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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. 333-75172), which was declared effective by the SEC on January 15, 2002, 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, (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 recapitalization come from the financial statements of the epoxy resins and versatic acids and derivatives business of Shell.

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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 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 131/2% senior subordinated notes. Prior to the recapitalization, RPP Inc. was a wholly-owned subsidiary of Shell.

We are the leading worldwide manufacturer and developer of epoxy resins and are also the leading global manufacturer of versatic acids and derivatives based on market share. 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. 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 cu ring 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 three principal geographic regions. Regional sales based on segment information are comprised of the following: the Americas (51% of revenues for the year ended December 31, 2001), Europe (46%) and Asia Pacific (3%). These customers are served by our global sales and customer service network and by manufacturing facilities in all three 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 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 custo mers 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 in the future, we may ocassionally use ECH and 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 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 glass

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 industries. In addition to being used in the manufacture of epoxy resins and versatic acids and derivatives, ECH is used in water treatment applications.

Bayer AG accounted for approximately 9% in 2001 and 10% of our revenues in 2000 and 1999. Bayer AG has developed its own internal capability for producing BPA and has been reducing its purchases of BPA from us. Sales of BPA to Bayer AG should continue to decrease in 2002 below current levels, as the contract with Bayer AG expires on December 31, 2002. We expect to replace this lost volume over time by increasing our own internal use of BPA and intend to increase sales of BPA to existing or new customers. As a result, we do not anticipate a material adverse effect from the reduction of sales to this customer.

We are one of three global producers of epoxy resins, who together accounted for more than half of the 2001 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 2001, 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 2001, 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 capabilities or cost structure to compete effectively in the epoxy resins industry on a global basis. We believe the significant capital req uired to construct a world-scale manufacturing facility, the production volumes required to maintain low unit costs, the need to secure reliable raw material supplies, the significant technical knowledge required to develop high performance products and applications and the need to develop close, integrated relationships with customers serve as substantial barriers to entry for new competitors.

During the year ended December 31, 2001, prices of our major feedstocks (acetone, chlorine, propylene, and phenol) declined relative to 2000. Historically, feedstock pricing is a primary 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.

During the fourth quarter 2000, the United States economy began to experience a slowdown in the manufacturing sector. The slowdown continued during 2001 and spread globally to other countries in which we operate. A significant portion of our customers operate in the manufacturing sectors. Accordingly, we have experienced softness in product demand apart from expected seasonality. Similarly, the pricing environment for epoxy resins has been negatively impacted by the global economic downturn experienced during 2001. Overall average prices in 2001 were improved over 2000 but have trended generally downward since the second quarter. We have not lost any significant volume due to competitive pressures but we cannot predict the future impact of competition on our business. BPA and ECH pricing has followed the same trend as resins, with stable to improving prices during the first quarter of 2001 compared to the fourth quarter of 2000 fol lowed by weakening prices in the remaining three quarters of 2001.

We compete primarily with Dow Chemical and Vantico Group S.A. (formerly a division of CIBA Specialty Chemicals) in the epoxy resins industry. In 2001, we, together with Dow and Vantico, were the major producers of liquid epoxy resins, which is the foundation product of this industry and account for a majority of 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. 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.

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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 substantial 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. 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. Bayer, a polycarbonate manufacturer who is currently a BPA customer of ours, is reducing purchases from us because it recently started up additional BPA production capacity. Competition in the BPA market is based primarily on price, product quality (purity and form) and security of supply.

In the versatic acids and derivatives product line, which is a small but growing niche market, our only significant competitor is Exxon, who produces a broad range of carboxylic acids. Exxon produces an alternative to our Cardura, called Glydexx, through a tolling arrangement, and an equivalent to VeoVa through a joint venture with Borden. 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.

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.

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 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 end-use industries. Epoxy resins accounted for 64% of our revenues for the year ended December 31, 2001 and 62% for 2000 and 1999.

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  Versatic Acids and Derivatives

Versatic acids and derivatives include basic versatic acids, VeoVa and Cardura. The applications for basic 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 have completed construction of an advanced manufacturing facility for Cardura at our Pernis facility in December 2001. As a result, we expanded our production capacity for Cardura by one third commencing in 2002.

Versatic acids and derivatives accounted for approximately 10% of our revenues in 2001 and 2000, and 12% of our revenues in 1999.

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 believe that we are one of the largest suppliers of BPA to third parties and the third largest producer 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. See the aforementioned "Loss of Major Customer" section for more details on reduced sales to Bayer AG.

Sales of BPA to third parties accounted for 21% of our revenues in 2001, 23% of our revenues in 2000, and 20% of our revenues in 1999.

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  Other Products

Sales of ECH and other products to third parties accounted for 5% of our revenues in 2001 and 2000, and 6% of our revenues in 1999.

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 hav e been able to expand the range of products purchased by larger customers and thereby improve our overall margin.

We sell and support our products in over 67 countries throughout the world through our regionally organized 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 approximately 40 employees in the Americas, 45 in Europe and Africa and 25 in Asia Pacific and the Middle East. We have been consolidating our customer service and support network into key regional customer service centers, and expect to continue to do so in order to reduce overhead costs. We have global account teams that focus on coordination for major global customers, including technical service, supply and pricing. In addition, technical professionals are assigned to each of the three regions to support the sales effort. In the Amer icas, 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 line (some on an exclusive basis), 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 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 generally established using multi-variable formulas, based on underlying chemical benchmark prices, cost of production and a margin.

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:

1. developing new or improved epoxy and specialty chemical applications based on our existing product line and identified customer needs;

2. developing new resin products for customers in order to improve their competitive advantage and profitability;

3. providing premier technical service for customers of specialty products;

4. providing technical support for manufacturing locations and assisting in plant optimization;

5. ensuring that our products are manufactured in accordance with our global health and safety policies and objectives; and

6. developing lower cost manufacturing processes.

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 co nventional batch technology, which is the traditional method of manufacturing epoxy resins.

We have approximately 120 scientists and technicians worldwide. We conduct research and development activities at our facilities in Pernis, The Netherlands; Houston, Texas; Louvain la Neuve, Belgium; and Yokkaichi, Japan, our joint venture partner's facility. 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 $25 million, $26 million and $31 million in 2001, 2000 and 1999, respectively. We centrally manage all these activites to ensure an adequate investment return and to globally share ideas within our business. We expect to spend similar amounts in the future on product development and process development over the next few years.

Our most significant intellectual property rights are our patents and related proprietary rights. As of December 31, 2001, we owned or licensed or had rights to approximately 1,500 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.

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

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.

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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 attractive 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 both Shell and other 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 arrangements for other major feedstocks as well as process chemicals, packaging materials and services.

We manufacture our products in the United States, Europe and Asia. 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. We also maintain a manufacturing presence in Asia through our 50% ownership of our Japanese joint venture and a tolling arrangement with Eternal Chemical, a Taiwan based company, for certain epoxy resins products.

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.

At December 31, 2001, we had approximately 970 employees worldwide (excluding Shell employees who operate certain of our facilities under operating and maintenance agreements). Of our employees, approximately 54% are based in the Americas, 43% in Europe and Africa and 3% in Asia Pacific and the Middle East.

Approximately 94 employees at our Deer Park plant are subject to a collective bargaining agreement which expires in November 2002. Approximately 58 employees at our Norco plant are subject to a collective bargaining agreement which expires on June 30, 2003. In several locations outside the United States, employees are represented 

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by local Staff Councils as required by local laws or customs. Management generally considers its relationships with its employees to be satisfactory.

We have adopted and implemented environmental, health and safety policies consistent with the standards specified by several national and international management system guidelines. These policies include systems and procedures governing environmental emissions, waste management, energy utilization, process safety management, worker health and safety requirements, emergency planning and response, product safety and compliance, and community relations. Facility managers have 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 natural resources and limit discharges of hazardous substances to the environment from ongoing operations and to protect workers and the public from exposure to certain hazardous chemical and dangerous work conditions. They provide for substantial fines and potential criminal sanctions for violations and they establish requirements to remediate contamination. The laws are complex, change frequently and have tended to become more stringent over time.

Environmental laws will affect how we operate our business, including the costs associated with the storage and disposal of raw materials, finished products and wastes, as well as the investigation and remediation of environmental conditions at current and former facilities. Moreover, the nature of our operations exposes us to risks of liability for breaches of safety, health and environmental laws as a result of the production, storage, transportation, handling, sale and disposal of materials that may cause contamination or personal injury when released to the environment.

For example, statutes such as CERCLA 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, individuals may seek recovery of damages for alleged personal injury or property damage due to exposure to hazardous substances and conditions at our facilities or to 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, groundwater and/or surface water 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. See "Certain Relationships and Related Transactions--Ongoing Relationship with Shell--Environmental Agreements." 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. Sh ell has the right to retain 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 environmental 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 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 will retain financial responsibility for all contamination issues that are or become subject to the consent order and any existing or future amendments thereto.

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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. Some examples 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 utilize the incinerators until a final decision is made regarding the permit renewal. We have been involved in on-going communications with the Louisiana Department of Environmental Quality regarding the renewal of the long-term permit. We are awaiting the agency's action to renew the permit.

In connection with the discussions mentioned above, emission control upgrades must be installed on the incinerator to satisfy maximum achievable control technology requirements imposed under the federal Clean Air Act. We are in the process of installing the required hardware for emission control. Shell has agreed to indemnify us for issues relating to the permit renewal and equipment upgrades, subject to a deductible, for costs incurred prior to December 31, 2002. In the event that the Louisiana Department of Environmental Quality does not renew the incinerator permit or if the new incinerator hardware does not meet the emission control regulatory requirements, we may be required to incur significant additional waste disposal costs or curtail operations, or both. Such costs may no longer be subject to indemnification from Shell after December 31, 2002. We have no reason to believe that the agency will not renew the permit o r that the hardware will not meet the regulatory requirements.

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. A recent ruling in Europe classified BPA as a category 3 reprotoxin (endocrine disrupter) which only requires that we label the product to say it poses a "possible risk of harm to the unborn child". In the event that BPA is further regulated, additional operating costs would likely be incurred.

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, the United States and Japan are most significant to our business, including the European inventory of existing commercial chemical substances, the European list of notified chemical substances, the United States Toxic Substances Control Act inventory and the chemical list of the Japanese Ministry of Trade and Industry. 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.

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

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 

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costs. Management believes that we maintain adequate working capital to meet our needs in the current business environment.

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We are headquartered in Houston, Texas and operate through a network of ten manufacturing facilities. We own the plants and equipment at all of our facilities, except at the facility owned and operated by our Japanese joint venture. 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, and the facility located in Yokkaichi, Japan which is owned and operated by our Japanese joint venture. All of our manufacturing facilities are co-located within Shell facilities, other than our facilities in Barbastro, Spain and Lakeland, Florida and the facility operated by our Japanese joint venture which is co-located within a Mitsubishi Chemical facility. Each of our facilities that are co-located within a Shell site, share utilities with the respective Shell site through operating agreements, and, generally, such util ities 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.

_________

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

** This facility is owned and operated by our Japanese joint venture with Mitsubishi Chemical.

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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 pending actions against us.

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On November 8, 2001, through Written Consent of Sole Member in Lieu of Meeting, RPP Inc., as sole member of RPP LLC approved the following: (i) 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 8, 2001, through Unanimous Written Consent of Sole Shareholder in Lieu of Meeting, RPP LLC, as sole shareholder of RPP Capital 

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Corporation, approved the re-election of Marvin O. Schlanger, Joshua J. Harris and Scott M. Kleinman as directors of RPP Capital Corporation.

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At February 1, 2002, RPP LLC had 1,000,000 units outstanding and one holder of record, which was RPP Inc. At February 1, 2002, 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 2001, RPP LLC did not declare any cash dividends; however, a constructive cash dividend to RPP Inc. in the amount of $0.6 million was recognized by paying legal and accounting fees on behalf of RPP Inc. RPP Capital has not declared or paid any cash dividends during 2001. Neither RPP LLC nor RPP Capital has declared or paid any cash dividends or other distributions during 2000.

On October 23, 2000, RPP Capital issued 1,000 shares of its common stock to RPP LLC for net proceeds of $1,000. On July 1, 1999, RPP LLC issued a membership interest to Shell (which Shell subsequently transferred to RPP Inc.) in exchange for all of the assets and certain liabilities of the epoxy resins business of Shell pursuant to a contribution agreement. Apart from the foregoing, no unregistered sales or issuances of the equity securities of either RPP LLC or RPP Capital Corporation have taken place in the last three years.

We believe that the foregoing issuances of our equity securities to RPP LLC and Shell did not involve a public offering or sale of securities and were exempt from the registration requirements of the Securities Act pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act. No underwriters, brokers or finders were involved in these transactions.

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The following table presents selected historical financial information. The historical statement of income data for the years ended December 31, 2001, 2000 and 1999 and the historical balance sheet data as of December 31, 2001 and 2000 are derived from our audited consolidated and combined financial statements included elsewhere in this report. The historical statement of income data for the years ended December 31, 1998 and 1997 and the historical balance sheet data as of December 31, 1999, 1998 and 1997 are derived from our audited combined financial statements that are not included herein.

_____________

(1)    Historical financial information for the fiscal years ended December 31, 1999, 1998, and 1997 were 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)    Effective January 1, 1998, we revised the useful life of certain manufacturing facilities from 10 years to 20 years. This change in estimate reduced 1998 depreciation expense by $22.0.

(3)    Special charges consist of non-recurring costs such as transaction, transition and severance costs related to restructuring or cost reduction programs. Transition costs, which are referred to in the indenture agreement between RPP LLC and The Bank of 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, $0, $6.0, $24.1 and $(1.4) of employee severance costs for the fiscal years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively.

(4)    Consolidated EBITDA represents income before income taxes, interest expense, special charges and depreciation and amortization. Consolidated EBITDA for the periods presented corresponds with the identically titled definition used as a measure in the indenture agreement between RPP LLC and The Bank of New York, as trustee and our credit agreement for determining our compliance with covenants contained in those agreements. In addition, Consolidated EBITDA is presented because it is used by investors to analyze and compare operating performance and to determine a company's ability to service and/or incur debt. However, Consolidated EBITDA should not be considered in isolation or as a substitute for net income, cash flows or 

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other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. Consolidated EBITDA is not calculated under GAAP and therefore is not necessarily comparable to similarly titled measures of other companies.

(5)    Consolidated EBITDA margin is calculated as a percentage of revenue.

The following discussion should be read in conjunction with Item 6. "Selected Financial Data," and the audited consolidated and combined 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 (File No. 333-75172). 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 statem ents 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.

The following covers periods before the completion of the November 2000 recapitalization transactions, the acquisition of the remaining 50% of the Elenac GmbH Resins Business and the offering of the notes and the use of proceeds therefrom. In connection with the recapitalization transactions, we have entered into new financing arrangements, altered our capital structure and entered into a number of operating and feedstock supply agreements with Shell. The results of operations and financial condition for the periods subsequent to the consummation of the recapitalization transactions will not necessarily be comparable to prior periods.

The historical financial information included in this filing for periods prior to the recapitalization is derived from the historical combined financial statements of the epoxy resins business of Shell. The preparation of this information is based on certain assumptions and estimates including allocations of costs from Shell. This information may not necessarily reflect what the results of operations, financial position and cash flows would have been if the epoxy resins business of Shell had been a separate, stand-alone entity during the periods presented or what the results of operations, financial position and cash flows will be in the future. In addition, our historical combined financial statements include certain assets, liabilities, revenues and expenses which were not historically recorded at the entity level of, but are associated with, our business and exclude certain expenses, such as the cost of borrowing money, that will be relevant to us as a stand-alone entity.

During the periods prior to July 1999 presented in "Results of Operations" below, our operations were conducted through various subsidiaries of Shell. In July 1999, Shell commenced a corporate restructuring program in which all of our manufacturing operations and primarily all of our marketing activities were transferred into our current legal entity structure. Certain feedstocks and a significant portion of our non-manufacturing operations were provided to us by other Shell subsidiaries. In connection with the recapitalization, we have negotiated and entered into favorable agreements with Shell under which Shell will provide us with various feedstocks and services including information technology, manufacturing site services and back-office accounting. In areas such as information technology, accounting and building maintenance where we believe we can achieve operational or financial efficiencies, we have, or will, obtai n our own resources to perform these functions.

As previously announced in connection with the recapitalization transactions, we identified annualized savings of approximately $7 million from the reduction of fixed costs. To achieve these cost savings, we incurred additional one-time costs of approximately $3 million in 2001 that are not reflected in these cost savings. We began implementing the fixed cost reduction measures in 2001 and achieved cost savings of approximately $4 million by year-end. Our cost savings would have increased by approximately $3 million if we had been able to implement these initiatives at the beginning of 2001. The primary components of fixed cost reductions were:

1. $3 million related to overhead eliminated by actions such as closing several Asian sales operations and conversions to distributorships, reducing certain identified discretionary expenses, headcount reductions, rationalization of warehouse space and reductions in packaging costs from the conversion of a particular labeling system,
2. $2 million related to manufacturing cost improvements for activities previously performed by Shell, with regard to which management has arranged for these services to be performed either in-house or on a contract basis at a lower cost and by the expected cancellation of other miscellaneous manufacturing related agreements in Europe, and
3. $2 million related to the cancellation of certain agreements with Shell where we can perform similar services at a lower cost, such as agreements that relate to the optimization of our research and development function and the cessation and replacement of certain services for our Japanese joint venture.

The following table sets forth certain information derived from the audited consolidated and combined statements of operations of RPP LLC for the years ended December 31, 2001, 2000 and 1999 expressed as a percentage of revenues. The following table and discussion should be read in conjunction with the information contained in our consolidated and combined financial statements and the notes thereto included elsewhere in this filing. Our historical results of operations set forth below for periods prior to the recapitalization may not necessarily reflect what would have occurred if the epoxy resins business of Shell had been a separate, stand-alone entity during the periods presented or what will occur in the future. Accordingly, there can be no assurance that the trends in the operating results will continue in the future.

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(1)    Consolidated EBITDA represents income before income taxes, interest expense, special charges and depreciation and amortization. Consolidated EBITDA for the periods presented corresponds with the identically titled definition used as a measure in the indenture and our credit agreement for determining our compliance with covenants contained in those agreements. In addition, Consolidated EBITDA is presented because it is used by investors to analyze and compare operating performance and to determine a company's ability to service and/or incur debt. However, Consolidated 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 or as a measure of a company's profitability or liquidity. Consolidated EBITDA 

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is not calculated under GAAP and therefore is not necessarily comparable to similarly titled measures of other companies.

The following is a discussion of significant financial statement items related to our audited consolidated and combined statements of income. See segment information in Note 13 to the consolidated and combined financial statements for the years ended December 31, 2001, 2000 and 1999.

  Revenue

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.

  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 exchange rates as volumes are generally consistent year over year. 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 attractive supply contracts with Shell and other third parties that are based on discounted market prices and an 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 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 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.

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  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 in one of our three research facilities.

  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 investees.

  Interest Expense, net

For periods after the recapitalization transactions, 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 notes. Historically, as part of Shell, we did not have any debt allocated to us except for operational accounts payable. As such, we did not have any interest expense prior to November 14, 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..

Prior to November 1, 2000, our operations have been included in the tax returns submitted by various Shell operating companies. The tax amounts reflected in our historical results have been allocated based on the amounts expected to be paid or received from the various Shell operating companies filing tax returns in which our operations were included. As of December 31, 2001 and 2000, we have accrued 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 to be treated as an acquisition of assets for tax purposes. Accordingly, for tax purposes the basis of our U.S. assets will be 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 five years.

Comparison of 2001 results to 2000 

  Revenue

Total revenue decreased by $86 million, or 9.1%, to $863 million for the year ended December 31, 2001. The decrease in revenue was a result of lower volume, partially offset by increased prices. The increase in prices was attributable to an increase in BPA, partially offset by decreases in resins, ECH and versatics. Overall average prices increased by 3% from the prior year. The increase in prices was primarily driven by our ability to negotiate and pass on certain increased costs of feedstock. Generally, the increase in feedstock costs is experienced in our revenue prices on a 

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3 to 12 month lag basis. Overall volumes decreased by 11% from the prior year due primarily to the soft global economy and the buy-out of a BPA contract by Bayer AG, a major customer.

Revenue in the U. S. decreased by $79 million, or 15.1%, to $444 million for the year ended December 31, 2001. 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 18%.

Revenue in Europe increased slightly by $2 million, or 0.5%, to $399 million for the year ended December 31, 2001. The increase in revenue was a result of increased prices, partially offset by decreased volumes. Average prices in Europe increased 5% while volumes decreased 4.8%.

In addition, the revenue split between the U. S. and Europe in 2001 was affected by new policies of sourcing for certain countries reflecting our our status as an independent Company.

The aforementioned discussion of the U. S. and Europe's revenue is before the impact of certain royalty, commission sales and manufacturing service arrangements between U. S. and Europe. Most notably, under the manufacturing service arrangement, the U. S. engaged the Europe to manufacture and supply product to certain of the U. S. global customers located in Asia. Accordingly, Europe's revenues in 2001 decreased by $11 million through inter-segment billings from the U. S. in connection with the net sales earned by the U. S. on these European export sales to Asian customers. Similarly, under certain other royalty and commission sales arrangements, Europe's revenues in 2001 decreased by another $3 million through inter-segment billings from the U. S.

Total purchases and variable product costs decreased by $96 million, or 16.6%, to $483 million. This decrease was largely driven by lower sales volume and lower feedstock prices due to the decreasing price of crude oil and related petrochemical products. As a percentage of revenue, purchases and variable product costs decreased from 61% to 56%.

Purchases and variable product costs in the US decreased by $56 million, or 17.6% to $262 million. The decrease was primarily a result of lower sales volume.

European purchases and variable product costs decreased by $35 million, or 14.6% to $205 million. The decrease was a result of lower sales volumes and lower feedstock prices.

The aforementioned discussion of Europe's purchase and variable product costs is before the impact of a global procurement arrangement between the U.S. and Europe. Under this arrangement, the U. S. effectively negotiated the terms of certain feedstock contracts on Europe's behalf and has agreed to bear the additional burden or benefit of these contract prices when compared to the prevailing market prices of these feedstocks, using a combination of monthly spot and quarterly contract prices. Accordingly, Europe's feedstock costs in 2001 increased by $34 million through an inter-segment billing from the U. S. for the respective difference between the contract and prevailing market prices on selected feedstocks.

  Operating Expenses

Operating expenses decreased by $14 million, or 8.4%, to $152 million. The decrease was largely a result of lower maintenance costs and additional savings on other operational services in connection with several agreements negotiated with Shell or others that were not in place for the entire year of 2000.

  Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $6 million, or 11.1%, to $60 million. The increase was primarily a result of normal administrative and management costs related to the formation of an independent entity, which exceeds the historical allocations in the prior year.

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  Depreciation and Amortization

Depreciation and amortization remained unchanged at $34 million.

  Research and Development Expenses

Research and development costs decreased by $1 million, or 3.8%, to $25 million. The decrease was primarily due to staff reductions from the cost savings plan announced in early 2001.

Special Charges

Special charges decreased by $34 million to $15 million. Transition costs in 2001 consisted of $3 million for severance costs and $12 million for exit and relocation costs related to the cost restructuring program compared to $18 million of exit and relocation costs in 2000. The prior year also included $31 million of costs related to the recapitalization transaction. The Company previously announced a restructuring program which covers the relocation or termination of employees, closing of foreign offices, and cancellation of service level agreements and certain other agreements in place prior to the Transaction. As a result of the restructuring program, 35 employees were terminated in 2001. The $3 million accrual for severance costs represents payments to be made over time for employee terminations during the year. In addition, seven foreign locations were targeted in 2001 and were in the process of being closed at year end. The remaining accrued liability for severance and exit/relocation costs was $3 million at December 31, 2001. We expect to complete the restructuring program during 2002.

  Operating Income

Operating income increased by $53 million to $94 million. The increase was primarily due to the decrease in purchase and variable product costs, special charges and operating expenses, partially offset by decreased revenues.

  Income from Equity Investment

Income from equity investment decreased by $3 million to $0 million. The decrease was due to lower earnings recognized from our 50% equity joint venture, Japan Epoxy Resins.

  Interest Expense, Net

Interest expense, net, increased by $59 million primarily due to the increase in long-term debt in connection with the recapitalization transaction on November 14, 2000.

  Income Before Income Taxes

Income before income taxes decreased by $9 million, or 25.7%, to $26 million. The decrease was due to increased interest expense, net, partially offset by increased operating income.

  Income Tax Expense

Income tax expense decreased by $5 million, or 31.3%, to $11 million. The decrease was primarily related to the decreased taxable income.

  Net Income

Net income decreased by $4 million, or 21.1%, to $15 million. The decrease was due to decreased income before income taxes, partially offset by decreased income tax expense.

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  Consolidated EBITDA

Consolidated EBITDA increased $16 million, or 12.6%, to $143 million. The increase was primarily due to the decreases in purchase and variable product costs and operating expenses, partially offset by decreased revenue and, increased selling, general and administrative expenses. During the year ended December 31, 2001, we implemented the previously mentioned cost savings plan with an expected annualize cost savings of $7 million. To achieve these cost savings, we incurred additional one-time costs of approximately $3 million in 2001 that are not reflected in these cost savings. We realized $4 million of these cost savings and we would have achieved an additional $3 million of cost savings if these programs had been in effect at the beginning of 2001. Including the full annualized benefit of the cost savings plan, adjusted Consolidated EBITDA would have been $146 million.

This financial information is being presented because it is an important measure that (i) management uses to analyze the business, (ii) is used in the calculation of the covenants under the indenture and the credit facility, and (iii) is relevant to the bondholders and lenders to analyze our financial performance. This financial information should not be construed as being more important than the GAAP financial data included in this report.

  Revenues

Total 2000 revenues increased by $7 million to $949 million, or 0.7%, over total 1999 revenues. Sales volumes improved 3% with resins volume growing 4% and versatics and BPA volumes unchanged. Resins volumes improved due to increased economic activity in Asia Pacific and Europe as sales in both regions improved.

Product prices in 2000 were lower for both resins and versatics, and were improved for BPA. Resins prices fell 5% while versatics prices declined 10%. Resins prices were impacted by a 17% decline in the Euro and a challenging competitive environment, especially during the first half of 2000. Resins product prices in the U.S. during the first half of 2000 were lower compared to the same period in 1999 as we responded to the competitive market pricing. Resins prices in the U.S. began increasing during the latter half of 2000. European resins prices increased throughout 2000 in local currency. However, the weakening Euro negated most of these gains when converted to the U.S. dollar, resulting in a year-to-year decline of 9%. Versatics prices were also adversely impacted by the weakening Euro. Versatics, which generates the majority of its revenue in Europe, implemented price gains for the majority of the product line in Europe. Howeve r, when converted to the U.S. dollar, prices were 10% lower. BPA prices increased 16% compared to 1999. The price increase was largely a result of increases in underlying crude oil prices, upon which many of our customers' price formulae are based. We believe that there were no significant fluctuations in our market shares in 2000 compared to 1999.

Purchases and Variable Product Costs

Purchases and variable product costs increased by $69 million, or 14%, to $579 million. This increase was largely driven by the prices for feedstocks which were much higher in 2000 due to the increasing price of crude oil and related petrochemical products. Price increases for key raw materials ranged from 21% to 46% compared to 1999 levels in the United States and 9% to 55% in Europe. As a percentage of revenue, purchases and variable product costs increased 7%, primarily as a result of proportionately higher cost of raw materials. Historically, we have been able to pass through increases in our raw material costs to our customers. However, the increase in revenues from higher selling prices typically lags behind the increases in our raw material costs.

In connection with the recapitalization transactions, several new feedstock contracts were implemented. If these new contracts had been in place during all of 2000 and 1999, raw material costs would have been reduced by approximately $29 million and $26 million, respectively.

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  Operating Expenses

Operating expenses decreased by $16 million, or 9%, to $166 million. In 2000, costs were lower by $7 million due to reduced maintenance turnaround activity as compared with 1999 which included extensive maintenance turnarounds at Deer Park, Norco and Pernis. Costs were also reduced as a result of the shutdown of the Durban facility, which incurred costs in early 1999, and the strong U.S. dollar also reduced operating expenses incurred in Europe when translated to the U.S. dollar.

  Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $5 million, or 8%, to $54 million. Cost improvement initiatives and lower staffing levels as the business has transitioned to independent status, as well as a reduction in charges previously allocated to the business as a unit of Shell, led to the decline.

On a pro forma basis, selling, general and administrative expenses, which reflect the costs required to operate the business as an independent entity, declined from $63 million in 1999 to $62 million in 2000.

  Depreciation and Amortization

Depreciation and amortization remained unchanged at $34 million.

  Research and Development Expenses

Research and development costs decreased by $5 million to $26 million. The decrease was primarily due to continued rationalization of research and development spending and more efficient expenditure of engineering support and externally executed research and development.

Special Charges

Special charges increased by $43 million to $49 million. Transition costs are non-recurring expenses incurred outside the ordinary course of business and relate to the activities required to establish RPP LLC as an independent company. Transition costs were $18 million in 2000, the majority of which related to activities required to become an independent entity including organizational design, recruiting, establishment of fit for purpose work processes, information service fees as well as establishment of a new brand.

Transaction costs of $31 million were expensed in 2000. These costs were for transaction due diligence and financing activities associated with the sale and recapitalization, including approximately $21 million in legal fees and other due diligence fees, and $10 million in financial services and advice.

Severance costs were $0 million and $6 million in 2000 and 1999, respectively.

  Operating Income

Operating income decreased by $79 million, or 66%, to $41 million. The decrease was primarily due to the increases in purchases and variable product costs and operating expenses.

  Income from Equity Investment

Income from equity investment changed insignificantly.

  Interest Expense, Net

Interest expense, net increased by $9 million primarily due to the increase in long term debt resulting from the recapitalization transactions, which included a leveraged buy out recapitalization. No debt was outstanding in 1999.

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  Income Before Income Taxes

Income before taxes decreased by $87 million, or 71%, to $35 million due to the decrease in operating income and increased interest expense, net.

  Income Tax Expense

Income tax expense decreased by $29 million, or 64%, to $16 million.

  Net Income

Net income for 2000 was $19 million, which was down 75% from $77 million for 1999. The decrease was due to decreased income before income taxes, partially offset by decreased income tax expense.

Prior to the consummation of the recapitalization transactions, we financed our operations through net cash provided by operating activities and contributions and advances from Shell. We also had participated in Shell's centralized treasury management system whereby all of our cash receipts were remitted to Shell and all of our cash disbursements were paid by Shell. While we were owned by Shell, we did not incur any long-term debt to fund our operations.

After the consummation of the recapitalization transactions, we established our own centralized treasury management system. Instead of making distributions of our excess operating cash flow to Shell as done previously, we retain all of our operating cash flow to finance the working capital and other needs of our business. During the year ended December 31, 2001, our operating cash flow was more than our working capital needs, and we used this excess cash to make voluntary principal payments totaling $69.1 million that reduced the amount of long-term debt outstanding under the credit agreement. We expect to continue to finance our operations through net cash provided by operating activities, existing cash on hand and borrowings under our revolving credit facility. As a result of the high level of debt incurred as part of the recapitalization transactions and the global economic downturn, we will have to continue to generate signifi cant cash flows to meet our current debt service requirements. For a discussion of factors affecting our operating cash flows, see "Outlook for 2002" below.

The 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 indenture governing the notes imposes certain restrictions on us, including, among others, restrictions on our ability to incur indebtedness, pay dividends, make investments, create liens, sell our assets and enter into transactions with our affiliates. The net proceeds from the issuance of the $200 million of existing registered notes were used to finance in part the 

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recapitalization and related transaction costs and expenses. The net proceeds from the issuance of the $75 million were used to repay borrowings under the credit agreement. Interest on the notes is payable semi-annually in cash on each May 15 and November 15, which began May 15, 2001 and the notes mature on November 15, 2010.

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 provides for a six-year euro equivalent $100 million (at issuance) A Euro Term Loan ("term loan A") and an eight-year $350 million B Term Loan ("term loan B"). Each term loan was fully funded on November 14, 2000 and used to finance the recapitalization transactions, including certain related costs and expenses. In addition, the credit agreement provides for a six-year $150 million revolving credit facility, to be used for, among other things, working capital and general corporate purposes of ours and our 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, 2001, we had $72 million outstanding under the term loan A, $225 million outstanding under the term loan B, and no borrow ings outstanding under the revolving credit facility. This resulted in a borrowing capacity of $148 million. During 2001, we borrowed $252 million and made payments of $353 million that includes voluntary payments of $69.1 million under the credit agreement.

The credit agreement is secured by substantially all current and future assets of RPP LLC, including a pledge of 100% of the stock of our domestic subsidiaries and 66 2/3% of the stock of our foreign subsidiaries. Our borrowings and those of our subsidiaries under the credit agreement are guaranteed by RPP Inc. and borrowings by our indirect subsidiary, Resolution Nederland B.V., are also guaranteed by us. The credit agreement limits the payment of certain dividends. The credit agreement requires us to maintain certain minimum financial covenants including a minimum interest coverage ratio and a maximum total leverage ratio. On November 6, 2001, we entered into an amendment to the credit agreement, which, among other things, permitted us to issue the $75 million notes so long as we prepaid the term loans with the proceeds therefrom. In addition, we amended our financial covenants regarding consolidated interest coverage and adjusted total leverage. As of December 31, 2001, we were in compliance with each of our financial covenants under the credit agreement. In addition, the credit agreement is not subject to a borrowing base limit on availability. Payment of borrowings under the credit agreement may be accelerated if an event of default occurs. Events of default under the credit agreement include our failure to pay principal or interest when due, a material breach of any representation or warranty, covenant defaults, events of bankruptcy and a change of control.

While the effective interest rate on the notes is higher than that of the related senior debt that was retired from the proceeds therefrom, as a result of the offering of the notes, we realized greater flexibility in our debt structure along with an easing of certain covenants through an amendment to the credit agreement with our senior debt holders relating to the consolidated interest coverage and adjusted total leverage.

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 3.75%, which margin is dependent upon our leverage, as determined on a quarterly basis. Interest rates on the borrowings maintained as euro term loans or loans under the revolving credit facility denominated in euros, accrue interest at the euro rate a margin ranging from 2.25% to 3.0% depending 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. During the year ended December 31, 2001, we entered into interest rate swap agreements related to the term loan B for notional amounts of $50 million, $75 million, $100 million, $25 million and $50 million. The interest rate swap agreements fix the LIBOR portion of our interest rates at 5.41%, 5.25%, 5.41%, 4.61% and 4.39%, respectively.

With respect to base rate loans, interest is payable quarterly on the last business day of each fiscal quarter, when the loan is converted to a euro rate loan or it is repaid. Calculation of all interest expense 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 

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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.

Term loan A under the credit agreement required quarterly principal reductions that began on March 31, 2001 and continuing through November 14, 2006. As a result of prepayments, no further mandatory payments are required until September 2004. As a result of the prepayments made on the term loan B, quarterly principal reductions are no longer required. The next scheduled principal payment related to term loan B is $225 million on November 14, 2008. Also, we may be required to make mandatory additional principal reductions under the credit agreement if we have excess cash flow or if we sell assets, issue additional debt, issue preferred or common equity or receive insurance proceeds.

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. We will continue to review capital leases as alternate sources of financing with favorable interest rates as opportunities arise.

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. Investing activities primarily consisted of expenditures for property, plant and equipment. 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. For the year ended December 31, 2000, we generated net cash provided by operating activities of $126 million, used cash in investing activities of $17 million and used cash in financing activities of $90 million, primarily due to the recapitalization transactions. For the year ended December 31, 1999, we generated net cash provided by operating activities of $134 million, used cash in investing activities of $103 million and used cash in financing activities of $31 million.

Expenditures for property, plant and equipment totaled $24 million, $18 million and $105 million for the years ending December 31, 2001, 2000 and 1999, respectively. 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. The increase in capital expenditures for 1999 was related to a repurchase of equipment held under a synthetic lease totaling $71 million.

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. Capital expenditures for maintenance have historically been relatively low at $9 million to $16 million per year, and we expect this to continue for the next three to five years.

During the latter part of 2001, a comprehensive information technology project was approved and initiated, and will encompass new globally integrated software, hardware, networks and phone systems that will support our business at a higher level. We estimate that the project will run through the end of 2002 and will cost approximately $35 to $38 million. In addition, we estimate $21 million of exit costs will be incurred in 2002 to transition from Shell's IT systems and other outsourced accounting and informational systems. Of the $35 to $38 million, certain costs will be capitalized and the remainder will be expensed to special charges depending upon various factors such as the type of financing arrangement, the phase of the project, and nature of the costs. As of December 31, 2001, we incurred approximately $5 million related to this project of which $4 million was capitalized and $1 million expensed.

The Company does 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 and combined financial statements. Off-balance sheet arrangements are limited to operating leases described in Note 12 of the 

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________

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

The high level of debt incurred as a result of the recapitalization may preclude us from borrowing any more funds. Based on our current level of operations and anticipated growth and cost savings, management believes that our cash flow from operations, together with existing cash and cash equivalents on hand and future borrowings under our revolving credit facility, if necessary, 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.

While we expect to see continued soft demand and weakening of our prices during the global recession, volumes are expected to rebound when a global recovery takes hold. In the interim, we expect to continue to benefit from declining raw material costs. While the global economy is in recession, we expect to continue to experience softness in both product demand and prices. There can be no assurances that (a) this trend will not continue beyond 2002, (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. Management targets have been set to improve our balance sheet and cash flows by (1) reducing costs by an additional $30 million per year to be in effect by the end of 2002 and (2) adding incremental cash generation this year of $20 million through continued aggressive asset management. We ca n not provide assurance that these targets can be achieved.

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. For a more detailed discussion of the impact of such matters on our business, see "Business Environmental/Occupational Health and Safety Matters."

As of December 31, 2001, 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 would accrue for an environmental remediation liability when a liability is considered probable and the costs are reasonably estimatable.

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 the recapitalization 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 

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certain limitations. For incidents occuring after the closing date, 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 with environmental matters. During 2001, the Company expended a total of $3 million in related mandatory EHS capital projects. Also during 2001, the Company expensed approximately $1 million of 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. Our current projection for 2002 capital expenditures on EHS mandatory capital projects is approximately $20 million of which $13 million is estimated to be recovered from Shell. Our current projection for 2003 expenditures on EHS mandatory capital projects is approximately $3 million of which $1 million is estimated to be recovered from Shell.

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 $25 million, $26 million and $31 million for the years ended December 31, 2001, 2000 and 1999, respectively. In order to continue to find alternate applications for our products and to continue to seek for 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.

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 audited 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 year ended December 31, 2001, 49% of our total revenues and 54% of our total expenses were from companies incorporated outside the United States. For the year ended December 31, 2000, 45% of our total revenues and 43% of our total expenses were from companies incorporated outside the United States. A substantial amount of assets and liabilities outside the United States are denominated in the Euro and the Dutch Guilder prior to 2001. 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.

Certain of our expenses, such as feedstocks and other raw materials used in the production of final products, 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 price increases, 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.

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Commencing January 1, 2001, we 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. 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. We do not enter into derivative instruments for trading purposes; however, interest rate swaps were entered into during 2001 in connection with our credit agreement. We use interest rate swaps to protect against interest rate fluctuation by fixing the variable portion of interest rates in our credit facility. By using the interest rate swaps to hedge interest rate cash flows, we expose ourselves to market risk; however, market risk is managed through the setting and monitoring of parameters that limit the types and degree of market risk which are acceptable.

As mentioned above, we entered into interest rate swap agreements related to the term loan B for notional amounts of $50 million, $75 million, and $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 remaining duration of the interest rate swap agreements range from 2 months to 14 months. The consolidated statement of income for the year ended December 31, 2001 includes interest expense at the fixed rates stated above. We did not hedge interest rate cash flows in the prior year period. For the year ended December 31, 2001, we have recognized a net $7 million charge in comprehensive income relating to SFAS 133. This charge was due to the change in the fair market value of our interest rate swaps as a result of declining interest rates.

In July 2001, the FASB issued SFAS 142 (Goodwill and Other Intangible Assets). This statement requires that goodwill no longer be amortized but should be tested for impairment at least on an annual basis. Other intangible assets are to be amortized over their useful life and reviewed for impairment in accordance with the provisions of SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of). Intangible assets with an indefinite useful life can no longer be amortized. SFAS No. 142 is effective for fiscal year beginning after December 15, 2001, however, it does apply to any goodwill acquired in a business combination completed after June 30, 2001. Based upon our review to date of SFAS 142, we do not believe that any changes will be required in our current practices or procedures. We do not have any goodwill and other intangible assets consist of patents with a net book value of $1 mill ion at December 31, 2001. Our adoption of SFAS 142 on January 1, 2002 did not have a material impact on consolidated results of operations, cash flows or financial position of the Company.

In August 2001, the FASB issued SFAS 143 (Accounting for Obligations associated with the Retirement of Long-Lived Assets). This statement requires the following: (a) an existing legal obligation associated with the retirement of a tangible long-lived asset be recognized as a liability when incurred and the amount of the liability be initially measured at fair value, (b) an entity recognize subsequent changes in the liability that result from the passage of time and revisions in either the timing or amount of estimated cash flows, and (c) upon initially recognizing a liability for an asset retirement obligation, an entity capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. SFAS 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002. The planned adoption of SFAS 143 on January 1, 2003 is not expected to have a material impact on consolidated results of operations, cash flows or financial position of the Company.

In October 2001, the FASB issued SFAS 144 (Accounting for the Impairment or Disposal of Long-Lived Assets). This statement supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The requirements of this statement provide that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. The scope of discontinued operations will be expanded to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of this statement are effective for fiscal years beginning after December 15, 2001. We do not typically dispose of significant assets that are used in the manufacturing operations and assets that are normally disposed of have a minimal net book value. Our ado ption of SFAS 144 on January 1, 2002 did not have a material impact on consolidated results of operations, cash flows or financial position of the Company.

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We are engaged in manufacturing and marketing resins 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 and combined financial statements provide a description of our accounting policies and other information related to these financial instruments. We do not engage in speculative transactions or trading activities and typically do not engage in hedging activities, except for the interest rate swaps which were put in place during 200 1 in connection with our credit agreement.

A substantial amount of assets and liabilities outside the U.S. are denominated in Euros and Dutch Guilders prior to 2001. The exchange rate of the U. S. dollar to the Euro is 1.13 at December 31, 2001. We may utilize forward exchange contracts to hedge foreign currency transaction exposures, however, during 2001 we did not enter into any forward exchange contracts.

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 2001 average investment rates would be material during 2002.

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.

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Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below.

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None.

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The following table sets forth certain information as of January 1, 2002 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.

Marvin O. Schlanger became 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 1975 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, OneChem, Ltd. and Wellman, Inc.

Jeffrey M. Nodland became 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, Mr. Nodland held various positions with McWhorter Technologies, Inc. serving most recently as President and Chief Executive Officer. Prior thereto since 1977, Mr. Nodland held various positions at Valspar Corporation, serving most recently as President of the McWhorter division.

J. Travis Spoede became Executive Vice President, Chief Financial Officer and Secretary 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.

James H. Melloan, Jr. became Vice President, Americas of RPP LLC and RPP Capital on November 14, 2000 and prior thereto had been the Business Manager of the Americas of Shell's Resins/Versatics Products business since January 1998. Mr. Melloan joined Shell in 1993 and previously served as Marketing Director of Epoxy Resins Formulators for ten years and a Business Director for Celanese for five years.

Wouter W. Jongepier became Vice President, Europe and Africa of RPP LLC and RPP Capital on November 14, 2000 and prior thereto had been the Sales Director of the European and African operations of Shell's 

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Resins/Versatics Products business since 1999. 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.

Dany Subrata became Vice President, Asia Pacific and the Middle East of RPP LLC and RPP Capital on November 14, 2000 and prior thereto had been the Business Manager for Asia Pacific--Middle East of Shell's Resins/Versatics Products business since late 1997. Mr. Subrata joined Shell in 1988 after a brief career in manufacturing at P&G. In 1992, Mr. Subrata was assigned to a Resins/Versatics Products business co-ordination and planning position in Shell Centre, London. He was appointed Chemicals Manager--Indonesia and Business Manager--Resins/Versatic Products for South East Asia and Oceania upon his return to Asia in 1995.

Abraham van Mannekes became Vice President, Global Operations of RPP LLC and RPP Capital on November 14, 2000 and prior thereto had been the Manager of Operations of Shell's Resins/Versatics Products business since August 1999. Prior to becoming Manager of Operations, Mr. van Mannekes served as a Director of Shell's Research and Technology Centre in Amsterdam. Mr. van Mannekes spent fifteen years, from 1972 to 1987, with Shell in polymer process development, design and plan operations and in strategic planning, followed by seven years in operations management at manufacturing sites in The Netherlands. Mr. van Mannekes has held managerial positions in South Africa, The Netherlands and Singapore.

Mark S. Antonvich became Vice President and General Counsel of RPP LLC in May 2001 and prior thereto had been Senior Counsel for Enron Global Exploration & Production Inc. since 2000 providing advice on international acquisitions and investments. From 1995 to 2000, Mr. Antonvich represented BHP Minerals in Tucson, Arizona and Houston, Texas, most recently serving as Senior Corporate Counsel, advising those companies on international mineral acquisitions, divestments and on commercial and administrative manners in connection with copper mining activities, smelting, refining and sales. From 1987 to 1995, he was in private practice in Washington D. C.

Hanna M. Lukosavich became 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.

Daniel A. Mariano became Vice President, Supply Chain of RPP LLC in May 2001. From 1998 to 1999, Mr. Mariano served as Vice President of Supply Chain at Lyondell Chemical Company. From 1981 to 1984 and 1989 to 1998, Mr. Mariano was a Vice President in various roles at ARCO Chemical Company, most recently serving as Vice President of Supply Chain. From 1985 to 1988, Mr. Mariano worked at Horsehead Industries.

Dennis F. White became 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 position with Shell.

Laurence M. Berg became a director of RPP Inc. on November 14, 2000 and a member of the Board of Managers of RPP LLC 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 Berlitz International, Continental Graphics Holdings, Inc. and Rent-A-Center, Inc.

Peter P. Copses became a director of RPP Inc. on November 14, 2000 and a member of the Board of Managers of RPP LLC 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., Prandium, Inc., Zale Corporation and Compass Minerals Group, Inc.

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Joshua J. Harris became 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 partner in 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 RPP Capital, Breuners Home Furnishings Corporation, Clark Retail Enterprises, Inc., Florsheim Group Inc., NRT, Incorporated, Pacer International, Inc., Quality Distribution Inc and Compass Minerals Group, Inc.

Scott M. Kleinman became 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 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 Encompass Services Corporation and Compass Minerals Group, Inc.

Joel A. Asen became a director of RPP Inc. on November 14, 2000 and a member of the Board of Managers of RPP LLC on March 2, 2001. 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 Group, Inc.

Heinn F. Tomfohrde, III became a director of RPP Inc. on November 14, 2000 and a member of the Board of Managers of RPP LLC 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, III is also a director of Compass Minerals Group, Inc.

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Prior to the recapitalization, we were a wholly owned business of Shell operated by a management team comprised solely of Shell personnel. For the period prior to the closing of the transactions on November 14, 2000 our executive officers were compensated by Shell and for the period on and after November 14, 2000 were compensated by us. 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, 2001, 2000 and 1999.

The following table lists the stock options granted to each of the officers named in the Summary Compensation Table above during the fiscal year 2001.

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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 2001. None of the named executive officers exercised any options during the last fiscal year.

RPP Inc. has adopted a stock option plan, effective as of November 14, 2000, pursuant to 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, 2001, RPP Inc. granted nonqualified options covering 59,232 shares, representing approximately 9.8% 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, 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.

RPP Inc. has adopted a stock option plan, effective as of November 14, 2000, pursuant to 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, 2001, RPP Inc. granted nonqualified options covering 59,232 shares, representing approximately 9.8% 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, 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.

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.

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.

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 

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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" sha ll 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 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.

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.

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.

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 have paid to Mr. Preston additional severance in equal monthly installments of $18,333.33, commencing on March 17, 2001 and ended on February 9, 2002. Mr. Preston has agreed not to compete with us until March 17, 2003.

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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.

The members of the Board of Managers of RPP LLC do not receive compensation for their service on the Board of Managers but are reimbursed for their out-of-pocket expenses.

Each of the members of the Board of Managers of RPP LLC also serves as a director of RPP Inc. The directors are compensated by receiving a fee for each meeting they attend. 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, 2001, RPP Inc. granted options cove ring 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:

1. 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 sells at least fifty percent of its shares of common stock of RPP Inc.

2. 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 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.

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.

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Return to Table of Contents

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 December 31, 2001 (based on 601,130.4 shares of common stock outstanding), by

*   Less than one percent.

On November 14, 2000, RPP Holdings, an affiliate of Apollo Management IV, L.P., acquired control of RPP Inc. in a recapitalization transaction for approximately $857.7 million in cash and retained securities (net of $8.5 million of excess cash at RPP LLC used to fund the Transactions), subject to adjustment, and a contingent subordinated note for up to $127 million. The contingent subordinated note, issued by RPP Inc., our parent, will only be earned to the extent the average contribution margin in 2001 and 2002 exceeds the contribution margin for the 

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twelve months ended December 31, 2000 by $60 million to $75 million. Interest payments, which are payable at an annual rate of 8% commencing after December 31, 2002, and the repayment of principal, which is due on December 31, 2007, on the contingent subordinated note will be payable in cash only to the extent the contingent subordinated note is earned and such payments are permitted under the terms of all indebtedness of RPP Inc. and its subsidiaries. In connection with the recapitalization, RPP Holdings and certain members of our management invested $185 million of cash and Shell had retained an investment of $15 million. We entered into a new senior secured credit agreement and distributed the proceeds from borrowings thereunder, together with the proceeds from the offering of the old notes, to RPP Inc. which in turn used the proceeds to fund $701.4 million of the recapitalization. On a fully-diluted basis for all management options and st ock issuable under RPP Inc.'s stock option plan and restricted unit plan, Apollo Management and its affiliates and certain other institutional investors own (through their ownership of RPP Holdings) approximately 81.9% of the outstanding common stock of RPP Inc., management owns (through its ownership of RPP Holdings and RPP Inc.) approximately 11.3% and Shell owns approximately 6.8%.

On July 10, 2000, Shell and RPP Inc. entered into a US Sale Agreement with Resin Acquisition, which had assigned its rights and obligations thereunder to RPP Holdings, setting forth the terms and conditions upon which RPP Holdings purchased the US portion of the business from Shell. On September 11, 2000, RPP Inc. and Shell entered into a Non-US Sale Agreement, pursuant to which RPP Inc. had agreed to acquire from Shell all of the outstanding capital stock of RPP B.V., which is the entity that holds all of the non-US operations of our business and RPP Inc. issued a note to Shell for the full purchase price of $662 million less the European indebtedness which was assumed by us and RPP Inc. at closing. RPP Inc. assigned to us its rights and obligations under the non-US Sale Agreement. The following is a summary of the sale agreements which governed the recapitalization transaction.

  Consideration

The consideration paid under the sale agreements for the recapitalization consisted of the following:

1. RPP Holdings and some members of our management purchased from Shell approximately $54.7 million of RPP Inc.'s common stock;
2. RPP Inc. redeemed all of Shell's common stock ownership of RPP Inc. other than the 7.5% retained ownership, for $185.0 million in cash and $140.0 million of its junior subordinated notes;
3. RPP Holdings and some members of our management purchased from Shell $127.6 million of junior subordinated notes of RPP Inc.;
4. Certain other members of our management purchased from Shell $1.9 million of junior subordinated notes of RPP Inc. and purchased $.8 million of common stock of RPP Inc.;
5. RPP Inc. issued the contingent subordinated note to RPP LLC as a capital contribution; and
6. RPP LLC paid Shell $659 million in cash and assumed $145 million of European indebtedness then outstanding and transferred the contingent subordinated note (which redeemed the promissory note issued by RPP LLC to RPP B.V.) to Shell.

A working capital settlement in the amount of $16 million was paid to us by Shell in the first half of 2001. Of the $16 million, $15 million was related to a purchase price adjustment for working capital in accordance with the sale agreement. In addition, a purchase price adjustment of $4 million was made that represents additional amounts recorded in connection with our January 2001 purchase of the French subsidiary.

Shell has publicly disclosed in its Annual Report on Form 20-F filed with the Commission that Shell's adjusted earnings in its Chemicals segment for 2000 excluded special credits of $67 million, resulting mainly from a net gain from its divestment programs, partly offset by provisions for litigation. The profit or loss realized by Shell in the Transaction is a component of these special credits.

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  Representations and Warranties

The sale agreements contained representations and warranties from Shell. However, our ability to recover for breaches of such representations and warranties is limited as follows: (a) RPP Holdings and RPP Inc. may only recover damages in excess of $12.0 million and (b) no party's total liability under the Sale Agreements may exceed $209.4 million, unless the claims arise from breaches of fundamental representations and warranties, in which case this limitation is raised to $905.0 million.

The representations and warranties contained in the sale agreements generally survive until May 14, 2002. Fundamental representations and warranties survive the closing indefinitely. The environmental agreements described below under "Ongoing Relationship with Shell" contain the only representations and warranties relating to environmental conditions that survived the closing. Some of the representations and warranties relating to tax matters survive the closing until the expiration of the applicable statute of limitations.

  Indemnification

Shell has agreed to indemnify us and RPP Inc. and its affiliates against certain liabilities, including, but not limited to:

1. damages resulting from third party claims or other third party liabilities (other than product liability claims, third party claims and third party liabilities reflected on the closing working capital statement) to the extent they relate to or arise prior to the closing of the recapitalization;
2. damages resulting from Shell's breach of any representations, warranties or covenants contained in the Sale Agreements, subject to the limitations set forth above; and
3. damages resulting from product liability claims with respect to products that were manufactured prior to the closing of the recapitalization and sold within 90 days after the closing.

  Covenant Not to Compete

Shell has agreed that neither it nor any of its affiliates will engage in or own more than 10% of a business that manufactures or sells products related to our business for five years following the closing of the recapitalization. However, Shell and its affiliates may (a) continue to manufacture or sell refinery products, including chemical feedstocks, (b) carry on their other businesses as they existed on the day before the closing and any natural development thereof, (c) acquire other entities as an immaterial part of its business, (d) engage in the incidental resale of products similar to ours and (e) develop and operate an e-commerce platform involving the trading of products similar to ours.

  Post-Closing Continuation of Contracts and Assignments

Except with respect to information technology, Shell has agreed to allow us and RPP Inc. to continue to purchase goods and services under existing contracts between Shell and its affiliates and third parties that governed the sale of certain goods and services to the business prior to the closing to the extent permitted by such third parties. However, Shell did not make any representations or warranties as to the costs that any third party vendor may charge us or that such contracts will not be terminated by Shell. If we choose to make purchases under such contracts, we will be responsible for all charges and costs relating to such purchases. We and RPP Inc. agreed to indemnify Shell and its affiliates for all claims, damages and liabilities related to our purchases under such contracts.

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 

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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.

From November 1, 2000 to December 31, 2000 and for the year ended December 31, 2001, we paid Shell approximately $63 million and $361 million in the aggregate, 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 Amsterdam and 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.

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:

1. its share of the supplier's variable costs for the SUMF item based on the purchaser's consumption of such SUMF item;
2. 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
3. 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.

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     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 part y 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 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 the fifth year). The basic term of each of the Amsterdam and Louvain-La-Neuve leases is two years, subject to certain conditions. Rent 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, Amsterdam 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.

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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 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, di-isobutylene 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 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.

  Human Resources Agreements

In connection with the sale agreements, RPP Inc. entered into two human resources agreements with Shell, one for our U.S. business and one for our non-U.S. business. Prior to the recapitalization, RPP Inc. assigned its interests under the human resources agreements to us.

Pursuant to the U. S. human resources agreement with Shell and RPP Inc., Shell will indemnify RPP Inc. against any losses arising out of certain claims by nonrepresented employees that relate to their employment with or termination of employment by Shell. RPP Inc. will indemnify Shell against any losses arising out of claims by employees not represented by a labor union that arise prior to, on or after November 30, 2000 and relate to their termination of employment from Shell as a result of RPP Inc.'s failure to comply with applicable law in its employment offer and selection process and any losses arising out of claims by transferred nonrepresented employees that arise after the closing date and that relate to their employment with or termination by RPP Inc.

Represented Employees.    With respect to represented employees, RPP Inc. has adopted, and will be the successor to Shell's obligations under, the collective bargaining agreements at the Deer Park and Norco facilities and the Deer Park Resins Divestiture Settlement Agreement and accompanying Letters of Agreement. RPP Inc. will 

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indemnify Shell for any loses arising out of RPP Inc.'s failure to perform its obligations under any collective bargaining agreement on and after November 30, 2000. Shell will indemnify RPP Inc. for losses arising out of Shell's failure to perform under the collective bargaining agreements and for certain other losses relating to represented employees.

Non-U.S. Human Resources Agreement.    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. has agreed to:

1. 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, 2002;
2. 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.

  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. 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; (3) the remediation of contamination at or migrating from our property and pre-close toll manu facturing facilities; and (4) non-conformance with environmental, health and safety laws in effect as of November 14, 2000. Claims relating to any of the above matters are subject to an aggregate deductible of $1.0 million.

Special provision is also made for: (1) compliance issues identified in the environmental agreements and (2) 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. With respect to compliance issues, Shell generally has agreed to indemnify us to the extent that costs for these matters exceed approximately $10 million and RPP Inc. incurs costs before the assigned expiration dates. Once these criteria are met, Shell is responsible for 100% of the environmental damages up to an aggregate of $10.0 million and then becomes liable for 80% of the costs in excess of $10.0 million. 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: (1) site contamination issues at (a) the Lakeland, Florida facility which are not the subject of the consent order and (b) the facility in Barbastro, and (2) certain issues of non-compliance, which exist as of November 14, 2000, but are not specifically identified in the 

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environmental agreements. 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 and three years, respectively, of November 14, 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 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:

1. we are not entitled to seek indemnity for environmental damages that result from or are increased by any material change in use of certain sites;
2. 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
3. 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:

    - --  compliance issues which are not specifically identified in the Environmental Agreemen

    --  site contamination issues at the Lakeland facility (other than known Lakeland site contamination issues)

  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 th e 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 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 u nder these agreements.

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  Interim Agreements for Information Technology Services

As part of the recapitalization, we entered into two interim agreements for information technology services, one for our U.S. business and the other for our non-U.S. business, pursuant to which Shell Chemical Company and Shell Services, Inc. provide specified information technology services to us. The purpose of these agreements is to assure that we receive substantially the same information technology services on substantially the same terms and conditions after the recapitalization that the resins business of Shell Chemical received prior to the recapitalization.

The services to be provided include, among others, the management, support and administration of voice communications, desktop computers and desktop applications, servers and other infrastructure systems, email, Internet and intranet access and disaster recovery support.

Shell will provide the services for a period up until November 1, 2004. However, we may terminate the provision of any particular service on thirty (30) days' notice to Shell. On November 1, 2001, we informed Shell that we will not require Shell to continue to provide the services for the full four year term. During the latter part of 2001, a comprehensive information technology project was approved and initiated. We estimate the project will be completed by the end of 2002 and cost approximately $35 to $38 million.

The aggregate cost to us for the provision of the services under the interim agreements for information technology services will be no more than $13.7 million per year, subject to increases in the third and fourth years of the term based on changes to the producer price index. The costs will be increased for additional services requested by us. In addition, if Shell is able to generate certain cost savings, they will be passed along to us.

  Financial Business Processing Transition Agreements

As part of the recapitalization, we entered into two financial business processing transition agreements dated as of November 1, 2000, one for our U.S. business and one for our non-U.S. business, pursuant to which Shell, or its subcontractor, will provide specified accounting and related services to us. The purpose of these agreements is to ensure that we receive substantially the same accounting and related services on substantially the same terms and conditions after the recapitalization that the resins units of Shell received prior to the recapitalization.

The services being provided include, among others, the accounting, management and administration of purchasing, invoicing, accounts payable and receivable, inventory, fixed assets, month-end and year-end closings and business reporting.

Shell will provide the services until the financial business processing transition agreements terminate on November 1, 2002. The aggregate cost to us for the provision of the services under the financial business processing transition agreements will be $8.0 million per year.

  Interim Services Agreement

As part of the recapitalization, we entered into an interim services agreement dated as of November 1, 2000, pursuant to which Shell will provide us with the same level of office services, building and plant maintenance and other services as in effect during the prior six month period Shell has agreed to provide services for terms ranging from six months to two years, unless we terminate them on 90 days' advance written notice. In addition, we and Shell will indemnify each other for certain losses.

  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 

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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.

  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,

1. restrictions on the transfer of shares of common stock by Shell;
2. 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;
3. 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, and to sell its shares of common stock if so required;
4. rights of Shell to participate in certain transfers of common stock by RPP Holdings other than to an affiliate;
5. rights of Shell to receive financial information; and
6. 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

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,

1. restrictions on the transfer of shares of common stock, options and junior subordinated notes by the management holders;
2. 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;
3. 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;
4. 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;
5. repurchase rights of RPP Inc. and RPP Holdings in the event of termination of employment of the management holders;
6. requirements of RPP Inc. to purchase common stock and junior subordinated notes in the event of a termination of employment initiated by RPP Inc. or any of its subsidiaries for any reason other than for cause within six months of the closing of the recapitalization of management holders who accepted loans from RPP LLC; and
7. restrictions on sales of common stock and junior subordinated notes by the management holders in the event of an initial public offering.

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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.

  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

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:

1. 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
2. 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, our new 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 loaned $350,000 in aggregate to new employees to finance in part their purchase of RPP Inc.'s common stock and RPP Inc. junior subordinated notes, including:

1. 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
2. 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.

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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. Except in the case of Mr. Preston, principal on the 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 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 "Management--Separation Agreement with Former President."

  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 notes, and we also granted contribution rights to such persons.

  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 to provide management consulting and financial advisory services to us and pay Apollo an annual management fee of $1.0 million for providing those services. In particular, Apollo 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 a fee of $5.0 million on November 14, 2000. We will also be required to pay Apollo a transaction fee if we engage in any merger, acquisition or similar transaction unless we and Apollo are unable to mutually agree upon the terms of Apollo's engagement, in which case we w ill be able to retain another special advisor. Since Apollo 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'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 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.

We also paid approximately $4 million related to certain freight costs to Quality Distribution, an affiliate of Apollo in 2001. We believe the amounts paid to Quality Distribution were fair and at arm's length terms.

During 2001, we paid approximately $0.6 million on behalf of RPP Inc. for legal and external audit services rendered in the ordinary course of business that has been recognized as a constructive dividend.

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