section 906 certification (filed herewith)