Document YD7ZGBry5aZjJxN7y7BddbZGK

COOPER INDUSTRIES LTD(Form 424B2, Received 10/25/2002 13 39 31) Page 42 of 68 classified as a long-term liability, based on Cooper's current estimate of the most likely amount of losses that it believes will be incurred The product liability accrual consists of $3 2 million of known claims with respect to ongoing operations, $4 9 million of known claims for previously divested operations and $4 9 million which represents an estimate of claims that have been incurred but not yet reported While Cooper is generally self-insured with respect to product liability claims, Cooper has insurance coverage for individual 2001 claims above $3 0 million Environmental remediation costs are accrued based on estimates of known environmental remediation exposures Such accruals are adjusted as information develops or circumstances change The environmental liability accrual includes $7 1 million related to sites owned by Cooper and $39 2 million for retained environmental liabilities related to sites previously owned by Cooper and third-party sites where Cooper was a potentially responsible party Third-party sites usually involve multiple contributors where Cooper's liability will be determined based on an estimate of Cooper's proportionate responsibility for the total cleanup. The amount actually accrued for such sites is based on these estimates as well as an assessment of the financial capacity of the other potentially responsible parties It has been Cooper's consistent practice to include the entire product liability accrual and a significant portion of the environmental liability accrual as current liabilities, although only approximately 15-25% of the balance classified as current is normally spent on an annual basis The annual effect on earnings for product liability is essentially equal to the amounts disbursed In the case of the environmental liability, the annual expense is considerably smaller than the disbursements, smce the vast majority of Cooper's environmental liability has been recorded in connection with acquired companies The change in the accrual balances from year to year reflects the effect of acquisitions and divestitures as well as normal expensing and funding Cooper has not utilized any form of discounting m establishing its product or environmental liability accruals While both product liability and environmental liability accruals involve estimates that can have wide ranges of potential liability, Cooper has taken a proactive approach and has managed the costs m both of these areas over the years Cooper does not believe that the nature of its products, its production processes, or the materials or other factors involved in the manufacturing process subject Cooper to unusual nsks or exposures for product or environmental liability Cooper's greatest exposure to inaccuracy m its estimates is with respect to the constantly changing definitions of what constitutes an environmental liability or an acceptable level of cleanup F-l 1 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with acquisitions accounted for using the purchase method of accounting, Cooper records, to the extent appropriate, accruals for the costs of closing duplicate facilities, severing redundant personnel and integrating the acquired business into existing Cooper operations Significant accruals mclude plant shut-down and realignment costs The following table summarizes the accrual balances and activity during each of the last three years ACTIVITY DURING EACH YEAR 2001 2000 (in millions) 1999