RPP CAPITAL CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______to______

Commission File Number 333-57170

RESOLUTION PERFORMANCE PRODUCTS LLC
(Exact name of registrant as specified in its 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 its 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)

N/A
(Former name, former address and former fiscal year, if changed
since last report)

Indicate by check mark whether the registrants (1) have 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 Registrants were required to file such reports), and (2) have
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---

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

At July 31, 2003, 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.

TABLE OF CONTENTS

Part I. Financial Information
Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 (unaudited) 3

Consolidated Statements of Income for the three and six month periods ended June 30,
2003 and 2002 (unaudited) 4

Consolidated Statement of Owner's Deficit for the six month period ended June 30,
2003 (unaudited) 5

Consolidated Statements of Cash Flows for the six month periods ended June 30, 2003
and 2002 (unaudited) 6

Notes to Consolidated Financial Statements (unaudited) 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15

Item 3. Quantitative and Qualitative Disclosures About Market Risk 26

Item 4. Controls and Procedures 26

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K 28

Signatures 29

2

ITEM 1. FINANCIAL STATEMENTS

RESOLUTION PERFORMANCE PRODUCTS LLC

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN MILLIONS OF U. S. DOLLARS, EXCEPT FOR UNITS)

See accompanying notes to consolidated financial statements.

3

RESOLUTION PERFORMANCE PRODUCTS LLC

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS OF U.S. DOLLARS)

See accompanying notes to consolidated financial statements.

4

RESOLUTION PERFORMANCE PRODUCTS LLC

CONSOLIDATED STATEMENT OF OWNER'S DEFICIT (UNAUDITED)
(IN MILLION OF U. S. DOLLARS)

- ------------
(a) Accumulated Other Comprehensive Loss is made up of the following components:
$52 million net loss for currency translation and $1 million net gain for
interest rate swap.

See accompanying notes to consolidated financial statements.

5

RESOLUTION PERFORMANCE PRODUCTS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS OF U. S. DOLLARS)

SIX MONTHS ENDED
JUNE 30,
----------------
2003 2002
------ ------
Cash flows (used for) provided by operating activities:
Net income (loss) .......................................... $ (22) $ 9
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................ 23 17
Amortization of deferred finance costs ................... 8 1
Equity earnings in affiliates ............................ (1) (1)
Deferred income taxes .................................... (11) 7
Pensions and other retirement plans obligation ........... 2 (4)
Deferred revenue ......................................... -- 4
Changes in operating assets and liabilities:
Receivables, net ......................................... (7) (12)
Due from related parties ................................. -- 1
Prepaid assets ........................................... 6 5
Inventories .............................................. (14) 2
Payables and accruals .................................... 13 (4)
Taxes receivable ......................................... 3 12
Taxes payable ............................................ (1) (3)
Deferred credit .......................................... (5) --
----- -----
Net cash (used for) provided by
operating activities ................................. (6) 34
----- -----

Cash flows used for investing activities:
Capital expenditures ..................................... (9) (23)
Distributions from equity affiliates ..................... -- 1
----- -----
Net cash used for investing activities................ (9) (22)
----- -----

Cash flows provided by (used for) financing activities:
Repayments of capital lease obligation ................... (1) --
Increase in deferred finance costs ....................... (9) (1)
Proceeds from long-term debt ............................. 415 33
Repayments of long-term debt ............................. (363) (49)
----- -----
Net cash provided by (used for)
financing activities ................................. 42 (17)
----- -----
Net increase (decrease) in cash and cash equivalents ....... 27 (5)
Cash and cash equivalents at beginning of period ........... 4 6
----- -----
Cash and cash equivalents at end of period ................. $ 31 $ 1
===== =====

Supplemental cash flow information on non cash transactions:
Capital lease obligation incurred .......................... $ -- $ 2

Trade notes payable incurred ............................... $ -- $ 3

6

RESOLUTION PERFORMANCE PRODUCTS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

1. ORGANIZATION, FORMATION AND BASIS OF PRESENTATION

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 finance subsidiary of RPP LLC that was formed
in October 2000 to co-issue the 13-1/2% Senior Subordinated Notes jointly and
severally with RPP LLC. RPP CC has nominal assets and no operations.

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.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. You should read these interim consolidated
financial statements in conjunction with our consolidated financial statements
and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2002. Certain amounts from the prior period have been reclassified
to conform to the current period presentation.

2. NEW ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issued SFAS No.149,"Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No.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 No.133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No.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 is not expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.

In May 2003, SFAS No. 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 is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.

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3. INVENTORIES OF PRODUCTS

Product inventories are valued at the lower of cost or net realizable
value, cost being determined using a FIFO (First In First Out) method. Effective
October 2002, the Company changed its inventory accounting policy in Europe from
the weighted-average method to FIFO. The change was made for consistency with
the inventory accounting policy in the United States and because the FIFO method
provides for a better matching of revenues and expenses. The effect of this
change was not material due to the Company's fairly rapid inventory turnover.
Historically, the Company's inventory turnover has averaged approximately sixty
to seventy five days.

Total inventories at June 30, 2003 and December 31, 2002 were comprised
of the following (in millions of U. S. dollars):

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at June 30, 2003 and December 31, 2002
consisted primarily of manufacturing assets as follows (in millions of U. S.
dollars):

- --------
Property, plant and equipment include capital leased assets with a net book
value of $3 million. Substantially all current and future assets are pledged as
security under the Company's credit agreement. Expenditures for property, plant
and equipment totaled $4 million for the quarter ending June 30, 2003 and $9
million for the six months ending June 30, 2003.

5. INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 141 "Business Combinations" and Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets". These
accounting pronouncements require that we prospectively cease amortization of
all intangible assets having indefinite useful economic lives. Such assets are
not to be amortized until their lives are determined to be finite, however, a
recognized intangible asset with an indefinite useful life should be tested for
impairment annually or on an interim basis if events or circumstances indicate
that the fair value of the asset has decreased below its carrying value.

8

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

Aggregate Amortization Expense:
For the six months ended June 30, 2003................................. $8.0

Estimated Amortization Expense:
For the period July 1, 2003 through December 31, 2003.................. $1.0
For the year ended December 31, 2004................................... $3.0
For the year ended December 31, 2005................................... $3.0
For the year ended December 31, 2006................................... $3.0
For the year ended December 31, 2007................................... $2.0
--------
The increase in amortization expense for 2003 includes a $6 million
write-off of deferred financing costs related to the prepayments,
refinancing and credit agreement amendments.

6. LONG-TERM DEBT

Long-term debt at June 30, 2003 and December 31, 2002 consisted of the
following (in millions of U. S. dollars):

During the six months ended June 30, 2003, we borrowed $415 million and
made payments of $363 million, which includes a mandatory principal payment of
$6 million as a result of the excess cash flow calculation under the credit
agreement. Other long-term debt consists of trade notes payable totaling $2
million that bear interest rates ranging from 6.75 percent to 8.18 percent and
are unsecured and payable over thirty-six months with one of our vendors for the
purchase of computer equipment and related services. Annual payments will
average approximately $1 million.

On April 9, 2003, the Company completed a private offering, together
with RPP CC, its wholly-owned subsidiary, of $175 million aggregate principal
amount of 9 1/2% Senior Second Secured Notes Due 2010 (the " Original Notes").
Interest will be payable semi-annually in cash on April 15 and October 15,
beginning October 15,

9

2003. The proceeds, net of $5 million estimated debt issue costs, from the
offering of the Original Notes were used to repay borrowings under the Credit
Agreement among the Company, RPP CC, RPPI, Resolution Europe B.V. and, together
with the Company, RPP CC and RPP Inc., (the "Borrowers") and the various
lenders party thereto, dated as of November 14, 2000 (as amended by the First
Amendment thereto, dated as of November 5, 2001, the Second Amendment thereto,
dated as of June 25, 2002, the Third Amendment thereto, dated as of December 2,
2002, and the Fourth Amendment thereto, dated as of April 1, 2003, the "Credit
Agreement") and for general corporate purposes, including working capital.

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 CC registered an identical series of
$175 million 9 1/2% Senior 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 CC, 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 RPP's
existing indenture. The net proceeds, net of $2 million estimated debt issue
costs from the offering of the Additional Notes, were used for general corporate
purposes, including working capital.

In July 2003, the Company and RPP CC (the "Issuers") 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 ("Exchange Offer") all of the $200 million unregistered notes for
registered notes. The terms of the registered notes issued in the Exchange Offer
are substantially identical to the unregistered notes, except that the
registered notes are freely tradable by persons other than affiliates.

7. OBLIGATIONS UNDER CAPITAL LEASES

Capital leases at June 30, 2003 and December 31, 2002 consisted of the
following (in millions of U. S. dollars):

- ---------
The capital leases were recorded at the present value of the minimum lease
payments which also approximated the fair market value of the obligation.

8. INTEREST RATE CAP

Changes in the fair value of derivatives 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 does not enter into
derivative instruments for trading purposes; however, an interest rate cap
agreement was entered into during 2002 in

10

connection with the Company's credit facility. The Company uses the interest
rate cap to protect against interest rate fluctuation by limiting the exposure
to increases in the variable portion of interest rates in its credit facility.

As of June 30, 2003, the Company has an interest rate cap agreement for
the notional amount of $150 million. 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 $0.2 million and will be amortized over its term.

9. PENSION PLANS, OTHER POST RETIREMENT BENEFITS AND 401(k) PLAN

The funded pension and unfunded other retirement obligations had the
following activity (in millions of U. S. dollars):

- ----------
The Company accrues net periodic expense based on an estimate from its
consulting actuary. During the six months ended June 30, 2003, the Company
revised the average retirement age and average turn over rate to age 60 and 7
per cent from age 58 and 5 percent. This revision in assumptions is expected to
have approximately $0.4 million dollar decrease in obligations for the U. S. for
2003. Net periodic pension expense for 2003 is trending to be lower than the
2002 level as a result of recognizing the amortization of benefits related to
prior year plan amendments and changes in assumptions.

10. TRANSACTIONS WITH RELATED PARTIES AND CERTAIN OTHER PARTIES

During the six months ended June 30, 2003, we have continued our
numerous agreements with Royal Dutch/Shell Group of Companies, ("Shell"),
including the purchase of feedstock, site services, utilities, materials,
facilities and operator ship services. There were no material changes regarding
our commitments surrounding certain agreements with Shell during the period.
During the six months ended June 30, 2003, we have paid Shell $131 million and
Shell has paid the Company $9 million.

In the ordinary course of business, we dispute charges arising from our
numerous agreements with Shell as well as with other third party vendors. As
with other third party vendors, resolution of disputes may have a significant
impact on our financial results.

11. SEGMENT 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 and customer 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.

11

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

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. Intersegment amounts represent sales transactions
within and between geographic regions.

12

12. INCOME TAXES

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 basis of the assets and
liabilities. Deferred tax assets also include net operating losses ("NOL") that
will be carryforward or pending carried back. As of June 30, 2003, current
deferred income taxes include an estimated $6 million NOL pending the completion
and filing of the 2002 tax return in the Netherlands. Once the tax return is
completed and filed with the Netherlands tax authorities the $6 million will be
reclassified to Taxes Receivable on the Consolidated Balance Sheets.

Deferred taxes result from differences between the financial and tax
basis for 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 a tax benefit will not
be realized. As of June 30, 2003, the Company has recorded a valuation allowance
in the amount of $1 million related to the United Kingdom operations.

As of June 30, 2003, the Company has reclassified to Tax Receivable a
total of $6 million. The Tax Receivable is the result of a 2001 Netherlands net
operating loss being carried back. We expect to collect this Tax Receivable in
the next twelve months.

13. 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 employee termination
expenses to be absorbed by the Company. During the current quarter,
approximately 39 of the 90 employees have been terminated. The Company expects
to complete the restructuring program by the end of 2003. The following is a
reconciliation of the severance liability (in millions of U. S. dollars):

14. COMMITMENTS AND CONTINGENCIES

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 material pending actions against the Company.

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.

As of June 30, 2003, 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.

We have determined that an environmental remediation liability is not
needed since we are not aware 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

13

the transactions whereby Shell 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.

15. 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 sheet. The statement of cash flows has
been adjusted to exclude the non-cash effects of the foreign currency
translation adjustments.

16. 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. Along with 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 have been and will be recognized using the percentage of
completion method. For the three months ended and six months ended June 30,
2003, $0.06 million and $0.12 million, respectively, have been recognized 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 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 the duration of the supply agreement. For the three months
ended and six months ended June 30, 2003, $0.07 million and $0.14 million,
respectively, has been recognized as Other Revenues related to the sale of the
option.

17. 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 June 30, 2003 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.

18. DEFERRED CREDIT

Deferred credit includes the remaining balance of proceeds received
from Shell under the environmental agreement indemnity payments. The deferred
credit amounts are matched against specific environmental capital projects that
in effect will reduce the amount of gross environmental capital expenditures.
For the six months ended June 30, 2003, the Company spent $6 million related to
environmental capital expenditures and recovered $5 million from the
environmental indemnification balance included in Deferred Credit. As of June
30, 2003, there is no remaining balance to apply to future environmental capital
expenditures.

The following is a table of the deferred credit activity (in millions
of U. S. dollars):

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Management's Discussion and Analysis of Financial Condition and Results of
Operations and other items in this Quarterly Report on Form 10-Q contain
forward-looking statements and information that are based on management's
beliefs, as well as assumptions made by, and information currently available to,
management. When used in this document, the words "believe", "anticipate",
"estimate", "expect", "intend", and similar expressions are intended to identify
forward-looking statements. Although management believes that the expectations
reflected in these forward-looking statements are reasonable; it can give no
assurance that these expectations will prove to have been correct. These
statements are subject to certain risks; uncertainties and assumptions,
including those discussed under the heading "-Cautionary Statements for Forward
Looking Information" and elsewhere in this report. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated. The
Company undertakes no obligation to release publicly any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in conjunction with the corresponding
sections and the Company's audited consolidated and combined financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of operations, expressed as a
percentage of revenues.

15

- -------------------
(1) EBITDA represents income (loss) before income taxes, interest expense, net,
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 United States 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. For a reconciliation of EBITDA
to net income (loss), see page 22.

The following is a discussion of significant financial statement items
related to our consolidated statements of income. See note 11 of the
consolidated financial statements for segment information.

Revenues

Our revenues are 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. Revenues have historically been driven by volumes, market prices
and foreign currency fluctuations. Revenues also includes other income derived
primarily from royalty income and commission income.

Other revenues

Other revenue consist 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 and 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 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 an
input-cost formula. Because we are co-located with Shell at several of our
facilities, our transportation and logistics costs for certain raw materials
which Shell provides to us are also 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 represent 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.

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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.

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 new and
existing products or customer specific initiatives on new and existing products
and costs associated with projects that seek improvements in manufacturing
processes. Primarily all of our research and development expenses are generated
in one of our three research facilities. This includes costs associated with
health, safety and environmental projects.

Special Charges

Special charges consist of non-recurring type costs such as
transaction, transition and severance costs related to restructuring or cost
reduction programs.

Income from Equity Investment

Income from equity investment is related to unconsolidated equity
investment.

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
amortization of deferred financing costs and amortization of the premium and
discount for the senior subordinated notes issued in 2002, 2001 and 2000.

Income Tax Expense

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

As of June 30, 2003, we have accrued for income taxes, including both
deferred and current income tax provisions. Additionally, we made a Section
338(h)(10) election to allow our recapitalization to be treated as an
acquisition of assets for tax purposes. Accordingly, for tax purposes the basis
of our U.S. assets has been stepped-up to their fair market values, and we will
be able to depreciate our assets using higher basis than the historical amount.
This tax basis step-up may reduce cash payments for income taxes over the next
four years.

SECOND QUARTER OF 2003 AND 2002 COMPARED

Revenues

Revenues decreased by $8 million, or 4%, to $199 million compared to
the prior year quarter. The decrease in revenues is a result of decreased
average

17

volumes, partially offset by increased average prices. Overall average prices
increased by 12% from the prior year period, however, excluding the impact of a
weaker dollar on our Euro-related sales, overall average prices increased 3%.
Overall volumes decreased by 14% from the prior year period as a result of soft
demand related to the global recession. 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.

18

Purchases and Variable Product Costs

Purchases and variable product costs increased by $19 million, or 15%,
to $144 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.

Operating Expenses

Operating expenses decreased by $6 million, or 19%, to $26 million. The
decrease is principally related to the cost reduction program implemented by the
Company at the beginning of 2003, lower net periodic pension expense and lower
maintenance costs. Pension expense decreased due to the change in estimates in
connection with our postretirement medical benefit obligation and to a lesser
extent due a reduction of benefits in pension 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. Maintenance
costs declined but we expect such a decline will be temporary and that
maintenance costs will return to historic levels.

Selling, General and Administrative Expenses

Selling, general and administrative expenses are flat and totaled $12
million. Although flat, selling, general and administrative expenses had
significant activity which was primarily the result of the cost reduction
program implemented by the company 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 a reduction of benefits in pension 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.

Depreciation and Amortization

Depreciation and amortization increased by $4 million, or 50%, to $12
million. The increase is primarily attributable to an increase in depreciation
expense resulting from capital projects placed in service subsequent to the
prior year quarter such as the information technology project completed in
November 2002.

Research and Development Expenses

Research and development costs decreased by $1 million, or 20%, to $4
million. The decrease is primarily due to the cost reduction program implemented
by the Company at the beginning of 2003.

Special Charges

Special charges decreased by $2 million. The decrease is related to the
completion of the Company's transition activities in the last quarter of 2002.
Transition activities for the quarter ended June 30, 2002 consisted of
non-recurring transition expenses from our predecessor's IT and accounting
systems.

Operating Income

Operating income decreased by $22 million, or 96%, to $1 million. The
decrease was primarily due to decreased revenues, the increases in purchases and
variable product costs and depreciation and amortization expenses, partially
offset by decreased operating expenses, research and development and special
charges.

Interest expense, net

Interest expense, net increased by $5 million, or 28%, to a $23
million. The increase is due to a $6 million write-off of deferred financing
costs related to the refinancing and credit agreement amendments. The current
period does not include bank fees related to a credit agreement amendment in the
prior year period for approximately $1 million.

19

Income (loss) before Income Taxes

Income (loss) before taxes decreased by $27 million to a $21 million
loss. The decrease is due to the decrease in operating income and increased
interest expense, net.

Income Tax Expense (Benefit)

Income tax expense (benefit) decreased by $9 million to a $7 million
benefit in 2003. The decrease is primarily related to decreased taxable income
resulting from decreased operating income and increased interest expense, net.

Net Income (Loss)

Net income (loss) decreased by $18 million to $14 million net loss in
2003. The decrease was due to decreased income (loss) before income taxes,
partially offset by increased income tax benefit.

EBITDA

EBITDA decreased by $18 million, or 56%, to $14 million. The decrease
was primarily due to decreased revenues, the increases in purchases and variable
product costs, partially offset by decreased operating expenses, and research
and development expenses.

FIRST HALF OF 2003 AND 2002 COMPARED

Revenues

Revenues increased by $3 million, or 1%, to $397 million compared to
the prior year period. The increase in revenues is a result of increased average
prices, partially offset by lower volume. 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 period, however,
excluding the impact of a weaker dollar on our Euro-related sales, overall
average prices were flat. Overall volumes decreased by 8% from the prior year
period as a result of soft demand related to the global recession.

Purchases and Variable Product Costs

Purchases and variable product costs increased by $56 million, or 25%,
to $282 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.

Operating Expenses

Operating expenses decreased by $8 million, or 13%, to $54 million. The
decrease is principally related to the cost reduction program implemented by the
Company at the beginning of 2003, lower net periodic pension expense and lower
maintenance costs. Pension expense decreased due to the change in estimates in
connection with our postretirement medical benefit obligation and to a lesser
extent due a reduction of benefits in pension 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. Maintenance
costs declined but we expect such a decline will be temporary and that
maintenance costs will return to historic levels.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $2 million,
or 7%, to $26 million. The decrease is primarily a result of the cost reduction
program implemented by the company at the beginning of 2003 and lower

20

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 a reduction of benefits in pension. In addition, pension
expense also decreased due to a revision of the retirement age and turnover
percentage.

Depreciation and Amortization

Depreciation and amortization increased by $6 million, or 35%, to $23
million. The increase is primarily attributable to an increase in depreciation
expense resulting from capital projects placed in service subsequent to the
prior year period, such as the information technology project completed in
November 2002.

Research and Development Expenses

Research and development costs decreased by $2 million, or 20%, to $8
million. The decrease is primarily due to the cost reduction program implemented
by the Company at the beginning of 2003.

Special Charges

Special charges decreased by $3 million. The decrease is primarily
related to the completion of the Company's transition activities in the last
quarter of 2002. Transition activities for the six ended June 30, 2002 consisted
of non-recurring transition expenses from our predecessor's IT and accounting
systems.

Operating Income

Operating income decreased by $44 million, or 92%, to $4 million. The
decrease was primarily due to the increases in purchases and variable product
costs and depreciation and amortization expenses, partially offset by increased
revenues and decreased operating expenses, selling, general and administrative
expenses, research and development and special charges.

Interest expense, net

Interest expense, net increased by $5 million, or 15%, to a $39
million. The increase is due to a $6 million write-off of deferred financing
costs related to the prepayments, refinancing and credit agreement amendment.
The current period does not include bank fees related to a credit agreement
amendment in the prior year period for approximately $1 million.

Income (loss) before Income Taxes

Income (loss) before taxes decreased by $49 million to a $34 million
loss. The decrease is due to the decrease in operating income and increased
interest expense, net.

Income Tax Expense (Benefit)

Income tax expense (benefit) decreased by $18 million to a $12 million
benefit in 2003. The decrease is primarily related to decreased taxable income
resulting from decreased operating income and increased interest expense, net.

Net Income (Loss)

Net income (loss) decreased by $31 million to a $22 million net loss in
2003. The decrease was due to decreased income (loss) before income taxes,
partially offset by increased income tax benefit.

EBITDA

EBITDA decreased by $38 million, or 58%, to $28 million. The decrease
was primarily due to the

21

increases in purchases and variable product costs, partially offset by increased
revenues and decreased operating expenses, selling, general and administrative
expenses and research and development expenses

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 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).

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2003, our operating cash flow was
less than our working capital needs. However, we obtained additional cash from
the issuance of $200 million principal amount on the aggregate 9 1/2 % Senior
Second Secured Notes Due 2010 and made some prepayments on our credit facility,
resulting in an increase of cash and cash equivalents for the period. Our
working capital requirements principally include accounts receivable, product
and raw materials inventory, labor, equipment and debt service costs. We expect
to finance our operations in the future through net cash provided by operating
activities, existing cash and cash equivalents on hand, other refinancing
vehicles and borrowings under our revolving credit facility. As a result of our
high level of debt and the global recession, we will have to continue to
generate significant cash flows to meet our current debt service requirements.
For a discussion of factors affecting our operating cash flows, see "Outlook for
Remainder of 2003" below.

At June 30, 2003, we had $28 million outstanding under the Term Loan A,
$58 million outstanding under the Term Loan B, and $0 million outstanding under
the revolving credit facility. This resulted in a borrowing capacity of $56
million after considering $19 million related to letters of credit. In July
2003, $16 million of the $19 million related to letters of credit were released
resulting in borrowing capacity of $72 million. During the six months ended June
30, 2003, we borrowed $415 million and made payments of $363 million, which
includes a mandatory principal payment of $6 million as a result of the excess
cash flow calculation under the credit agreement. Also as of June 30, 2003, we
were in compliance with our financial covenant under the credit agreement.

On April 9, 2003, the Company completed a private offering, together
with RPP CC, its wholly-owned subsidiary, of $175 million aggregate principal
amount of 9 1/2% Senior Second Secured Notes Due 2010 (the " Original Notes").
Interest is payable semi-annually in cash on April 15 and October 15, beginning
October 15, 2003. The proceeds, net of $5 million estimated debt issue costs,
from the offering of the Original Notes were used to repay borrowings under the
Credit Agreement among the Company, RPP CC, RPPI, Resolution Europe B.V. and,
together with the Company, RPP CC and RPP Inc., (the "Borrowers") and the
various lenders party thereto, dated as of November 14, 2000 (as amended by the
First Amendment thereto, dated as of November 5, 2001, the Second Amendment
thereto, dated as of June 25, 2002, the Third Amendment thereto, dated as of
December 2, 2002, and the Fourth Amendment thereto, dated as of April 1, 2003,
the "Credit Agreement") and for general corporate purposes, including working
capital.

22

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 aggregate principal amount of the
Original Notes and the Additional Notes (as defined below) so long as they used
at least the first $135 million of net proceeds from the offering of such 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 CC registered an identical series of
9 1/2% Senior Secured Notes due 2010 in the amountof $175 million 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 CC, 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 RPP's
existing indenture. The net proceeds, net of $2 million estimated debt issue
costs from the offering of the Additional Notes were used for general corporate
purposes, including working capital.

In July 2003, the Company and RPP CC (the "Issuers") 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 ("Exchange Offer") all of the $200 million unregistered notes for
registered notes. The terms of the registered notes issued in the Exchange Offer
are substantially identical to the unregistered notes, except that the
registered notes are freely tradable by persons other than affiliates.

As of June 30, 2003, the Company has an interest rate cap agreement for
the notional amount of $150 million. 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 $0.2 million and will be amortized over its term.

For the six months ended June 30, 2003, we used net cash for operating
activities of $6 million, used cash in investing activities of $9 million and
provided cash from financing activities of $42 million. Investing activities
primarily consisted of expenditures for property, plant and equipment. Financing
activities primarily consisted of the $200 million of Original Notes and
Additional Notes (collectively, the "Notes") and the partial early
extinguishment of term loans A and B totaling $135 million. For the six months
ended June 30, 2002, we generated net cash provided by operating activities of
$34 million, used cash in investing activities of $22 million and used cash in
financing activities of $17 million.

Expenditures for property, plant and equipment totaled $9 million and
$23 million for the six months ending June 30, 2003 and 2002, respectively. The
$9 million spent in 2003 is made up of $14 million gross amount for operational
projects net of $5 million environmental indemnification recovery. Of the $23
million spent in 2002, $11 million was related to the information technology
project and $12 million for other capital expenditures.

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 2003 to be approximately
$17 to $18 million of which approximately $13 million has been budgeted for
maintenance capital expenditures.

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
and future borrowings under our revolving credit facility, if necessary,

23

will be sufficient to fund our working capital needs and expenditures, for
property, plant and equipment and debt service obligations, although no
assurance can be given in this regard.

OUTLOOK FOR REMAINDER OF 2003

While the global economy remains in a low growth mode and/or is
impacted by regional recessions, we expect our raw material costs to decline
somewhat in the latter half of the year due to an anticipated drop in oil prices
resulting from the resolution of the conflict in Iraq. Only modest increases in
demand are expected, coupled with fairly broad price increases in the remainder
of 2003. Once a global recovery takes hold, volumes are expected to rebound
along with a continued reduction in average raw material prices, which had
increased in the first half of the year due to political instability in the
Middle East, including the recent conflict in Iraq, and supply disruptions
elsewhere. There can be no assurances that (a) the global recovery will occur
during 2003, (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 reduce our margins.

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.

We accrue for environmental liabilities when the liability is probable
and the costs are reasonably estimable. As of June 30, 2003, 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 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 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 of environmental matters. During the first half of
2003, we expended a gross total of $6 million in related mandatory EHS capital
projects and we recovered $5 million from the Deferred Credit balance. The
Deferred Credit balance resulted from the 2002 settlement with Shell. As of June
30, 2003, the Deferred Credit balance is 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.

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 and combined financial statements. Exchange rates
between these currencies and U.S. dollars in recent years have fluctuated
significantly and may do so in the future. The majority of our revenues and
costs are denominated in U.S. dollars, with euro-related currencies also being
significant. For the six months ended June 30, 2003, 56% of our total revenues
and 58% of our total expenses were from companies incorporated outside the
United States. For the six months ended June 30, 2002, 49% of our total revenues
and 58% of our total expenses were from companies

24

incorporated outside the United States. A substantial amount of assets and
liabilities outside the United States are denominated in the euro. The average
exchange rate of the U. S. dollar to the euro was approximately 0.8940 to 1.0950
for the six months ended June 30, 2003 and 2002, respectively. 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.

CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION

Certain information set forth in this report contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements include statements
concerning our plans, objectives, goals, strategies, future events, future
revenues or performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, business trends, and other information that
is not historical information in particular, appear under the heading "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". When used in this report, the words "estimates," "expects,"
"anticipates," "forecasts," "plans," "intends," "believes" and variations of
such words or similar expressions are intended to identify forward-looking
statements. We may also make additional forward-looking statements from time to
time. All such subsequent forward-looking statements, whether written or oral,
by us or on our behalf, are also expressly qualified by these cautionary
statements.

All forward-looking statements, including, without limitation,
management's examination of historical 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. All
forward-looking statements apply only as of the date made. 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.

There are a number of risks and uncertainties that could cause our
actual results to differ materially from the forward-looking statements
contained in or contemplated by this report. Such risks, uncertainties and other
important factors include, among others:

- general economic and business conditions; including those influenced by
international and geopolitical events such as the situation in Iraq and
any future terrorist attacks;

- the continuing decrease in our annual revenues over the past five years
and net income over the last three years;

- industry trends;

- increases in our leverage;

- changes in our ownership structure;

- restrictions contained in our debt agreements;

- the continuity or replacement of systems and services being provided to
us by Shell or its affiliates;

- changes in business strategy, development plans or cost savings plans;

- competition;

25

- changes in distribution channels or competitive conditions in the
markets or countries where we operate;

- the highly cyclical nature of the end-use markets in which we
participate;

- the loss of any of our major customers;

- raw material costs and availability;

- ability to attain and maintain any price increases for our products;

- changes in demand for our products;

- availability of qualified personnel;

- foreign currency fluctuations and devaluations and political
instability in our foreign markets;

- the loss of our intellectual property rights;

- availability, terms and deployment of capital;

- changes in, or the failure or inability to comply with, government
regulation, including environmental regulations; and

- increases in the cost of compliance with laws and regulations,
including environmental laws and regulations.

These risks and certain other uncertainties are discussed in more
detail in our Registration Statement on Form S-4, as amended (File No.
333-106331), which was declared effective by the SEC on July 2, 2003. There may
be other factors, including those discussed elsewhere in this report that may
cause our actual results to differ materially from the forward-looking
statements. Any forward-looking statements should be considered in light of
these factors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are engaged in manufacturing and marketing resins in the U. S. and
internationally. As a result, the Company is exposed to certain market risks
that include financial instruments such as foreign currency, short-term
investments, trade receivables, and long-term debt. The Company does not enter
into derivative instruments for trading purposes; however, an interest rate cap
for a notional amount of $150 million has been previously executed in connection
with the Company's credit facility. The interest rate cap protects the Company
against rising interest rates fluctuation by capping the floating portion of
credit facility interest rate. At June 30, 2003, the credit facility balance
does not include any amounts outstanding that are subject to variable interest
rates except within the limit of the interest rate cap.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, 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

26

limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.

Management is aware that certain internal controls 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 are operating as intended.

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 significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation. In addition, there have been no changes
in the Company's internal control over financial reporting that have occurred
during the most recent fiscal quarter that have materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

27

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
4.1 Indenture dated as of April 9, 2003 among Resolution
Performance Products LLC, RPP Capital Corporation and
Deutsche Bank Trust Company Americas, as trustee,
related to 9 1/2% Senior Second Secured Notes Due 2010
(incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-4 dated April
25, 2003 (File No. 333-104750))
4.2 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
Company's Registration Statement on Form S-4 dated June
20, 2003 (File No. 333-106331))
10.1 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 Company's Registration
Statement on Form S-4 dated April 25, 2003 (File No.
333-104750))
10.2 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 Company's Registration Statement
on Form S-4 dated April 25, 2003 (File No. 333104750))
10.3 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 Company's Registration Statement
on Form S-4 dated April 25, 2003 (File No. 333-104750))
10.4 Dutch Deed of Pledge dated as of April 9, 2003 among
Resolution Performance Products LLC, a Delaware limited
liability company, RPP Capital Corporation, a Delaware
corporation, Resolution Holdings B. V., a private
limited liability company organized and existing under
the laws of the Netherlands, Morgan Stanley & Co.
Incorporated an Deutsche Bank Trust Company Americas
(incorporated by reference to Exhibit 10.55 to the
Company's Registration Statement on Form S-4 dated
April 25, 2003 (File No. 333-104750))
31.1 CFO Section 302 certification
31.2 CEO Section 302 certification
32 CEO and CFO Section 906 certification
(b) Reports on Form 8-K.

On April 1, 2003, the Registrants filed a Current Report
on Form 8-K to disclose a private placement offering of
$175 million of 9 1/2% senior second secured notes due
2010 and credit agreement amendment under " Item 5.
Other Events", and submitted certain other disclosures
under "Item 9. Regulation FD Disclosure.
On May 13, 2003, the Registrants filed a Current Report
on Form 8-K to disclose the first quarter 2003 earnings
press release under "Item 9. Regulation FD Disclosure.
On May 15, 2003, the Registrants filed a Current Report
on Form 8-K to disclose a private placement offering of
$25 million aggregate principal amount of 9 1/2% senior
second secured notes due 2010 under "Item 5. Other
Events".
No financial statements were filed with any of the above
Current Reports on Form 8-K.

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

RESOLUTION PERFORMANCE PRODUCTS LLC

Date: August 14, 2003 By: /s/ J. Travis Spoede
--------------------------------------------
J. Travis Spoede, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)

RPP CAPITAL CORPORATION

Date: August 14, 2003 By: /s/ J. Travis Spoede
--------------------------------------------
J. Travis Spoede, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)

29

INDEX TO EXHIBITS