Honeywell 2003 Annual Report Download - page 403

Refractory Products
Honeywell owned NARCO from 1979 to 1986. NARCO produced refractory products
(high temperature bricks and cement) which were sold largely to the steel
industry in the East and Midwest. Less than 2 percent of NARCO's products
contained asbestos.
When we sold the NARCO business in 1986, we agreed to indemnify NARCO with
respect to personal injury claims for products that had been discontinued prior
to the sale (as defined in the sale agreement). NARCO retained all liability for
all other claims. NARCO had resolved approximately 176,000 claims through
January 4, 2002, the date NARCO filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code, at an average cost per claim of two thousand two hundred
dollars. Of those claims, 43 percent were dismissed on the ground that there was
insufficient evidence that NARCO was responsible for the claimant's asbestos
exposure. As of the date of NARCO's bankruptcy filing, there were approximately
116,000 remaining claims pending against NARCO, including approximately 7
percent in which Honeywell was also named as a defendant. Since 1983, Honeywell
and our insurers have contributed to the defense and settlement costs associated
with NARCO claims. We have approximately $1.3 billion of insurance remaining
that can be specifically allocated to NARCO related liability.
As a result of the NARCO bankruptcy filing, all of the claims pending against
NARCO are automatically stayed pending the reorganization of NARCO, except one
claim which is not material as to which the stay was lifted in August 2003.
Because the claims pending against Honeywell necessarily will impact the
liabilities of NARCO, because the insurance policies held by Honeywell are
essential to a successful NARCO reorganization, and because Honeywell has
offered to commit the value of those policies to the reorganization, the
bankruptcy court has temporarily enjoined any claims against Honeywell, current
or future, related to NARCO. Although the stay has been extended twenty-two
times since January 4, 2002, there is no assurance that such stay will remain in
effect. In connection with NARCO's bankruptcy filing, we paid NARCO's parent
company $40 million and agreed to provide NARCO with up to $20 million in
financing. We also agreed to pay $20 million to NARCO's parent company upon the
filing of a plan of reorganization for NARCO acceptable to Honeywell, and to pay
NARCO's parent company $40 million, and to forgive any outstanding NARCO
indebtedness, upon the confirmation and consummation of such a plan.
As a result of ongoing negotiations with counsel representing NARCO related
asbestos claimants regarding settlement of all pending and potential NARCO
related asbestos claims against Honeywell, we have reached definitive agreements
or agreements in principle with approximately 256,000 claimants, which
represents in excess of 90 percent of the approximately 275,000 current
claimants who are now expected to file a claim as part of the NARCO
reorganization process. We are also in discussions with the NARCO Committee of
Asbestos Creditors on Trust Distribution Procedures for NARCO. We believe that,
as part of the NARCO plan of reorganization, a trust will be established
pursuant to these Trust Distribution Procedures for the benefit of all asbestos
claimants, current and future. If the trust is put in place and approved by the
Court as fair and equitable, Honeywell as well as NARCO will be entitled to a
permanent channeling injunction barring all present and future individual
actions in state or federal courts and requiring all asbestos related claims
based on exposure to NARCO products to be made against the federally-supervised
trust. We expect the NARCO plan of reorganization and the NARCO trust to be
approved by the Court in 2004. As part of its ongoing settlement negotiations,
Honeywell has reached agreement in principle with the representative for future
NARCO claimants to cap its annual contributions to the trust with respect to
future claims at a level that would not have a material impact on Honeywell's
operating cash flows. Given the substantial progress of negotiations between
Honeywell and NARCO related asbestos claimants and between Honeywell and the
Committee of Asbestos Creditors during the fourth quarter of 2002, Honeywell
developed an estimated liability for settlement of pending and future asbestos
claims and recorded a charge of $1.4 billion for NARCO related asbestos
litigation charges, net of insurance recoveries. This charge consists of the
estimated liability to settle current asbestos related claims, the estimated
liability related to future asbestos related claims through 2018 and obligations
to NARCO's parent, net of insurance recoveries of $1.8 billion.
The estimated liability for current claims is based on terms and conditions,
including evidentiary requirements, in definitive agreements or agreements in
principle with in excess of 90 percent of current claimants. Once finalized,
settlement payments with respect to current claims are expected to be made over
approximately a four-year period.
The liability for future claims estimates the probable value of future asbestos
related bodily injury claims asserted against NARCO over a 15 year period and
obligations to NARCO's parent as discussed above. The estimate is based upon the
disease criteria and payment values contained in the NARCO Trust Distribution
Procedures negotiated with the NARCO Committee of Asbestos Creditors and the
NARCO future