10-Q 1 h10579e10vq.txt RESOLUTION PERFORMANCE PRODUCTS LLC - 09/30/2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______to______ Commission File Number 333-57170 RESOLUTION PERFORMANCE PRODUCTS LLC (Exact name of registrant as specified in its charter) Delaware 76-0607613 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Commission File Number 333-57170-01 RPP CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0660306 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1600 SMITH STREET, SUITE 2400 HOUSTON, TEXAS 77002 (888) 949-2502 (Address of principal executive offices and telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] At October 31, 2003, there were 1,000,000 outstanding membership units of Resolution Performance Products LLC and 1,000 outstanding shares of common stock of RPP Capital Corporation. TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (unaudited) 3 Consolidated Statements of Income for the three and nine month periods ended September 30, 2003 and 2002 (unaudited) 4 Consolidated Statement of Owner's Deficit for the nine month period ended September 30, 2003 (unaudited) 5 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2003 and 2002 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 26 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28

2 ITEM 1. FINANCIAL STATEMENTS RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS OF U. S. DOLLARS, EXCEPT FOR UNITS)

See accompanying notes to consolidated financial statements. 3 RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS OF U.S. DOLLARS)

See accompanying notes to consolidated financial statements. 4 RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED STATEMENT OF OWNER'S DEFICIT (UNAUDITED) (IN MILLIONS OF U. S. DOLLARS)

------------ (a) Accumulated Other Comprehensive Loss at September 30, 2003 is made up of the following components: $58 million net loss for foreign currency translation and $1 million net gain for interest rate swap. See accompanying notes to consolidated financial statements. 5 RESOLUTION PERFORMANCE PRODUCTS LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS OF U. S. DOLLARS)

See accompanying notes to consolidated financial statements. 6 RESOLUTION PERFORMANCE PRODUCTS LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 1. ORGANIZATION, FORMATION AND BASIS OF PRESENTATION The consolidated financial statements include the consolidated operations of Resolution Performance Products LLC ("RPP LLC", or the "Company"), and its wholly owned subsidiaries including RPP Capital Corporation ("RPP CC"). RPP LLC is a wholly owned subsidiary of Resolution Performance Products Inc. ("RPPI"). RPP CC is a wholly owned finance subsidiary of RPP LLC that was formed in October 2000 to co-issue the 13-1/2% Senior Subordinated Notes jointly and severally with RPP LLC. RPP CC has nominal assets and no operations. The Company is engaged in manufacturing and marketing resins in the U.S. and internationally. Resins include epoxy resins, versatic acids and derivatives. Epoxy resins are chemicals primarily used in the manufacture of coatings, adhesives, printed circuit boards, fiber reinforced plastics and construction materials. Products containing epoxy resins serve a wide range of end-users, including automotive, aerospace, electrical, construction and industrial maintenance. Versatic acids and derivatives are specialty products that complement epoxy resins product offerings in the coatings, adhesives and construction industries. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation, have been included. You should read these interim consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain amounts from the prior period have been reclassified to conform to the current period presentation. 2. INVENTORY ADJUSTMENT During the third quarter 2003, we became aware that certain manufacturing costs have not been included in finished goods inventory. The cumulative effect of the exclusion of such costs resulted in a $2.4 million overstatement of owner's deficit at December 31, 2002. The effect of not including such costs in finished goods inventory was not material to our historical financial statements or to our expected full year 2003 financial position or results of operations. To properly reflect these costs in inventory, an adjustment to the financial statements was made in third quarter 2003. The impact of the adjustment was to increase inventory by $3.6 million and pretax income for the three and nine months ended September 30, 2003 by $3.6 million ($2.4 million after tax). The adjustment is included in purchases and variable product costs. 3. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", an Interpretation of Accounting Research Bulletin No. 51 "Consolidated Financial Statements" (FIN 46). FIN 46 provides guidance related to identifying variable interest entities (VIEs), including entities more commonly referred to as special purpose entities or SPEs, and in determining whether such entities should be consolidated by the entities' primary beneficiary, defined in FIN 46 as the entity that holds the majority of the variable interests in the 7 VIE. In addition, FIN 46 requires disclosure for both consolidated and non-consolidated VIEs. Certain disclosure provisions of FIN 46 are effective for financial statements issued after January 31, 2003, and the consolidation requirements applicable to the Company are effective for all periods beginning after June 15, 2003. Although we are still assessing the impact, we do not believe that this interpretation will have a material impact on our consolidated financial statements. In April 2003, the FASB issued SFAS No.149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No.149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. Adoption of the standard is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In May 2003, SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" was issued. The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of the standard is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. 4. INVENTORIES OF PRODUCTS Product inventories are valued at the lower of cost or net realizable value, cost being determined using a FIFO (First In First Out) method. Effective October 2002, the Company changed its inventory accounting policy in Europe from the weighted-average method to FIFO. The change was made for consistency with the inventory accounting policy in the United States and because the FIFO method provides for a better matching of revenues and expenses. The effect of this change was not material. Total inventories, less allowance for obsolescence at September 30, 2003 and December 31, 2002 were comprised of the following (in millions of U. S. dollars):

5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30, 2003 and December 31, 2002 consisted primarily of manufacturing assets as follows (in millions of U. S. dollars):

8 Property, plant and equipment include capital leased assets with a net book value of $3 million. Substantially all current and future assets are pledged as security under the Company's credit agreement. Expenditures for property, plant and equipment totaled $4 million for the quarter ending September 30, 2003 and $13 million for the nine months ending September 30, 2003. 6. INTANGIBLE ASSETS Intangible assets consist of the following (in millions of U. S. dollars):

The amortization expense for 2003 includes a $6 million write-off of deferred financing costs related to the prepayments, refinancing and credit agreement amendments. 7. LONG-TERM DEBT Long-term debt at September 30, 2003 and December 31, 2002 consisted of the following (in millions of U. S. dollars):

During the nine months ended September 30, 2003, we borrowed $522 million and made payments of $471 million, which includes a mandatory principal payment of $6 million as a result of the excess cash flow calculation under the credit agreement. Other long-term debt consists of trade notes payable totaling $2 million that bear interest rates ranging from 6.75 percent to 8.18 percent and are unsecured and payable over thirty-nine months with one of our vendors for the purchase of computer equipment and related services. Annual payments will average approximately $1 million. On April 9, 2003, the Company completed a private offering, together with RPP CC, its wholly-owned subsidiary, of $175 million aggregate principal amount of 9 -1/2% Senior Second Secured Notes Due 2010 (the "Original Notes"). Interest will be payable semi-annually in cash on April 15 and October 15, beginning October 15, 2003. The proceeds, net of $5 million estimated debt issue costs, from the offering of the Original Notes were used to repay borrowings under the Credit Agreement among the Company, RPP CC, RPPI, Resolution Europe B.V. 9 (the "Borrowers") and the various lenders party thereto, dated as of November 14, 2000 (as amended by the First Amendment thereto, dated as of November 5, 2001, the Second Amendment thereto, dated as of June 25, 2002, the Third Amendment thereto, dated as of December 2, 2002, and the Fourth Amendment thereto, dated as of April 1, 2003, the "Credit Agreement") and for general corporate purposes, including working capital. The Company and the other Borrowers executed the Fourth Amendment to the Credit Agreement dated as of April 1, 2003 (the "Credit Agreement Amendment"). The Credit Agreement Amendment, among other things, (a) permitted the Borrowers to issue up to $200 million of the Original Notes and Additional Notes (as defined below) so long as they used at least the first $135 million of net proceeds from the offering of the Notes to prepay the term loans outstanding under the Credit Agreement, (b) amended the financial covenants by eliminating the consolidated interest coverage ratio covenant and the adjusted total leverage ratio covenant and added an adjusted bank leverage ratio covenant, and (c) reduced the size of the revolving credit facility from $100 million to $75 million. In May 2003, the Company and RPP CC registered an identical series of $175 million 9 -1/2% Senior Second Secured Notes due 2010 with the Securities and Exchange Commission and subsequently completed an offer to exchange the unregistered notes for the registered notes. On May 22, 2003, the Company completed a private offering, together with RPP CC, its wholly-owned subsidiary, as co-issuer, of an additional $25 million aggregate principal amount of 9-1/2% Senior Second Secured Notes Due 2010 (the "Additional Notes"). The Additional Notes, together with the $175 million aggregate principal amount of Original Notes that were originally issued on April 9, 2003, are treated as a single class of securities under RPP's existing indenture. The net proceeds, net of $2 million estimated debt issue costs from the offering of the Additional Notes, were used for general corporate purposes, including working capital. In July 2003, the Company and RPP CC registered an identical series of 9 -1/2% Senior Second Secured Notes Due 2010 with the Securities and Exchange Commission and subsequently completed an offer to exchange all of the unregistered notes for registered notes. As a result of these two exchange offers, all of the outstanding $200 million of 9 -1/2% Senior Second Secured Notes due 2010 are registered notes. 8. OBLIGATIONS UNDER CAPITAL LEASES Capital leases at September 30, 2003 and December 31, 2002 consisted of the following (in millions of U. S. dollars):

The capital leases were recorded at the present value of the minimum lease payments which also approximated the fair market value of the obligation. 9. INTEREST RATE CAP Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the type of derivative and the effectiveness of the hedge. The Company does not enter into derivative instruments for trading purposes; however, an interest rate cap agreement was entered into during 2002 in connection with the Company's credit facility. The Company uses the interest rate cap to protect against interest rate fluctuation by limiting the exposure to increases in the variable portion of interest rates in its credit facility. As of September 30, 2003, the Company has an interest rate cap agreement for the notional amount of $150 million. The interest rate cap agreement caps the floating rate at 3% and expires on February 28, 2004. The cost of the interest rate cap agreement was $0.2 million. 10 10. PENSION PLANS, OTHER POST RETIREMENT BENEFITS AND 401(k) PLAN The funded pension and unfunded other retirement obligations had the following activity (in millions of U. S. dollars):

The Company accrues net periodic expense based on an estimate from its consulting actuary. During the nine months ended September 30, 2003, the Company revised the average retirement age and average turn-over rate to age 60 and 7 percent from age 58 and 5 percent. This revision in assumptions is expected to have approximately $0.4 million dollar decrease in obligations for the U. S. for 2003. Net periodic pension expense for 2003 is trending to be lower than the 2002 level as a result of recognizing the amortization of benefits related to prior year plan amendments and changes in assumptions. 11. TRANSACTIONS WITH RELATED PARTIES AND CERTAIN OTHER PARTIES During the nine months ended September 30, 2003, we have continued our numerous agreements with Royal Dutch/Shell Group of Companies, ("Shell"), including the purchase of feedstock, site services, utilities, materials, facilities and operator type services. There were no material changes regarding our commitments surrounding certain agreements with Shell during the period. During the nine months ended September 30, 2003, we have paid Shell $231 million and Shell has paid the Company $13 million. In the ordinary course of business, we dispute charges arising from our numerous agreements with Shell as well as with other third party vendors. As with other third party vendors, resolution of disputes may have a significant impact on our financial results. 12. SEGMENT INFORMATION Using guidelines set forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has identified three reportable segments based on geographic and customer information: (i) U. S., (ii) Europe and Africa, and (iii) Asia Pacific and Middle East. Management operates its business through geographic regions and is not organized nor does it prepare discreet financial information by product line within the geographic regions. 11 Selected financial data by geographic region are presented below (in millions of U. S. dollars):

Sales revenues are attributed to geographic regions based on the location of the manufacturing facility and/or marketing company, and are not based on location of customer. Inter-segment amounts represent sales transactions within and between geographic regions. 13. INCOME TAXES The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires the recognition of deferred tax assets and 12 liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Deferred tax assets also include net operating losses ("NOL") that will be carried forward or are pending carry back. Deferred taxes result from differences between the financial and tax basis for assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. As of September 30, 2003, the Company has reclassified to Tax Receivable a total of $12 million. The Tax Receivable is the result of a 2001 and 2002 Netherlands net operating loss being carried back. We expect to collect this Tax Receivable in the next twelve months. 14. RESTRUCTURING CHARGES The Company accrued a charge for employee severance and other exit costs of $6 million in the fourth quarter of 2002 related to a cost reduction program implemented in response to a significant decline in profitability. The global reduction in work force affected approximately 90 employees or 9% of the global work force. Other exit costs relate to a modification of the OMS agreement previously entered into with Shell covering employee termination expenses to be absorbed by the Company. As of September 30, 2003, all the employees related to the reduction in work force have been terminated and the remaining liability will be paid out through early 2004. The following is a reconciliation of the severance liability (in millions of U. S. dollars):

15. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company is subject to various laws and regulations and, from time to time, litigation. In the opinion of management, compliance with existing laws and regulations will not materially affect the financial position or results of operations of the Company. Management is not aware of any material pending actions against the Company. As mentioned above, our business is subject to various federal, state, local and foreign laws and regulations which govern environmental health and safety ("EHS") related matters. Compliance with these laws and regulations requires substantial continuing financial commitments and planning. Moreover, the laws and regulations directly affect how we operate our business. The financial commitments consist of environmental costs for normal day to day operations, voluntary and mandatory matters as well as remediation issues. As of September 30, 2003, we have assessed that an environmental remediation liability accrual is not needed based on the current available facts, present laws and regulations, and current technology. The Company is 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 transactions whereby Shell will indemnify us for environmental damages associated with environmental conditions that occurred or existed before the closing date of the recapitalization, subject to certain limitations. In addition, management believes that we maintain adequate insurance coverage, subject to deductibles, for environmental remediation activities. 16. SUPPLEMENTAL CASH FLOW INFORMATION The Company translates its foreign subsidiary's financial statements for consolidation in accordance with SFAS 52 (Foreign Currency Translation), using the current rate method. As a result, consolidated balance sheets are affected by the non-cash foreign currency translation adjustments. The statement of cash flows has been adjusted to 13 exclude the non-cash effects of the foreign currency translation adjustments coming from the consolidated balance sheets. 17. OTHER REVENUE In 2002 and 2001, the Company entered into BPA technology license agreements wherein the Company granted non-exclusive licenses to third parties to use RPP LLC's technology to construct, operate and maintain and/or repair one licensed plant for the manufacture of BPA. Along with the grant to use the license, the Company will also provide technical assistance in the design, engineering, procurement, training, commissioning and/or start-up of the licensed plant. Revenues from the sale of the BPA technology license and related support services have been and will be recognized using the percentage of completion method. For the three months ended and nine months ended September 30, 2003, $0.36 million and $0.49 million, respectively, have been recognized as Other Revenues related to the sale of the BPA technology licenses. In May 2002, the Company entered into an exclusive and irrevocable option with a third party to execute a long-term supply contract, wherein the Company received $4.2 million. In June 2002, the Company executed a calcium chloride supply agreement with the third party for fifteen years. Revenues from the sale of the option will be recognized on a straight line basis over fifteen years consistent with the duration of the supply agreement. For the three months ended and nine months ended September 30, 2003, $0.07 million and $0.21 million, respectively, have been recognized as Other Revenues related to the sale of the option. 18. DEFERRED REVENUE Deferred revenue includes the unamortized balances related to the sale of the BPA technology licenses and the sale of the exclusive and irrevocable option to execute a long-term supply contract. As of September 30, 2003 the balance included in Deferred Revenue for the sale of BPA technology licenses and the sale of the option was $1 million and $4 million, respectively. 19. DEFERRED CREDIT Deferred credit includes the remaining balance of proceeds received from Shell under the environmental agreement indemnity payments. The deferred credit amounts are matched against specific environmental capital projects that in effect will reduce the amount of gross environmental capital expenditures. For the nine months ended September 30, 2003, the Company spent $6 million related to environmental capital expenditures and utilized $5 million from the environmental indemnification balance included in Deferred Credit. As of September 30, 2003, there is no remaining balance to apply to future environmental capital expenditures. The following is a table of the deferred credit activity (in millions of U. S. dollars):

20. SUBSEQUENT EVENT On November 14, 2003, a wholly owned subsidiary of the Company completed the sale of forty percent of the outstanding shares in Japan Epoxy Resins Co., Ltd to its joint venture partner, Mitsubishi Chemical Company for a purchase price of over $20 million. In connection with the sale of its shares, a new joint venture agreement, technology license agreement and trademark license agreement were negotiated. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENT REGARDING FORWARD-LOOKING INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management's beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words "believe", "anticipate", "estimate", "expect", "intend", and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable; it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks; uncertainties and assumptions, including those discussed under the heading "Cautionary Statements for Forward Looking Information" and elsewhere in this report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in conjunction with the corresponding sections and the Company's audited consolidated and combined financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, information derived from the Company's consolidated statements of income, expressed as a percentage of revenues.

15 ------------- (1) EBITDA represents income (loss) before income taxes, interest expense, net, and depreciation and amortization. EBITDA is presented because it is used by investors to analyze and compare operating performance, which includes a company's ability to service and/or incur debt. In addition, management focuses on EBITDA and adjustments to EBITDA because they are used as internal performance measures. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other income or cash flow data prepared in accordance with United States generally accepted accounting principles ("GAAP") or as a measure of a company's profitability or liquidity. EBITDA is not calculated under GAAP and therefore is not necessarily comparable to similarly titled measures of other companies. For a reconciliation of EBITDA to net income (loss), see page 21. The following is a discussion of significant financial statement items related to our consolidated statements of income. See note 12 of the consolidated financial statements for segment information. Revenues Our revenues are primarily generated through the sale of our three main product lines: (1) epoxy resins, (2) versatic acids and derivatives, and (3) sales of BPA to third parties. In addition, we sell small amounts of ECH to third parties. Revenues have historically been driven by volumes, market prices and foreign currency fluctuations. Revenues also include other income derived primarily from royalty income and commission income. Other revenues Other revenues consist mainly of the sale of a BPA technology license and related support services. Purchases and Variable Product Costs Purchases and variable product costs are primarily comprised of feedstock costs. Feedstock costs are driven primarily by market conditions and volumes fluctuate with production. The significant feedstocks for which we are highly sensitive to the market prices are phenol, acetone, propylene and chlorine. We purchase chlorine, a primary raw material for ECH, under long-term supply contracts with third parties which provide us with producer-like economics by allowing us to buy this raw material at a margin above production cost and thereby lower our manufacturing costs. We also purchase propylene, the other primary raw material for ECH, under long-term supply agreements with Shell that are based on market price less negotiated volume discounts. We purchase phenol and acetone, the primary raw materials for BPA, under supply contracts with Shell and other third parties that are based on discounted market prices and an input-cost formula. Because we are co-located with Shell at several of our facilities, our transportation and logistics costs for certain raw materials which Shell provides to us are also reduced. Variable manufacturing costs, which are primarily utilities, are also a significant component of this line item. Purchases and variable costs are reduced by the sale of by-products generated during the manufacturing process, primarily hydrochloric acid. Operating Expenses Operating expenses represent the costs associated with the non-variable operations of our manufacturing facilities. Included in operating costs are personnel related costs, manufacturing overhead, periodic maintenance, turnaround costs and environmental costs. Depreciation relating to manufacturing assets is included within depreciation and amortization. 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. 16 Depreciation and Amortization Depreciation is computed on a straight-line basis over the estimated useful lives of the respective assets. Estimated useful lives for plant and equipment, office buildings, tanks and pipelines are twenty years and range from three to ten years for other assets. Amortization is computed on a straight-line basis for intangibles such as patents. Research and Development Expenses Research and development expenses are costs associated with new and existing products or customer specific initiatives on new and existing products and costs associated with projects that seek improvements in manufacturing processes. Primarily all of our research and development expenses are generated in one of our three research facilities. This includes costs associated with health, safety and environmental projects. Special Charges Special charges consist of non-recurring type costs such as transaction, transition and severance costs related to restructuring or cost reduction programs. Income from Equity Investment Income from equity investment is related to our unconsolidated equity investment. Interest Expense, net Interest expense, net consists of interest expense payable with respect to borrowings under our credit agreement. existing notes and miscellaneous interest expense, offset by our interest income from short-term cash investments. Interest expense also includes amortization of deferred financing costs and amortization of the premium and discount for the senior subordinated notes issued in 2002, 2001 and 2000. Income Tax Expense The Company is organized as a limited liability company and is not subject to U. S. income tax. Income tax information presented includes U. S. income taxes attributed to the Company's operations that are the responsibility of the Company's sole owner, RPP Inc. As of September 30, 2003, we have accrued for income taxes, including both deferred and current income tax provisions. Additionally, we made a Section 338(h)(10) election to allow our recapitalization to be treated as an acquisition of assets for tax purposes. Accordingly, for tax purposes the basis of our U.S. assets has been stepped-up to their fair market values, and we will be able to depreciate our assets using higher basis than the historical amount. This tax basis step-up may reduce cash payments for income taxes over the next four years. THIRD QUARTER OF 2003 AND 2002 COMPARED Revenues Revenues increased by $10 million, or 6%, to $189 million compared to the prior year quarter. The increase in revenues is a result of increased average prices, partially offset by decreased average volumes. Overall average prices increased by 7% from the prior year period, however, excluding the impact of a weaker dollar on our Euro-related sales, overall average prices decreased 2%. Overall volumes decreased by 2% from the prior year period as a result of soft demand related to the global recession. The increase in average prices was primarily attributable to the impact of a weaker dollar on our Euro-related sales and to a lesser extent due to modest price increases on certain products. 17 Purchases and Variable Product Costs Purchases and variable product costs increased by $24 million, or 23%, to $130 million. This increase was largely driven by higher prices for feedstocks due to the increasing price of crude oil and related petrochemical products and the higher cost of natural gas, partially offset by lower sales volume and the inventory adjustment discussed in Note 2 of the consolidated financial statements. Operating Expenses Operating expenses decreased by $1 million, or 3%, to $29 million. The decrease is principally related to the cost reduction program implemented by the Company at the beginning of 2003, lower net periodic pension expense and lower maintenance costs. Pension expense decreased due to the change in estimates in connection with our postretirement medical benefit obligation and to a lesser extent due a reduction of benefits in pension recognized in late 2002. In addition, pension expense also decreased due to a revision of the retirement age and turnover percentage recognized in the second quarter of 2003. Maintenance costs declined but we expect such a decline will be temporary and that maintenance costs will return to historic levels. Selling, General and Administrative Expenses Selling, general and administrative expenses are flat and totaled $13 million. Although flat, selling, general and administrative expenses had significant activity which was primarily the result of the cost reduction program implemented by the company at the beginning of 2003 and lower net periodic pension expense. Pension expense decreased due to the change in estimates in connection with our post retirement medical benefit obligation and to a lesser extent due a reduction of benefits in pension recognized in late 2002. In addition, pension expense also decreased due to a revision of the retirement age and turnover percentage recognized in the second quarter of 2003. Also, included in the current period is an insurance refund of approximately $1 million related to prior periods. The current period does not include capitalization of personnel costs related to the information technology project that was reflected in the third quarter of 2002. Depreciation and Amortization Depreciation and amortization increased by $3 million, or 33%, to $12 million. The increase is primarily attributable to an increase in depreciation expense resulting from capital projects placed in service subsequent to the prior year quarter such as the information technology project completed in November 2002. Research and Development Expenses Research and development expenses decreased by $2 million, or 33%, to $4 million. The decrease is primarily due to the cost reduction program implemented by the Company at the beginning of 2003. Special Charges Special charges decreased by $3 million. The decrease is related to the completion of the Company's transition activities in the last quarter of 2002. Transition activities for the quarter ended September 30, 2002 consisted of non-recurring transition expenses from our predecessor's IT and accounting systems. Operating Income Operating income decreased by $11 million, or 92%, to $1 million The decrease was primarily due increases in purchases and variable product costs and depreciation and amortization expenses, partially offset by increased revenue and decreased operating expenses, research and development and special charges. 18 Interest expense, net Interest expense, net increased by $3 million, or 20%, to $18 million. The increase is due to a higher average outstanding debt balances and higher average interest rates. Income (loss) before Income Taxes Loss before income taxes increased by $14 million to a $17 million loss. The increase is due to the decrease in operating income and increased interest expense, net. Income Tax Expense (Benefit) Income tax benefit increased by $8 million to a $9 million benefit in 2003. The increase is primarily related to decreased taxable income resulting from decreased operating income and increased interest expense, net. Net Income (Loss) Net loss increased by $6 million to $8 million net loss in 2003. The increase was due to increased loss before income taxes, partially offset by increased income tax benefit. EBITDA EBITDA decreased by $8 million, or 38%, to $13 million. The decrease was primarily due to increases in purchases and variable product costs and depreciation and amortization expenses, partially offset by increased revenue and decreased operating expenses, research and development. NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 Revenues Revenues increased by $13 million, or 2%, to $586 million compared to the prior year period. The increase in revenues is a result of increased average prices, partially offset by lower volume. The increase in average prices was primarily attributable to the impact of a weaker dollar on our Euro-related sales and to a lesser extent due to modest price increases on certain products. Overall average prices increased by 9% from the prior year period, however, excluding the impact of a weaker dollar on our Euro-related sales, overall average prices were flat. Overall volumes decreased by 6% from the prior year period as a result of soft demand related to the global recession. Purchases and Variable Product Costs Purchases and variable product costs increased by $80 million, or 24%, to $412 million. This increase was largely driven by higher prices for feedstocks due to the increasing price of crude oil and related petrochemical products and the higher cost of natural gas, partially offset by lower sales volume and the inventory adjustment discussed in Note 2 of the consolidated financial statements. Operating Expenses Operating expenses decreased by $6 million, or 7%, to $83 million. The decrease is principally related to the cost reduction program implemented by the Company at the beginning of 2003, lower net periodic pension expense and lower maintenance costs. Pension expense decreased due to the change in estimates in connection with our postretirement medical benefit obligation and to a lesser extent due a reduction of benefits in pension recognized in late 2002. In addition, pension expense also decreased due to a revision of the retirement age and turnover percentage recognized in the second quarter of 2003. Maintenance costs declined but we expect such a decline will be temporary and that maintenance costs will return to historic levels. 19 Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $5 million, or 11%, to $39 million. The decrease is primarily a result of the cost reduction program implemented by the company at the beginning of 2003 and lower net periodic pension expense. Pension expense decreased due to the change in estimates in connection with our post retirement medical benefit obligation and to a lesser extent due a reduction of benefits in pension. In addition, pension expense also decreased due to a revision of the retirement age and turnover percentage. Also, included in the current period is an insurance refund of approximately $1 million related to prior periods. Depreciation and Amortization Depreciation and amortization increased by $9 million, or 35%, to $35 million. The increase is primarily attributable to an increase in depreciation expense resulting from capital projects placed in service subsequent to the prior year period, such as the information technology project completed in November 2002. Research and Development Expenses Research and development expenses decreased by $4 million, or 25%, to $12 million. The decrease is primarily due to the cost reduction program implemented by the Company at the beginning of 2003. Special Charges Special charges decreased by $6 million. The decrease is primarily related to the completion of the Company's transition activities in the last quarter of 2002. Transition activities for the nine months ended September 30, 2002 consisted of non-recurring transition expenses from our predecessor's IT and accounting systems. Operating Income Operating income decreased by $55 million, or 92%, to $5 million. The decrease was primarily due increases in purchases and variable product costs and depreciation and amortization expenses, partially offset by increased revenue and decreased operating expenses, research and development and special charges. Interest expense, net Interest expense, net increased by $8 million, or 16%, to a $57 million. The increase is due to a $6 million write-off of deferred financing costs related to the prepayments, refinancing and credit agreement amendment. In addition, the increase is also due to a higher average outstanding debt balances and higher average interest rates. The current period does not include bank fees related to a credit agreement amendment in the prior year period for approximately $1 million. Income (loss) before Income Taxes Income (loss) before taxes decreased by $63 million to a $51 million loss. The decrease is due to the decrease in operating income and increased interest expense, net. Income Tax Expense (Benefit) Income tax expense (benefit) decreased by $26 million to a $21 million benefit in 2003. The decrease is primarily related to decreased taxable income resulting from decreased operating income and increased interest expense, net. Net Income (Loss) Net income (loss) decreased by $37 million to a $30 million net loss in 2003. The decrease was due to 20 decreased income (loss) before income taxes, partially offset by increased income tax benefit. EBITDA EBITDA decreased by $46 million, or 53%, to $41 million. The decrease was primarily due to increases in purchases and variable product costs and depreciation and amortization expenses, partially offset by increased revenue and decreased operating expenses, and research and development expenses. EBITDA is presented because it is used by investors to analyze and compare operating performance, which includes a company's ability to service and/or incur debt. In addition, management focuses on EBITDA and adjustments to EBITDA because they are used as internal performance measures. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other income or cash flow data prepared in accordance with GAAP or as a measure of a company's profitability or liquidity. EBITDA is not calculated under GAAP and therefore is not necessarily comparable to similarly titled measures of other companies. The following table reconciles the differences between net income (loss), as determined under GAAP and EBITDA (in millions).

LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2003, our operating cash flow was less than our working capital needs. However, we obtained additional cash from the issuance of $200 million aggregate principal amount of 9 1/2 % Senior Second Secured Notes Due 2010 and made some prepayments on our credit facility, resulting in a modest increase of cash and cash equivalents for the period. Our working capital requirements principally include accounts receivable, product and raw materials inventory, labor, equipment and debt service costs. We expect to finance our operations in the future through net cash provided by operating activities, existing cash and cash equivalents on hand, other refinancing vehicles, and borrowings under our revolving credit facility and, to the extent needed, sales of non-core assets. As a result of our high level of debt and the global recession, we will have to generate significantly more cash flows through operating activities, borrowing and asset sales to meet our current debt service requirements. For a discussion of factors affecting our operating cash flows, see "Outlook for Remainder of 2003" below. At September 30, 2003, we had $28 million outstanding under the Term Loan A, $58 million outstanding under the Term Loan B, and no borrowings outstanding under the revolving credit facility. This resulted in a borrowing capacity of $56 million after considering $18 million related to letters of credit. Subsequent to September 30, 2003, $15 million of the $18 million related to letters of credit were released. During the nine months ended September 30, 2003, we borrowed $522 million and made payments of $471 million, which includes a mandatory principal payment of $6 million as a result of the excess cash flow calculation under the credit agreement. Also as of September 30, 2003, we were in compliance with our financial covenant under the credit agreement. On April 9, 2003, the Company completed a private offering, together with RPP CC, its wholly-owned subsidiary, of $175 million aggregate principal amount of 9 1/2% Senior Second Secured Notes Due 2010 (the "Original Notes"). Interest is payable semi-annually in cash on April 15 and October 15, beginning October 15, 2003. The proceeds, net of $5 million estimated debt issue costs, from the offering of the Original Notes were used 21 to repay borrowings under the Credit Agreement among the Company, RPP CC, RPPI, Resolution Europe B.V. , (the "Borrowers") and the various lenders party thereto, dated as of November 14, 2000 (as amended by the First Amendment thereto, dated as of November 5, 2001, the Second Amendment thereto, dated as of June 25, 2002, the Third Amendment thereto, dated as of December 2, 2002, and the Fourth Amendment thereto, dated as of April 1, 2003, the "Credit Agreement") and for general corporate purposes, including working capital. The Company and the other Borrowers executed the Fourth Amendment to the Credit Agreement dated as of April 1, 2003 (the "Credit Agreement Amendment"). The Credit Agreement Amendment, among other things, (a) permitted the Borrowers to issue up to $200 million aggregate principal amount of the Original Notes and the Additional Notes (as defined below) so long as they used at least the first $135 million of net proceeds from the offering of such Notes to prepay the term loans outstanding under the Credit Agreement, (b) amended the financial covenants by eliminating the consolidated interest coverage ratio covenant and the adjusted total leverage ratio covenant and added an adjusted bank leverage ratio covenant, and (c) reduced the size of the revolving credit facility from $100 million to $75 million. In May 2003, the Company and RPP CC registered an identical series of 9 1/2% Senior Second Secured Notes due 2010 in the amount of $175 million with the Securities and Exchange Commission and subsequently completed an offer to exchange the unregistered notes for the registered notes. On May 22, 2003, the Company completed a private offering, together with RPP CC, its wholly-owned subsidiary, as co-issuer, of an additional $25 million aggregate principal amount of 9 1/2% Senior Second Secured Notes Due 2010 (the "Additional Notes"). The Additional Notes, together with the $175 million aggregate principal amount of Original Notes that were originally issued on April 9, 2003, are treated as a single class of securities under RPP's existing indenture. The proceeds, net of $2 million estimated debt issue costs from the offering of the Additional Notes were used for general corporate purposes, including working capital. In July 2003, the Company and RPP CC registered an identical series of 9 1/2% Senior Second Secured Notes Due 2010 with the Securities and Exchange Commission and subsequently completed an offer to exchange all of the unregistered notes for registered notes. As a result of these two exchange offers, all of the outstanding $200 million of 9 1/2% Senior Second Secured Notes due 2010 are registered notes. As of September 30, 2003, the Company has an interest rate cap agreement for the notional amount of $150 million. The interest rate cap agreement caps the floating rate at 3% and expires on February 28, 2004. The cost of the interest rate cap agreement was $0.2 million and will be amortized over its term. For the nine months ended September 30, 2003, we used net cash for operating activities of $28 million, used cash in investing activities of $12 million and provided cash from financing activities of $41 million. Investing activities primarily consisted of expenditures for property, plant and equipment. Financing activities primarily consisted of the $200 million of Original Notes and Additional Notes (collectively, the "Notes") and the partial early extinguishment of term loans A and B totaling $135 million. For the nine months ended September 30, 2002, we generated net cash provided by operating activities of $49 million, used cash in investing activities of $40 million and used cash in financing activities of $12 million. Expenditures for property, plant and equipment totaled $13 million and $41 million for the nine months ending September 30, 2003 and 2002, respectively. The $13 million spent in 2003 is made up of $18 million gross amount for operational projects net of $5 million environmental indemnification recovery. Of the $41 million spent in 2002, $24 million was related to the information technology project and $17 million for other capital expenditures. Because we have an established infrastructure in place, our capital expenditures are generally not for the building of new plants but for their maintenance, mandatory environmental projects, occasional incremental expansion or cost reduction/efficiency improvement where justified by the expected return on investment. We expect our gross capital expenditures for 2003 to be approximately $21 to $22 million of which approximately $13 million has been budgeted for maintenance capital expenditures. 22 On November 14, 2003, a wholly owned subsidiary of the Company completed the sale of forty percent of the outstanding shares in Japan Epoxy Resins Co., Ltd to its joint venture partner, Mitsubishi Chemical Company for a purchase price of over $20 million. In connection with the sale of its shares, a new joint venture agreement, technology license agreement and trademark license agreement were negotiated Our high level of debt may preclude us from borrowing any more funds beyond those available under the revolving credit agreement. Based on our current level of operations, anticipated recovery and cost reductions, management believes that our cash flow from operations, together with existing cash and cash equivalents on hand, net proceeds from the issuances of the Notes, future borrowings under our revolving credit facility and sales of non-core assets, if necessary, will be sufficient to fund our working capital needs and expenditures, for property, plant and equipment and debt service obligations in the foreseeable future, although no assurance can be given in this regard. OUTLOOK FOR REMAINDER OF 2003 While the global economy remains in a low growth mode, we expect an increase in demand coupled with relatively flat raw material costs compared to the most recent quarter. Once a global recovery takes hold, volumes are expected to rebound along with a continued reduction in average raw material prices, which had increased in the first half of the year due to political instability in the Middle East, including the recent conflict in Iraq, and supply disruptions elsewhere. There can be no assurances that (a) the global recovery will occur during 2003, (b) we will be able to realize margins we have historically achieved as feedstock costs decline, or (c) our feedstock costs will not rise faster than our product prices and reduce our margins. ENVIRONMENTAL, HEALTH AND SAFETY Our business is subject to various federal, state, local and foreign laws and regulations which govern environmental health and safety ("EHS") related matters. Compliance with these laws and regulations requires substantial continuing financial commitments and planning. Moreover, the laws and regulations directly affect how we operate our business. The financial commitments consist of environmental costs for normal day to day operations, voluntary and mandatory matters as well as remediation issues. We accrue for environmental liabilities when the liability is probable and the costs are reasonably estimable. As of September 30, 2003, we have assessed that an environmental remediation liability accrual is not needed based on the current available facts, present laws and regulations, and current technology. This assessment is based on the lack of evidence of any claims or possible claims against us from the closing date of the recapitalization. For environmental conditions that existed prior to the closing date, our environmental remediation liability is influenced by agreements associated with the transactions whereby Shell generally will indemnify us for environmental damages associated with environmental conditions that occurred or existed before the closing date of the recapitalization, subject to certain limitations. In addition, for incidents occurring after the closing date of the recapitalization transaction, management believes that we maintain adequate insurance coverage, subject to deductibles, for environmental remediation activities. As mentioned above, we have substantial continuing financial commitments for compliance of environmental matters. During the nine months ended September 30, 2003, we expended a gross total of $10 million related mandatory EHS capital projects and we recovered $5 million from the Deferred Credit balance. The Deferred Credit balance resulted from the 2002 settlement with Shell. As of September 30, 2003, the Deferred Credit balance is zero. We expect a similar operating environmental commitment to continue in future years; however, the level of financial commitment may increase if the environmental laws and regulations become more stringent. 23 EFFECTS OF CURRENCY FLUCTUATIONS We conduct operations in countries around the world. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sales transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our consolidated and combined financial statements. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. The majority of our revenues and costs are denominated in Euros, with the U. S. dollar also being significant. For the nine months ended September 30, 2003, 55% of our total revenues and 57% of our total expenses were from companies incorporated outside the United States. For the nine months ended September 30, 2002, 51% of our total revenues and 60% 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. The average exchange rate of the U. S. dollar to the Euro was approximately 0.8623 to 1.0193 for the nine months ended September 30, 2003 and 2002, respectively. Historically, we have not undertaken hedging strategies to minimize the effect of currency fluctuations. Significant changes in the value of the euro relative to the U.S. dollar could also have an adverse effect on our financial condition and results of operations and our ability to meet interest and principal payments on Euro-denominated debt, including certain borrowings under the credit agreement, and U.S. dollar denominated debt, including the notes and certain borrowings under the credit agreement. CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information in particular, appear under the heading "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations". When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including, without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements, which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Such risks, uncertainties and other important factors include, among others: - general economic and business conditions; including those influenced by international and geopolitical events such as the situation in Iraq and any future terrorist attacks; - the continuing decrease in our annual revenues over the past five years and net income over the last three years; - industry trends; - increases in our leverage; 24 - changes in our ownership structure; - restrictions contained in our debt agreements; - the continuity or replacement of systems and services being provided to us by Shell or its affiliates; - changes in business strategy, development plans or cost savings plans; - competition; - changes in distribution channels or competitive conditions in the markets or countries where we operate; - the highly cyclical nature of the end-use markets in which we participate; - the loss of any of our major customers; - raw material costs and availability; - ability to attain and maintain any price increases for our products; - changes in demand for our products; - availability of qualified personnel; - foreign currency fluctuations and devaluations and political instability in our foreign markets; - the loss of our intellectual property rights; - availability, terms and deployment of capital; - changes in, or the failure or inability to comply with, government regulation, including environmental regulations; and - increases in the cost of compliance with laws and regulations, including environmental laws and regulations. These risks and certain other uncertainties are discussed in more detail in our Registration Statement on Form S-4, as amended (File No. 333-106331), which was declared effective by the SEC on July 2, 2003. There may be other factors, including those discussed elsewhere in this report that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are engaged in manufacturing and marketing resins in the U. S. and internationally. As a result, the Company is exposed to certain market risks that include financial instruments such as foreign currency, short-term investments, trade receivables, and long-term debt. The Company does not enter into derivative instruments for trading purposes; however, an interest rate cap for a notional amount of $150 million has been previously executed in connection with the Company's credit facility. The interest rate cap protects the Company against rising interest rates fluctuation by capping the floating portion of credit facility interest rate. At September 30, 2003, the credit facility balance does not include any amounts outstanding that are subject to variable interest rates except within the limit of the interest rate cap. 25 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Our management, including the CEO and CFO, does not expect that our Disclosure Controls or our "internal controls and procedures for financial reporting" ("Internal Controls") will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Management is aware that certain internal controls continue to be refined and improved. For example, we have implemented an internal control steering committee and commenced the implementation of an internal control software tool to enhance internal controls that will continue to provide us with reasonable assurance that the identified controls are operating as intended. Based upon the Controls Evaluation, the CEO and CFO have concluded that, to the best of their knowledge and subject to the limitations noted above, the Disclosure Controls are effective to timely alert management to material information relating to us during the period when our periodic reports are being prepared. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation. In addition, there have been no changes in the Company's internal control over financial reporting that have occurred during the most recent fiscal quarter that have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 26 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.5 Share Purchase Agreement dated November 14, 2003 by and between Resolution Holdings B.V., a Dutch corporation and Mitsubishi Chemical Corporation, a Japanese corporation. 31.1 CFO Section 302 certification 31.2 CEO Section 302 certification 32 CEO and CFO Section 906 certification (b) Reports on Form 8-K. On August 14, 2003, the Registrants filed a Current Report on Form 8-K to disclose the first quarter 2003 earnings press release under "Item 7. Financial Statements and Exhibits" and "Item 12. Results of Operations and Financial Condition. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESOLUTION PERFORMANCE PRODUCTS LLC Date: November 14, 2003 By: /s/ J. Travis Spoede -------------------- J. Travis Spoede, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) RPP CAPITAL CORPORATION Date: November 14, 2003 By: /s/ J. Travis Spoede -------------------- J. Travis Spoede, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 28 EXHIBIT INDEX Exhibits 10.5 Share Purchase Agreement dated November 14, 2003 by and between Resolution Holdings B.V., a Dutch corporation and Mitsubishi Chemical Corporation, a Japanese corporation. 31.1 CFO Section 302 certification 31.2 CEO Section 302 certification 32 CEO and CFO Section 906 certification 29

RESOLUTION PERFORMANCE PRODUCTS LLC 10-Q