Cabot Corporation Faces Asbestos Related Litigation --------------------------------------------------- Published January 03, 2003 Cabot Corporation has exposure to a safety respiratory products business that it acquired, through a subsidiary, in April 1990. It disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, after an initial period during which responsibility was shared, to indemnify the seller, American Optical Corporation (American Optical), for costs, including legal costs, settlements and judgments, in connection with a number of lawsuits and claims relating to the respirators (in exchange for which the subsidiary received the benefits of the seller's insurance and other indemnities). These lawsuits and claims typically involve allegations that the plaintiffs suffer from asbestosis or silicosis as a result, in part, from respirators that were negligently designed or labeled. The defendants in these lawsuits are often numerous and include, in addition to respirator manufacturers, makers of asbestos and sand used in sand blasting. Neither Cabot, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. Moreover, not every person with exposure to asbestos giving rise to an asbestos claim used a form of respiratory protection. At no time did the business for which Cabot is financially responsible for legal costs represent a significant portion of the respirator market. In addition, as a result of the arrangements involving these lawsuits and claims, Cabot has only a portion of the liability in any given case. When Cabot's subsidiary disposed of the business in 1995 to Aearo Corporation, it agreed with Aearo that for an annual fee of $400,000, the subsidiary would retain responsibility for, and indemnify Aearo against, claims asserted after July11, 1995 to the extent they are attributable to the use of respirators sold before that date. Aearo can discontinue payment of the fee at any time, in which case it will assume the responsibility for and indemnify the Company with respect to these claims. Between the date of divestiture and fiscal 2001, Cabot had never spent more than the $400,000 that it collects from Aearo each year. As of the beginning of calendar year 2002, there were around 28,000 claimants in pending cases asserting claims against American Optical in connection with respirators. As of September30, 2002, there were approximately 43,000 claimants. Under the present allocation arrangements, as claims are settled, Cabot would expect to contribute toward settlement of a significant percentage, but not all, of these claims. During the third quarter of fiscal year 2002, Cabot agreed to pay up to $2million as its contribution toward a settlement involving up to 13,000 claimants in Mississippi. Cabot, at the time, expected to pay this amount over a period of approximately eighteen months. Due to complications in the funding mechanism of the overall settlement of these Mississippi claims, a shortfall of $5.5million in the initial amount to be paid to the plaintiff group resulted. In December 2002, Cabot agreed to fund this shortfall in exchange for an undertaking from the representatives of the payor group (consisting of the various insurers and other parties) to exercise their best efforts to seek a global settlement with the payor group. While Cabot's ability to negotiate an acceptable global settlement and its specific terms are uncertain at this time, the global settlement discussed with the representatives of the payor group would provide that as long as the payor group continues to pay all costs and liabilities in connection with the respirator litigation, Cabot's liability under a global settlement would be limited to a specified amount. As a result of the Mississippi settlement and the rate of new claims which have been filed during the calendar year, Cabot recorded a charge of $5million during the third quarter bringing its total reserve for respirator matters to $6million as of September30, 2002. In estimating its liability, Cabot made the assumptions: (1) that future settlements would continue at the historical rate of $320 per claimant; (2) while the actual number of claims for which Cabot contributes depends upon a number of factors, that Cabot will continue to be responsible for well over half of the total claims; and (3) that a significant number of the outstanding claims are included in the Mississippi settlement. This amount represents Cabot's best estimate of the liability it will incur in connection with the settlement of pending respirator claims. Cabot is unable to reasonably estimate a range of possible loss for pending respirator claims given the current status of litigation and uncertainty involving the outcome of numerous cases. In addition, because this is a very unpredictable area, Cabot is also unable to estimate the number of future claims or the range of liability that may be incurred as a result of such claims on any reasonable basis. As a result, Cabot has not recorded a reserve for future claims at this time. While Cabot's liability associated with these future claims could have a material effect on the results of operations in a particular quarter or fiscal year as these matters develop or as a result of Cabot's initiative to seek a global settlement, Cabot continues to believe that this issue will not have a material adverse effect on Cabot's financial position or liquidity. COMPANY PROFILE Cabot Corporation (NYSE: CBT) Two Seaport Lane, Ste. 1300 Boston, MA 02210 Phone: 617-345-0100 Fax: 617-342-6103 http://www.cabot-corp.com Employees : 4,500 Revenue : $ 1,557,000,000 Net Income : $ 106,000,000 Assets : $ 2,067,000,000 Liabilities : $ 1,090,000,000 (As of September 30, 2002) Description: Cabot is the world's #1 producer of carbon black, a reinforcing and pigmenting agent used in tires, inks, cables, and coatings. It has about 25% of the world market for carbon black. Cabot also makes fumed metal oxides such as fumed silica and fumed alumina, which are used as anti-caking, thickening, and reinforcing agents. Other products include tantalum (used to make capacitors used in electronics), thermoplastic concentrates, ink jet colorants, and fluids used in gas and oil drilling. Cabot also owns about 42% of Aearo Corporation (a maker of safety products such as eyewear; formerly Cabot Safety Holding Corporation). ------------------------------------------------------------------- LitigationDataSource.com