James Hardie Industries NV
				ARBN 097 829 895
				Incorporated in The Netherlands
12 December 2006				The liability of members is limited
				Atrium 8th Floor
				Strawinskylaan 3077
				1077 ZX Amsterdam,
The Manager				The Netherlands
Company Announcements Office
Australian Stock Exchange Limited				Telephone: 31-20-301 2980
20 Bridge Street				Fax:           31-20-404 2544
SYDNEY NSW 2000

Dear Sir

Lodgement of Explanatory Memorandum

Please accept for lodgement the typeset version of the Explanatory Memorandum outlining the proposal to provide long-term funding for compensating Australian asbestos-related personal injury claims against certain former James Hardie companies. The Explanatory Memorandum includes an Independent Expert’s Report.

As previously announced, the proposal will be the subject of an Extraordinary General Meeting to be held in Ballroom B, Hilton Amsterdam, Apollolaan 138, 1077 BG Amsterdam, The Netherlands at 11.30 am Central Europe Time (CET) on Wednesday, 7 February 2007.

An Extraordinary Information Meeting of CUFS holders of James Hardie Industries NV will be held at The Wesley Conference Centre, 220 Pitt Street, Sydney NSW Australia at 9.30 am Australian Eastern Daylight Time (AEDT) on Thursday, 1 February 2007.

The Notice of Meetings that relates to the proposal contained in the Explanatory Memorandum is expected to be lodged with the ASX later this week. The printed Explanatory Memorandum and the Notice of Meetings is scheduled will be mailed to James Hardie CUFS holders on Thursday, 21 December, 2006.

Yours faithfully

Benjamin P Butterfield
Company Secretary

Explanatory Memorandum

James Hardie Industries NV
ARBN 097 829 895

Proposal to provide long-term funding for compensating Australian asbestos-related personal injury claims against certain former James Hardie companies

Your Directors unanimously recommend that you vote in favour of the Proposal.

This document is important and requires your immediate attention. It should be read in its entirety. If you are in doubt as to what you should do, you should consult your investment adviser or other professional adviser. If you have recently sold all of your James Hardie shares, please ignore this document. If you have any queries about this document, the Proposal or how to vote, information is available on the James Hardie Shareholder Helpline, available between 8:00am and 6:00pm AEDT on Business Days. Call 1800 021 321 within Australia or (+61 2) 9638 9889 from outside Australia.

FINANCIAL ADVISER		AUSTRALIAN LEGAL ADVISER

IMPORTANT NOTICES

This document has been prepared for the purpose of assisting Shareholders to decide how to vote in relation to the Proposal. You should read this document in its entirety before making a decision as to how to vote on the resolution to be considered at the Extraordinary General Meeting.

DEFINED TERMS

Capitalised terms, and certain other recurring terms used in this document are defined in the glossary in Part G.

FORWARD LOOKING STATEMENTS

This document contains both historical and forward-looking statements. All statements other than statements of historical fact are or may be deemed to be forward-looking statements. Words such as “believe”, “anticipate”, “plan”, “expect”, “consider”, “intend”, “target”, “estimate”, “project”, “predict”, “forecast”, “guideline”, “should”, “aim” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to place undue reliance on these forward-looking statements and all such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. Forward-looking statements speak only as of the date they are made and are statements of the current expectations of James Hardie concerning future results and events. Because forward-looking statements address future events and conditions, they, by their very nature, involve inherent risks and uncertainties. Such known and unknown risks, uncertainties and other factors may cause James Hardie’s actual results, performance or other achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements. These factors include but are not limited to: all matters relating to or arising out of the prior manufacture of products containing asbestos by the Former James Hardie Companies; competition and product pricing in the markets in which James Hardie operates; general economic and market conditions; compliance with and possible changes in law, including environmental and health and safety laws; the success of James Hardie’s research and development efforts; the supply and cost of raw materials; James Hardie’s reliance on a small number of product distributors; the consequences of product failures or defects; exposure to environmental, asbestos or other legal proceedings; risks of conducting business internationally; compliance with and changes in tax laws and treatments; foreign exchange risks; and all other risks identified in James Hardie reports filed with Australian and US securities agencies and exchanges. You should carefully review all of the information, including the revised presentation of financial information and notes to such information, included in this document, before making a decision on how to vote on the Proposal to be considered at the Extraordinary General Meeting.

KEY FUTURE DATES

The key dates in respect of the implementation of the Proposal are shown below.

All times referred to are Australian Eastern Daylight time (“AEDT”) unless otherwise stated.

This document is dated 12 December 2006.

EVENT		DATE
Deadline for submission of Proxy Request Forms for Extraordinary General Meeting		No later than 5 pm AEDT on 29 January 2007
Extraordinary Information Meeting – in Australia		9:30am AEDT on 1 February 2007 at Wesley Conference Centre, 220 Pitt Street, Sydney
Record date for voting at Extraordinary General Meeting		No later than 5 pm AEDT on 2 February 2007
Deadline for submission of Direction Forms for Extraordinary General Meeting		No later than 5 pm AEDT on 5 February 2007
Deadline for submission of Proxy Forms for Extraordinary General Meeting		No later than 9:30pm AEDT on 5 February 2007
Extraordinary General Meeting – in The Netherlands		11:30am Central European Time and 9:30pm AEDT, 7 February 2007 at Ballroom B, Hilton Amsterdam, Apollolaan 139, 1077 BG Amsterdam
Expected Commencement Date (if Proposal approved by Shareholders and all other conditions are met)		14 February 2007*

Instructions on how to vote are contained in the Notice of Meeting which accompanies this document.

i    James Hardie Industries

		James Hardie Industries N.V.
		ARBN 097 829 895
		Incorporated in The Netherlands The
		liability of members is limited
		Atrium 8th Floor
		Strawinskylaan 3077
		1077 ZX Amsterdam,
		The Netherlands
		Telephone: 31-20-301 2980
		Fax:           31-20-404 2544

12 December 2006

Dear Shareholder

We are writing to you to seek your approval of a proposal to provide long-term compensation funding to a special purpose fund for Australian asbestos-related personal injury claims against certain former James Hardie subsidiaries (the “Proposal”). The Proposal reflects James Hardie’s response to the estimated future funding shortfall of those companies to meet such claims.

This Proposal is the result of negotiations between James Hardie and the NSW Government, which were formalised in a conditional agreement signed on 1 December 2005, and then amended on 21 November 2006 (known as the “Final Funding Agreement”). All substantive conditions to the Final Funding Agreement have been satisfied, except the requirement for the approval of James Hardie’s shareholders. The Proposal has the support of other interested stakeholders such as the Asbestos Diseases Groups, ACTU and UnionsNSW, and is consistent with current investor and Australian community expectations.

All parties involved in the negotiations recognise the benefits of aligning the interests of James Hardie’s shareholders and people who have certain personal injury claims against the former James Hardie subsidiaries with the future success of James Hardie over the period of the Final Funding Agreement, which is expected to last until at least 2045.

The Proposal is designed to be flexible by seeking to accommodate changes in the profile and quantum of asbestos claims and James Hardie’s future financial performance over the term of the Final Funding Agreement. However, because the future level of claims which will be made against the former James Hardie subsidiaries and the level of James Hardie’s free cash flow are uncertain, no assurance can be given that there will be sufficient funds to pay all relevant Australian asbestos-related personal injury claims.

The Explanatory Memorandum sets out material information relevant to the Proposal. Shareholders should read this document in its entirety to understand fully the Proposal before making a decision whether to vote in favour of the Proposal.

James Hardie commissioned an independent expert to provide an independent third party assessment of the Proposal. The independent expert concluded that the implementation of the Proposal is in the best interests of James Hardie Industries NV and its enterprise as a whole.

The Directors believe that the Proposal represents the best option available to respond to the estimated future funding shortfall for Australian asbestos-related personal injury claims against the former James Hardie subsidiaries. They also believe that, in addition to the financial benefit of providing compensation for people with certain personal injury claims against the former James Hardie subsidiaries, on balance, the benefits expected to be derived by the James Hardie Group from the implementation of the Proposal outweigh the expected disadvantages and risks of the Proposal.

James Hardie Industries  ii

Your Directors unanimously recommend that you vote in favour of the Proposal, as they intend to do in respect of their shareholdings. The Proposal will not be implemented without Shareholder approval, which requires the resolution to be passed by a majority of the votes cast by those persons present (in person or by proxy) and entitled to vote at a general meeting at which at least 5% of the issued and outstanding share capital is present or represented.

Yours sincerely

Members of the Boards of James Hardie Industries NV:

Supervisory Board:

Meredith Hellicar (Chairman)				John Barr (Deputy Chairman)
Michael Brown				Michael Gillfillan
James Loudon				Donald McGauchie
Managing Board:
Louis Gries (Chief Executive Officer)				Benjamin Butterfield
Russell Chenu

Joint Board:

The Joint Board of James Hardie Industries NV consists of all the Directors of the Supervisory Board and Louis Gries as Chief Executive Officer.

iii    James Hardie Industries

CONTENTS

PART A: INTRODUCTION AND OVERVIEW			1
1. Key Features of the Proposal			2
1.1 Why have the Directors proposed to provide long-term compensation funding?			2
1.2 The Proposal at a glance			2
1.3 What is the financial and accounting impact of the Proposal?			4
1.4 What are the key benefits to James Hardie of the Proposal?			5
1.5 What are the key disadvantages to James Hardie of the Proposal?			6
1.6 What are the key risks to James Hardie of the Proposal?			6
1.7 What are the key steps required to implement the Proposal?			7
1.8 How will implementing the Proposal affect Shareholders?			7
1.9 What happens to James Hardie if the Proposal does not proceed?			7
1.10 What alternative options were considered by the Directors?			8
1.11 Has the Proposal been approved by other parties?			8
1.12 Has the Proposal been independently reviewed?			8
1.13 What do the Directors recommend?			8
1.14 What do Shareholders have to do?			8
PART B: BACKGROUND TO THE PROPOSAL			9
1. Overview			10
2. James Hardie’s Past Association with Asbestos			10
2.1 Background			10
2.2 Past association with asbestos in Australia			11
2.3 Past association with asbestos outside Australia			11
3. The Establishment of the MRCF and the 2001 Reorganisation			12
3.1 Background to events in 2001			12
3.2 Establishment of the MRCF			14
3.3 2001 Reorganisation			16
3.4 Establishment of ABN 60 Foundation			17
3.5 Indications of estimated future funding shortfall			19
4. The Jackson Commission			19
4.1 Background			19
4.2 Scope of the inquiry			19
4.3 Key findings			20
4.4 Developments during and immediately following the Jackson Commission			21
5. The Heads of Agreement and Subsequent Events			23
5.1 Heads of Agreement			23
5.2 Events subsequent to Heads of Agreement			24
5.3 Final Funding Agreement			24
5.4 Tax Conditions Precedent			24
5.5 Release Legislation and Transaction Legislation			25
5.6 Accounting for asbestos-related payments			25
5.7 Other matters			25

James Hardie Industries    iv

6. Involvement of the MRCF in the Proposal			25
7. The NSW Government Review of Legal and Administrative Costs in Dust Diseases Compensation Claims			26
8. Quantification of Asbestos Liabilities			28
8.1 Actuarial assessments			28
8.2 Background			28
8.3 KPMG Actuarial Report			30
8.4 Uncertainty associated with actuarial valuations			32
9. James Hardie’s Current Business			33
9.1 Introduction			33
9.2 Business segments			33
9.3 Location of operations			37
9.4 Short-term outlook of James Hardie			38
9.5 Business strategy			38
PART C: DETAILS OF THE PROPOSAL			39
1. Overview			40
1.1 Introduction			40
1.2 Annual payment			40
1.3 Annual Cash Flow Cap			40
1.4 Term			40
1.5 Other key aspects of the Proposal			40
1.6 Summary only			41
2. Asbestos Injuries Compensation Fund			41
2.1 Asbestos Injuries Compensation Fund			41
2.2 Role of the Trustee			41
2.3 Payment of claims against the Former James Hardie Companies			45
2.4 Governance of the Trustee			45
2.5 Audit and actuarial review			45
2.6 Restrictions on location and business of the Asbestos Injuries Compensation Fund and the Trustee			45
2.7 Statutory Recoveries			45
2.8 Rationing			46
2.9 Ownership and management of the Former James Hardie Companies			47
2.10 Liability of Amaca for Marlew Claims			48
2.11 Consequences if the Trustee becomes Insolvent or unable to operate			48
3. James Hardie’s Funding Obligations			48
3.1 Funding of the Asbestos Injuries Compensation Fund			48
3.2 Interim funding measures			56
3.3 Liability position of James Hardie			56
3.4 Substitution of Performing Subsidiary			56
3.5 James Hardie Guarantee			57
3.6 Intercreditor arrangements			57
3.7 Financial covenants			58

v    James Hardie Industries

4. Restriction on Specified Dealings			58
4.1 Introduction			58
4.2 Restriction on Specified Dealings			58
4.3 Exemptions to restriction			59
4.4 Arm’s-length dealings			59
4.5 Ordinary course of business			60
4.6 Transactions between members of the Close Group			60
4.7 Ordinary dividends			60
4.8 Issues of securities – equity, debt and hybrid			60
4.9 Capital Management Transactions			60
4.10 Valuation Ratio			61
4.11 Takeover bid by a James Hardie Group company			62
4.12 Excluded Related Entity gains control of James Hardie			62
4.13 Accession by new Parent Entity or Sibling Entity			63
4.14 Wind-Up Event or Reconstruction Event			63
4.15 Assessing effect of Specified Dealings			63
4.16 Required notice for non-exempt Specified Dealings			63
4.17 Other options available with respect to Specified Dealings			63
4.18 Aggregation of certain Specified Dealings			63
4.19 Review of Specified Dealings by Independent Valuation Expert			64
5. Capital Elections			65
6. Mandatory Accession to Final Funding Agreement and Related Agreements			68
6.1 Introduction			68
6.2 Accession by new Parent Entity			68
6.3 Accession by new Sibling Entity			70
6.4 Legal opinion			71
6.5 James Hardie release from obligations			71
7. Restrictions on Adverse Legislative or Regulatory Action			71
7.1 Introduction			71
7.2 What is adverse legislative or regulatory action?			72
7.3 Scope of undertakings			72
7.4 No amendment of common law basis of damages			73
7.5 Referral of legislative powers to the Australian Parliament			73
7.6 Consequences of adverse legislative or regulatory action by the NSW Government			73
7.7 Suspension of obligations of the NSW Government			73
7.8 NSW Government advocacy and participation in discussions with Other Governments			74
7.9 Actions by Other Governments			74
8. Default, Enforcement and Termination			75
8.1 Introduction			75
8.2 Defaults			75
8.3 Enforcement of Final Funding Agreement by the NSW Government			76
8.4 Termination of Final Funding Agreement			77

James Hardie Industries    vi

9. Releases of Civil Liabilities			79
9.1 Introduction			79
9.2 Rationale for Releases			80
9.3 Scope of releases for Relevant Matters and economic loss			80
9.4 Other Releases			82
10. Funding for Medical Research and Education Campaign			83
10.1 Introduction			83
10.2 Medical research funding			83
10.3 Education campaign			83
11. Conditions to Implementing the Proposal			84
11.1 Introduction			84
11.2 Conditions			84
11.3 Timing			84
PART D: FINANCIAL IMPACT OF THE PROPOSAL			85
1. Financial Impact of the Proposal			86
1.1 Introduction			86
1.2 Accounting for the Proposal			86
1.3 Taxation implications			92
1.4 Distributions to Shareholders			92
1.5 Revised presentation of financial information			93
1.6 Explanation of ongoing effect on James Hardie			97
PART E: IMPORTANT CONSIDERATIONS FOR SHAREHOLDERS			103
1. Overview			104
2. Key Benefits to James Hardie of the Proposal			104
2.1 Proportion of Free Cash Flow which may be payable under the Proposal is limited			104
2.2 Funding obligations limited by reference to Australian asbestos-related personal injury claims			105
2.3 No recourse to the James Hardie Group			105
2.4 Reduction in risk of adverse governmental action			105
2.5 Additional benefits of implementing the Proposal			106
3. Key Disadvantages to James Hardie of the Proposal			107
3.1 Reduction in Free Cash Flow			107
3.2 Financial reporting volatility			107
3.3 Long-term nature of the Proposal			107
3.4 Restrictions on the ability of James Hardie to undertake certain transactions			108
3.5 Ongoing monitoring and compliance requirements			108
3.6 Ongoing associated costs			108

vii    James Hardie Industries

4. Key Risks to James Hardie of the Proposal			108
4.1 Possible adverse action against James Hardie			108
4.2 Insufficient cash flow to fund capital expenditure, repayment of debt principal and Shareholder distributions			109
4.3 Other asbestos claimants seeking compensation outside the Trustee arrangements			110
4.4 Insufficient Australian taxable income to utilise tax deductions			110
4.5 Restriction on ability to undertake certain transactions			110
4.6 Potential escalation in Proven Claims and associated costs			110
4.7 Adequacy of funds available to meet Payable Liabilities			111
4.8 Foreign exchange exposure			111
4.9 Complexity of the Proposal			112
4.10 Long-term nature of the Proposal			112
4.11 Ability to raise capital			112
4.12 Remaining product bans and boycotts not being lifted			112
4.13 Risk of Tax Conditions ceasing to be satisfied			112
4.14 Dependence upon legislation			113
5. Matters Not Affected by the Proposal			113
5.1 No changes to operations or identity of the James Hardie Group			113
6. What Happens if the Proposal Does Not Proceed?			113
6.1 Final Funding Agreement will not come into effect			113
6.2 Diminishing funds to meet asbestos-related liabilities of the Former James Hardie Companies			114
6.3 Adverse legislative action			114
6.4 Increased litigation			114
6.5 No releases or extinguishment of liability			114
6.6 Other negative impacts on James Hardie			115
7. Other Options Considered by the Directors			115
7.1 Options considered			115
7.2 Evaluation			116
7.3 Independent Expert’s recommendation			116
7.4 Outcome and conclusions			116
8. Directors’ Recommendation			116
8.1 Recommendation			116
8.2 Principal reasons for recommendation			116
8.3 Board structure of James Hardie			117
8.4 Members of Supervisory Board and Managing Board			117
8.5 Directors’ recommendation procedure			118

James Hardie Industries    viii

PART F: ADDITIONAL INFORMATION			119
1. Other Aspects of the Final Funding Agreement			120
1.1 Consequences of a Wind-Up Event			120
1.2 Consequences of a Reconstruction Event			121
1.3 Adjustment mechanism – Overlapping Scheme			123
2. Summaries of Other Material Agreements			124
2.1 James Hardie Guarantee			124
2.2 Intercreditor Deeds			125
2.3 Establishment of the Asbestos Injuries Compensation Fund			127
2.4 Constituent documents of the Trustee			127
2.5 Unions’ Deed of Release			129
2.6 NSW Government Deed of Release			130
2.7 Irrevocable Powers of Attorney			130
2.8 Costs of the Proposal			130
3. Other Information Relevant to the Proposal			131
3.1 Legal basis for compensation of asbestos diseases in Australia			131
3.2 Further information in relation to former asbestos-related activities			133
PART G: GLOSSARY			135
ANNEXURE A: INDEPENDENT EXPERT’S REPORT			163

ix    James Hardie Industries

Part A

Introduction
and Overview

James Hardie Industries    1

PART A – INTRODUCTION AND OVERVIEW

1. KEY FEATURES OF THE PROPOSAL

This Section is a summary only. Shareholders should read the entire document before making a decision on how to vote. Capitalised terms used in this document are defined in the glossary in Part G.

1.1 WHY HAVE THE DIRECTORS PROPOSED TO PROVIDE LONG-TERM COMPENSATION FUNDING?

The Proposal has been developed in response to an estimated future funding shortfall faced by the Former James Hardie Companies in relation to future Australian asbestos-related personal injury claims against them, and certain similar claims against Marlew, a former subsidiary of ABN 60, and is consistent with current investor and Australian community expectations. In developing the Proposal, James Hardie has sought to align the interests of James Hardie’s shareholders and Claimants¹ with the future success of James Hardie over the period of the Final Funding Agreement.

None of the Former James Hardie Companies is a member of the current James Hardie Group. James Hardie believes that under current law James Hardie has no present legal liability to meet the liabilities of the Former James Hardie Companies, except to the limited extent previously agreed to by James Hardie under the terms of a deed of covenant and indemnity and interim funding arrangements described in Part B, Sections 3.2 and 4.4.6.

Notwithstanding those matters, the Directors are seeking Shareholder approval to implement the Proposal, having regard to the following factors:

>		the Former James Hardie Companies engaged in manufacturing, production and sales of products containing asbestos while they were members of the Former James Hardie Group. Marlew engaged in asbestos mining activities while it was a member of the Former James Hardie Group;
>		while the Former James Hardie Companies were within the Former James Hardie Group, they had sufficient assets so as to enable them to meet all of the asbestos-related claims which had been made against them;
>		upon separation of Amaca and Amaba from the Former James Hardie Group in February 2001, ABN 60 (the former listed holding company of the Former James Hardie Group, then known as James Hardie Industries Limited) provided additional funding to those entities, which was estimated by ABN 60 management to be sufficient to meet the so-called “best estimate” (see glossary in Part G) of Amaca and Amaba’s asbestos-related liabilities prepared by an external actuarial firm (Trowbridge Consulting);
>		following the establishment of the trust known as the Medical Research and Compensation Foundation (“MRCF”) in 2001 by ABN 60, there has been a significant increase in the estimated asbestos-related personal injury liabilities of the Former James Hardie Companies. KPMG Actuaries concluded that the significant increase in the estimated liabilities from around 2001 was due in material part to an unforeseeable upward trend in claim numbers and average claims costs. The graphs in Part B, Sections 8.2 and 8.3.4 illustrate this upward trend;
>		it therefore became apparent that the funds available to Amaca and Amaba would not be sufficient to meet their expected asbestos-related personal injury liabilities, resulting in a significant estimated future funding shortfall;
>		the contribution of funding on a voluntary basis in response to such a shortfall is consistent with investor and Australian community expectations; and
>		James Hardie is at risk of having potential adverse action taken against it by governments, unions and consumers if it does not provide a response to the estimated future funding shortfall which is acceptable to the NSW Government, the Australian Government, the ACTU, UnionsNSW and Asbestos Diseases Groups. While it is not possible to predict the precise nature or impact of such actions, it is possible that these actions could, individually or cumulatively, have a significant adverse effect upon James Hardie’s profitability, results of operation and reputation, particularly with respect to its Australian based operations.

These matters are explained in detail in the remainder of this Section, Part B and Part E, Section 6.

1.2 THE PROPOSAL AT A GLANCE

The Proposal is designed to provide long-term funding in relation to future Australian asbestos-related personal injury claims against the Former James Hardie Companies (including claims relating to compensation to relatives). The Proposal is set out in the Final Funding Agreement, to which James Hardie, the Performing Subsidiary, the Asbestos Injuries Compensation Fund Limited (the “Trustee”) and the NSW Government are parties. A copy of the Final Funding Agreement is available on the James Hardie website at www.ir.jameshardie.com.au.

The key elements of the Proposal are as follows:

>

establishment of the Asbestos Injuries Compensation Fund, which will be managed by the Trustee to provide compensation for proven Australian asbestos-related personal injury claims against the Former James Hardie Companies, and certain similar claims with respect to

2    James Hardie Industries

PART A — INTRODUCTION AND OVERVIEW

Marlew. The Asbestos Injuries Compensation Fund will not provide compensation for any non Australian asbestos-related claims or any claims for pure economic loss arising from asbestos exposure. The Trustee will be controlled but not owned by James Hardie;

>

James Hardie 117 Pty Ltd, a wholly-owned Australian subsidiary of James Hardie (known as the “Performing Subsidiary”) will provide funding to the Trustee on a long-term agreed basis. Funding Payments will include:

	–		Initial Funding to the Trustee of A$184.3 million; and
	–		subsequent Annual Payments to the Trustee, based on annually updated actuarial “central estimates” (see glossary in Part G) of certain Australian asbestos-related personal injury liabilities, subject to the operation of an Annual Cash Flow Cap;

>		James Hardie has agreed to observe a restriction on its ability to undertake certain transactions including certain Distributions, Reorganisations and Non-Arm’sLength Dealings;
>		James Hardie has provided a guarantee to the Trustee and the NSW Government of the payment obligations of the Performing Subsidiary;
>		a cap on the amount of the Annual Payments to the Trustee after the Initial Funding. This cap will be based on a percentage of James Hardie’s Free Cash Flow, which will initially be set at 35% of Free Cash Flow of the immediately preceding Financial Year, with a phased reduction to 10% possible over time depending on James Hardie’s financial performance and the actuarial assessment of expected claims;

>		no cap on individual payments to Claimants;
>		the initial term of the Final Funding Agreement is to 31 March 2045 but there is a possibility that the Annual Payments may be terminated if the parties to the Final Funding Agreement are able to agree on appropriate terms of termination;
>		intercreditor arrangements have been agreed between James Hardie, the Trustee and the NSW Government, on terms intended to ensure that, if an Insolvency Event of James Hardie were to arise, James Hardie’s nominated lenders would be paid in full before any amounts are paid to the Trustee; and
>		separate annual contributions by James Hardie to fund medical research and an education campaign, in the manner described in Part C, Section 10.

A simplified diagram representing the funding structure is set out below:

FUNDING STRUCTURE

James Hardie Industries    3

PART A – INTRODUCTION AND OVERVIEW

The Proposal is designed to be flexible by seeking to accommodate changes in the profile and quantum of asbestos claims and James Hardie’s future financial performance. However, because the future level of claims which will be made against the Former James Hardie Companies and the level of Free Cash Flow are uncertain, no assurance can be given that the Trustee will have sufficient funds to be able to compensate all Claimants against the Former James Hardie Companies or Marlew, or provide full compensation in relation to any particular claim or claims.

Under the Final Funding Agreement, the NSW Government has agreed and acknowledged that, apart from the funding obligations contemplated in the Final Funding Agreement, no member of the James Hardie Group has any liability to meet any funding shortfall arising in relation to the Trustee’s ability to compensate all Claimants against the Former James Hardie Companies. The legislation passed in NSW in connection with the Proposal makes provision for compensation payments by the Trustee to be rationed, subject to oversight by the NSW Government and the NSW Supreme Court, in the event that such funding is unlikely to be sufficient to meet all such claims as they fall due.

The Proposal does not require James Hardie to raise any new equity capital in order to implement the Proposal, and implementation of the Proposal will not, of itself, involve any change in ownership of James Hardie nor require any change to the nature, scale or scope of its existing operations. In particular:

>		James Hardie’s primary stock exchange listing on the ASX will be unchanged by the Proposal, and James Hardie will remain subject to the ASX Listing Rules;
>		there will be no change to the identity of the Boards or senior management as a result of the Proposal; and
>		no change in James Hardie’s dividend practice is currently planned or envisaged. The Directors will continue to determine the amount of the dividend, if any, every six months, having regard to the after-tax profits available, the prospects and reinvestment needs of the businesses, and the funding and other requirements under the Final Funding Agreement.

Further information on the Proposal is set out in Part C.

1.3 WHAT IS THE FINANCIAL AND ACCOUNTING IMPACT OF THE PROPOSAL?

An Initial Funding payment to the Trustee of A$184.3 million, and annual payments of up to 35% of James Hardie’s Free Cash Flow in any financial year, will be required to be made by the Performing Subsidiary for each Financial Year during the Term.

The payments to the Trustee will reduce the amount of funds available to be utilised by James Hardie, including for funding business growth, making repayments of debt principal and making distributions to Shareholders.

Based on James Hardie’s current financial position and current expectations of its financial performance (which assumes continuing favourable business conditions for James Hardie) and recent actuarial estimates of the future asbestos liabilities of the Former James Hardie Companies in the near term, James Hardie does not expect that implementation of the Proposal will prevent it from funding and growing its existing business, making repayments of debt principal or making distributions to Shareholders in the near term. Although James Hardie does not have any expectation that the Proposal will cease to be affordable, no assurance can be given as to the long-term effect of the Proposal on James Hardie’s financial position, results of operation or outlook.

Calculation of the annual payments will be affected by the annual actuarial central estimate of relevant Australian asbestos-related personal injury liabilities for a rolling three year period, the net asset position of the Trustee, the estimated operating expenses of the Trustee and the operation of the annual cash flow cap (which is dependent upon the Australian dollar Free Cash Flow of James Hardie). Because it is not possible to predict these variables with any certainty on an ongoing basis, it is not possible reliably to estimate future funding payments to be made by James Hardie. If James Hardie’s Free Cash Flow is zero or negative for any Financial Year, no Annual Payment will be required on the next following Payment Date.

On 5 July 2006, James Hardie made a payment of A$189 million to the ATO which represented part payment of an amended tax assessment of A$378 million received by one of its subsidiary companies, RCI Pty Limited, in respect of the 1999 financial year. This payment will significantly reduce James Hardie’s Free Cash Flow in respect of the year ending 31 March 2007 which is used to calculate the Annual Cash Flow Cap in respect of the Annual Payment due on 1 July 2007. RCI Pty Limited strongly disputes the amended assessment and is pursuing all avenues of objection and appeal to contest the ATO’s position in this matter.

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PART A — INTRODUCTION AND OVERVIEW

On the assumptions that:

>		James Hardie’s Free Cash Flow (pre asbestos payments and any payments in respect of the assessment above) for the year ending 31 March 2007 is the same as the year ended 31 March 2006 (A$320 million); and
>		the KPMG actuarial report projections as at 30 September 2006 are unchanged.

James Hardie’s Free Cash Flow for the year ending 31 March 2007 (after the adjustments to Free Cash Flow for the year ending 31 March 2007 set out in the Final Funding Agreement and the payment in respect of the assessment above) would be A$39.5 million. On this basis, the Annual Cash Flow Cap in relation to the Annual Payment due on 1 July 2007 would be A$13.8 million and the Performing Subsidiary’s Annual Payment to the Trustee on 1 July 2007 (after adjustments in relation to the Annual Payment for the year ending 31 March 2007 set out in the Final Funding Agreement) would be A$6.1 million (see Part D, Section 1.6.2.1). However, the balance of the Initial Funding of A$184.3 million (after payments to Claimants and any Operating Expenses up to 1 July 2007), and any assets remaining in the Former James Hardie Companies, will still be available to pay Claimants.

The James Hardie Group will have to account for the effect of the Proposal in a way which could result in reported results volatility. Under US GAAP, James Hardie will be required to consolidate the Trustee (and the Former James Hardie Group) into the James Hardie Group accounts. Inclusion of the Trustee within the James Hardie Group accounts will materially impact both the statement of financial performance and the statement of financial position of the James Hardie Group.

The principal impact on the James Hardie Group financial statements will arise from the consolidation of net asbestos-related liabilities (asbestos liabilities net of Insurance and Other Recoveries) into the James Hardie Group accounts. This means that any increase in the US dollar estimates of these liabilities will result in an asbestos expense and/or a foreign exchange expense in the James Hardie Group statement of financial performance. However, under Dutch GAAP the consolidation of the Trustee and its associated asbestos provision is not expected to reduce the distributable reserves of James Hardie or James Hardie’s ability to make distributions to its Shareholders.

A detailed explanation of the accounting and financial effect of the Proposal on the James Hardie Group is contained in Part D.

1.4 WHAT ARE THE KEY BENEFITS TO JAMES HARDIE OF THE PROPOSAL?

The Proposal is James Hardie’s response to the estimated future funding shortfall facing the Former James Hardie Companies by providing additional funding for Claimants, and is consistent with current investor and Australian community expectations. In addition, James Hardie expects that the most significant benefits for the James Hardie Group arising from implementing the Proposal will be:

>		to limit the annual amount payable by the James Hardie Group under the Proposal to a maximum cap of 35% of the James Hardie’s Free Cash Flow in the preceding year;
>		to limit the amounts payable by the James Hardie Group under the Proposal, so that annual payments are calculated by reference to the actuarial estimate of the Australian asbestos-related personal injury claims and associated costs of the Former James Hardie Companies, to the exclusion of other asbestos-related liabilities of the Former James Hardie Companies;
>		no recourse to any member of the James Hardie Group in relation to any liabilities of the Former James Hardie Companies other than the funding obligations to the Trustee arising under the Proposal; and
>		a substantial reduction in the risk of the NSW Government, the Australian Government and/or one or more other state or territory governments seeking to impose liability on James Hardie Group members, or taking other possible actions against it, in respect of the Australian asbestos-related personal injury liabilities of the Former James Hardie Companies, on terms which may be less advantageous (and potentially significantly less advantageous) to the James Hardie Group than those applicable under the Proposal.

Accordingly, the Proposal is expected to substantially reduce the level of uncertainty regarding the exposure of the James Hardie Group in respect of the asbestos-related liabilities of the Former James Hardie Companies.

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PART A – INTRODUCTION AND OVERVIEW

Other benefits expected for the James Hardie Group from implementing the Proposal include:

>		enhancing James Hardie’s ability to access debt and equity capital markets and to secure debt funding on improved terms, relative to its position in the absence of the Proposal;
>		reducing the amount of board and management time which James Hardie has been devoting to asbestos-related issues, and establishment of the Asbestos Injuries Compensation Fund administered by representatives of both James Hardie and the NSW Government to focus on such issues, thus allowing James Hardie to focus on its core business;
>		providing releases from civil liability in connection with historic events in favour of members of the James Hardie Group, the Former James Hardie Companies and their respective directors, officers, employees, advisers and agents, to assist James Hardie to “put the past behind it” and to reduce the risk that James Hardie is required to “pay twice” with respect to legacy asbestos issues;
>		arrangements to encourage the further lifting of James Hardie product bans and boycotts in Australia and to discourage any new bans or boycotts from being implemented;
>		greater visibility of the claims administration process in relation to the Australian asbestos-related liabilities of the Former James Hardie Companies; and
>		cost savings on advisory and other fees in connection with asbestos-related matters.

The Proposal may also lead to other benefits, including enhanced relationships with employees, customers and other stakeholders.

Each of these potential benefits is explained in more detail in Part E, Section 2.

1.5 WHAT ARE THE KEY DISADVANTAGES TO JAMES HARDIE OF THE PROPOSAL?

James Hardie believes that there will be several disadvantages to the James Hardie Group that result from the implementation of the Proposal. The key disadvantages include:

>		an Initial Funding payment to the Trustee of A$184.3 million, and Annual Payments of up to 35% of James Hardie’s Free Cash Flow in each previous financial year will be required to be made by the Performing Subsidiary for each Financial Year during the Term. These payments will reduce the amount of funds available to be utilised by James Hardie, including for funding business growth, making repayments of debt principal and making distributions to Shareholders;
>		James Hardie will have to account for the effect of the Proposal in a way which could result in reported results volatility. An explanation of the accounting and financial effect of the Proposal on James Hardie is contained in Part D;
>		the Proposal is of a long-term nature, having an initial term up to 31 March 2045, and it is potentially of a longer (indeterminate) term. It can only be terminated if the parties agree upon the amount of the Final Payment;
>		restrictions on the ability of James Hardie to undertake certain Specified Dealings, including payment of dividends and capital returns, which are likely to be materially prejudicial to the funding obligations arising under the Proposal;
>		the Proposal will necessitate ongoing monitoring and compliance requirements for James Hardie; and
>		James Hardie will incur costs related to the operations of the Trustee and the Former James Hardie Companies.

Each of these potential disadvantages is explained in more detail in Part E, Section 3.

1.6 WHAT ARE THE KEY RISKS TO JAMES HARDIE OF THE PROPOSAL?

James Hardie believes that the James Hardie Group will be or may become subject to risks from implementing the Proposal. The risks it considers to be the principal risks are that:

>		the benefits to be derived by the James Hardie Group (and in particular its Australian business) from the implementation of the Proposal are likely to be affected if the NSW Government undertakes adverse legislative or regulatory action against James Hardie contrary to the terms of the Final Funding Agreement. If the NSW Government were to take such adverse legislative or regulatory action, James Hardie could be significantly and adversely affected. The continuing support of other governments, regulatory bodies, unions and asbestos diseases groups is also important. If such support were withdrawn, James Hardie might face adverse action by one or more of these bodies;
>		James Hardie may have insufficient cash flow to fund capital expenditure, repayment of debt principal and Shareholder distributions as a result of the Funding Payments to the Trustee;
>		claimants who may have claims against the Former James Hardie Companies but who cannot recover in respect of such claims under the Proposal may seek to exert pressure on James Hardie to expand the scope of the Proposal or to provide compensation outside the scope of the Proposal;
>		the James Hardie Group may not have sufficient Australian taxable income to utilise tax deductions resulting from Funding Payments;
>		James Hardie has agreed to observe a restriction on its ability to undertake certain transactions including certain Distributions, Reorganisations and Non-Arm’s-Length Dealings. Determining whether this restriction applies may delay the implementation of transactions James Hardie wishes to undertake. Also, James Hardie may ultimately be prevented from undertaking particular transactions altogether;

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PART A — INTRODUCTION AND OVERVIEW

>		if the assets of the Trustee diminish more rapidly than expected (for example, because of an unforeseen escalation in current or expected future Proven Claims, the Trustee is required to pay income tax on investment income, legal costs efficiencies are not achieved, or if funds or income generated or held by the Trustee are less than anticipated), the amount of the Annual Payments may be correspondingly increased (subject to the operation of the Annual Cash Flow Cap);
>		James Hardie may be subject to greater foreign exchange risk arising from the need to make payments to the Trustee in Australian dollars;
>		the complexity and long-term nature of the Proposal including that the intercreditor arrangements may result in future disputes and affect the processes by which or terms on which James Hardie may obtain debt or equity capital;
>		existing product bans and boycotts may not be lifted;
>		the Tax Conditions may cease to be satisfied in a manner which does not permit James Hardie to terminate the Final Funding Agreement; and
>		the Proposal is dependent upon legislation that has been enacted by the NSW Parliament. If this legislation is amended, withdrawn or otherwise repealed, James Hardie or any member of the James Hardie Group may be significantly and adversely affected.

Part E, Section 4 explains the risks of the Proposal in more detail.

1.7 WHAT ARE THE KEY STEPS REQUIRED TO IMPLEMENT THE PROPOSAL?

The key remaining condition which must be satisfied before implementation of the Proposal is Shareholder approval.

A more detailed list of implementation steps and conditions necessary to implement the Proposal is set out in Part C, Section 11.2.

1.8 HOW WILL IMPLEMENTING THE PROPOSAL AFFECT SHAREHOLDERS?

The Proposal will not result in any change in ownership of the James Hardie Group or any change in the proportion of ownership between Shareholders.

If the Proposal is implemented, all Shareholders will have the same ownership interest in James Hardie after implementation as they had before, and will be able to trade CUFS on the ASX and ADRs on the NYSE in the same way as trading takes place today.

The implementation of the Proposal will reduce James Hardie’s cash flow and will thereby reduce the amount of funds available to be utilised by James Hardie, including for making distributions to Shareholders. For further details concerning the reduction in cash flow, and a comparison with the adverse consequences which James Hardie may face if the Proposal is not implemented, see Part E, Sections 3.1 and 6.

1.9 WHAT HAPPENS TO JAMES HARDIE IF THE PROPOSAL DOES NOT PROCEED?

If Shareholders do not approve the implementation of the Proposal, or if for any other reason the Proposal does not proceed:

>		the Final Funding Agreement will not come into effect;
>		the funding available to the Former James Hardie Companies to meet their asbestos-related liabilities will continue to diminish, and unless an alternative source of funding becomes available, Claimants will be adversely affected;
>		members of the James Hardie Group (in particular, the Australian members) are likely to be subject to adverse legislative or regulatory action;
>		members of the James Hardie Group may be subject to increased litigation;
>		releases and extinguishments of civil liability for members of the James Hardie Group, and their respective directors, officers, employees, advisers and agents may be revoked or repealed;
>		James Hardie’s business and results of operations, particularly in Australia, may be adversely affected due to increased product bans and boycotts, negative press coverage and unfavourable consumer sentiment;
>		James Hardie’s share price may be adversely affected due to uncertainties surrounding James Hardie’s potential exposure to the asbestos-related liabilities of the Former James Hardie Companies, including under legislation which may be introduced by one or more of the Australian Government, the NSW Government and other Australian state and territory governments;
>		the morale of employees may suffer, which may in turn adversely affect turnover and operational performance of James Hardie’s businesses; and
>		capital market support for James Hardie may be significantly reduced. This may adversely affect, and potentially severely adversely affect, James Hardie’s ability to obtain debt or equity finance in the future.

Part E, Section 6 explains what happens in these circumstances in more detail.

If the Proposal does not proceed, the Directors and management of James Hardie intend to continue to seek to find an alternative response to the estimated future funding shortfall facing the Former James Hardie Companies, which would be acceptable to all stakeholders, including Shareholders. There can be no assurance, however, that such an alternative response could be developed and would be accepted by all stakeholders.

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PART A — INTRODUCTION AND OVERVIEW

1.10 WHAT ALTERNATIVE OPTIONS WERE CONSIDERED BY THE DIRECTORS?

The Directors considered various options in assessing how best to address the estimated future funding shortfall facing the Former James Hardie Companies.

In considering alternative options, the Directors considered that any option which did not involve the contribution of additional funding for the benefit of Claimants was unlikely to satisfactorily respond to that shortfall. In addition, until a satisfactory response was provided, some or all of the business and operations of the James Hardie Group (in particular, in Australia) would be at risk of adverse action by governments, regulatory bodies, unions, asbestos diseases groups, customers and consumers.

In considering options involving the contribution of additional funding, the Directors considered proposals involving payment of a lump sum and payments over time.

The Directors concluded that, on balance, the Proposal represents the best option available to address the asbestos-related issues facing James Hardie.

Part E, Section 7 explains in more detail some of the key alternative options considered by the Directors.

Whilst they were not signatories to the Final Funding Agreement, the ACTU, UnionsNSW and a representative of Asbestos Diseases Groups were closely involved in settling the terms of the Final Funding Agreement. The ACTU, UnionsNSW and a representative of Asbestos Diseases Groups are also parties to a deed of release in their favour, as summarised in Part F, Section 2.5. Those persons were also signatories to the Heads of Agreement signed on 21 December 2004, which set out the agreed key principles which formed the basis of negotiations leading to the settlement of the Final Funding Agreement. The Final Funding Agreement is broadly consistent with the principles set out in the Heads of Agreement.

In particular, when the execution of the Final Funding Agreement was announced, the ACTU Secretary, Greg Combet, endorsed the Final Funding Agreement as “...balancing the need to provide justice and proper compensation for the Australian victims of James Hardie asbestos products with the need to ensure the company can continue as a commercially successful business”.

The ACTU has called on all unions and others in the community to lift any remaining bans or boycotts of James Hardie products. Under the terms of the deed of release, each of the ACTU, UnionsNSW and a representative of Asbestos Diseases Groups is obliged to use their respective best endeavours to seek the lifting of such bans and boycotts.

1.12 HAS THE PROPOSAL BEEN INDEPENDENTLY REVIEWED?

James Hardie has appointed an Independent Expert, Lonergan Edwards & Associates Limited, to assess independently the merits of the Proposal. In its capacity as Independent Expert, Lonergan Edwards & Associates Limited has concluded that the Proposal is in the best interest of James Hardie and its enterprise as a whole.

You should refer to the Independent Expert’s Report in Annexure A where the Independent Expert sets out why it believes the Proposal is in the best interest of James Hardie and its enterprise as a whole.

1.13 WHAT DO THE DIRECTORS RECOMMEND?

The Directors unanimously recommend that you vote in favour of the resolution to approve and implement the Proposal. Each Director intends to vote in favour of the Proposal in respect of his or her own holdings.

1.14 WHAT DO SHAREHOLDERS HAVE TO DO?

You should read and carefully consider all of the information in this document before determining how you will vote in relation to the Proposal. To the extent that you have any questions, these questions can be submitted in advance of the Extraordinary Information Meeting and the Extraordinary General Meeting, to be answered during these meetings. You can also ask questions at these meetings, without submitting those questions in advance. Information is also available on the James Hardie Shareholder Helpline, available between 8:00am and 6:00pm AEDT on Business Days. Call 1800 021 321 within Australia, or (+61 2) 9638 9889 from outside Australia.

In order to vote, please follow the instructions in the voting instructions accompanying this document.

Although voting is not compulsory, your vote is important and the Directors encourage you to vote in relation to the Proposal.

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Part B

Background to the Proposal

James Hardie Industries   9

10   James Hardie Industries

PART B — BACKGROUND TO THE PROPOSAL

Further details of the law relating to compensation for asbestos-related disease in Australia are provided in Part F, Section 3.1.

The past association of Former James Hardie Group entities with asbestos-related activities arose predominantly through Australian and New Zealand manufacturing and distribution operations. Former James Hardie Group entities also conducted export activities and held investments in foreign companies which were involved in asbestos-related activities.

The types of asbestos used in products produced by Former James Hardie Companies in the past included chrysotile (white asbestos), amosite (brown asbestos) and crocidolite (blue asbestos).

Up to 1987, Former James Hardie Group entities were involved in the manufacture and distribution of a variety of products containing asbestos, including:

>		asbestos cement building products;
>		asbestos cement pipes;
>		brake linings and other friction products; and
>		insulation products.

Former James Hardie Companies ceased using crocidolite in 1968 and then phased out the use of all other forms of asbestos by 1987. The insulation business was closed in 1974. In 1981, James Hardie pioneered the manufacture of the world’s first asbestos-free fibre cement products. The building products business ceased using asbestos by 1985; the pipes business ceased using asbestos by 1987; and the brakes business ceased using asbestos by 1984 and was sold in 1987. James Hardie products manufactured since those dates have not contained any asbestos.

Following earlier bans of amosite and crocidolite, the National Occupational Health and Safety Commission in Australia finally banned the importation and use of chrysotile in October 2001, to take effect from 31 December 2003.

As far as James Hardie is aware, none of the companies within the current James Hardie Group, with the exception of Studorp Limited, has at any time had any involvement with asbestos-related activities.

2.2 PAST ASSOCIATION WITH ASBESTOS IN AUSTRALIA

The Former James Hardie Companies which manufactured and distributed products containing asbestos were:

>		James Hardie & Coy Pty Ltd (now known as Amaca) (between 1937 and 1987);
>		Hardie-Ferodo Pty Limited (later Jsekarb Pty Ltd and now known as Amaba) (between 1961 and 1987); and
>		James Hardie Industries Limited (the holding company of the Former James Hardie Group, now known as ABN 60) (up to 1937).

In addition, Amaca also had interests in:

>		Asbestolite Pty Limited (a joint venture with Wunderlich Ltd — now Seltsam Ltd, a CSR company) (between 1941 and 1961) which became 100% owned by Amaca (in 1961); and
>		Hardie-BI (a partnership with CSR Limited) (between 1964 and 1974).

Asbestos Mines Pty Ltd (a former subsidiary of ABN 60 and Amaca), now known as Marlew Mining Pty Ltd (in liquidation), operated an asbestos mine in Baryulgil, NSW between 1944 and 1976. From 1944 to 1953, Marlew was operated as a joint venture between Amaca and Wunderlich Ltd. From 1954 to its sale in 1976, Marlew was 100% owned by ABN 60. Marlew is discussed in further detail in Part C, Section 2.10.

As far as James Hardie is aware, at the date of this document all finalised claims against the Former James Hardie Companies for asbestos-related compensation which are due and payable have been paid. Before the establishment of the MRCF in February 2001, the Former James Hardie Companies paid these claims directly. After February 2001, claims have been paid by Amaca and Amaba under the ownership and management of the MRCF. Before the establishment of the ABN 60 Foundation in March 2003, ABN 60 paid relevant claims against it directly. After March 2003, claims have been paid by ABN 60 under the ownership and management of the ABN 60 Foundation.

Prior to the time at which Amaca and Amaba left the Former James Hardie Group in February 2001 upon the establishment of the MRCF, the Former James Hardie Companies had paid A$135 million since the late 1980s in relation to asbestos-related liabilities.

A James Hardie Group subsidiary in New Zealand, Studorp Limited, previously manufactured products containing asbestos.

ABN 60 also held shares in companies that manufactured products containing asbestos in Indonesia and Malaysia, and held minority shareholdings in companies that conducted asbestos mining operations based in Canada and southern Africa.

Former James Hardie Group entities also exported asbestos products to various countries around the world.

It should be noted that the funding to be provided to the Trustee under the Proposal is only available for the purposes of paying Proven Claims against the Former James Hardie Companies which are made in Australia and arise from exposure to asbestos in Australia, the expenses of operating the Trustee and the Former James Hardie Companies, and certain related costs and expenses. Accordingly, funding provided to the Trustee will not be available for the purpose of meeting any non-Australian asbestos-related claims. Further details of the restrictions on use of funds are set out in Part C, Section 2.2.1.

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PART B — BACKGROUND TO THE PROPOSAL

2.3.1 New Zealand

A James Hardie subsidiary in New Zealand, Studorp Limited, manufactured asbestos cement building products between 1938 and 1983 and pipes between 1959 and 1987, at a plant in Penrose, New Zealand.

In New Zealand, asbestos-related disease compensation claims are managed by the state-run Accident Compensation Commission (“ACC”). Studorp Limited, like all businesses in New Zealand, contributed financially to the ACC fund as required by law via payment of an annual levy whilst it carried on business. Like all other businesses in New Zealand, James Hardie NZ Limited currently makes contributions to the ACC. All decisions relating to the amount and allocation of payments to claimants in New Zealand are made by the ACC in accordance with New Zealand law.

In addition to the ACC payments, Studorp Limited, based on a deed entered into between Studorp Limited and unions in 1987, has undertaken to make ex-gratia payments to certain qualifying former employees. Any such individual payments are capped at NZ$35,100 and will be made by Studorp Limited. There have been two such payments made under this deed during the last 10 years.

A number of claims with a New Zealand connection have been brought in Australia against Amaca and ABN 60. These claims are discussed further in Part F, Section 3.2.1.

2.3.2 Indonesia and Malaysia

ABN 60 was a party to joint ventures conducted through companies that manufactured products containing asbestos in Malaysia from 1966 and Indonesia from 1969. ABN 60 sold its investments in Indonesia in 1985 and in Malaysia shortly thereafter, and has not received any claims for asbestos-related liabilities in respect of Indonesia or Malaysia either prior to or since the sale of its investments in either country.

2.3.3 Shareholdings in mining investments outside Australia

ABN 60 held a minority shareholding in one of its asbestos suppliers in Canada between 1964 and 1981.

In the 1950s, ABN 60 also held shares in an English company that owned and mined asbestos deposits in southern Africa.

As far as James Hardie is aware, ABN 60 has not received any claims in relation to asbestos-related liabilities in respect of these investments either prior to or since the sale of its shareholding in either company.

2.3.4 Export activity

Former James Hardie Companies exported modest volumes of products containing asbestos to the US in the late 1960s through to the early 1980s.

Since 1980, there have been ten claims from the US against one of the Former James Hardie Companies. All of these claims have been resolved: eight by dismissal without payment, and two were settled. Of these two settled claims, one was settled over 20 years ago for a de minimus amount and one was settled more recently by the MRCF. No new claims from the US against Former James Hardie Companies have been filed since 2002.

Given the modest quantities of sales and limited product range and distribution in the US, James Hardie has no reason to consider that the numbers and significance of additional legitimate cases in the US against the Former James Hardie Companies would be anything other than minimal.

Exports of products containing asbestos were also made to many other countries, but to date only ten claims arising from these activities have been made against the Former James Hardie Companies. All of these claims have settled without any admission of liability by a Former James Hardie Company, and none of the claims has involved nor is expected to involve any of the Former James Hardie Companies incurring any material liability. For further information about these claims, see Part F, 3.2.2.

2.3.5 United States gypsum business

James Hardie disposed of its US gypsum business in April 2002. James Hardie’s gypsum business consisted of operations acquired between June 1987 and February 1997. It operated only in the US. Although James Hardie did not use asbestos in its gypsum business, it has given an indemnity to the purchaser of the gypsum business with respect to asbestos-related claims arising from the gypsum business. For further details refer to Part F, Section 3.2.3.

2.3.6 Claims against the current James Hardie Group

There have been 29 other claims outside Australia against James Hardie Group subsidiaries that have never manufactured or sold products containing asbestos. All of these claims have been dismissed without payment, except for nine, several of which are inactive and none of which is likely to result in significant litigation, or any liability.

3. THE ESTABLISHMENT OF THE MRCF AND THE 2001 REORGANISATION

3.1 BACKGROUND TO EVENTS IN 2001

In the period from 1985 to 1998, both Amaca and Amaba had sold their operating businesses and their predominant activity had become the management and settlement of asbestos-related claims against them.

In 1998, the Former James Hardie Group (of which the parent entity was ABN 60) began to implement further corporate restructuring (the “1998 Reorganisation”).

3.1.1 Objectives of the 1998 Reorganisation

From approximately 1996, the Former James Hardie Group divested a number of its underperforming and non-core assets and significantly invested in its core fibre cement and gypsum businesses, particularly in the United States where growth was strongest. Consequently, by 1998 approximately 70% of the Former James Hardie Group’s earnings were being generated in the United States.

The 1998 Reorganisation sought to address the then increasing structural imbalance within the Former James Hardie Group which resulted from the corporate management and shareholder base being located in

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PART B — BACKGROUND TO THE PROPOSAL

Australia, and the Former James Hardie Group’s earnings being predominantly generated in the United States. As set out in the information memorandum for the 1998 Reorganisation, the primary objectives of the 1998 Reorganisation were to:

>		relocate the Former James Hardie Group’s operational headquarters to its key market in the United States;
>		improve the Former James Hardie Group’s overall financial efficiency by recapitalising the group with a new debt funding structure;
>		increase the Former James Hardie Group’s shareholder base in the United States;
>		generate higher after-tax earnings by taking advantage of tax initiatives established in The Netherlands known as the “financial risk reserve regime”; and
>		increase the potential value of the Former James Hardie Group’s operational business by segregating non-core assets for potential disposal.

To achieve these objectives, it was proposed to form a new intermediate holding company in The Netherlands, James Hardie NV (“JH NV”), to hold the operating assets of the Former James Hardie Group and pursue an initial 15% capital raising and listing of that entity on the NYSE.

The proposal did not involve the divestiture of any Former James Hardie Companies with asbestos-related liabilities. Rather, under the 1998 Reorganisation, ABN 60 continued to own the companies within the Former James Hardie Group with asbestos-related liabilities.

3.1.2 Steps taken to implement the 1998 Reorganisation

On 2 July 1998, ABN 60 announced the 1998 Reorganisation. On 16 September 1998, an information memorandum was sent to ABN 60 shareholders who subsequently approved the 1998 Reorganisation on 16 October 1998.

In anticipation of the NYSE listing of JH NV, the following steps had been implemented:

>		the formation of JH NV;
>		the transfer, at fair market value, to subsidiaries of JH NV, of all of the fibre cement businesses, the US gypsum wallboard business, the Australian and New Zealand building systems business and the Australian windows business, all of which, except for the fibre cement businesses, were subsequently sold;
>		a debt financing, consisting of an issuance of notes to US purchasers, and the arrangement of an Australian credit facility; and
>		the relocation of most senior executives and managers to operational headquarters in the United States.

3.1.3 Decision not to proceed with the equity offering

In early 1999, it became apparent to the Former James Hardie Group that there was insufficient market demand for an equity offering in the US. This was due to a number of reasons including the Russian debt crisis at the end of 1998, the emerging appeal of the new dot.com companies and the corresponding equity market unattractiveness of manufacturing and commodity businesses such as the Former James Hardie Group’s US gypsum business. Accordingly on 5 March 1999, ABN 60 decided to withdraw the proposed equity offering.

Following the withdrawal of the equity offering, the Former James Hardie Group structure (in summary form) was as follows:

GROUP STRUCTURE

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PART B — BACKGROUND TO THE PROPOSAL

It was clear to ABN 60 that US investors would be less inclined to invest in the Former James Hardie Group if companies within the group continued to have potential asbestos-related liabilities.

3.2.1 Alternatives considered by ABN 60

Following the withdrawal of the equity offering, ABN 60 began to assess options to deal with a number of unresolved issues with the Former James Hardie Group structure, including:

>		increasing the Former James Hardie Group’s shareholder base in the United States and generating higher after-tax earnings by taking advantage of the financial risk reserve regime in The Netherlands. These objectives could be addressed by the incorporation of a new ultimate holding company in The Netherlands (see Section 3.3); and
>		potentially increasing the market value of the core operating assets of the Former James Hardie Group by removing Amaca and Amaba from the Former James Hardie Group while making provision for asbestos claimants. Amaca and Amaba held the vast majority of asbestos-related liabilities within the Former James Hardie Group. ABN 60 identified that investors discounted the value of the operating assets of ABN 60’s subsidiaries due to the retention of Amaca and Amaba within the Former James Hardie Group.

Options considered to resolve the second issue included the sale of the companies with asbestos-related liabilities to third parties, reinsurance or the establishment of a trust to which ABN 60’s interests in Amaca and Amaba would be transferred.

In December 2000, ABN 60 management determined that the trust option was the most practically achievable option. It therefore decided to evaluate further the separation of Amaca and Amaba from the Former James Hardie Group by establishing a trust known as the Medical Research and Compensation Foundation, or MRCF. The trustee of the MRCF would own and control all of the shares in Amaca and Amaba in trust for the purposes of compensating sufferers of asbestos-related diseases with claims against Amaca and Amaba and funding medical research aimed at finding cures for these diseases.

3.2.2 Determination of the funding position of Amaca and Amaba

There were concerns that the directors of ABN 60 could not, consistently with their directors’ duties, either:

>		transfer ABN 60’s shares in Amaca and Amaba to the MRCF for no consideration; or
>		provide the MRCF with funding in addition to the net assets of Amaca and Amaba.

This was because legal advice had indicated that Amaca might have a surplus of assets at the time of the proposed transfer on the basis that future claimants were not considered “creditors” under the Australian Corporations Law. In transferring shares for nil value and providing additional funding, ABN 60’s directors might have been considered to be giving away value to the detriment of its shareholders.

To deal with the first concern, ABN 60 commissioned an independent determination of the value of the shares in Amaca and Amaba. The independent determination valued these shares at nil.

In relation to the second concern, ABN 60 utilised actuarial estimates prepared by Trowbridge Consulting (valuation date 31 March 2000) which had been commissioned by ABN 60 to provide an estimate as to the future asbestos liabilities of Amaca and Amaba. The Trowbridge Consulting actuarial estimate stated that the best estimate of the asbestos liabilities of Amaca and Amaba on an undiscounted basis (that is, actual payments over time) was A$734 million, and on a discounted basis was A$322.6 million (using actuarial debt-based discount rates).

Management of ABN 60 undertook a cash flow analysis to determine the level of funding which would be needed by Amaca and Amaba to meet the above mentioned undiscounted actuarial estimate of future asbestos liabilities. The cash flow analysis undertaken by ABN 60 management and presented to the board of directors of ABN 60 indicated that Amaca and Amaba would require net assets of approximately A$293 million to be invested in order to meet this undiscounted best estimate: a figure significantly in excess of their existing net asset position (which at that time was estimated to be approximately A$214 million). The reason that ABN 60’s estimate of A$293 million differed from the actuarial discounted estimate of A$322.6 million was because the actuarial discounted estimate was calculated using long-term debt-based discount rates, whereas the ABN 60 estimate was calculated using an average investment rate of return which was higher than a debt-based rate of return.

The board of ABN 60 considered that Amaca and Amaba should have the capacity to fund the undiscounted best estimate of their asbestos-related liabilities. The ABN 60 directors also considered legal advice supporting the grounds upon which the directors could make additional funding available to achieve this outcome.

ABN 60 determined to provide additional funding required to meet this undiscounted best estimate, as well as a contribution of A$3 million to the MRCF to be applied towards medical research directed towards finding a cure for asbestos-related diseases. The additional funding (which had an estimated net present value of approximately A$79 million) was proposed to be provided by way of fixed yearly payments by ABN 60 to each of Amaca and Amaba under the 2001 Deed of Covenant and Indemnity. Under the 2001 Deed of Covenant and Indemnity, ABN 60 had the right to prepay the net present value of the remaining outstanding amounts after a specified period, and assumed that this right would be exercised in determining the additional funding required. Amaca and Amaba each had the right to call for ABN 60

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to pay the net present value of the remaining payments if asbestos-related claims costs exceeded a certain amount. Under the 2001 Deed of Covenant and Indemnity, Amaca and Amaba also gave certain covenants and undertakings not to bring any asbestos-related claims against ABN 60 or to make claims with respect to payments previously made by Amaca and Amaba to ABN 60 or its affiliates. Amaca and Amaba also indemnified James Hardie (and other entities within the James Hardie Group which were related bodies corporate of ABN 60), and their respective present or past directors, officers, employees and agents, for all claims against and losses suffered by these persons arising from the marketing, manufacture, processing, sale, distribution or importation by Amaca and Amaba of asbestos or products containing asbestos. If ABN 60 wished to have the benefit of these covenants, undertakings and indemnities, it was obliged to make the specified payments in accordance with the terms of the 2001 Deed of Covenant and Indemnity.

3.2.3 Steps taken to establish the MRCF and its initial funding position

The establishment of the MRCF involved the following steps:

>		the trustee of the MRCF was incorporated in NSW as a public company limited by guarantee on 15 February 2001. A wholly-owned subsidiary of the MRCF trustee (MRCF Investments Pty Ltd) was also incorporated;
>		Amaca, Amaba and ABN 60, entered into the 2001 Deed of Covenant and Indemnity, and certain other agreements dealing with their position upon leaving the Former James Hardie Group;
>		ABN 60 made a payment of A$3 million to the MRCF to be used for medical research aimed at finding treatments and cures for asbestos-related diseases; and
>		ABN 60’s shareholdings in Amaca and Amaba were cancelled, and new shares were issued by those companies so that:

	–		the MRCF trustee held 50% of the shares in Amaca, with the MRCF trustee’s wholly-owned subsidiary, MRCF Investments Pty Ltd, holding the other 50%; and
	–		Amaca owned all the shares in Amaba.

At that time, the assets of Amaca and Amaba included a portfolio of long-term securities, a substantial cash reserve, a loan receivable earning interest, properties which earned rent and certain insurance policies which covered various types of claims including all workers’ compensation claims. The net value of these assets at establishment was approximately A$214 million. In addition, under the 2001 Deed of Covenant and Indemnity ABN 60 expected to make payments to Amaca and Amaba which had a then net present value of approximately A$79 million (assuming that ABN 60’s prepayment right was exercised). On this basis, ABN 60 calculated that the total asset value of Amaca and Amaba at the time of the MRCF establishment was approximately A$293 million, which had been estimated by ABN 60 management to be sufficient, when invested, to meet the undiscounted best estimate of Amaca and Amaba’s asbestos-related liabilities prepared by Trowbridge Consulting.

The group structures of the Former James Hardie Group and the MRCF were then as follows:

GROUP STRUCTURE

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3.2.4 Management and control of the MRCF and asbestos claims

Since its establishment in February 2001, the MRCF has been managed by an independent trustee and operated entirely independently of the James Hardie Group. James Hardie does not control (directly or indirectly) the activities of the MRCF in any way, and from 16 February 2001, has not owned or controlled (directly or indirectly) the activities of Amaca or Amaba.

The MRCF trustee is responsible for the management of claims against Amaca and Amaba and the investment of their assets. James Hardie has no economic interest in the MRCF, the MRCF trustee, Amaca or Amaba, and has no right to dividends or capital distributions made by the MRCF, the MRCF trustee, Amaca or Amaba.

3.3 2001 REORGANISATION

3.3.1 Rationale for the 2001 Reorganisation

While the establishment of the MRCF had separated the Former James Hardie Group from the asbestos liabilities and had sought to make provision for asbestos claimants, it had not resolved the tax inefficiencies present in the group’s structure. High non-Australian withholding taxes would have been incurred in the process of repatriating offshore generated income (89% of total income by 2000) back to the predominantly Australian shareholder base (approximately 90% of total shareholders at that time). To address this issue, it was decided a more efficient tax structure would be to domicile a newly created holding company in The Netherlands, which would take advantage of the Dutch financial risk reserve regime and the double taxation treaty between The Netherlands and the United States. Based on the then current forecasts of James Hardie’s business growth in the United States, it was expected that James Hardie’s effective tax rate would be in the order of 25–30% following the reorganisation, rather than the 40–50% expected if the reorganisation did not proceed.

3.3.2 Implementation of the 2001 Reorganisation

On 24 July 2001, ABN 60 announced a further plan of reorganisation and capital restructuring (the “2001 Reorganisation”) which was proposed primarily to address these tax inefficiencies. The 2001 Reorganisation was conducted by way of a court-approved scheme of arrangement under the Corporations Act 2001 (Cth). It was approved by ABN 60 shareholders on 28 September 2001 and received unconditional NSW Supreme Court approval on 11 October 2001. The 2001 Reorganisation was completed on 19 October 2001, and included the following steps:

>		the issue of ordinary shares by James Hardie, represented by CUFS on a one-for-one basis, to substantially all ABN 60 shareholders in exchange for their shares in ABN 60, thereby making James Hardie the ultimate holding company of ABN 60 and JH NV;
>		the transfer by ABN 60 of all of the outstanding shares of JH NV (which directly or indirectly held substantially all of the assets of the Former James Hardie Group at that time) to James Hardie. The consideration for the transfer was James Hardie’s then market capitalisation, less the book value of the assets of ABN 60 and its subsidiaries, plus the sum of the book amount of the liabilities of ABN 60 and its subsidiaries. ABN 60 then returned this amount to James Hardie (ABN 60’s sole shareholder) by way of a capital return and a dividend distribution;
>		in order to avoid detriment to creditors of ABN 60 arising from the capital return and distribution, ABN 60 issued 100,000 partly paid shares to James Hardie for a total issue price approximately equal to the market value of the Former James Hardie Group immediately prior to the scheme’s implementation (which equalled approximately A$1.9 billion and was the amount returned to James Hardie by way of the capital return and dividend distribution). There was an initial subscription price paid of A$50 per partly paid share (that is, for a total subscription price of A$5 million), and the remainder was left uncalled; and
>		the quotation of the shares of James Hardie, represented by James Hardie CUFS, on the ASX, and the quotation of ADRs, representing James Hardie CUFS which in turn represent shares of James Hardie, on the NYSE.

3.3.3 Partly paid shares

As described above, one of the proposed steps necessary to implement the 2001 Reorganisation was a capital return and distribution by ABN 60 to James Hardie. At the time of the 2001 Reorganisation, it was decided not to undertake a detailed review of ABN 60’s creditors in order to determine whether ABN 60’s assets were sufficient such that the capital return and dividend distribution would not prejudice the interests of ABN 60’s creditors. This was because ABN 60 was a guarantor of certain subsidiaries’ obligations under various business sale agreements, but at the time of the 2001 Reorganisation it was not possible to ascertain whether these guarantees carried material liabilities. Instead, the partly paid shares were created to preserve the net worth of ABN 60, so that the capital return and distribution could proceed within the proposed timetable.

ABN 60 issued 100,000 partly paid shares to James Hardie. The total price payable by James Hardie for these shares was equivalent to the amount which ABN 60 was to return to James Hardie as a capital return and distribution. James Hardie made an initial payment of A$5 million, but was not obliged to pay any of the remainder of the subscription price for the partly paid shares unless ABN 60 made a call on James Hardie to do so. Under the terms of the partly paid shares, ABN 60 could only make a call on James Hardie to pay any unpaid portion of the partly paid shares to the extent that ABN 60 could not satisfy its liabilities and would be insolvent without the additional payment from James Hardie. It was not possible to make a call on the partly paid shares for any other purpose. The partly paid shares were issued

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to preserve the position of ABN 60’s creditors, not for the purpose of providing additional funding to the MRCF trustee or its subsidiaries.

At the time of the 2001 Reorganisation, Amaca and Amaba were creditors of ABN 60 in relation to the specified payments by ABN 60 under the 2001 Deed of Covenant and Indemnity. ABN 60 had sufficient assets at this time to meet its liabilities, including the specified payments to Amaca and Amaba, without having to make a call on the partly paid shares.

3.3.4 Results of the 2001 Reorganisation

As a result of the implementation of the 2001 Reorganisation, James Hardie has achieved considerable tax savings arising from the Dutch financial risk reserve regime. By 31 March 2006, these savings totalled US$70.1 million.

ABN 60 had been listed in Australia on the ASX and following the 2001 Reorganisation the new holding company, James Hardie, replaced ABN 60 on the ASX and controlled the same assets and liabilities as ABN 60 had controlled as a holding company immediately prior to the 2001 Reorganisation. The James Hardie Group structure and the MRCF structure (in summary form) were then as follows:

RESULTS OF THE 2001 REORGANISATION

ABN 60 became a subsidiary of the new James Hardie Group following the 2001 Reorganisation. After the 2001 Reorganisation, ABN 60 was expected to be able to meet its liabilities from its own assets. Only to the extent necessary to avoid insolvency, ABN 60 could also call on the partly-paid shares. At this time, ABN 60’s only liability to Amaca and Amaba was to make payments under the terms of the 2001 Deed of Covenant and Indemnity. The 2001 Reorganisation did not alter or extinguish any liabilities of ABN 60 arising from its past association with asbestos. The 2001 Reorganisation also did not alter or extinguish any asbestos-related liabilities of Amaca or Amaba.

3.4 ESTABLISHMENT OF ABN 60 FOUNDATION

Following the successful sale of the majority of James Hardie’s gypsum assets in April 2002, ABN 60 commenced a review of its financial position in late 2002 (including the guarantees provided by ABN 60 in relation to business sale agreements). This was done in anticipation of a successful sale of the remainder of James Hardie’s gypsum business (which was eventually completed in March 2003). Following this sale, the James Hardie Group had sufficient cash such that ABN 60 could be transferred from the James Hardie Group with sufficient cash to meet its liability under the 2001 Deed of Covenant and Indemnity to Amaca and Amaba. The transfer of ABN 60 from the James Hardie Group on this basis would not have been practicable prior to the sale of James Hardie’s gypsum assets.

As contemplated under the 2001 Deed of Covenant and Indemnity, and in order to achieve a further separation of the James Hardie Group from potential asbestos-related liabilities, James Hardie offered to transfer ABN 60 to the MRCF trustee. However, before doing so, the directors of both ABN 60 and James Hardie wanted to confirm that the assets remaining in ABN 60 would be sufficient to meet its liabilities and that no creditors of ABN 60 were disadvantaged.

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Accordingly, a lengthy and detailed review of the assets and liabilities of ABN 60 was completed. This included a detailed evaluation of potential future claims which could be made against ABN 60 related to its past business activities. ABN 60 determined that it had liabilities owed to Amaca and Amaba under the 2001 Deed of Covenant and Indemnity, with a net present value of approximately A$76 million, and that it would be appropriate to have a buffer sufficient to cover any other future potential liabilities. The directors of ABN 60 and James Hardie determined that total assets of ABN 60 of A$94.5 million (which represented surplus net assets of A$18.5 million) would be more than sufficient to meet its liabilities and potential future liabilities. Therefore, it was no longer necessary for the partly paid shares to exist, nor appropriate if ABN 60 were to be outside the James Hardie Group.

The decision to cancel the partly paid shares was considered in light of the various external independent legal opinions provided to ABN 60 and James Hardie, and after performing due diligence and detailed analysis. Accordingly, on 14 March 2003, ABN 60 cancelled the partly paid shares at the request of its sole shareholder James Hardie, in anticipation of the transfer of ABN 60 to the MRCF trustee.

By late March 2003, it had become apparent that the MRCF and James Hardie would not be able to agree on the terms for the transfer of ABN 60. Instead, on 31 March 2003, James Hardie transferred ABN 60 to a new foundation, the ABN 60 Foundation. The trustee of the ABN 60 Foundation was established to be the sole shareholder of ABN 60.

Following the establishment of the ABN 60 Foundation and transfer of shares in ABN 60 to it, James Hardie no longer owned any shares in ABN 60. The ABN 60 Foundation was and is managed by an independent trustee and operates entirely independently of the James Hardie Group. James Hardie does not own or control (directly or indirectly) the assets or activities of ABN 60 or the ABN 60 Foundation in any way, it has no economic interest in ABN 60 or the ABN 60 Foundation, and it has no right to dividends or capital distributions made by the ABN 60 Foundation or ABN 60.

At this stage, the James Hardie Group structure, the MRCF structure and the ABN 60 Foundation structure (in summary form) were as follows:

ESTABLISHMENT OF ABN 60 FOUNDATION

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3.5 INDICATIONS OF ESTIMATED FUTURE FUNDING SHORTFALL

The MRCF trustee first raised the possibility of a potential future funding shortfall of the MRCF with ABN 60 management in discussions in April 2001. At the time, the potential funding shortfall was unquantified. Over the course of the next two years, the MRCF trustee approached the management of each of ABN 60 and James Hardie on a number of occasions seeking a voluntary contribution from James Hardie with respect to the potential funding shortfall. During this period, the MRCF trustee provided James Hardie management with a number of different estimates of the potential funding shortfall. Negotiations between the parties to agree the amount and terms of any voluntary funding contribution stalled in March 2003.

In September 2003, the MRCF trustee sent James Hardie management a letter seeking to obtain further funding from James Hardie and outlining possible causes of action that it believed to be available to it in respect of the establishment of the MRCF.

In October 2003, in the course of filing its year end financial accounts, the directors of the MRCF trustee announced that they had obtained revised actuarial advice from Trowbridge Consulting of the estimated asbestos-related liabilities of Amaca and Amaba. By deducting these liabilities from the assets of Amaca and Amaba, the MRCF trustee estimated a future funding shortfall of approximately A$800 million.

The MRCF trustee anticipated that the future funding shortfall would not occur until 2007 and, as far as James Hardie was aware, no person entitled to compensation was going unpaid. In addition, a number of complex and competing issues relevant to the provision of additional funding were considered, including:

>		the need to obtain an independent actuarial assessment to confirm the predicted funding shortfall and to provide greater certainty as to the level of funding that might address that shortfall;
>		investor and Australian community expectations;
>		the legal issues as to how a contribution of funds to the MRCF would be in the best interests of James Hardie and, therefore, as to how its directors could satisfy their duties to act in James Hardie’s best interests;
>		the assessment of the MRCF’s claims administration processes to determine if these processes were reasonable and cost effective; and
>		the inefficiencies in the claims system and the potential of reform to reduce the level of funding required.

While James Hardie was considering these issues and attempting to discuss them with the NSW Government, following calls for an inquiry from unions and asbestos diseases groups, the NSW Government established the Jackson Commission in late February 2004.

4. THE JACKSON COMMISSION

4.1 BACKGROUND

In late February 2004, the NSW Premier announced that a Special Commission of Inquiry would be established to investigate certain matters relating to the establishment and the financial position of the MRCF (“Jackson Commission”).

James Hardie welcomed the establishment of the Jackson Commission. As well as providing an opportunity for James Hardie to respond to its critics concerning the legality of the establishment of the MRCF and subsequent reorganisations, it also provided an opportunity to explore a solution to the funding shortfall advised by the MRCF and, if required, to be a catalyst for reform of the dust diseases claims administration system in NSW.

The Jackson Commission commenced hearing submissions in April 2004. James Hardie made extensive submissions to the Jackson Commission, as well as responding to submissions by other parties and questions from Commissioner Jackson. In addition, a number of current and former executives and officers of James Hardie and the Former James Hardie Group gave evidence before the Jackson Commission.

4.2 SCOPE OF THE INQUIRY

The Jackson Commission was commissioned to inquire into and report on the following matters:

>		the financial position of the MRCF and whether it was likely to meet its future asbestos-related liabilities in the medium to long term (“Terms of Reference One”);
>		the circumstances in which the MRCF was separated from the James Hardie Group and whether this may have resulted in or contributed to a possible insufficiency of assets to meet its future asbestos-related liabilities (“Terms of Reference Two”);
>		the circumstances in which any corporate reconstructions or asset transfers occurred within or in relation to the James Hardie Group prior to the separation of the MRCF to the extent that any of these transactions may have affected the ability of the MRCF to meet its current and future asbestos-related liabilities (“Terms of Reference Three”); and
>		the adequacy of current arrangements available to the MRCF under the Corporations Act 2001 (Cth) to assist the MRCF to manage its liabilities, and whether reform was desirable to assist the MRCF to manage its obligations to current and future claimants (“Terms of Reference Four”).

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4.3 KEY FINDINGS

James Hardie made comprehensive submissions in response to each of the Terms of Reference considered by the Jackson Commission. A copy of all of James Hardie’s submissions is available from the James Hardie website at www.ir.jameshardie.com.au, under the heading of “Asbestos Compensation”.

The Jackson Commission published its report on 21 September 2004. It should be noted that the Jackson Commission was a special commission of inquiry rather than a court, and as such its findings are not legally binding. It is possible that if the matters investigated by the Jackson Commission were the subject of separate litigation, a court could come to one or more different conclusions.

4.3.1 Terms of Reference One: Adequacy of the MRCF funding

The Jackson Commission found that there was a significant estimated future funding shortfall in relation to the asbestos-related liabilities of Amaca and Amaba. In part, this finding was based on an actuarial report prepared by KPMG Actuaries (valuation date 30 June 2003), commissioned by James Hardie, which indicated that the discounted value of the central estimate of the asbestos-related liabilities of Amaca and Amaba was approximately A$1.5 billion. KPMG Actuaries concluded that the significant increase in the estimated liabilities from around 2001 was due in material part to an unforeseeable upward trend in claim numbers and average claims costs. For more information on this upward trend in claim numbers and average claims costs, see Part B, Sections 8.2 and 8.3.4.

Commissioner Jackson found that the net assets of the MRCF and ABN 60 (estimated to be A$179.2 million as at 30 June 2004) were not sufficient to meet these prospective liabilities and were likely to be exhausted in a relatively short timeframe (the first half of 2007).

4.3.2 Terms of Reference Two: Separation of the MRCF

The Jackson Commission observed that the Former James Hardie Group was “perfectly entitled to seek a means whereby it could pursue its business aims without being perceived, rightly or wrongly, as associated with ongoing asbestos liabilities”. It also indicated that the establishment of the MRCF and the establishment of the ABN 60 Foundation were legally effective and that, accordingly, any ongoing asbestos liabilities remained with Amaca, Amaba or ABN 60 (as the case may be). The Jackson Commission also found that no significant liabilities for those claims could likely be made directly against James Hardie or any of the other entities in the James Hardie Group.

The Jackson Commission also found that it was not possible, in money terms, to say that separation directly resulted in, or contributed to, a possible insufficiency of assets to meet the future asbestos-related liabilities of Amaca and Amaba. However, Commissioner Jackson expressed an opinion that “in practical terms” the separation was likely to have had such an effect because if separation of Amaca and Amaba from ABN 60 had not taken place in February 2001, it seemed to him likely that, for the indefinite future, the asbestos-related liabilities of the Former James Hardie Companies would have been treated, as they had been for years, as one of the annual expenses of the James Hardie Group.

In relation to the circumstances of the establishment of the MRCF, the Jackson Commission made certain adverse findings against, among others, Mr Peter Macdonald (the former Chief Executive Officer of ABN 60 and James Hardie) and Mr Peter Shafron (the former General Counsel of ABN 60 and James Hardie and former Chief Financial Officer of James Hardie). Among other matters, the Jackson Commission noted that it found it difficult to accept that ABN 60 management “could really have believed that the funds of the Foundation would have been sufficient to meet all legitimate future asbestos-related claims”. In particular, the cash flow model used by ABN 60 management to estimate the funding required in order to meet the best estimate of liabilities prepared by Trowbridge Consulting was subject to criticism due to the simplistic nature of the model and the earnings assumptions. Commissioner Jackson considered that certain elements of a press release and associated statements issued by ABN 60 at the time of the establishment of the MRCF, which conveyed that the MRCF had been provided with sufficient funds, were “seriously misleading”.

The Jackson Commission criticised Trowbridge Consulting for failing to take account of superimposed inflation in its 13 February 2001 report, and failing to adopt a high projected curve of claims in circumstances where Trowbridge Consulting had no reason to think that the propensity to sue had peaked, and substantial reason to think it had not. The failure to adopt a high curve as a best estimate seemed unjustifiable to Commissioner Jackson, and not consistent with appropriate professional care.

The Jackson Commission also found that the alleged causes of action against James Hardie and its directors, officers or advisers did not cause any material loss to the MRCF or to the asbestos claimants which would create a valuable cause of action against, and therefore a material liability of, any James Hardie Group entity or would lead to any of the restructuring arrangements being reversed by a court. The Jackson Commission noted that none of the proposed claims (primary or secondary) could be regarded as straightforward, and some seemed “speculative indeed”, requiring change in the law or rather radical adaptation. Even assuming success in primary and secondary claims, issues of enforcement against James Hardie would also arise, given that it has limited assets in Australia.

4.3.3 Terms of Reference Three: Corporate restructures

In relation to circumstances in which any corporate restructures may have affected the MRCF’s ability to meet its current and future liabilities, overall the Jackson Commission found that the relevant corporate restructures were for valid business reasons and had not so far adversely affected the ability of the Former James Hardie Companies to meet current and future liabilities.

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4.3.4 Terms of Reference Four: Adequacy of current arrangements

The Jackson Commission concluded that the current arrangements available to the MRCF under the Corporations Act 2001 (Cth) would not assist the MRCF to manage its liabilities. It went on to note that the best long-term solution for satisfying the asbestos-related liabilities of Amaca, Amaba and ABN 60 would be a scheme, for which that proposed by James Hardie during the Jackson Commission hearings might be a good starting point.

To respond to the significant future funding shortfall of the MRCF, on 14 July 2004, James Hardie lodged a submission with the Jackson Commission stating that it would recommend that Shareholders approve the provision of additional funding to enable an effective statute-based scheme for payment of compensation to future claimants for asbestos-related injuries for which Amaca and Amaba were liable.

James Hardie’s proposal included some broad principles which might reduce costs in relation to the claims process, without affecting payments to claimants, to ensure that, in making the voluntary additional funding available, James Hardie’s shareholders were not being asked to fund claims process inefficiencies. The proposal was made without any admission of liability or prejudice to James Hardie’s rights or defences.

A full copy of the Jackson Commission Report can be downloaded from the website of the NSW Government Cabinet Office at www.cabinet.nsw.gov.au/publications (under “Legal Branch”) or James Hardie’s website at www.ir.jameshardie.com.au.

4.4 DEVELOPMENTS DURING AND IMMEDIATELY FOLLOWING THE JACKSON COMMISSION

James Hardie suffered significant negative media coverage, widespread adverse political and public reaction and a deterioration of its share price following the disclosure of the MRCF’s estimated future funding shortfall and throughout and following the Jackson Commission.

4.4.1 Negative media coverage

The Jackson Commission was the subject of extensive media coverage, with particularly widespread reporting of various allegations made by witnesses and counsel against James Hardie and certain of its directors, officers and executives.

From the time the Jackson Commission was announced, James Hardie determined to respect the Jackson Commission process and restrict its statements and comments concerning the matters within the scope of the Jackson Commission to the Jackson Commission proceedings. James Hardie’s officers and executives who were the subject of much of the reporting were scheduled to appear before the Jackson Commission after most other witnesses, which meant that their statements were not admitted into evidence and were not able to be made public, until that time.

This made it difficult for James Hardie to respond publicly to many of the allegations without disregarding the Jackson Commission’s rules on making public the material submitted to it in witness statements and exhibits.

James Hardie’s inability to respond to these allegations at the time they were made resulted in numerous incorrect media reports being published unchallenged.

Repeated accusations and inaccurate statements about specific events (such as the establishment of the MRCF and the 2001 Reorganisation, including the move of the James Hardie Group holding company to The Netherlands and cancellation of the partly paid shares by ABN 60) continue to be made.

Although the level of media coverage declined significantly after James Hardie signed the Heads of Agreement on 21 December 2004, the original allegations still appear in the media. James Hardie now seeks to respond promptly to correct such media statements, where it is appropriate. These responses are published on the James Hardie website at www.ir.jameshardie.com.au.

4.4.2 Investigation by the Australian Securities & Investments Commission (“ASIC”)

On 22 September 2004, ASIC announced that it was conducting an investigation into potential contraventions of certain Australian laws arising from transactions considered by the Jackson Commission. The persons whose conduct is being investigated have not been expressly identified by ASIC.

James Hardie has produced certain categories of documents to ASIC in connection with its investigation. ASIC has also conducted examinations of persons whom it believes may have information relevant to its investigation. James Hardie has been cooperating with ASIC in relation to its investigation.

Under the terms of the James Hardie (Civil Liability) Act 2002 (NSW), if the Proposal is implemented James Hardie, ABN 60, Amaca, Amaba, and their respective current and former officers, employees, advisers and agents have been released from “any civil liability” arising from protected conduct. For further details of the releases of civil liability under the Proposal, see Part C, Section 9.3. Criminal proceedings may still be brought by ASIC against released persons.

4.4.3 Bans and boycotts

During the period of and following the Jackson Commission, bans and boycotts of James Hardie products were imposed by over 170 NSW local councils and also local councils in other Australian states. Bans and boycotts on the use of James Hardie products were publicly announced by various unions and union bodies, including the Victorian Trades Hall Council, the Australian Manufacturing Workers’ Union, and the Construction, Forestry, Mining and Energy Union. These bans and boycotts were supported by various other unions in NSW, South Australia, Australian Capital Territory, Tasmania and Western Australia. The bans and boycotts began to affect James Hardie’s Australian operations in a detrimental way.

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PART B — BACKGROUND TO THE PROPOSAL

It is, however, difficult to quantify the financial impact of the adverse publicity and bans and boycotts against James Hardie arising from the Jackson Commission and associated circumstances, as it is difficult to identify decisions not to use James Hardie products made in response to boycott pressures and adverse media coverage.

4.4.4 Government actions

James Hardie’s proposal for a statutory scheme offered during the Jackson Commission was rejected by the NSW Government. The NSW Government stated that it would not consider assisting the implementation of any proposal advanced by James Hardie unless it was the result of an agreement reached with the union movement acting through the ACTU and UnionsNSW as well as a representative of Asbestos Diseases Groups. Negotiations between James Hardie and these representatives started on 1 October 2004. The statutory scheme proposed by James Hardie was rejected early in these negotiations.

On 28 October 2004, the NSW Premier announced that the NSW Government would seek that the Ministerial Council, comprising Ministers of the Australian Government and the Australian states and territories, allow the NSW Government to pass legislation to “wind back James Hardie’s corporate restructure and rescind the cancellation of A$1.9 billion in partly paid shares”. The announcement said that “the laws will effectively enforce the liability [for asbestos-related claims] against the Dutch parent”. However, the announcement did not specify how the NSW legislature would successfully impose such a liability upon James Hardie.

On 5 November 2004, the Australian Commonwealth Attorney-General and the Parliamentary Secretary to the Australian Treasurer issued a news release stating that the Ministerial Council for Corporations (“MINCO”) had unanimously agreed to support a negotiated settlement. MINCO also agreed in principle that, if the then current negotiations did not reach an acceptable conclusion, MINCO would consider options for legislative reform. The news release indicated that treaties to enforce Australian judgments in Netherlands and US courts would not be required but that the Australian Government had been involved in communications with Netherlands and US authorities regarding arrangements to ensure that Australian judgments would be able to be enforced where necessary.

On 30 November 2005, the NSW Government introduced a bill into the NSW Parliament known as the James Hardie (Imposition of Corporate Responsibility) Bill. Although the Final Funding Agreement was in fact signed the next day, the introduction of the bill demonstrated that the threat of adverse legislation against James Hardie was both imminent and material. That bill was introduced into the NSW Parliament together with the James Hardie Former Subsidiaries (Winding up and Administration) Bill, namely the bill that was passed and which became the Transaction Legislation, and also together with the bills that were passed and which became the Release Legislation. James Hardie is not aware of the contents of the James Hardie (Imposition of Corporate Responsibility) Bill, as they were not made public, and the bill was withdrawn after the Final Funding Agreement was executed.

James Hardie has no detailed information as to the likely content of any legislation which might be sought to be imposed upon one or more members of the James Hardie Group if the Final Funding Agreement is not approved and implemented, other than as described above. As a result, if such legislation were passed, James Hardie is not currently aware as to whether such legislation would be enforceable in other jurisdictions as a matter of law, or whether the governments passing such legislation would need to agree to special arrangements for enforceability with other jurisdictions in which James Hardie has assets. In the absence of special arrangements to address the enforceability of Australian legislation in other jurisdictions (for instance, the relevant jurisdiction passes specific legislation to this effect), James Hardie considers that the enforceability of such legislation or judgments based upon such legislation in other jurisdictions outside Australia where James Hardie has material assets would not be automatic, and complex legal questions would need to be subject to legal proceedings before the relevant courts would enforce an Australian judgment based on such legislation. Alternatively, if special arrangements were needed to enforce this legislation, James Hardie is also not currently aware as to the likelihood that such arrangements would be agreed between the relevant governments.

4.4.5 Share price movements up to signing of the Heads of Agreement

From 25 February 2004 (the announcement of the establishment of the Jackson Commission) to 20 December 2004 (the day prior to the signing of the Heads of Agreement), James Hardie’s share price deteriorated by 9.2% (see graph on following page), which James Hardie believes was due in part to investor concerns over James Hardie’s exposure to asbestos-related liabilities. During the same period, the S&P/ASX 200 Index appreciated by approximately 20%.

4.4.6 Interim funding for the MRCF

James Hardie has undertaken or announced a number of initiatives to seek to facilitate the continued payment of asbestos-related claims by the MRCF in response to the MRCF’s stated concerns as to the solvency of Amaca or Amaba prior to James Hardie’s entry into the Final Funding Agreement. In November 2004, James Hardie offered to assist the MRCF to obtain interim funding for a period of up to six months from that date. Also in November 2004, James Hardie provided an indemnity to the directors of ABN 60, whereby James Hardie agreed to meet any liability of the ABN 60 directors arising from the release of approximately A$88.5 million in funding to Amaca and

22   James Hardie Industries

PART B — BACKGROUND TO THE PROPOSAL

SHARE PRICE (A$)

Amaba under the 2001 Deed of Covenant and Indemnity (see Section 3.2.2). As a result, ABN 60 released these funds to the MRCF in November and December 2004.

In March 2005, James Hardie renewed its commitment to assist the MRCF to obtain interim funding, if necessary, prior to the Final Funding Agreement being finalised in accordance with the timetable contemplated at that time. However, it was not necessary for James Hardie to provide the MRCF with any additional funding under these arrangements.

On 16 November 2006, James Hardie (through a wholly-owned subsidiary) agreed to provide certain interim funding by way of loan to Amaca, if necessary. Details of the interim funding arrangements are described in Part C, Section 3.2.

5. THE HEADS OF AGREEMENT AND SUBSEQUENT EVENTS

5.1 HEADS OF AGREEMENT

Negotiations between James Hardie, the NSW Government, the ACTU, UnionsNSW and a representative of Asbestos Diseases Groups following the release of the Jackson Commission report culminated in the signing of a Heads of Agreement on 21 December 2004.

Although the Heads of Agreement was not a legally binding document, it set out the agreed position of the parties in relation to the principles on which a binding agreement (known as the Final Funding Agreement) would be based and the key considerations relevant to implementing those principles.

James Hardie Industries   23

PART B — BACKGROUND TO THE PROPOSAL

5.2 EVENTS SUBSEQUENT TO HEADS OF AGREEMENT

On 15 April 2005, James Hardie announced that it had extended the coverage of the future arrangements agreed under the Heads of Agreement to enable the Trustee to settle or meet proven claims against Asbestos Mines Pty Ltd (a former ABN 60 and Amaca subsidiary which conducted asbestos-related mining activities in Baryulgil, NSW) by members of the Baryulgil community.

The James Hardie Former Subsidiaries (Special Provisions) Act 2005 (NSW) came into effect on 23 June 2005. This legislation was enacted by the NSW Parliament to preserve the position as to the ownership and domicile of the Former James Hardie Companies pending the resolution of the future funding shortfall with respect to these companies under the Proposal. The legislation also provided for the external administration and management of the Former James Hardie Companies during this period, as well as the making and payment of claims. The James Hardie Former Subsidiaries (Special Provisions) Act 2005 (NSW) will automatically terminate on the full commencement of the Transaction Legislation associated with the Proposal.

5.3 FINAL FUNDING AGREEMENT

The principles set out in the Heads of Agreement and the Baryulgil announcement described above formed the basis on which the parties negotiated the terms of the Original Final Funding Agreement. The negotiations to finalise the Original Final Funding Agreement were complex and lengthy, involving the production of 15 formal drafts of the Final Funding Agreement, ongoing and numerous conferences between James Hardie, the NSW Government and their respective professional advisers, and resolution of complex factual, legal, tax, accounting and financial issues in three key jurisdictions (Australia, the United States and The Netherlands). The Original Final Funding Agreement was signed on 1 December 2005. The Original Final Funding Agreement was amended and restated by the parties on 21 November 2006, to address certain tax conditions precedent: see Section 5.4.

The parties to the Final Funding Agreement are James Hardie, James Hardie 117 Pty Ltd (a wholly-owned subsidiary of James Hardie), Asbestos Injuries Compensation Fund Limited and the NSW Government.

The Final Funding Agreement sets out the actions necessary for the implementation of the Proposal and assigns responsibility to various parties for those actions. For a detailed description of the Final Funding Agreement, see Parts C and F.

5.4 TAX CONDITIONS PRECEDENT

The Final Funding Agreement contains a number of conditions precedent relating to the tax treatment of the Proposal. James Hardie has sought a number of rulings from the ATO in order to satisfy these conditions.

5.4.1 No deduction under section 8-1 of the Income Tax Assessment Act 1997 (Cth)

In the Original Final Funding Agreement, the tax condition relating to tax deductibility of the expenditure to be incurred under the Original Final Funding Agreement required the expenditure to be deductible in full in the year in which such expenditure was incurred.

On 16 September 2005, James Hardie Research (Holdings) Pty Limited (“JHRH”) sought a private ruling from the ATO seeking confirmation as to whether the James Hardie Group Taxpayer (currently JHRH) would be allowed a deduction under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”) for payments made, or to be made, by the Performing Subsidiary to the Trustee under the Original Final Funding Agreement.

On 15 December 2005, the ATO ruled that deductions would not be available under section 8-1 of the ITAA 1997 for such payments, on the basis that the expenditure incurred under the Original Final Funding Agreement was expenditure of a capital nature.

5.4.2 Deductions under “black hole” legislation

On 6 April 2006, the Tax Laws Amendment 2006 Measures No 1 Act 2006 (Cth) received royal assent. That act repealed section 40-880 of the ITAA 1997 and replaced it with a new provision, known as the “black hole” legislation, providing deductibility for certain capital expenditure.

Deductions are available under the new section 40-880 for all businesses in Australia which satisfy the tests set out in that section. The section contains no special provisions granting any special treatment in relation to capital expenditure to be incurred under the Final Funding Agreement to James Hardie or any other member of the James Hardie Group. Importantly, the new section 40-880 provides that qualifying capital expenditure can only be deducted over a period of five income years starting in the year in which it was incurred and is unable to be deducted wholly in the year in which it was incurred. Even though black hole deductibility did not result in the expenditure being deductible in full in the year in which such expenditure was incurred, James Hardie determined to accept this outcome as satisfying the condition in the Original Final Funding Agreement relating to deductibility of funding payments.

5.4.3 No endorsement as a tax concession charity

Under the Original Final Funding Agreement, there was a tax condition which required the trustee to be exempt from tax in respect of its income.

On 13 January 2006, the trustee of the Asbestos Injuries Compensation Fund lodged an application with the ATO seeking endorsement of the trustee as exempt from income tax under section 50-105 of the ITAA 1997, and the endorsement of the trustee as the trustee of a charitable fund under subsection 176-5(1) of the GST Act. On 23 June 2006, the ATO refused this application.

5.4.4 Satisfaction of tax conditions precedent in Final Funding Agreement

As a result of the ATO’s decision to refuse the application made by the trustee in respect of tax-exemption on its income, and to reflect James Hardie’s decision to accept black hole deductibility in lieu of the tax condition requiring deductibility in full in the year in which such expenditure is incurred, the parties to the Original Final Funding

24   James Hardie Industries

PART B — BACKGROUND TO THE PROPOSAL

Agreement amended that agreement on 21 November 2006. The parties have also agreed to amend the Original Trust Deed. The tax conditions precedent were amended accordingly. The amendments to the Original Final Funding Agreement and Original Trust Deed preserve the commercial intent of the original arrangements to allow the Trustee to make compensation payments to Claimants. For details of the tax conditions precedent in the Final Funding Agreement, see Part C, Section 8.4.3.

On 29 June 2006, the ATO provided JHRH with a private ruling confirming that expenditure incurred would be deductible under the black hole legislation for the period to 31 March 2045. The ruling was confirmed by the ATO on 8 November 2006 on the basis of draft documents, and subsequently confirmed in relation to final documentation on 6 December 2006.

On 8 November 2006, the ATO also issued binding private rulings which satisfied all of the remaining tax conditions precedent on the basis of draft documents, and subsequently confirmed those rulings in relation to final documentation on 6 December 2006.

5.5 RELEASE LEGISLATION AND TRANSACTION LEGISLATION

In order to facilitate the Proposal, the NSW Parliament has passed the Release Legislation and the Transaction Legislation. The Transaction Legislation was subsequently amended to accommodate changes arising from the amendment of the Original Final Funding Agreement and the Original Trust Deed. The Release Legislation is currently in force, although the effect of the extinguishments of liability contained in that legislation can be revoked. Parts of the Transaction Legislation are also currently in force, and it is a condition precedent to the implementation of the Proposal that the remaining parts of the Transaction Legislation also come into effect. For further details of the Release Legislation and the Transaction Legislation, see Part C.

5.6 ACCOUNTING FOR ASBESTOS-RELATED PAYMENTS

In the fourth quarter of financial year 2006, James Hardie recorded a liability for future asbestos-related payments because it was probable and estimable that it would make payments to fund asbestos-related claims on a long-term basis. Even if the conditions to James Hardie’s funding obligations under the Final Funding Agreement are not fulfilled, James Hardie has determined that it is nevertheless likely that it will make payments in respect of certain Australian claimants who were injured by asbestos products manufactured, mined or distributed by the Former James Hardie Companies. The amount of the asbestos provision is based on James Hardie’s best estimate of the probable outcome. This estimate, which reflected the terms of the Final Funding Agreement, has been updated to reflect the actuarial estimate of projected future cash flows prepared by KPMG Actuaries as at 30 September 2006. The asbestos provision includes cash flows that are undiscounted and uninflated and includes an allowance for the future operating costs of the Trustee. The estimate is also adjusted for any anticipated tax deductions arising from the “black hole” legislation which came into force on 6 April 2006.

5.7 OTHER MATTERS

James Hardie’s share price was positively affected by the signing of both the Heads of Agreement and the Final Funding Agreement. James Hardie’s closing share price increased by 6.1% upon announcement of the signing of the Heads of Agreement, and by 5.8% upon announcement of the signing of the Final Funding Agreement. James Hardie has also received more favourable capital markets coverage since the signing of the Heads of Agreement.

Since the signing of the Final Funding Agreement, to James Hardie’s knowledge, almost all of the bans and boycotts have been removed. There has also been a reduction in the extent of negative media coverage of and other commentary about James Hardie since the signing of the Heads of Agreement.

6. INVOLVEMENT OF THE MRCF IN THE PROPOSAL

As explained in further detail in Section 3.2, the MRCF was originally established with assets of approximately A$296 million, which comprised:

>		approximately A$214 million net assets of the Former James Hardie Companies;
>		additional funding to Amaca and Amaba via the 2001 Deed of Covenant and Indemnity of approximately A$79 million; and
>		a contribution of A$3 million by ABN 60 (then known as James Hardie Industries Limited) in February 2001 to the MRCF to be applied towards medical research directed towards finding a cure for asbestos-related diseases.

No member of the James Hardie Group has any interest in, nor exercises any control over, the MRCF and has not had any such control since the creation of the MRCF in February 2001.

The MRCF is not itself a party to the Final Funding Agreement. However, the shares in those Former James Hardie Companies currently owned by the MRCF will be transferred to the Trustee, as described further in Part C, Section 2.9.1.

Under the terms of the Transaction Legislation, the MRCF will pay the balance of its medical research funds to an institution conducting or funding medical research into asbestos-related diseases. The MRCF trust will then be wound up.

This funding is separate from the funding of A$5 million over 10 years to be provided under the Final Funding Agreement by James Hardie towards medical research, as described further in Part C, Section 10.

James Hardie Industries   25

PART B — BACKGROUND TO THE PROPOSAL

7. THE NSW GOVERNMENT REVIEW OF LEGAL AND ADMINISTRATIVE COSTS IN DUST DISEASES COMPENSATION CLAIMS

A significant issue raised in the discussions leading to the Heads of Agreement was the need for efficiencies to be introduced into the legal process for the resolution of asbestos claims in NSW and other states and territories of Australia. For instance, in a report prepared by KPMG Actuaries of asbestos-related liabilities of the Former James Hardie Companies as at 30 June 2004, it was estimated that legal costs would account for A$410 million of the discounted central estimate of the asbestos-related liabilities of the Former James Hardie Companies, which would be equivalent to 31% of the estimated value of claims (including insurance and other recoveries).

On 18 November 2004, the NSW Premier announced a Review of Legal and Administrative Costs in Dust Diseases Compensation Claims (the “Costs Review”). The Terms of Reference for the Costs Review required it to:

>		consider processes for handling and resolving dust diseases compensation claims; and
>		identify ways in which legal, administrative and other costs can be reduced within the existing common law system in NSW.

The Terms of Reference specified that the Costs Review was not to consider proposals introducing a statutory scheme to resolve dust diseases compensation claims or proposals that would adversely affect claimants’ compensation rights.

The Costs Review was conducted by Ms Leigh Sanderson, Deputy Director-General of The Cabinet Office, and Mr Laurie Glanfield AM, Director-General of the Attorney-General’s Department.

An issues paper was issued in November 2004. James Hardie made substantial submissions to the Costs Review and after the release of the findings in respect of matters on which further comment was sought. The James Hardie submissions, other non-confidential submissions and other materials relating to the Costs Review, are available from the NSW Government Cabinet Office website at www. cabinet.nsw.gov.au/publications (under “Legal Branch”).

The conclusions of the Costs Review were released on 8 March 2005. The key Costs Review recommendations to support costs reduction were:

>		the early provision of as much information as possible by claimants in a prescribed form prior to actively litigating the claim in court;
>		a formal process of mediation prior to active litigation in court;
>		the development of “standard presumptions” for the purpose of provisional apportionment among defendants;
>		streamlining of Dust Diseases Tribunal procedures for matters that are not resolved by settlement offers and which proceed to a court hearing; and
>		cost penalties if litigation proceeds and the result is not materially different from the settlement offers.

Following the release of the Costs Review findings, further issues were addressed resulting in proposals for representation of defendants by a single claims manager for the purpose of making offers of settlement and attending pre-court compulsory mediation with the plaintiff.

The recommendations of the Costs Review which were adopted by the NSW Government have been given legislative effect by the Dust Diseases Tribunal Amendment (Claims Resolution) Act 2005 (NSW) passed on 26 May 2005. The Act incorporates new regulations for the claims resolution process in respect of asbestos claims.

Most provisions of the Act were proclaimed to commence on 1 July 2005. All remaining provisions commenced by proclamation on 17 August 2005.

As a result, significant changes have been made to the procedures for asbestos claims resolution in NSW from 1 July 2005 including:

>		a required information exchange at the commencement of the claim between parties by way of statements of full particulars by plaintiffs and detailed replies from defendants;
>		a compulsory mediation of claims, failing settlement by agreement;
>		a single claims manager model to represent multiple defendants in the negotiation of settlement and failing settlement, mediation of plaintiff claims;
>		a process for defendants to reach agreement on contribution between each other for the purposes of the settlement or mediation of a plaintiff’s claim. If defendants cannot agree on contribution, the Act provides that apportionment of liability will be decided by an independent contributions assessor using standard presumptions of apportionment as set out in the Dust Diseases Tribunal (Standard Presumptions — Apportionment) Order 2005 (NSW). A defendant cannot challenge the decision of a contributions assessor until determination of the plaintiff’s claim by settlement or judgment;
>		imposition of cost penalties in circumstances where:

	–		parties breach the rules of the new claims resolution process;
	–		parties fail to participate in mediation in good faith, including where defendants may unreasonably limit a single claims manager’s authority to settle a claim;
	–		parties unreasonably leave issues in dispute following an unsuccessful mediation; and
	–		any subsequent litigation does not result in a materially different position from that of settlement offers made by the parties; and

>

imposition of cost penalties if a defendant challenges the decision of a contributions assessor and fails to better its position by the greater of A$20,000 or 10% of the amount otherwise payable by it.

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PART B — BACKGROUND TO THE PROPOSAL

The above procedures apply to all non-urgent cases except in limited circumstances where the parties agree to opt out of the process or one party has failed to comply with the procedures. Urgent cases are those where the Dust Diseases Tribunal is satisfied that, as a result of the seriousness of the claimant’s condition, the claimant’s life expectancy is so short as to leave insufficient time for the requirements of the claims resolution process to be completed and the claim to be finally determined by the Dust Diseases Tribunal on an expedited basis. Urgent cases may be removed from a claims resolution process but in each case, the Dust Diseases Tribunal must consider whether to order the application of provisions relating to compulsory mediation and apportionment between defendants to that claim. Urgent cases will still be dealt with by the Dust Diseases Tribunal if they cannot be addressed in an expedited timetable for the new claims resolution process, but in keeping with revised Dust Diseases Tribunal hearing procedures.

Legal representatives of parties to dust diseases claims will also be required to provide information to the Dust Diseases Tribunal in relation to the compensation awarded or agreed and the amount of legal costs recovered following the settlement or determination of a claim.

The Dust Diseases Tribunal Amendment (Claims Resolution) Act 2005 (NSW) also amends:

>		procedures for the issue of subpoenas and the making and acceptance of offers of compromise;
>		the procedures for the hearing of claims that have failed to settle by removing the ability of parties to invoke pre-trial procedures such as interrogatories, discovery or request for particulars, except in very limited circumstances;
>		provisions to clarify that the Dust Diseases Tribunal has jurisdiction to deal with claims for contribution between defendants or other tortfeasors liable in respect of any damages; and
>		requirements for Dust Diseases Tribunal judgments to identify those issues of a general nature that are determined on the basis of judgments made in earlier proceedings, thereby reducing the number of common issues being re-litigated or re-argued.

The Dust Diseases Tribunal proceedings have been amended by the Civil Procedure Act 2005 (NSW) which enables courts to engage in electronic court management systems and to deal with evidence of multiple expert witnesses in a single hearing. These measures if utilised by the Dust Diseases Tribunal are expected to improve court efficiencies and reduce hearing times.

While the reform is concerned solely with NSW procedures and legislation, the NSW Government has indicated its willingness to promote the recommendations of the Costs Review to other states and territories of Australia. The adoption of certain of these recommendations by other states and territories is an important issue for ensuring that efficiencies are achieved in respect of the resolution of dust diseases compensation claims, particularly in those places where there are a large number of cases and the costs of proceedings are a significant component of the total costs of the claim.

The NSW Government released an Issues Paper in October 2006: Review of Dust Diseases Claims Resolution Process that is available from the NSW Government Cabinet Office website at www.cabinet.nsw.gov.au/ publications under “Legal Branch”. Submissions on the Issues Paper closed on 24 November 2006. There may be further changes to the dust diseases compensation system as a consequence of this review, however any changes will not be known until the NSW Government releases its proposals.

Since the implementation of the NSW Government reforms, average legal costs incurred by Amaca and Amaba in relation to the settlement of asbestos-related claims have shown a considerable reduction.

Half of the savings previously envisaged to arise from the reforms have now been realised, although it is not possible to estimate the extent to which such savings have been a result of cost savings initiatives implemented by Amaca or the NSW Government reforms.

The savings realised to date have amounted to more than A$50 million across all States, with approximately A$30 million relating to NSW.

The KPMG Actuarial Report implicitly allows for the cost savings that have already been realised, and also separately estimates the savings that have yet to be realised as a result of these reforms, and estimates that these measures may result in further savings in NSW with a net present value of approximately A$35.2 million. This saving would result in legal costs as a percentage of the estimated value of claims (including insurance and other recoveries) falling from its current level of approximately 24% to 22%. The KPMG Actuarial Report also identifies further potential legal cost savings with a net present value of approximately A$23.3 million arising from the implementation of these procedural reforms in states other than NSW. However, it should be noted that there has been no indication by other Australian state governments that they accept or will implement any procedural reforms at this time.

In October 2006, the NSW Government announced a further review of the reforms, and the dust diseases compensation system generally, including the provision of data that had been collected under the new claims resolution process. It is not yet clear whether further reforms will result from this review, or the extent to which further reforms may reduce legal costs further. At this stage, no allowance has been made for any further benefits resulting from this further review.

James Hardie Industries   27

PART B — BACKGROUND TO THE PROPOSAL

8. QUANTIFICATION OF ASBESTOS LIABILITIES

8.1 ACTUARIAL ASSESSMENTS

The estimation of future liabilities arising from asbestos-related diseases as a result of past exposure to products containing asbestos is subject to significant difficulty and complexity. This is principally due to the extremely long-tailed nature of the liabilities resulting from the long latency period of disease manifestation from the time of exposure. Consequently, these liabilities are usually valued by actuaries.

Actuaries use actuarial techniques involving analysing past trends and claims experience, together with their views on future experience and trends (including social, medical and legal developments) and epidemiological studies relating to the future incidence of diseases, to calculate an actuarial assessment of the quantum of potential liabilities.

The actual emergence of the liabilities may vary materially from any estimate. No assurance can be given by either James Hardie or KPMG Actuaries that the actual liabilities of the Former James Hardie Companies will not exceed or be less than the estimates contained in the KPMG Actuarial Report, or that any such variation will not be material.

8.2 BACKGROUND

The first actuarial assessment of the asbestos-related personal injury liabilities of Former James Hardie Companies was undertaken in 1996 by Trowbridge Consulting which estimated the net present value of asbestos-related liabilities to be approximately A$230 million. Since then, a number of actuarial assessments of the asbestos-related liabilities of the Former James Hardie Companies have been undertaken. The following table provides a summary of the net present value of each actuarial estimate of the central estimate of expected future asbestos-related claims payments and associated costs (including legal and settlement costs) of those claims as at the valuation date, net of insurance recoveries.

ESTIMATE OF LIABILITIES BY VALUATION DATE

				KPMG Actuaries				Trowbridge Consulting
				estimates (NPV)				estimates (NPV)
Valuation Date		Report date		(A$ Million)				(A$ Million)				Notes
31 March 1996		10 October 1996			—				230.2				1
31 March 1998		10 September 1998			—				253.8				1
31 March 2000		16 June 2000 (draft)			—				294.7				1,2
31 March 2000		13 February 2001			—				322.6				1,2
30 June 2001		16 August 2001			—				574.3				3
30 June 2002		28 October 2002			—				751.9				3
30 June 2003		12 September 2003			—				1,089.8				3
30 June 2003		7 June 2004			1,573.4				—				4
30 June 2004		21 November 2004			1,536.0				—				4
31 March 2005		14 May 2005			1,684.9				—				4
30 June 2005		1 December 2005			1,568.4				—				4,5
31 March 2006		15 May 2006			1,517.0				—				4,5
30 September 2006		13 November 2006			1,554.8				—				4,5

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PART B — BACKGROUND TO THE PROPOSAL

The methodology applied and assumptions made in each actuarial report are not consistent, and as a result, while broadly comparable, they are not like-for-like comparisons.

The work done by Trowbridge Consulting to produce the report dated 13 February 2001 with a valuation date of 31 March 2000 was utilised by ABN 60 in calculating the amount of additional funding to be provided to Amaca and Amaba (see Section 3.2.2). Trowbridge Consulting’s best estimate of the undiscounted asbestos-related liabilities of Amaca and Amaba prepared in connection with this report was A$734 million. ABN 60 management estimated that the provision of additional funding with a net present value of approximately A$79 million, together with Amaca and Amaba’s net assets valued at approximately A$214 million, would generate sufficient income to meet Trowbridge Consulting’s best estimate of the undiscounted asbestos-related liabilities of Amaca and Amaba.

The Trowbridge Consulting report dated 13 February 2001 with a valuation date of 31 March 2000 was an updated assessment of the Trowbridge Consulting 31 March 2000 valuation (draft report dated 16 June 2000) to consider the impact of additional work that Trowbridge Consulting had undertaken in relation to the future level of asbestos liabilities in Australia. The updated assessment included consideration of a paper presented to the 8th Accident Compensation Seminar by Mr Bruce Watson and Mr Mark Hurst, actuaries at Trowbridge Consulting. The updated assessment substantively focused on potential changes to the future number of claims estimated.

A graphical comparison of these different actuarial estimates is set out below.

ESTIMATE OF LIABILITIES BY REPORT DATE

The substantial difference in the liability assessment between the reports has in part resulted from:

>		the inclusion by KPMG Actuaries of Superimposed Inflation in its assessment methodology. A description of Superimposed Inflation is contained in Part G;
>		different reports making different assumptions as to the future emergence of asbestos-related disease claims and average claim awards. These assumptions have been influenced by the rapid increase in the number of claims against the Former James Hardie Companies and increasing average claim awards over the period of the actuarial reports since 2001; and
>		different reports making different assumptions as to the discount rate applied in calculating the net present value of liabilities based on changing economic conditions.

In its report dated 7 June 2004, KPMG Actuaries undertook a review of the reasonableness and key assumptions adopted by Trowbridge Consulting in their valuations. KPMG Actuaries formed the view that overall and without the benefit of hindsight, the steps taken by Trowbridge Consulting with respect to the data used to prepare their prior valuations did not appear to be reasonable. The Jackson Commission also criticised the Trowbridge Consulting report dated 13 February 2001: see Section 4.3.2.

James Hardie Industries   29

PART B — BACKGROUND TO THE PROPOSAL

8.3 KPMG ACTUARIAL REPORT

8.3.1 Introduction

KPMG Actuaries was appointed to provide an actuarial assessment of the asbestos-related liabilities of the Former James Hardie Companies as at 30 September 2006 on a central estimate basis, taking into account the potential savings arising from the implementation of legislation from the Costs Review.

A complete copy of the KPMG Actuarial Report is available on the James Hardie website at www.ir.jameshardie.com.au.

8.3.2 Basis of preparation

The liability assessment is prepared on a central estimate basis. A central estimate assessment is an estimate of the expected value of the range of potential future liability outcomes. In other words, if all the possible values of the liabilities are expressed as a statistical distribution, the central estimate is an estimate of the mean (or average) of that distribution. The central estimate, in broad terms, corresponds to a value such that the actual outcome of cost would be equally likely to be greater or less than the estimate.

The central estimate liability represents the present value of KPMG Actuaries’ actuarial estimate of the expected future asbestos-related Proven Claims and associated costs of those claims. The central estimate liability makes allowance for the anticipated savings in NSW that are estimated to arise as a result of the implementation of legislation resulting from the Costs Review.

The liability assessment does not include any explicit allowance or risk margin for the uncertainty surrounding the assessment made.

It should be noted that KPMG Actuaries has not allowed for any internal claims administration costs or the operational expenses of the special purpose fund and the Former James Hardie Companies in its liability assessment. James Hardie estimates the cost of this will be approximately A$3.3 million for the six months to 31 March 2007, and A$5.4 million in the financial year ending 31 March 2008.

8.3.3 Liability assessment

As at 30 September 2006, KPMG Actuaries’ central estimate of the liability of the Former James Hardie Companies was A$1,554.8 million (net of cost savings in NSW only):

COMPOSITION OF CENTRAL ESTIMATE (A$ MILLION)

		31 March				30 September
		2006				2006
Total projected cash flows in current dollars			1,401.7				1,442.3
Future inflation allowance			1,677.4				1,726.6
Total projected cash flows with inflation allowance			3,079.2				3,168.9
Discounting allowance			(1,562.2	)			(1,614.0	)
Net present value liabilities1,2			1,517.0				1,554.8

A detailed reconciliation between the net present value of the liabilities of the Former James Hardie Companies between 31 March 2006 (contained in the most recent actuarial report prepared for the purposes of the Original Final Funding Agreement) and 30 September 2006 (contained in the current version of the actuarial report prepared for the purposes of the Final Funding Agreement) is shown on the following page, and is discussed further in the KPMG Actuarial Report.

30   James Hardie Industries

RECONCILIATION OF CHANGE IN DISCOUNTED CENTRAL ESTIMATE LIABILITIES FROM 31 MARCH 2006 TO 30 SEPTEMBER 2006 (A$ MILLION)

Net liability at 31 March 2006		$	1,517.0
Expected claim payments		($	35.1	)
Unwind of discount		$	41.0
Expected liability at 30 September 2006		$	1,522.9
Change in discount rates		$	(0.4	)
Increase in claim numbers		$	62.6
Increase in nil settlement rate		($	8.5	)
Decrease in average claim costs
and legal costs		($	50.2	)
Increase in claims inflation		$	43.4
Emerging claims experience		($	15.0	)
Net liability at 30 September 2006		$	1,554.8

The key components of the liabilities are set out below:

COMPONENTS OF ASBESTOS LIABILITIES — NET PRESENT VALUES (A$ MILLION)

		31 March				30 September
		2006				2006
Claim costs (excluding all legal costs)		$	1,190.6			$	1,230.3
Total legal costs (plaintiff and defendant costs)		$	400.9			$	359.7
Costs Review		($	74.5	)		($	35.2	)
Total liability		$	1,517.0			$	1,554.8

Whilst claim costs represent the largest component (77%) of KPMG Actuaries’ asbestos valuation, legal costs still represent a significant proportion of the total liability. As a result of the Costs Review, legislation has been put in place which is estimated to result in further savings with a present value of A$35.2 million in NSW (additional to those savings which have already been realised) and which, if similar reforms were applied in the other Australian states, could result in further savings which KPMG Actuaries has estimated to be A$23.3 million resulting in total potential future savings with a present value of A$58.5 million.

A sensitivity analysis has been performed to determine how the actuarial estimates would change if certain assumptions (that is, regarding the rate of inflation and Superimposed Inflation, the average costs of claims and legal costs, and the projected number of claims) were different from the assumptions used to determine the central estimates in the analysis above. This analysis shows that the discounted central estimates could range between A$1.0 billion to A$2.4 billion (undiscounted estimates of A$1.8 billion to A$5.7 billion) as of 30 September 2006. It should be noted that the actual costs of the liabilities could be outside of that range depending on actual experience relative to the assumptions made.

A more detailed discussion of the assessment of the liabilities of the Former James Hardie Companies can be found in the KPMG Actuarial Report.

8.3.4 Claims profile over time

The changes in the profile of expected claims over time have led to the increases and volatility observed in the estimated asbestos-related liabilities set out in the table in Section 8.2. The key drivers of changes in the claims profile over time are the changes in the assumed future claim numbers and the changes to the assumed future average claim costs. The KPMG Actuaries graph on the following page illustrates the change in the claims profile over time.

The historic actuarial estimates in the graph below were chosen by way of example for the following reasons:

>		the Trowbridge Consulting valuation as at 31 March 1996 was the first actuarial assessment undertaken;
>		the Trowbridge Consulting valuation as at 31 March 2000 (dated 13 February 2001) was the actuarial assessment undertaken just prior to the establishment of the MRCF; and
>		the KPMG Actuaries’ valuations as at 31 March 2006 and 30 September 2006 are the most recent actuarial estimates of James Hardie’s asbestos-related liabilities. Neither the 31 March 2006 nor the 30 September 2006 valuations in this analysis includes the estimate of cost savings arising from implementation of the Costs Review in order to make comparisons more meaningful.

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PART B — BACKGROUND TO THE PROPOSAL

TRENDS IN CLAIMS PROFILE (HISTORIC AND ESTIMATED FUTURE)

The graph above reflects a significant trend upwards in net cash flow (cash flow associated with claims after insurance and other recoveries) associated with asbestos-related claims against the Former James Hardie Companies from around 2001 which KPMG Actuaries concludes was due in part to an unforeseeable upward trend in claim numbers and average claims costs. Net cash flow is currently expected to peak around 2018/2019 and fall thereafter.

The actual net cash flow as at 31 March 2006 shows a fall in 2005/2006 relative to 2004/2005. The reason for the fall in 2005/2006 is due to a sharp fall in claim numbers reported in the period, together with an increased level of recoveries being made against the insurers of the Former James Hardie Companies.

The reduction in net cash flow projected at 30 September for the 2006/2007 year compared with that which was forecast at 31 March 2006 is due to a substantial increase in insurance recoveries together with fewer mesothelioma claims having been reported.

8.4 UNCERTAINTY ASSOCIATED WITH ACTUARIAL VALUATIONS

The table in Section 8.2 demonstrates the inherent uncertainty in estimating current and future asbestos-related liabilities. This uncertainty includes the following:

>		the difficulty in quantifying the extent and pattern of past asbestos exposures and the number and incidence of the ultimate number of lives that may be affected by asbestos-related diseases arising from such past asbestos exposures; and
>		the fact that the ultimate severity of the impact of the disease and the quantum of the claims that will be awarded over such an extended period of time will be subject to the outcome of events that have not yet occurred, including medical and epidemiological developments, jury decisions, court interpretations, legislative changes, public attitudes, potential exposures from asbestos products already in situ (known as “third wave” exposures) and social and economic conditions such as inflation.

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PART B — BACKGROUND TO THE PROPOSAL

It should therefore be expected that the actual emergence of the liabilities will vary, perhaps materially, from any estimate.

9. JAMES HARDIE’S CURRENT BUSINESS

9.1 INTRODUCTION

James Hardie is an international building materials company with manufacturing operations in the United States, Australia, New Zealand and the Philippines, and sales offices in Europe. It is a world leader in researching, developing, manufacturing, selling and marketing fibre cement building products that are used in the exterior and interior of buildings, from exterior cladding and internal lining, to bracing, decorative finishes, fencing and pipes.

Based on revenue, James Hardie is the largest manufacturer of fibre cement products and systems for internal and external building construction applications in the United States, Australia, New Zealand and the Philippines.

James Hardie presently employs over 3,200 people, generating net sales of approximately US$1.5 billion in the 2006 financial year.

9.2 BUSINESS SEGMENTS

James Hardie has three key business segments: USA Fibre Cement, Asia Pacific Fibre Cement and Other. For the purposes of the descriptions below, the Asia Pacific Fibre Cement and Other business segments have been grouped together and referred to as non-USA Fibre Cement.

In recent years, James Hardie has focused on growing its highly successful USA Fibre Cement business – as a result, 82% of James Hardie’s net sales were derived from the United States in the 2006 financial year. Sales and EBIT for the financial years from 2002 to 2006 broken down by business segment are illustrated in the charts below.

SALES BY SEGMENT (US$ MILLION)

(US$ millions)		FY2002				FY2003				FY2004				FY2005				FY2006
Non-USA Fibre Cement
Asia Pacific Fibre Cement			141.7				174.3				219.8				236.1				241.8
Other			5.2				9.6				23.5				35.1				28.3
			146.9				183.9				243.3				271.2				270.1
Discontinued operations
Gypsum			247.6				18.7				—				—				—
New Zealand Building Systems			15.2				20.1				2.9				—				—
			262.8				38.8				2.9				—				—

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PART B — BACKGROUND TO THE PROPOSAL

James Hardie has maintained strong sales growth over the past five years. The compound annual growth rate in total net sales depicted above from 2002 to 2006 is 15% (including discontinued operations). This growth was primarily driven by the strong underlying performance of the USA Fibre Cement business which has delivered a compound annual growth rate in sales of 29% over the same period. The growth in the USA Fibre Cement business since 2002 has largely been due to growth in primary demand for fibre cement, continued market penetration and a favourable housing construction market.

Net sales from non-USA Fibre Cement delivered a compound annual growth rate of 16% from 2002 to 2006, with the second largest contributor to total net sales (Asia Pacific Fibre Cement) growing by 14% over the same period.

EBIT BY SEGMENT (US$ MILLION)

(US$ millions)		FY2002				FY2003				FY2004				FY2005				FY2006
Non-USA Fibre Cement
Asia Pacific Fibre Cement			20.9				27.3				37.6				46.8				41.7
Other			(8.9	)			(10.7	)			(15.9	)			(11.8	)			(13.1	)
			12.0				16.6				21.7				35.0				28.6
Discontinued operations
Gypsum			0.9				1.8				—				—				—
New Zealand Building Systems			1.5				2.8				—				—				—
			2.4				4.6				—				—				—

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PART B — BACKGROUND TO THE PROPOSAL

The compound annual growth rate in EBIT depicted on the previous page from 2002 to 2006 is 56%, again primarily driven by the robust underlying performance of the USA Fibre Cement business, which has delivered a compound annual growth rate in EBIT of 41% over the same period.

Non-USA Fibre Cement also demonstrated strong growth in EBIT delivering a compound annual growth rate of 24% between 2002 and 2006. The Asia Pacific Fibre Cement business, which contributed approximately 14% of EBIT in 2006, delivered a compound annual growth rate of 19% between 2002 and 2006. Growth declined by 11% in 2006 due to lower prices and increased operating expenses.

NET OPERATING CASH FLOW (US$ MILLION)

The total compound annual growth of net operating cash flow depicted above from 2002 to 2006 is 33%.

James Hardie Industries 35

PART B — BACKGROUND TO THE PROPOSAL

Below is a summary description of each of James Hardie’s business segments:

9.2.1 USA Fibre Cement

Based on net sales, James Hardie is the largest manufacturer of fibre cement products and systems for internal and external building construction applications in the United States. James Hardie’s USA fibre cement products include siding, trim, soffit, and fascia primarily used for exterior cladding and interior linings of residential homes in new residential construction, manufactured housing and repair and remodelling.

Products include the ColorPlus® product range, Hardieplank® lap siding, Hardiepanel® vertical siding, Hardie Shingleside® shingles, Hardiesoffit® panels, Hardiebacker® ceramic tile backerboard and HardieTrim® boards. James Hardie introduced fibre cement products to the United States in 1988 and since then, James Hardie siding products have been installed on millions of homes across the United States.

Based on James Hardie’s knowledge, experience and third-party data regarding the building products industry, James Hardie estimates that, in financial year 2006, it sold approximately 12% of the estimated 12.3 billion square foot US exterior siding market (excludes fascia, trim and soffit). This has been achieved with a compound annual growth rate of 29% in exterior net sales for the fiscal years 2002–2006.

Furthermore, based on James Hardie’s knowledge, experience and third-party data, James Hardie estimates that it has 30–40% of the USA Interior Cement board market. James Hardie’s net sales in this segment have achieved a compound annual growth rate of 25% from fiscal years 2002–2006.

9.2.2 Asia Pacific Fibre Cement

James Hardie’s Asia Pacific Fibre Cement segment manufactures a range of fibre cement products in Australia, New Zealand and the Philippines and sells these products throughout the Asia Pacific region. The products are primarily utilised for external cladding and internal lining in residential and commercial construction and alterations and additions. In Australia, James Hardie also manufactures fibre reinforced concrete pipes for civil and commercial use, and fibre cement columns for decorative use.

9.2.3 Other

The Other business segment comprises the fibre cement operations in Europe and the USA Hardie Pipe business in the United States.

The USA Hardie Pipe business manufactures fibre reinforced concrete pipes at a custom-built facility in Florida and the pipes are used for drainage in civil and commercial construction and also in the development of residential sub-divisions.

9.2.4 Research and development

During the year ended 31 March 2006, James Hardie invested US$12 million in core research and development activities and US$16 million in product development in its business units. James Hardie views research and development as key to sustaining and growing its existing market leadership position in fibre cement. James Hardie’s research and development strategy includes:

>		developing innovative technologies and new differentiated products and systems that offer advantages over alternatives such as brick, concrete, wood, vinyl and stucco; and
>		investing in process technology to reduce capital and operating costs.

James Hardie operates research and development centres in Sydney, Australia and Fontana, California, where it:

>		conducts core research;
>		develops new manufacturing technology platforms; and
>		develops products for specific markets and applications.

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PART B — BACKGROUND TO THE PROPOSAL

9.3 LOCATION OF OPERATIONS

James Hardie has 10 fibre cement flat sheet plants in the United States, covering all significant markets. James Hardie also has a Hardie® Pipe plant located in the United States.

In the Asia Pacific region, James Hardie has two fibre cement flat sheet plants in Australia, one in New Zealand and one in the Philippines, providing national coverage of those markets. James Hardie also has a pipe plant in Australia. These plants are complemented by a number of sales offices.

In Europe, James Hardie’s sales offices are supplemented by a distribution centre in the UK.

The locations of facilities and sales offices are illustrated below:

LOCATION OF MANUFACTURING PLANTS AND SALES OFFICES

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PART B — BACKGROUND TO THE PROPOSAL

9.4 SHORT-TERM OUTLOOK OF JAMES HARDIE

In North America, a further softening in demand for new residential housing is expected in the short-term with the US-based National Association of Home Builders reporting that the heavy supply of houses for sale points toward further declines in new starts in the months ahead.

The current weakened market conditions reflect lower housing affordability, a large inventory of unsold homes and investors leaving the market. However, regional variances in impact are expected to continue.

Repair and remodelling activity is expected to remain ahead of activity levels in new residential construction in th e short-term.

Volume growth is likely to be affected further in James Hardie’s third quarter to 31 December 2006, but the US business expects to continue outperforming the market overall by taking more market share from alternative materials and by increasing the proportion of value-added differentiated products in its sales mix.

Input costs are expected to remain high in the short- term with the cost of raw materials, particularly pulp, at very high levels. Attractive margins are expected to be maintained in the short-term despite the higher costs.

In the Australian and New Zealand business, market conditions are expected to remain challenging with no near-term improvement in sight. Further volume growth is expected due to initiatives to grow primary demand, but the average selling price is expected to remain under pressure due to price competition in Australia.

In the Philippines, the building and construction market is expected to remain under pressure for the remainder of the year, but a small improvement in net sales is expected.

9.5 BUSINESS STRATEGY

James Hardie’s strategy continues to be to:

>		grow the market for fibre cement;
>		increase share of exterior siding and backerboard market while maintaining share in other existing market segments;
>		leverage superior technology to offer differentiated segment-specific products; and
>		offer products with superior value to those of competitors.

James Hardie does not expect that the implementation of the Proposal will alter its ongoing business strategy. James Hardie seeks to grow its businesses in markets where it can establish a differentiated competitive position using its unique technology and the skills of its employees.

38 James Hardie Industries

Part C

Details of
the Proposal

James Hardie Industries 39

PART C — DETAILS OF THE PROPOSAL

1. OVERVIEW

1.1 INTRODUCTION

The Proposal involves the establishment of the Asbestos

Injuries Compensation Fund, which will be managed by a trustee to provide compensation for proven Australian asbestos-related personal injury claims against the Former James Hardie Companies, and certain similar claims with respect to Marlew. The Asbestos Injuries Compensation Fund consists of a charitable trust (known as the “Charitable Fund”) and a discretionary private trust (known as the “Discretionary Fund”) which will be managed by a common trustee (the “Trustee”).

A subsidiary of James Hardie (described in this document as the “Performing Subsidiary”) will make Funding Payments on a long-term basis to the Trustee in its capacity as trustee of the Charitable Fund. Taxable income earned on the assets of the Trustee will be the subject of the Discretionary Fund.

A copy of the Final Funding Agreement is available on James Hardie’s website at www.ir.jameshardie.com.au.

1.2 ANNUAL PAYMENT

Subject to the operation of an Annual Cash Flow Cap, the Performing Subsidiary will make Annual Payments to the Trustee in its capacity as trustee of the Charitable Fund. If the Proposal is implemented, the Initial Funding is expected to be paid in February 2007 and subsequent Annual Payments will be made on 1 July of each Financial Year (commencing 1 July 2007), provided that James Hardie has positive Free Cash Flow for the previous Financial Year.

Unless the Annual Cash Flow Cap applies, the amount of each Annual Payment is equal to:

>

the Period Actuarial Estimate of the expected Proven Claim liabilities of the Former James Hardie Companies and Marlew for the Financial Year in which the payment is made and the next two Financial Years, calculated as at the end of the previous Financial Year;

plus

>

the estimated reasonable Operating Expenses of the Trustee and the Former James Hardie Companies for the Financial Year in which the payment is made;

less

>

the net assets of the Trustee and the Former James Hardie Companies as at the end of the previous Financial Year, as determined by the Approved Auditor.

The actual Proven Claims liabilities may vary, perhaps materially, from such estimates. However if the actual Proven Claims for a Financial Year are greater than those estimated, the next following Annual Payment would be expected to increase as a result of there being lower than expected reduced net assets of the Trustee at the end of that Financial Year. Similarly, if the actual Proven Claims for a Financial Year are less than those estimated, the next following Annual Payment would be expected to decrease as a result of there being greater than expected net assets of the Trustee at the end of that Financial Year. For a more detailed explanation of the basis on which Proven Claims are estimated and the factors which are expected to materially influence such liabilities, see Part B, Section 8.

Because the future level of Proven Claims which will be made against the Former James Hardie Companies and the level of James Hardie’s future Free Cash Flow are uncertain, no assurance can be given that the Trustee will have sufficient funds to compensate, in whole or in part, all Proven Claims.

1.3 ANNUAL CASH FLOW CAP

The amount of each Annual Payment is subject to an Annual Cash Flow Cap. If the Annual Payment would exceed the Annual Cash Flow Cap for the relevant Financial Year, the Annual Payment by the Performing Subsidiary to the Trustee will be limited to the amount of the Annual Cash Flow Cap for the relevant Financial Year. If the Annual Payment is below the Annual Cash Flow Cap for the relevant Financial Year, then the Annual Cash Flow Cap will not apply. The amount of the Annual Cash Flow Cap for each relevant Financial Year is calculated afresh each year. The calculation of the Annual Cash Flow Cap is described in Section 3.1.3.

1.4 TERM

The initial Term is from the Commencement Date until 31 March 2045, although the Term will be automatically extended by one or more successive periods of 10 years unless the parties agree upon the terms on which a Final Payment could be made by the Performing Subsidiary to the Trustee. As a result, the Term could be for a period much longer than approximately 40 years and is currently not able to be determined with any certainty.

1.5 OTHER KEY ASPECTS OF THE PROPOSAL

Other key aspects of the Proposal include or relate to:

>		restrictions on Reorganisations, Distributions and Non-Arm’s-Length Dealings by the James Hardie Group;
>		special provisions to apply to the calculation of James Hardie’s Free Cash Flow in the event of future capital raisings, takeovers or other reconstructions;
>		legislation which seeks to preserve the funds of the Former James Hardie Companies and the Trustee for the payment of claims covered by the Proposal and certain other Payable Liabilities;
>		the legal structure and control of the Trustee, including the consequences if the Trustee cannot fully compensate Claimants, or becomes Insolvent or unable to operate;
>		the guarantee by James Hardie of the obligations of the Performing Subsidiary;

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PART C — DETAILS OF THE PROPOSAL

>		intercreditor arrangements between James Hardie, the Trustee (in its capacity as trustee of the Charitable Fund), the NSW Government and the Guarantee Trustee, which are designed to allow James Hardie’s nominated lenders to be paid in full before any amounts are paid to the Trustee in an Insolvency of James Hardie;
>		undertakings by the NSW Government not to pursue certain adverse legislative or regulatory actions against any member of the James Hardie Group;
>		consequences of default under the Final Funding Agreement by James Hardie or the NSW Government, including a right of the NSW Government to take control of the Trustee, or otherwise initiate enforcement action on behalf of the Trustee, in the event that James Hardie defaults on certain key obligations;
>		rights of the parties to terminate the Final Funding Agreement, including a termination right for James Hardie in the event that certain key tax conditions cease to be satisfied;
>		extinguishment of certain civil liabilities in favour of certain entities and persons associated with James Hardie and the Former James Hardie Companies in connection with certain matters;
>		funding for an asbestos public education and awareness campaign and medical research into asbestos-related disease; and
>		conditions to implementing the Proposal.

Each of the elements of the Proposal described above is explained in more detail in the remainder of this Part C.

1.6 SUMMARY ONLY

Shareholders should note that this Part C contains a non-exhaustive and simplified summary of certain key features of the Final Funding Agreement, Related Agreements, Release Legislation and Transaction Legislation, and does not take precedence for interpretative purposes over the terms of those agreements or legislation. For a full description of the relevant concepts, please refer to the precise terms of the Final Funding Agreement, the Related Agreements, the Release Legislation and the Transaction Legislation. Copies of the Final Funding Agreement, Related Agreements, Release Legislation and Transaction Legislation can be found on James Hardie’s website at www.ir.jameshardie.com.au.

2. ASBESTOS INJURIES COMPENSATION FUND

2.1 ASBESTOS INJURIES COMPENSATION FUND

Under the Proposal, two separate trusts (together, the Asbestos Injuries Compensation Fund) will provide compensation for Proven Claims, subject to having the funds available to do so. The first trust (known as the “Charitable Fund”) will be a charitable trust. The trustee of the Charitable Fund will be AICFL (“Trustee”), a company limited by guarantee, incorporated in Australia and registered in NSW. The Charitable Fund will obtain funding from annual contributions made by the Performing Subsidiary, which will be a James Hardie subsidiary, initially James Hardie 117 Pty Ltd.

The second trust will be a private discretionary trust, known as the “Discretionary Fund”. In summary, the assets of the Discretionary Fund will consist of taxable income which is generated on the investments of the Charitable Fund. The trustee of the Discretionary Fund will also be Asbestos Injuries Compensation Fund Limited. This dual trust structure has been established to maximise the amount available to the Trustee to make compensation payments to Claimants, by dealing with the consequences of the decision of the ATO not to grant tax-exempt status to the trustee of the Charitable Fund, whilst preserving the commercial intent of the original arrangements to allow the Trustee to make compensation payments to Claimants.

2.2 ROLE OF THE TRUSTEE

In summary, in its role as trustee of the Charitable Fund, the Trustee will:

>		be a party to the Final Funding Agreement and certain Related Agreements;
>		hold the benefit of the payment obligations to the Trustee arising under those agreements and to enforce the other parties’ obligations under those agreements;
>		be the creditor of the Performing Subsidiary and James Hardie for payments under the Final Funding Agreement and have the benefit of the James Hardie Guarantee;
>		manage the response of the Former James Hardie Companies in relation to their Payable Liabilities;
>		subject to it having the necessary funds to do so, pay those Payable Liabilities which the Trustee is permitted to fund (known in this document as “Trust Funded Liabilities”) itself, or on behalf of or for the benefit of, or through one or more of the Former James Hardie Companies;
>		use its best endeavours to achieve legal and administrative cost savings in relation to asbestos-related personal injury claims which are or can be made against the Former James Hardie Companies;
>		use its best endeavours to exercise rights of recovery of the Former James Hardie Companies from insurers, reinsurers and other parties who may have financial responsibility for or contributed to the loss relating to asbestos-related personal injury claims which are made against the Former James Hardie Companies;
>		invest the assets of the Asbestos Injuries Compensation Fund;
>		generally do all things necessary or convenient for the purpose of handling or finalising Payable Liabilities, either itself or on behalf of any Former James Hardie Company;

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PART C — DETAILS OF THE PROPOSAL

>		be entitled to exercise (and be subrogated to) the rights of Claimants against the Former James Hardie Companies or Marlew in relation to any claims settled or met by the Trustee out of the property of the Charitable Fund; and
>		at its discretion, negotiate with Claimants and procure that any Former James Hardie Company enters into binding settlements with respect to Proven Claims.

The Trustee is only obliged to undertake acts on behalf of the Former James Hardie Companies (such as managing the response of the Former James Hardie Companies in relation to their Payable Liabilities) to the extent that those companies are under its direction or control. The Former James Hardie Companies will only be under the direction or control of the Trustee while these companies are owned by the Trustee. See Section 2.9.1 for further details.

In its role as trustee of the Discretionary Fund, the Trustee will:

>		hold on trust the Annual Income for the Income Beneficiaries;
>		at its discretion, pay Operating Expenses;
>		at its discretion, apply Annual Income in favour of one or more Income Beneficiaries; and
>		if at the end of the Financial Year not all of the Annual Income of that Financial Year has been applied in favour of one or more Income Beneficiaries, the Trustee will add the remainder of that Annual Income to the Charitable Fund.

2.2.1 Restriction on use of funds by the Trustee

Under the terms of the Final Funding Agreement and the Trust Deed, the Trustee must only apply the assets of the Asbestos Injuries Compensation Fund in the payment of Trust Funded Liabilities.

Trust Funded Liabilities are:

>		Proven Claims;
>		Claims Legal Costs;
>		Operating Expenses;
>		Pre-commencement Claims against the Former James Hardie Companies; and
>		reimbursements to any government or governmental agency for Statutory Recoveries (subject to the limits on Statutory Recoveries described in Section 2.7) .

Each of these categories of Trust Funded Liabilities is explained in more detail in Sections 2.2.1.1 to 2.2.1.7. Further categories of Trust Funded Liabilities may be added, if James Hardie and the NSW Government agree in writing.

The Final Funding Agreement does not require James Hardie, the Performing Subsidiary or any other member of the James Hardie Group to provide any funding for payment of any of the following liabilities of the Former James Hardie Companies:

>		personal injury or death claims arising from exposure to asbestos outside Australia;
>		personal injury or death claims made outside Australia;
>		claims for economic loss (other than any economic loss forming part of the calculation of an award of damages for personal injury or death) or loss of property, including those relating to land remediation and/or asbestos or asbestos products removal, arising out of or in connection with asbestos or asbestos products manufactured, sold, distributed or used by or on behalf of the Former James Hardie Companies;
>		any Excluded Marlew Claim; or
>		any liabilities of the Former James Hardie Companies other than Trust Funded Liabilities.

2.2.1.1 Proven Claims

In order to be a Proven Claim, a claim must be:

>		Proven; and
>		a Personal Asbestos Claim or a Marlew Claim.

In order to be Proven, the claim must either be the subject of a binding settlement entered into by a Former James Hardie Company (or entered into on their behalf by the Trustee) or a final judgment given against a Former James Hardie Company or any member of the James Hardie Group from time to time. The amount of the Proven Claim is the amount of the liability incurred by or on behalf of the relevant Former James Hardie Company or James Hardie Group member under that settlement or judgment. Note that one of the Former James Hardie Companies (Amaca) has been made statutorily liable for certain claims against Marlew (known as “Marlew Claims”). For further details, see Section 2.10.

Each of the concepts of Personal Asbestos Claim and Marlew Claim is discussed in further detail below.

2.2.1.2 Personal Asbestos Claim

A Personal Asbestos Claim has the following characteristics:

Personal Injury:		The claim must be a personal injury or death claim for damages arising under the common law or any other law, subject to certain restrictions about future changes to such laws:
		see Section 7;
Claimant:		The claim must be brought by the individual who has suffered the personal injury, the legal personal representative of that individual or a relative of that individual bringing a claim under compensation to relatives legislation;
Defendant:		The claim must be made against one or more of the Former James Hardie Companies or any member of the James Hardie Group from time to time;

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PART C — DETAILS OF THE PROPOSAL

Exposure to asbestos within Australia:		The claim must arise from exposure to asbestos occurring within Australia. Normally, the exposure must have occurred wholly within Australia. If the claim arises from both exposure to asbestos within Australia and outside Australia, the Proposal will only provide funding for the damages attributable to the proportion of the exposure which caused or contributed to the loss or damage which occurred within Australia;
Australian court or tribunal:		The claim must be made in an Australian court or tribunal; and
Exclusions:		Any claim will not comprise a Personal Asbestos Claim to the extent that it:
		>    is a Marlew Claim (because Marlew Claims are dealt with separately); or
		>    has been recovered or is recoverable under a Worker’s compensation Scheme or Policy.

Personal Asbestos Claims also include Contribution Claims in relation to Personal Asbestos Claims. A Contribution Claim is a claim by a third party (including non-individuals) by way of cross-claims or claims for contribution against the Former James Hardie Companies or a member of the James Hardie Group, which seeks recovery of some or all of the damages with respect to a personal injury claim against that third party. The types of personal injury claims for which a Contribution Claim may be made are claims which would satisfy the criteria listed above if that claim had been made against a Former James Hardie Company.

The definition of Personal Asbestos Claims includes asbestos-related personal injury claims (meeting all of the criteria in the above list) against any member of the James Hardie Group from time to time. As discussed in Part B, Section 2, James Hardie does not believe that any current James Hardie Group member (apart from Studorp Limited) has any asbestos-related liabilities. However, if a valid asbestos-related claim satisfying the criteria listed above is made against a member of the James Hardie Group, the Trustee will be able to make payments to satisfy these liabilities on behalf of the James Hardie Group member. If any such liability is satisfied by the Trustee, the relevant member of the James Hardie Group will be free from liability for that claim. The funding of such payments by the Performing Subsidiary will be subject to the operation of the Annual Cash Flow Cap as described in Section 3.1.3.

2.2.1.3 Marlew Claims

A Marlew Claim is similar to a Personal Asbestos Claim, but with the following differences:

>		the claim must be made against Marlew (assuming it had never been in external administration);
>		the claim must arise from exposure to asbestos occurring within Australia, which is shown or accepted to arise from exposure to asbestos in the Baryulgil region from asbestos mining activities at Baryulgil conducted by Marlew. If the claim arises from both exposure to asbestos within the Baryulgil region and outside Australia, the Proposal will only provide funding for the damages attributable to the proportion of the exposure which caused or contributed to the loss or damage which occurred within the Baryulgil region;
>		the claim must have been commenced in the Dust Diseases Tribunal; and
>		a claim will be excluded to the extent that it is:

	–		covered by the indemnities granted by the NSW Minister of Mineral Resources under the deed between the Minister, Fuller Earthmoving Pty Limited and ABN 60 dated 11 March 1996;
	–		a claim by an employee of Marlew in relation to asbestos exposure in the course of employment which is recoverable from a Marlew Joint Tortfeasor;
	–		by an individual who was or is an employee of a person other than Marlew arising from asbestos exposure in the course of that employment where that claim is recoverable against that person or under a Worker’s Compensation Scheme or Policy; or
	–		a claim in which another defendant (or its insurer) is a Marlew Joint Tortfeasor from whom the plaintiff may recover compensation in proceedings in the Dust Diseases Tribunal, and the claimant is capable of recovering damages from that Marlew Joint Tortfeasor in accordance with the Marlew Legislation.

Under the Proposal, Amaca will assume statutory liability as a defendant of last resort for Marlew Claims: refer to Section 2.10.

2.2.1.4 Claims Legal Costs

Claims Legal Costs mean all costs, charges, expenses and outgoings incurred or expected to be incurred by the Trustee or the Former James Hardie Companies in connection with Personal Asbestos Claims and Marlew Claims, including in respect of legal advisers, other advisers, experts, court proceedings and other dispute resolution methods. However, costs which have been included as a component of calculating a Proven Claim (for instance, where a damages award includes a component for legal costs) are excluded from this definition.

2.2.1.5 Operating Expenses

Operating Expenses means the reasonable operating costs, expenses and taxes of the Trustee or the Former James Hardie Companies arising from the Trustee’s performance of its role as described in this Section 2.2, but excludes any Claims Legal Costs.

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2.2.1.6 Pre-commencement Claims

A Pre-commencement Claim is a claim that was made or brought in legal proceedings against a Former James Hardie Company commenced before 1 December 2005. The Former James Hardie Companies will remain liable to pay such claims, although if the claims are or become Proven Claims, they will be Trust Funded Liabilities and able to be paid by the Trustee.

2.2.1.7 Statutory Recoveries

In some Australian states and territories, government agencies make asbestos compensation payments directly to claimants, including under “no fault” compensation arrangements. The relevant government agency then has a statutory right to seek recovery of those compensation payments from the persons who had the legal liability to provide compensation to the relevant claimant. This right of recovery is known as a “statutory recovery”.

For the purposes of the Final Funding Agreement, Statutory Recoveries are defined as statutory entitlements of the NSW Government or any Other Government or any governmental agency or authority of any such government (the “Relevant Body”) to impose liability on or to recover an amount or amounts from any person in respect of any payments made or to be made or benefits provided by a Relevant Body in respect of Personal Asbestos Claims or Marlew Claims (other than as a defendant or in settlement of any claim, including a cross-claim or claim for contribution).

An example of a Statutory Recovery is a claim against a Former James Hardie Company by the Dust Diseases Board under section 8E of the Workers’ Compensation (Dust Diseases) Act 1942 (NSW), for reimbursement of compensation paid by the Dust Diseases Board in performing its role of providing statutory “no-fault” compensation to NSW workers disabled by dust diseases resulting from exposure to asbestos.

For a description of the limits on payments of Statutory Recoveries which can be made by the Trustee, see Section 2.7.

2.2.2 Restrictions on use of funds by the Former James Hardie Companies

Under the Transaction Legislation, the Former James Hardie Companies are required to satisfy Payable Liabilities and are restricted from satisfying any other liabilities which are not Payable Liabilities (similar to the Trustee restriction with respect to Trust Funded Liabilities). For this purpose, Payable Liabilities are:

>		Trust Funded Liabilities (see Section 2.2.1);
>		liabilities of the Former James Hardie Companies to the Trustee itself under the Trustee’s statutory right of indemnity described further in Section 2.3; and
>		any liabilities of the Former James Hardie Companies to pay any insurance proceeds recovered by them, to Claimants or other third parties under regulations made under the Transaction Legislation.

Payments for Payable Liabilities which are not Trust Funded Liabilities cannot be funded by the Trustee. To the extent that the Former James Hardie Companies have Payable Liabilities which will not be funded by the Trustee, the Former James Hardie Companies must meet these liabilities out of their own assets (to the extent possible).

2.2.3 Restrictions on satisfying liabilities other than Trust Funded Liabilities and Payable Liabilities

To the extent that a Former James Hardie Company or the Trustee has a liability which does not fall within the permitted categories described in this Section 2.2, that entity is prohibited from making any payment with respect to that liability until such time as the statutory winding up of the Former James Hardie Companies arising under the Transaction Legislation (known as the “NSW Supervised Winding Up”) is complete. However, this does not prohibit Amaca from repaying any interim funding provided by the Performing Subsidiary (see Section 3.2). For further details, see Section 2.9.3.

Claims for matters such as asbestos-related economic loss (not forming part of a personal injury claim or otherwise resulting from personal injury), loss of property (including those claims relating to land remediation and asbestos products removal), or asbestos-related personal injury claims arising or commenced outside Australia are not covered by the Proposal. James Hardie is not required to contribute any funding with respect to such claims, and the terms of the Trust Deed and the Transaction Legislation prevent the Trustee and the Former James Hardie Companies from making any payments out of the assets of the Trustee or the Former James Hardie Companies in respect of such claims during the NSW Supervised Winding Up period referred to above. The NSW Supervised Winding Up period is expected to last for at least as long as the Term.

The Transaction Legislation also prohibits potential claimants from beginning or continuing with civil proceedings against a Former James Hardie Company during the NSW Supervised Winding Up period unless the proceedings seek to enforce claims which the Former James Hardie Company is permitted to pay. Each of the Former James Hardie Companies is incorporated in NSW and is therefore required to comply with the laws of NSW. The funds to be made available by the Trustee will only be located in NSW and therefore will be subject to these restrictions. In addition, the Transaction Legislation is expressed to have extraterritorial effect, which means that it will have the force of law in jurisdictions which give full faith and credit to the laws of New South Wales.

The practical effect of the restrictions upon the use of funds by the Trustee and the Former James Hardie Companies, together with the restriction on enforcement proceedings which can be taken against the Former James Hardie Companies, means that it is expected that unless a claim is a Payable Liability or does not involve the payment of money, that claim will not be satisfied until the end of the NSW Supervised Winding Up period. However, any such claim will only be satisfied if and to the extent that the Former James Hardie Companies have any assets to do so. It is expected that if there were any such assets remaining at the conclusion of the NSW Supervised Winding Up period, their value would be negligible.

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2.3 PAYMENT OF CLAIMS AGAINST THE FORMER JAMES HARDIE COMPANIES

The Trustee will utilise funding available to it to make payments of Trust Funded Liabilities directly to claimants against the Former James Hardie Companies in respect of Proven Claims. The Transaction Legislation provides that such payments operate to discharge the liability concerned to the same extent to which the liability would have been discharged if the payment had been made directly by the Former James Hardie Company.

The Transaction Legislation provides that the Trustee will be indemnified by the relevant Former James Hardie Company for the amount of the payment (including any relevant interest), except where the Trustee makes the payment out of the Discretionary Fund. The Trustee also has the same rights to obtain contribution from third parties in respect of the subject matter of the liability concerned as the Former James Hardie Company would have had if it had made the payment directly. The Trustee may require the Former James Hardie Company to pay the indemnified amount on demand.

2.4 GOVERNANCE OF THE TRUSTEE

Initially, the board of the Trustee will consist of five directors. James Hardie has appointed three of those initial directors and the NSW Government must appoint two of those initial directors. As at the date of this document, the NSW Government had not yet appointed its nominee directors. As the Trustee is a company limited by guarantee, it does not have shareholders: instead, it is owned by its members. The Trustee’s members must be one or more of its directors from time to time.

On an ongoing basis, James Hardie will be entitled to appoint a majority of the directors of the Trustee, and to appoint the Chairman. However, if a Special Default occurs, or an Insolvency Event in relation to James Hardie occurs, then the NSW Government has the right to reconstitute the Trustee board such that representative directors appointed by the NSW Government will control the Trustee.

Under the Proposal, James Hardie’s day-to-day involvement with the Trustee is expected to be limited to:

>		appointing up to three of the directors of the Trustee from time to time (including its Chairman);
>		reviewing the calculation of Annual Payments;
>		procuring the Performing Subsidiary to pay the Annual Payments;
>		liaising with the Trustee in relation to the efficient administration of Proven Claims; and
>		reviewing and discussing with those directors of the Trustee board appointed by James Hardie information permitted to be passed to James Hardie.

2.5 AUDIT AND ACTUARIAL REVIEW

2.5.1 Approved Actuary

The Trustee must ensure that an Approved Actuary is appointed at all times during the Term. The initial Approved Actuary is KPMG Actuaries. The NSW Government has the right to appoint a reviewing actuary in certain circumstances: see Section 3.1.4.

2.5.2 Approved Auditor

The Trustee must appoint and continue to retain an Approved Auditor to be the auditor of the Trustee. The appointment of the Approved Auditor is subject to the consent of James Hardie and the NSW Government. The initial Approved Auditor is PricewaterhouseCoopers, who is also the auditor of James Hardie.

The NSW Government also has a right to appoint an auditor at is own cost to conduct a general or more limited audit of the activities, affairs and financial position of the Trustee. The Trustee must give the NSW Government appointed auditor full and free access to the books and records of the Trustee at its premises, all reasonable assistance and explanations of information that the NSW Government appointed auditor may request and access to the working papers of all Approved Auditors (to the extent the Trustee is entitled to do so without being in breach of any relevant confidentiality obligations).

2.6 RESTRICTIONS ON LOCATION AND BUSINESS OF THE ASBESTOS INJURIES COMPENSATION FUND AND THE TRUSTEE

The Final Funding Agreement requires the Trustee to ensure that the Asbestos Injuries Compensation Fund remains governed by the laws of NSW, and that the Trustee maintains its principal place of business in NSW.

2.7 STATUTORY RECOVERIES

The NSW Government has agreed to use its best endeavours to ensure, through the Transaction Legislation, that the Former James Hardie Companies (or the Trustee on their behalf) cannot be compelled to pay Statutory Recoveries (whether directly to Relevant Bodies or as a component of amounts payable or liabilities incurred in respect of Proven Claims) which in aggregate exceed in any Financial Year the lesser of:

>		the amount equal to the liabilities of the Former James Hardie Companies to pay Statutory Recoveries as calculated under the relevant statute(s) from time to time; and
>		the Annual Limit.

The Annual Limit is A$750,000 for the first Financial Year of the operations of the Trustee and, in respect of each subsequent Financial Year, an amount equal to the prior Financial Year’s Annual Limit, indexed for inflation or deflation by reference to the All Groups Consumer Price Index as published by the Australian Bureau of Statistics (or, if such statistic ceases to be published, the nearest equivalent generally published figure).

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The Statutory Recoveries are subject to a further aggregate limit of A$30 million over the Term.

If any Former James Hardie Company (or the Trustee on its own behalf or on behalf of a Former James Hardie Company) or any member of the James Hardie Group is required to pay any amount in respect of Statutory Recoveries which exceeds the limits described above, the payment obligations of the Performing Subsidiary and James Hardie under the Final Funding Agreement and the Related Agreements shall be adjusted by the amount of the excess as though the excess were a payment of a Relevant Liability under an Overlapping Scheme. See Section 7.9.

The Transaction Legislation states that Statutory Recovery claims against a Former James Hardie Company may only be paid during the NSW Supervised Winding Up period if the funding set aside under the Final Funding Agreement for the payment of such claims is or will be sufficient to cover such claims. If the funding for Statutory Recoveries is not sufficient for the Financial Year concerned, regulations may be made by the responsible NSW Minister to specify how such Statutory Recoveries are to be paid. However, the responsible NSW Minister may not recommend the making of such regulations unless the responsible NSW Minister has received the written consent of the Trustee to the making of the regulations. At the date of this document, no such regulations have been made or announced.

2.8 RATIONING

The Transaction Legislation makes provision for the Trustee to ration the timing or amount of payments made with respect to Proven Claims or Trust Funded Liabilities in certain circumstances, as described further below.

If it appears reasonably likely to the Trustee that, for a period of time, there will be insufficient amounts in the Asbestos Injuries Compensation Fund for all Payable Liabilities of a Former James Hardie Company to be paid in full as and when they fall due for payment, the Trustee may, with the approval of the NSW Minister made responsible for such matters, apply to the NSW Supreme Court for orders establishing a rationing scheme.

On an application by the Trustee to establish a rationing scheme, the NSW Supreme Court may, if satisfied that there is a funding insufficiency:

>		make an order declaring that there will be insufficient funds to pay the Payable Liabilities in full as and when t hey fall due for payment for the period specified by the order; and
>		approve a scheme for the payment by installments of the full amount of Payable Liabilities due, or deferral of payment of Payable Liabilities, during the insufficient funds period.

While an approved payment scheme is in force, the Trustee may pay Trust Funded Liabilities only to the extent and in accordance with the terms of the scheme, and a Former James Hardie Company may pay Payable Liabilities only to the extent and in accordance with the terms of the scheme.

The NSW Supreme Court may not approve a scheme for the payment in installments, or deferral of payment, of Payable Liabilities during the insufficient funds period unless the scheme provides for the following:

>		the payment in full of the Operating Expenses and Claims Processing Expenses during the period in priority to other Payable Liabilities;
>		the payment in installments of Proven Claims during the period (calculated on an appropriate proportionate basis among claimants whose claims are payable when the period commences or become payable during that period), but not in a manner that discriminates between claimants by reference to the nature or extent of the loss or damage sustained;
>		the deferral during the period of the payment of Payable Liabilities that are liabilities to pay Contributions Claims in relation to Proven Claims; and
>		the deferral during the period of the payment of Payable Liabilities that are liabilities to pay Pre-commencement Claims (other than Proven Claims).

The Transaction Legislation makes provision for the Trustee to apply for the variation or revocation of an approved payment scheme order, and provides that such orders are automatically revoked if the Trustee, with the approval of the responsible NSW Minister, gives the NSW Supreme Court notice that sufficient funds are or will become available to pay in full the installments provided for by the approved payment scheme, the ongoing Operating Expenses and Claims Processing Expenses of the Former James Hardie Company and any deferred claims.

The Transaction Legislation allows for interim rationing arrangements to be implemented pending such approval, which entitle the Trustee to direct the Former James Hardie Companies to defer the payment of Payable Liabilities in whole or in part in a manner consistent with the rationing requirements for a scheme as described above, if the Trustee has sought but not obtained approval to implement a rationing scheme, and if the Trustee is satisfied that the insufficiency of funds to pay the Payable Liabilities requires the urgent rationing of payments pending the receipt of approval from the responsible NSW Minister.

If the amount of the Funding Payments has been adjusted as a result of the Tax Conditions ceasing to apply (see Section 3.1.5), the Trustee must consider deferring payment of claims, or introducing an appropriate rationing scheme as a result of the actual and expected impact of the adjusted payments, so as to ensure that there is no discrimination between Claimants (or the proportion of their Proven Claim which may be expected to be paid) on the basis of the time at which they lodge their claim with the relevant Former James Hardie Company.

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2.9 OWNERSHIP AND MANAGEMENT OF THE FORMER JAMES HARDIE COMPANIES

2.9.1 Transfer of Former James Hardie Companies to the Trustee

Ownership of Amaca and Amaba will be transferred from the MRCF to the Trustee and ABN 60 will be transferred from the ABN 60 Foundation to the Trustee, each in accordance with the terms of the Transaction Legislation. The Trustee will hold the shares in ABN 60, Amaca and Amaba in its capacity as trustee of the Charitable Fund. No compensation will be payable in relation to the transfer of ownership of Amaca, Amaba or ABN 60.

2.9.2 Ministerial orders with respect to the Former James Hardie Companies

The Transaction Legislation also provides that the registered offices and register of members of the Former James Hardie Companies must be located within NSW, and restricts the transfer of shares in the Former James Hardie Companies without the order of the responsible NSW Minister. The registered office and register of members of each of the Former James Hardie Companies are currently located in NSW. However, if this were not the case the Transaction Legislation also gives the responsible NSW Minister power to make an order requiring a change of location of the registered office or register of members of a Former James Hardie Company to a location within NSW. The responsible NSW Minister may also order the transfer of any or all of the shares in a Former James Hardie Company to the person or persons specified in the order.

The responsible NSW Minister may also order a specified director of a Former James Hardie Company, the MRCF trustee, MRCF Investments Pty Ltd (a wholly-owned subsidiary of the MRCF trustee) and ABN 60 Foundation to cease to hold that office, and has the power to appoint replacement directors. However, the responsible NSW Minister may not exercise this power if the Trustee holds all of the shares in the Former James Hardie Company for the purposes of the Charitable Fund.

The responsible NSW Minister’s powers with respect to these companies expire on 1 October 2007 (in relation to the MRCF trustee, MRCF Investments Pty Ltd and the ABN 60 Foundation), and at the end of the NSW Supervised Winding Up period (for the Former James Hardie Companies).

2.9.3 Winding up of Former James Hardie Companies

The Former James Hardie Companies will be placed in a form of statutory-based winding up known as the NSW Supervised Winding Up. The NSW Supervised Winding Up regime is established by the Transaction Legislation, and replaces the general provisions contained in Chapter 5 of the Corporations Act 2001 (Cth) which would otherwise govern any external administration of the Former James Hardie Companies.

The NSW Supervised Winding Up regime will:

>		ensure the continued existence of the Former James Hardie Companies, even if those entities become insolvent at any time during the Term; and
>		prohibit the Former James Hardie Companies from paying any liabilities of the Former James Hardie Companies, except for Payable Liabilities.

The NSW Supervised Winding Up regime will not affect any rights of recovery which the Former James Hardie Companies may have against insurance companies or other third parties.

Under the Transaction Legislation, during the NSW Supervised Winding Up period for a Former James Hardie Company, a person cannot begin or continue with civil proceedings against the entity in a court or other tribunal unless the proceedings seek to enforce:

>		a Personal Asbestos Claim (whether or not a Proven Personal Asbestos Claim);
>		a Contribution Claim (whether or not a proven Contribution Claim);
>		any other Payable Liability of the Former James Hardie Company that was incurred to the person; or
>		a right of the person against the Former James Hardie Company (other than a right to be paid damages or receive other payment).

The Former James Hardie Companies, and their respective directors and other officers, are specifically authorised during the NSW Supervised Winding Up period to conduct the business of the entity in the manner directed, required, authorised or permitted by or under the Transaction Legislation even if the entity is insolvent, or the entity will become insolvent by reason of conducting its business in such a manner.

The Transaction Legislation also contains provisions to clarify that nothing in the legislation would permit a claimant to recover more than once with respect to any particular loss.

2.9.4 Management and settlement of claims against the Former James Hardie Companies

The Transaction Legislation also confers upon the Trustee certain ancillary powers of direction and management with respect to the Former James Hardie Companies, which will assist the Trustee to perform its role. Pursuant to those powers, the Trustee may, by written order served on a Former James Hardie Company, direct the entity to do (or not to do) anything that the Trustee deems to be necessary or appropriate for the winding up of the entity in accordance with the NSW Supervised Winding Up regime, and the Former James Hardie Company must comply with such direction. This may include (without limitation) directing a Former James Hardie Company to enter into arrangements for the pooling of funds of the Former James Hardie Companies, or the allocation of pooled funds to the payment of Payable Liabilities of any one or more of those entities.

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The Trustee also has the ability to direct the Former James Hardie Companies to utilise the Trustee’s claims management services (including acting as a single claims manager in respect of the management of such claims).

After the commencement of the NSW Supervised Winding Up, each Former James Hardie Company must establish four separate bank accounts, into which the Former James Hardie Company must separately deposit proceeds from asset realisation, insurance proceeds, Trustee funding and funds from any other sources. Money held in these accounts must only be applied for the payment of the Payable Liabilities of the Former James Hardie Company.

2.10 LIABILITY OF AMACA FOR MARLEW CLAIMS

Section 22 of the James Hardie (Civil Liability) Act 2005 (NSW) (part of the Release Legislation) makes Amaca statutorily liable in respect of a Marlew Claim as if the asbestos mining activities conducted by or on behalf of Marlew at Baryulgil, NSW in respect of which the claim arises had been conducted by or on behalf of Amaca.

Amaca’s liability for Marlew Claims is limited to claims brought in the Dust Diseases Tribunal, or any Marlew Claim brought in any court, tribunal or other judicial body constituted in Australia if such claim was commenced prior to 2 December 2005. Amaca’s statutory liability for Marlew Claims does not entitle a person to recover more than once in respect of a Marlew Claim (that is, a person who recovers against either Amaca or Marlew in respect of such a claim cannot also recover against the other in respect of the claim). These claims are not expected to result in any material liability for Amaca.

The liability for Marlew Claims statutorily imposed on Amaca is intended to operate solely to the extent that the relevant claimant is unable to recover compensation from any other liable person. In other words, Amaca is a defendant of last resort. A plaintiff is considered to be unable to recover damages from a Concurrent Wrongdoer if, and only if, the plaintiff has made a demand for payment of damages by the Concurrent Wrongdoer after judgment in favour of the plaintiff has taken effect, and the Concurrent Wrongdoer has failed to pay the damages within 28 days after the demand for payment was made.

Amaca is entitled to recover from other Concurrent Wrongdoers, any payment made by Amaca to a plaintiff in respect of Amaca’s liability as a concurrent wrongdoer for a Marlew Claim. Amaca is also entitled to recover from Marlew as a debt, the amount of any payment made by Amaca in satisfaction of any Payable Liability with respect to a Marlew Claim. The statutorily imposed liability does not affect any liability of an insurer under a policy of insurance that insures Marlew against liability in connection with a Marlew Claim.

Accordingly, references in this document to the Australian asbestos-related personal injury liabilities of the Former James Hardie Companies include the specific liabilities of Marlew which Amaca will assume as statutory liabilities under the Proposal, unless the context indicates otherwise.

2.11 CONSEQUENCES IF THE TRUSTEE BECOMES INSOLVENT OR UNABLE TO OPERATE

If the Trustee becomes Insolvent or is otherwise unable by operation of law to carry out its functions (excluding any inability arising by reason of an act or omission of the NSW Government), then after the six months that the Trustee remains unable to carry out its functions, the NSW Government may establish an alternative payment mechanism whereby the Performing Subsidiary pays the Funding Payments to a new entity or person in substitution for the Trustee.

Any such alternative payment mechanism must not negate, reduce or increase the continuing obligations of James Hardie or the Performing Subsidiary under the Final Funding Agreement, or entitle the NSW Government or any Government Authority to the benefit of any amounts paid or which are or may become payable by James Hardie or the Performing Subsidiary under the Proposal.

3. JAMES HARDIE’S FUNDING OBLIGATIONS

3.1 FUNDING OF THE ASBESTOS INJURIES COMPENSATION FUND

Under the terms of the Final Funding Agreement, a newly established Australian subsidiary of James Hardie (James Hardie 117 Pty Ltd) has been nominated to be the Performing Subsidiary, and it has the primary obligation to make the Funding Payments to the Trustee in its capacity as trustee of the Charitable Fund once the conditions precedent to the operation of the Final Funding Agreement have been satisfied.

The Trustee will use the Funding Payments to meet the Trust Funded Liabilities. The primary type of Trust Funded Liability is a Proven Claim with respect to Amaca, Amaba, ABN 60 or Marlew. To the extent that the Trustee makes direct payments to Claimants with respect to a liability owed by the Former James Hardie Companies, the Trustee will have a statutory right of reimbursement against the relevant Former James Hardie Company, for payments which it makes out of the Charitable Fund.

James Hardie has provided to the NSW Government and the Trustee an unconditional and irrevocable guarantee that the Performing Subsidiary will make the Funding Payments in accordance with the terms of the Final Funding Agreement.

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The Proposal is designed to be responsive to changes in the profile and quantum of expected Proven Claims, and to James Hardie’s financial performance. This responsiveness is achieved through:

>		calculating the Annual Payments on the basis of annually updated actuarial central estimates of relevant asbestos- related liabilities and Operating Expenses;
>		a cap on Annual Payments, which is calculated as a percentage of James Hardie’s Free Cash Flow in the most recent Financial Year; and
>		subject to the operation of the Annual Cash Flow Cap, the inclusion of a funding buffer whereby a maximum of approximately three years’ funding will be available to the Trustee immediately after the Annual Payment.

The objective of such flexibility is to reduce the risk that a short-term fluctuation in claims or James Hardie’s financial performance will result in the funding arrangements being subject to stress, renegotiation or challenge, and to allow James Hardie to continue to fund and grow its existing business, to make repayments of debt principal, or to make distributions to Shareholders.

The diagram below illustrates the key legal relationships as well as funding flows between the Trustee, James Hardie, the Performing Subsidiary, Amaca, Amaba and ABN 60.

FUNDING STRUCTURE

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3.1.1 Initial Funding

It is a condition precedent to the Final Funding Agreement that the Performing Subsidiary pays Initial Funding of A$184.3 million to the Trustee. The Initial Funding will be the last condition precedent to be satisfied before the Proposal is effective. If Shareholder approval is obtained, and the other outstanding conditions precedent to the Final Funding Agreement are satisfied, it is currently expected that the Initial Funding will be paid in February 2007.

3.1.2 Annual Payments

The Performing Subsidiary will make Annual Payments in Australian dollars to the Trustee. These Annual Payments will be due three months and one day after the end of each Financial Year. If the Proposal is implemented, the first Annual Payment is expected to be made on 1 July 2007 and subsequent Annual Payments will be made on 1 July of each year.

The amount of the Annual Payment is calculated as follows:

>		the Period Actuarial Estimate of the expected Proven Claim liabilities of the Former James Hardie Companies and Marlew for the Financial Year in which the payment is made and the next two Financial Years, calculated as at the end of the previous Financial Year; plus
>		the estimated reasonable Operating Expenses of the Trustee and the Former James Hardie Companies for the Financial Year in which the payment is to be ma de; less
>		the net assets of the Trustee and the Former James Hardie Companies as at the end of the previous Financial Year, as determined by the Approved Auditor.

The amount of the Annual Payment is subject to an Annual Cash Flow Cap. If the Annual Payment would exceed the Annual Cash Flow Cap for the relevant Financial Year, the Annual Payment will be limited to the amount of the Annual Cash Flow Cap for the relevant Financial Year. The operation of the Annual Cash Flow Cap is discussed in more detail at Section 3.1.3.

3.1.2.1 Period Actuarial Estimate

The Period Actuarial Estimate is the Approved Actuary’s central estimate of the present value of the liabilities of the Former James Hardie Companies and Marlew in respect of expected Proven Claims and Claims Legal Costs which are reasonably expected to become payable in the relevant period. This estimate does not take into account any proceeds which may be available to the Former James Hardie Companies for these liabilities arising from insurance or third party indemnities known as “Insurance and Other Recoveries”.

The Period Actuarial Estimate is not a general estimate of all the asbestos-related liabilities of the Former James Hardie Companies and Marlew: it is strictly limited to Proven Claims and Claims Legal Costs. In this way, James Hardie will only be obliged to provide funding for particular

types of asbestos liability of the Former James Hardie Companies and Marlew. The Trustee is also prohibited from using this funding to pay claims that are not Proven Claims. For further detailed information on the concepts of Proven Claim and Claims Legal Costs, and the restrictions applicable to the Trustee’s use of funds, see Section 2.2.1.

3.1.2.2 Estimated reasonable Operating Expenses of the Trustee and Former James Hardie Companies

For the purpose of calculating the Operating Expenses of the Trustee and the Former James Hardie Companies, the Trustee must make a reasonable determination as to this estimate for the Financial Year in which the payment is made. This amount is then included in the Annual Payment calculation.

3.1.2.3 Net assets

The net assets of the Trustee and the Former James Hardie Companies as at 31 March each Financial Year will be calculated as the assets shown on the audited financial statements of the Trustee and the Former James Hardie Companies, less the liabilities of the Trustee and the Former James Hardie Companies. These assets will include insurance recoveries for claims made against the Former James Hardie Companies to the extent payable during the period prior to the next Annual Payment (in the opinion of the Approved Auditor, formed on reasonable grounds). The calculation of liabilities will exclude all Asbestos Liabilities other than current Proven Claims.

3.1.2.4 Repayment of surplus funds

If the Annual Payment is calculated to be a negative amount, this will indicate that the Trustee has assets surplus to its current requirements at that time. That is, net assets will be greater than the amount necessary to meet the three years worth of expected Proven Claim payments and expected Claims Legal Costs and Operating Expenses for the Financial Year in which the payment is to be made. In these circumstances, the Trustee will refund to the Performing Subsidiary the excess amount on the Payment Date.

3.1.2.5 Operation of funding buffer

Subject to the operation of the Annual Cash Flow Cap, there is expected to be a maximum of approximately three years estimated funding available to the Trustee immediately after the Annual Payment. This buffer will reduce as the Trustee makes payments during the course of the year. If the outgoings of the Trustee are consistent with the estimates utilised in calculating the Annual Payment, the buffer available to the Trustee immediately prior to the next Annual Payment will have reduced to approximately two years worth of estimated funding for Proven Claims and Claims Legal Costs. The buffer will then be topped up by the Performing Subsidiary (subject to the operation of the Annual Cash Flow Cap) on the next Payment Date so that it again represents approximately three years’ estimated funding based on the then current annual actuarial assessment. The inclusion of a funding buffer is expected to decrease the likelihood that the Trustee will have insufficient funds to provide

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full compensation to Claimants arising from short-term fluctuations in the incidence of Proven Claims and/or changes in the financial performance of James Hardie.

However, the inclusion of a funding buffer also means that the Performing Subsidiary will make payments to the Trustee in respect of Proven Claims and Claims Legal Costs that are not expected to be paid for a period of time. Such payments reduce James Hardie’s capital resources that could otherwise be used for other corporate purposes.

3.1.2.6 Payment by installments and prepayment

Instead of making one Annual Payment in any given year, the Performing Subsidiary may elect to pay the Annual Payment in equal installments at three or six monthly intervals commencing on that Payment Date. All installments in respect of a Financial Year must become payable by the last Business Day of that Financial Year. Alternatively, the Performing Subsidiary may prepay an Annual Payment at any time.

Because the effect of paying in installments is to defer the time at which the Trustee receives the full amount of the Annual Payments, if the Performing Subsidiary elects to pay in installments, it must pay interest to the Trustee to compensate the Trustee for the interest which it has foregone as a result of the later receipt of Annual Payments, at the Interest Rate for the period during which a payment is deferred.

Any prepaid amounts are not refundable. Adjustments will be made to the Annual Payment calculations to ensure that the Trustee is not disadvantaged by any prepayment relative to its position if the prepayment had not been made. In addition, the amount of any prepayment will be excluded when calculating the net assets of the Trustee for the purpose of calculating Annual Payments, unless the Valuation Ratio (see Section 4.10) as at the last day of the Financial Year preceding the relevant Payment Date exceeded 2.75.

3.1.3 Annual Cash Flow Cap

In each Financial Year, the Annual Payment to the Trustee will be limited such that the Annual Payment cannot exceed the Annual Cash Flow Cap for that year. Accordingly, if James Hardie has zero or negative Free Cash Flow in a Financial Year, there will be no Annual Payment made in the following Financial Year. However, this capping arrangement does not apply to the Initial Funding made by the Performing Subsidiary.

3.1.3.1 Details of calculation of Annual Cash Flow Cap

The Annual Cash Flow Cap for the Financial Year in which the relevant Annual Payment is made is calculated as follows:

Annual Cash Flow Cap		=		Free Cash Flow of immediately
				preceding Financial Year
				x		Annual Cash Flow
						Cap Percentage
				x		Qualifying Capital Ratio.

The Annual Cash Flow Cap cannot be a negative number. If Free Cash Flow is a negative number, the Annual Cash Flow Cap for the relevant year will be zero.

The Annual Cash Flow Cap in respect of the Annual Payment due on 1 July 2007 will be reduced by A$7.7 million. The reason for this adjustment is that the calculation of the Initial Funding of A$184.3 million included a prepayment of A$7.7 million of the Annual Payment due on 1 July 2007.

3.1.3.2 Calculation of James Hardie’s Free Cash Flow

The Free Cash Flow is the net cash provided by operating activities (as calculated in accordance with US GAAP as in force on 21 December 2004) of the James Hardie Group for the relevant Financial Year:

(a) after deducting:

	(i)		interest paid, increases in net operating assets and liabilities, and taxes paid;
	(ii)		any asbestos-related payments (of any kind) made by any member of the James Hardie Group in that Financial Year; and
	(iii)		the income statement charge in relation to minority interests’ share of profits; and

(b) after adding:

	(i)		interest received, decreases in net operating assets and liabilities, and receipt of taxes;
	(ii)		any asbestos-related payments received by any member of the James Hardie Group in that Financial Year; and
	(iii)		the income statement credit in relation to minority interests’ share of losses.

There are also specific adjustments to the Free Cash Flow that must be made for the Financial Years ending 31 March 2007 and 31 March 2008.

In calculating the Free Cash Flow for the Financial Year ending 31 March 2007, an additional amount of A$93.0 million will be added. In calculating the Free Cash Flow for the Financial Year ending 31 March 2008, an amount of A$7.7 million will be subtracted:

>		the adjustment to the Free Cash Flow for the Financial Year ending 31 March 2007 is to ensure that the deduction to Free Cash Flow as a result of the Initial Funding is limited to the Period Actuarial Estimate for the Financial Year ending 31 March 2009 and the reasonable Operating Expenses of the Trustee and Former James Hardie Companies for the six months ending 31 March 2007 as this is more representative of the expected ongoing Annual Payments under the Final Funding Agreement.
>		the adjustment to Free Cash Flow for the Financial Year ending 31 March 2008 is to ensure that the amount of A$7.7 million prepaid as part of the Initial Funding is treated for the purposes of the Final Funding Agreement as paid in the Financial Year ending 31 March 2008.

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Because James Hardie’s financial statements are expressed in US dollars and the payments to the Trustee must be made in Australian dollars, the Free Cash Flow reported by James Hardie will be converted to Australian dollars by reference to the relevant spot Australian dollar/ foreign currency exchange rate (for purchasing Australian dollars) at 10:00am AEDT on the day, five days before the relevant Payment Date.

The Free Cash Flow can be impacted by a number of factors, including the operating cash flows of the business, interest charges, tax payments and corporate transactions permitted under the Final Funding Agreement.

3.1.3.3 Annual Cash Flow Cap Percentage

The initial Annual Cash Flow Cap Percentage is set at 35%. The Annual Cash Flow Cap Percentage can never be increased above 35%.

The Final Funding Agreement provides that for each Financial Year ending on or after 31 March 2012, the Annual Cash Flow Cap Percentage shall be reduced in increments of five percentage points (to a floor of 5%), provided that the Annual Payments are, on average, lower than the reduced Annual Cash Flow Cap Percentage level for the four years preceding the reduction. The Annual Cash Flow Cap Percentage cannot reduce by more than five percentage points in any four year period.

The earliest that the Annual Cash Flow Cap Percentage could “step-down” to:

>		30%, is the Financial Year ending 31 March 2012;
>		25%, is the Financial Year ending 31 March 2016;
>		20%, is the Financial Year ending 31 March 2020;
>		15%, is the Financial Year ending 31 March 2024;
>		10%, is the Financial Year ending 31 March 2028; and
>		5%, is the Financial Year ending 31 March 2032.

A graph of the earliest possible times that the Annual Cash Flow Cap Percentage could consecutively “step-down” is set out below. Whether the earliest step-down scenario is actually achieved will depend entirely on the actual and anticipated claims experience of the Former James Hardie Companies and the financial performance of James Hardie.

ANNUAL CASH FLOW CAP PERCENTAGE-EARLIEST “STEP-DOWN”

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In the graph on the previous page, the Annual Cash Flow Cap is 5% after 2032 until the end of the Term.

Where there has been a step-down in the Annual Cash Flow Cap Percentage to 30% or below, a five percentage point step-up to the next level would be required if (and only if) the Annual Contribution Amount in any Financial Year (expressed as a percentage of Free Cash Flow of the immediately preceding Financial Year) is above the then current Annual Cash Flow Cap Percentage. The Final Funding Agreement does not permit two or more consecutive step-ups. Although the lowest Annual Cash Flow Cap Percentage is 5%, once this level has been achieved it is always possible for there to be one step-up of five percentage points to a new Annual Cash Flow Cap Percentage of 10%. This means that the lowest effective cap on the Funding Payments is 10% of the Free Cash Flow, because even if the Annual Cash Flow Cap Percentage reduces to 5%, there is always the potential that it could increase to 10%.

Subject to the exception described below, where there has been a step-up to the next 5 percentage point level, a step-down can occur for the following year, but only if the level of the Annual Payment as a percentage of Free Cash Flow of the immediately preceding Financial Year is less than the Annual Cash Flow Cap Percentage for the immediately preceding year less 5 percentage points.

Where a step-up has been applied to the Financial Year ending 31 March 2013 to increase the Annual Cash Flow Cap Percentage to 35%, a step-down cannot be applied to the Financial Year ending on 31 March 2014 to reduce the Annual Cash Flow Cap Percentage in that Financial Year back to 30%, but can be applied in subsequent years.

3.1.3.4 Qualifying Capital Ratio

The Qualifying Capital Ratio is described in Section 5.

3.1.4 Annual actuarial assessment and review

The Period Actuarial Estimate will be updated by the Approved Actuary on an annual basis to take account of developments in the actual and anticipated claims experience of the Former James Hardie Companies.

The Final Funding Agreement contains a mechanism whereby the NSW Government may appoint a reviewing actuary to conduct a peer review of a report prepared by the Approved Actuary. In the event that the reviewing actuary disagrees with the Approved Actuary’s report, has reasonable grounds to disagree, and considers the disagreement to be material, the NSW Government may notify the Trustee, James Hardie and the Performing Subsidiary accordingly. The Trustee must instruct the Approved Actuary to give bona fide consideration to the matters set out by the NSW Government and to provide a detailed response.

Where the Approved Actuary considers it necessary or appropriate to do so, the Approved Actuary may revise and reissue the most recent report on which the reviewing actuary conducted its review, or recalculate the Discounted Central Estimate, Period Actuarial Estimate or Term Central Estimate accordingly (with corresponding effect on the calculation of the Funding Payments). Where an error or recalculation disclosed in a revised report has resulted in the Performing Subsidiary making an overpayment or underpayment to the Trustee, the relevant party shall promptly reimburse any over or under paid amount.

3.1.5 Adjustments to Annual Payments

The Annual Payment may be reduced to take into account any payments which any James Hardie Group member is required to make in respect of Relevant Liabilities under an Overlapping Scheme, where the liability to make such payments arises other than under the terms of the Final Funding Agreement, the Release Legislation or the Transaction Legislation. Further details of this adjustment mechanism are set out in Section 7.9.

The ongoing payment obligations of James Hardie and the Performing Subsidiary (other than with respect to the Initial Funding) are also conditional upon:

>		binding legislation or Rulings which satisfy the Tax Conditions having come into and remaining in full force;
>		there being no Change of Tax Law which results in, or which will if implemented result in, the Tax Conditions ceasing to be satisfied, and any relevant Ruling has not ceased to be effective (unless, if there has been a Cessation of Ruling, the relevant taxpayer has obtained a final judgment to the effect that the Tax consequences set out in that Ruling continue to apply in respect of that taxpayer); or
>		if the applicable legislation or Ruling imposes any additional conditions or qualifications to the Tax Conditions being or remaining satisfied, those conditions being acceptable to James Hardie acting reasonably.

If the Tax Conditions cease to be satisfied, there are three possible consequences:

>

the Performing Subsidiary must continue to make Funding Payments, either because:

	–		James Hardie has determined to make Funding Payments notwithstanding that no member of the James Hardie Group has any legal obligation to do so;
	–		the Tax Condition has ceased to have effect because a James Hardie Group member deliberately, recklessly or negligently caused or contributed to the cessation of the Tax Condition; or
	–		the amount of additional tax payable as a result of the Tax Condition ceasing to be satisfied is minimal when compared to the average of the James Hardie Contributions over the past three Financial Years;

>		the Performing Subsidiary will have no obligation to make Funding Payments until the relevant Tax Condition is again satisfied. In this circumstance, if the Tax Conditions are not satisfied again within 12 months, the Final Funding Agreement will be terminated unless the parties agree otherwise; or
>		the Performing Subsidiary must continue to make Funding Payments, but the amount of the Funding Payments will be subject to adjustment.

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For an explanation of the Tax Conditions and relevant Changes of Tax Law, see Section 8.4.3. Withholding of payments on the basis of a Change of Tax Law does not affect the efficacy of the Releases. However, if the Tax Conditions cease to be satisfied and the Final Funding Agreement terminates, and an appropriate response to the estimated future funding shortfall facing the Former James Hardie Companies acceptable to all stakeholders is not developed, James Hardie expects that adverse legislative and regulatory action is likely to be taken against the James Hardie Group: see Part E, Section 6.

3.1.5.1 Performing Subsidiary must continue to make Funding Payments

Even if the Tax Conditions cease to be satisfied, the Performing Subsidiary will still be obliged to make Funding Payments in full where:

>		James Hardie has irrevocably waived its right to withhold funding where a Tax Condition ceases to be satisfied. It may do so in relation to one or more years of taxation, or in relation to particular forms or levels of taxation;
>		the amount of additional tax incurred by the James Hardie Group Taxpayer, the Trustee or any Former James Hardie Company (each a “Relevant Entity”) in a year of income after the Tax Conditions cease to be satisfied is not more than a de minimus amount of the average Funding Payments for the three Financial Years prior to the Financial Year in which the Change of Tax Law or event occurred which caused the Tax Conditions to cease to be satisfied. For this purpose, Funding Payments for each of the three Financial Years ended or ending on 31 March 2005, 31 March 2006 and 31 March 2007 is deemed to be the amount of the Initial Funding divided by 2.5;
>		James Hardie has caused the Tax Condition to cease to be satisfied as a result of the substitution of the Performing Subsidiary with a James Hardie Group member that is not an Australian tax resident for the purposes of the Income Tax Assessment Act 1997 (Cth) or which is a resident of a country other than Australia for taxation purposes;
>		the Tax Conditions have ceased to apply by reason of deliberate or reckless non-compliance by any member of the James Hardie Group with any condition or requirement accepted by James Hardie;
>		the Tax Conditions have ceased to apply by reason of negligent or inadvertent non-compliance by any member of the James Hardie Group with any condition or requirement accepted by James Hardie, unless:

	–		James Hardie has given notice to the Trustee and the NSW Government of the relevant circumstances, and has paid or agreed to pay any applicable penalty or interest reasonably imposed by assessment of the ATO and has taken such other reasonable steps as necessary to remedy the non-compliance with the accepted Tax Condition; and
	–		either:

	–		the ATO has then revoked or withdrawn the Black Hole Deductibility of the James Hardie Contributions or has not otherwise confirmed to James Hardie within 12 months of James Hardie giving notice as specified above, that the Tax Conditions will thereafter be satisfied; or
	–		where the Tax Conditions were satisfied under the legislation in force, that legislation is amended or repealed so as to result in the Tax Conditions ceasing to be satisfied and alternate legislation resulting in the Tax Conditions being again satisfied does not come into force within 12 months of the date of amendment or repeal of the earlier legislation.

Cessation of the Tax Conditions does not affect James Hardie’s obligation to pay the Wind-Up Amount or Reconstruction Amount, where a Tax Condition ceases to apply solely by reason of the Wind-Up Event or Reconstruction Event which triggers the obligation to pay the Wind-Up Amount or Reconstruction Amount. For further details of the circumstances in which James Hardie may become obliged to pay the Wind-Up Amount or Reconstruction Amount, see Part F, Sections 1.1 and 1.2.

3.1.5.2 Performing Subsidiary is not obliged to make Funding Payments

The Performing Subsidiary does not have any obligation to make Funding Payments if none of the circumstances set out in Section 3.1.5.1 apply, and one or more of the following Tax Conditions has ceased to be satisfied:

>		payments of the Funding Payments to the Trustee will be deductible to the James Hardie Group Taxpayer on the basis of Black Hole Deductibility for the purpose of determining the taxable income of the James Hardie Group Taxpayer;
>		the Funding Payments received by the Trustee of the Charitable Fund from the Performing Subsidiary will comprise corpus of a trust and so will not form part of the assessable income of the trustee of the Charitable Fund as either ordinary or statutory income; or
>		the Funding Payments to be made by the Performing Subsidiary to the trustee of the Charitable Fund do not represent or comprise consideration for a taxable supply made by the trustee.

In addition, if binding legislation, a Ruling or a final judgment having the effect of the relevant Tax Condition does not come into force within 12 months of any of the Tax Conditions above ceasing to be satisfied (or such later date as James Hardie may elect), then the Final Funding Agreement will terminate on the last day of that 12 month period or the later specified date. For further details see Section 8.4.3.

If subsequent legislation, a Ruling or final judgment results in the Tax Conditions above being satisfied within 12 months, then the Performing Subsidiary must, within 20

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Business Days, pay any outstanding payments which have been withheld, together with interest calculated at the Interest Rate.

3.1.5.3 Performing Subsidiary must continue to make Funding Payments but these are subject to adjustment

The Performing Subsidiary will remain obliged to make Funding Payments (subject to certain adjustments outlined below), if:

>

any of the Tax Conditions other than the Tax Conditions specified in Section 3.1.5.2 cease to be satisfied and none of the circumstances set out in Section 3.1.5.1 apply;

and either of the following circumstances has occurred:

>		binding legislation, a Ruling or a final judgment having the effect of the relevant Tax Condition does not come into force within 12 months of the date upon which the relevant Tax Condition ceased to have effect; or
>		the Trustee, acting in good faith and consistently with its duties as trustee of the Asbestos In juries Compensation Fund, determines and notifies the other parties that if that Annual Payment is not made, the Trustee would have insufficient funds to pay all Trust Funded Liabilities which would become due and payable during the Financial Year.

In these circumstances, any future Funding Payments will be subject to adjustment. For the purposes of the calculation of net assets relevant to determining Annual Payments or relevant to determining the Valuation Ratio:

>

if any member of the James Hardie Group incurs Tax (or incurs an increased liability to Tax) that exceeds the amount of Tax it would have incurred in a particular year of income had the relevant Tax Conditions remained satisfied at all times (the “Incremental James Hardie Tax” ), then 50% of this amount will be deemed to:

	>		increase and on a continuing basis form part of the net assets of the Trustee; and
	>		earn tax-exempt income for each Financial Year ended on or after the date the Incremental James Hardie Tax is incurred at the discount rate published by the Approved Actuary in the Annual Actuarial Report in relation to the relevant Financial Year and such income shall be carried forward and capitalised on a compound basis; and

>

if the Trustee (in any capacity) or any Former James Hardie Company incurs Tax (or incurs an increased liability to Tax that exceeds the amount of Tax it would have incurred in a particular year of income had the relevant Tax Conditions remained satisfied at all times (the “Incremental Tax”), then 50% of this amount will be deemed to:

	>		increase and on a continuing basis form part of the net assets of the relevant Former James Hardie Company or the Trustee (as applicable); and
	>		earn tax-exempt income for the Former James Hardie Company or the Trustee (as applicable) for each Financial Year ended on or after the date the Incremental Tax is incurred, at the discount rate published by the Approved Actuary in the Annual Actuarial Report in relation to the relevant Financial Year and such income shall be carried forward and capitalised on a compound basis.

The Performing Subsidiary must, within 20 Business Days of the date it has become obliged to make an adjusted Funding Payment, pay any such adjusted Funding Payments or other payments which have not been paid but would have been due and payable under the Final Funding Agreement or any Related Agreement.

3.1.5.4 Additional obligations upon cessation of Tax Conditions

If Funding Payments have not been made because of the cessation of a Tax Condition, then each party to the Final Funding Agreement must, for a period of 12 months from the time that the Funding Payments have not been made (or any longer period as may be agreed by the parties in writing (“Interim Period”)):

>		use its best endeavours to secure the satisfaction within the Interim Period of the Tax Condition which has ceased to be satisfied; and
>		keep the other parties informed as to the progress of steps it has taken, consult with such parties in relation to such material steps and provide all reasonable assistance and information to any party in connection with the taking of any of these steps.

The costs of a party taking any action of this kind must be borne solely by that party.

3.1.6 Commutation of Annual Payments

James Hardie can approach the NSW Government at any time for its consent to the commutation of the obligations of James Hardie and the Performing Subsidiary under the Final Funding Agreement and Related Agreements. If James Hardie makes such a request, the NSW Government and James Hardie are required to negotiate in good faith to seek a mutually acceptable commutation arrangement. This could involve:

>		a lump sum payment to the Trustee made or procured by the Performing Subsidiary or another member of the James Hardie Group;
>		another person assuming the obligations of the James Hardie Group companies under the Final Funding Agreement and Related Agreements; or
>		another person taking on new obligations to replace the obligations of the James Hardie Group companies under the Final Funding Agreement and Related Agreements.

Subject to fulfilling the obligation to negotiate in good faith as described above, the NSW Government may withhold its consent to any commutation of liability in its absolute discretion.

3.1.7 Term and end of Term arrangements

The Final Funding Agreement contemplates that James Hardie may make a payment (known as the “Final Payment”) to end its funding obligations under the Final Funding

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Agreement at the end of the Term. The Final Payment and the terms upon which it is paid are subject to the approval of the NSW Government and the Trustee.

In order to make the Final Payment, James Hardie would need to indicate that it wished to do so and instruct the Approved Actuary to prepare an actuarial report setting out its estimate of the Final Payment, having regard to the fact that the payment would be a “once and for all” lump sum payment to end James Hardie’s financial obligations under the Final Funding Agreement. As a result, the actuarial estimate of the required Final Payment is likely to be higher (and may be materially higher) than if the Approved Actuary utilised the Discounted Central Estimate valuation methodology used in calculating the Annual Payment.

3.1.8 Term of Final Funding Agreement

The initial Term of the Final Funding Agreement is from the Commencement Date to 31 March 2045.

If the NSW Government, James Hardie, the Performing Subsidiary and the Trustee are unable to agree on the basis and terms on which the Final Payment would be made at the end of the initial Term, then the Term will be automatically extended by a period of 10 years. At the conclusion of each extended Term, a further extension of 10 years will occur unless the parties agree on the terms of the Final Payment. There is no limit on the number of 10 year extensions by which the Term can be extended.

3.2 INTERIM FUNDING MEASURES

Pending the implementation of the funding arrangements under the Proposal, James Hardie and the Performing Subsidiary have agreed to provide assistance to the Former James Hardie Companies if required to ensure that funding is available for the purposes of meeting liabilities to Claimants up to the Commencement Date. This assistance need only be provided once other existing sources of funding for the Former James Hardie Companies have been exhausted. The obligation to provide assistance is also conditional upon the other parties to the Final Funding Agreement having performed their respective obligations under the Final Funding Agreement.

On 16 November 2006, James Hardie 117 Pty Ltd, Amaca and the MRCF entered into a loan agreement, whereby James Hardie 117 Pty Ltd agreed to lend up to A$24,114,000 interim funding to Amaca for the purposes of meeting Payable Liabilities. The loan will be secured against certain insurance receivables. Any monies borrowed under the interim funding facility will bear interest, and cannot be drawn down unless Amaca certifies that it expects that its available funds will be exhausted within the following month. Amaca must repay the loan on the earlier of the Business Day after the Commencement Date, five Business Days after James Hardie 117 Pty Ltd provides a notice to Amaca that the Final Funding Agreement has terminated and/or that negotiations with the NSW Government regarding alternative arrangements have fully and finally ceased, or the date on which the interim funding agreement is terminated by James Hardie 117 Pty Ltd in accordance with its terms.

If the Proposal is implemented, the Trustee will apply some of the Initial Funding towards discharging Amaca’s liability to repay the Interim Funding.

3.3 LIABILITY POSITION OF JAMES HARDIE

The obligations of James Hardie and the Performing Subsidiary under the Final Funding Agreement are owed to the Trustee and the NSW Government, not to Claimants or the Former James Hardie Companies. The Proposal does not give Claimants any rights against any member of the James Hardie Group, and the ability of Claimants or other persons to seek enforcement of the Proposal is restricted by the terms of the Transaction Legislation.

Provided that the Performing Subsidiary makes the Funding Payments contemplated under the Final Funding Agreement and there is no Insolvency Event or Reconstruction Event in relation to James Hardie, no member of the James Hardie Group will have any additional liability under the Proposal to contribute funding, even if the amount of funding provided to the Trustee under the Proposal is not sufficient to meet the liabilities of the Former James Hardie Companies. In this event, the funds of the Trustee may be subject to rationing in the manner described in Section 2.8.

3.4 SUBSTITUTION OF PERFORMING SUBSIDIARY

James Hardie may substitute the subsidiary that has the obligations of the Performing Subsidiary under the Final Funding Agreement (including the primary liability for paying the Annual Payments to the Trustee), provided that there are no overdue payments to the Trustee under the Final Funding Agreement due at the time of a proposed substitution and the incoming entity meets the requirements set out in the Final Funding Agreement to be the Performing Subsidiary.

James Hardie must substitute the Performing Subsidiary if:

>		an Insolvency Event occurs in respect of the Performing Subsidiary which has not been cured before the earlier of the next date on which the Performing Subsidiary is due to make a Funding Payment to the Trustee and the date falling three months after that Insolvency Event, if the NSW Government so requests; or
>		the Performing Subsidiary ceases for any reason to be a subsidiary of James Hardie, and the parties have not agreed otherwise within 25 Business Days after James Hardie has given notice of the Performing Subsidiary ceasing to be a subsidiary.

The substitution of a Performing Subsidiary will not occur unless:

>		the incoming party is not subject to an Insolvency Event;
>		the incoming party duly accedes to all obligations of the outgoing Performing Subsidiary under the Final Funding Agreement;
>		if the incoming party is not a wholly-owned subsidiary of James Hardie, or if the NSW Government so requests, James Hardie duly executes and delivers to the Trustee

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		and the NSW Government a guarantee in respect of the obligations of the incoming party which is on the same terms (with necessary changes) as the then current James Hardie Guarantee;
>		if the incoming party is not incorporated in or within Australia, James Hardie procures the delivery of an opinion of generally recognised independent legal counsel qualified to practise in the relevant jurisdiction to the effect that all deeds of accession or novation, agreements or other instruments effecting such an assumption are valid, binding and enforceable in accordance with their terms and comply with the requirements set out in the Final Funding Agreement and the Related Agreements in relation to such deeds, agreements or other instruments (assuming, for the purposes of such opinion, the validity of all terms of the Final Funding Agreement and all Related Agreements); and
>		if the outgoing Performing Subsidiary has been subject to an Insolvency Event, James Hardie executes and delivers to the Trustee and the NSW Government a deed poll in favour of them acknowledging that, despite any compromise or extinguishment of the funding obligations under that Insolvency Event, the nature and the value of obligations of the incoming Performing Subsidiary and James Hardie under the Final Funding Agreement and the James Hardie Guarantee (including in relation to the funding obligations and (where payable) the Wind-Up Amount or Reconstruction Amount) have not been reduced or compromised by that compromise or extinguishment and procures that the incoming Performing Subsidiary provides a corresponding acknowledgment in respect of its obligations under the Final Funding Agreement and the Related Agreements. This obligation will not apply if, at the time of substitution, the Insolvency Event has been discharged or cured, and such discharge or cure did not involve any such compromise or extinguishment of the above- mentioned rights which would affect the obligations of the incoming Performing Subsidiary.

If James Hardie nominates a new Performing Subsidiary which is not an Australian tax resident for the purposes of the Income Tax Assessment Act 1997 (Cth) or that is a resident of a country other than Australia for taxation purposes, then:

>		the new Performing Subsidiary shall be liable to make the Funding Payments free and clear of any Tax due or payable in any country other than Australia;
>		if that Performing Subsidiary is or becomes subject to a law of any jurisdiction outside Australia that requires deductions or withholdings of amounts from the Funding Payments, then that Performing Subsidiary will pay an additional amount in respect of each affected Funding Payment as shall be required so that the aggregate amount received by the Trustee is not less than the Funding Payment would have been if no deduction or withholding had been required; and
>		the Performing Subsidiary will not be able to withhold Funding Payments on the basis that the Tax Conditions have ceased to be satisfied.

3.5 JAMES HARDIE GUARANTEE

James Hardie will enter into an irrevocable and unconditional guarantee (known as the “James Hardie Guarantee”) of the performance of the Performing Subsidiary’s funding obligations under the Final Funding Agreement. If the Performing Subsidiary fails to make a funding payment under the Final Funding Agreement, James Hardie will be obliged to make the payment on demand by the Trustee (in its capacity as trustee of the Charitable Trust) under the James Hardie Guarantee. James Hardie’s obligations under the James Hardie Guarantee will be subordinated to its obligations to nominated lenders to the James Hardie Group in the manner described in Section 3.6.

3.6 INTERCREDITOR ARRANGEMENTS

James Hardie’s obligations to guarantee the payment of funding by the Performing Subsidiary will be subordinated to its obligations to nominated lenders to the James Hardie Group. These intercreditor arrangements, which are summarized in this Section 3.6 and described in more detail in Part F, Section 2.2, are intended to protect and ensure James Hardie’s ability to raise debt finance on ordinary commercial terms during the Term of the Final Funding Agreement. References to the Trustee in this Section 3.6 are references to the Trustee in its capacity as trustee of the Charitable Fund.

If certain Insolvency events relating to James Hardie were to occur, the Trustee would rank equally with James Hardie’s other unsecured creditors (other than those mandatorily preferred by law). However, under the Proposal, the Trustee, James Hardie, the NSW Government and the Guarantee Trustee will enter into the James Hardie Intercreditor Deed for the benefit of nominated Lenders to the James Hardie Group (“Financiers”). James Hardie intends to nominate most or all of the current providers of financial accommodation to it or other members of the James Hardie Group which it guarantees, other than the lenders not entitled to the benefit of the James Hardie Intercreditor Deed as described in Part F. Subject to limited exceptions, the Financiers may include the providers of all forms of financial accommodation to James Hardie or to other members of the James Hardie Group whose indebtedness has been guaranteed by James Hardie.

If James Hardie becomes subject to specified Insolvency proceedings, any amounts recovered by the Trustee or the NSW Government under the James Hardie Guarantee will be held by them on trust for the Financiers and must be paid:

>		first, to the Guarantee Trustee, to satisfy James Hardie’s obligations to the Financiers in full; and
>		secondly, to the extent of any amount remaining after payment of the Financiers in full, to the Trustee, to satisfy James Hardie’s obligations to the Trustee under the James Hardie Guarantee.

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In certain circumstances during specified Insolvency proceedings involving James Hardie, the Financiers will also have the right under the James Hardie Intercreditor Deed to instruct the Guarantee Trustee in relation to any vote attaching to the claim arising out of James Hardie’s obligations to the Trustee under the James Hardie Guarantee.

The James Hardie Intercreditor Deed will not otherwise restrict the ability of the Trustee or the NSW Government to exercise their rights against James Hardie under the Final Funding Agreement and the James Hardie Guarantee.

In addition, the obligations of the Performing Subsidiary to the Trustee under the Final Funding Agreement will be subordinated to its obligations to nominated lenders to it (if any) in a similar manner. The terms of this intercreditor agreement will be substantially similar to those described above in relation to James Hardie and its obligations to the Trustee under the James Hardie Guarantee.

3.7 FINANCIAL COVENANTS

James Hardie has given certain financial covenants to the Trustee on equivalent terms to those given to its Lenders. In the event that the financial covenants given by James Hardie to its Lenders from time to time change during the Term, James Hardie has undertaken to give new financial covenants to the Trustee on equivalent terms. James Hardie has agreed to notify the Trustee of a breach of any financial covenants at the same time as it gives notice to a relevant Lender.

Although the Trustee has the benefit of the financial covenants, James Hardie does not need to consult the Trustee in order to change any financial covenants, or otherwise seek consents or waivers of such covenants. Rather, any consent or waiver granted by a Lender is taken to be a consent or waiver given by the Trustee, subject to the qualifications equivalent to those set out in the Lender’s consent or waiver.

If any James Hardie Group member (other than James Hardie) enters into any Cross Guarantee in favour of a Lender on or after 21 December 2004, James Hardie must ensure that the relevant James Hardie Group member gives a cross guarantee to the Trustee, subordinated to the Cross Guarantee given to the Lender but otherwise on equivalent terms.

James Hardie has given a warranty on the absence of certain Cross-Guarantees given by other James Hardie Group members, as at the date of the Final Funding Agreement. Although there is a cross-guarantee in place at the date of this document, James Hardie expects that it will be released prior to the Commencement Date.

James Hardie (as a holding company) has also warranted to the Trustee and the NSW Government that it has (and for the Term will have) no material liabilities, other than:

>		creditors, provisions and indemnities incidental to its activities as a holding company without a material operating business;
>		guarantees or indemnities given to Lenders;
>		liabilities in relation to Taxation;
>		liabilities to Shareholders in their capacity as such not prohibited under the Final Funding Agreement;
>		those liabilities arising by virtue of the cross guarantees to obtain relief under ASIC Class Order 98/1418 for wholly-owned subsidiaries from preparing audited financial statements (or any class order amending, replacing or superseding such order), or ATO tax consolidation requirements imposed by virtue of Part 3-90 of the Income Tax Assessment Act 1997 (Cth); and
>		liabilities arising under the Final Funding Agreement and the Related Agreements to which it is a party.

4. RESTRICTION ON SPECIFIED DEALINGS

4.1 INTRODUCTION

The Final Funding Agreement provides that James Hardie will refrain from undertaking certain reorganisations of or distributions from the Liable Group, or from undertaking certain non-arm’s-length dealings (known as Specified Dealings) without obtaining the prior consent of the NSW Government. However, a broad range of transactions are exempt from this restriction.

Given the nature of the restriction on Specified Dealings and the available exemptions, James Hardie does not expect that in the ordinary course this restriction will significantly constrain it from funding and growing its existing business, making repayments of debt principal or making distributions to Shareholders.

4.2 RESTRICTION ON SPECIFIED DEALINGS

The restriction on Specified Dealings has been designed to prevent transactions that would result in James Hardie or the Performing Subsidiary ceasing to be likely to satisfy the funding obligations which would have arisen under the Proposal had the Specified Dealing not occurred. For the purpose of applying this standard, certain Specified Dealings are aggregated in the manner described in Section 4.18.

In order for the restriction to apply, the Specified Dealing by the James Hardie Group must:

>		materially and adversely affect the priority of payments as between the Trustee and Equity Securityholders of James Hardie to a notional surplus which would arise after payments to Lenders and other creditors having a right of priority of payment over the Trustee; or
>		materially impair the legal or financial capacity of James Hardie and the Performing Subsidiary as a whole;
such that, in each case, James Hardie and the Performing Subsidiary would, by reason of the relevant Specified Dealing, cease to be likely (assessed on a reasonable basis and having regard to all relevant circumstances) to be able to satisfy the funding and guarantee obligations which would have arisen under the Proposal had the Specified Dealing not occurred.

The Final Funding Agreement provides that the entitlement of the Trustee and Equity Securityholders of James Hardie to the notional surplus described above is to be calculated as if such a surplus were to be allocated between those entitled to it. The surplus is to be determined without

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James Hardie Industries

PART C — DETAILS OF THE PROPOSAL

assuming that a Wind-Up Amount or Reconstruction Amount is then payable (that is, without reference to the potential modification to the operation of insolvency and bankruptcy laws which have been agreed with the NSW Government and the Trustee, as further described in Part F, Section 1.1.6).

4.3 EXEMPTIONS TO RESTRICTION

In summary terms, the exempted transactions are:

>		any transaction or dealing by a James Hardie Group member on arm’s-length terms (as explained in Section 4.4);
>		any transaction or dealing by a James Hardie Group member entered into in the ordinary course of business of the James Hardie Group (as explained in Section 4.5);
>		any transaction solely between wholly-owned subsidiaries of the James Hardie Group, or between such subsidiaries and James Hardie (as explained in Section 4.6);
>		any ordinary dividends, provided that the total dividends provided for or paid by James Hardie in any period of two consecutive Financial Years (including the Financial Year in which the dividend is paid or provided for) do not exceed 75% of the average of the James Hardie Group’s Net Income for the two Financial Years prior to the Financial Year in which the dividend is paid or provided for (as explained in Section 4.7);
>		any issue of Equity Securities of James Hardie (as explained in Section 4.8);
>		any issue of bonds, notes or other unsecured debt securities (excluding Hybrids) which are on arm’s-length terms (as explained in Section 4.8);
>		while James Hardie’s shares are Quoted, any issue of Hybrids (that is, securities other than Equity Securities convertible into shares of a James Hardie Group company) on arm’s-length terms (as explained in Section 4.8);
>		the making of a Capital Election by James Hardie (as explained in Section 5);
>		two classes of Capital Management Transactions (as explained in Section 4.9):

	–		if James Hardie’s shares are Quoted, a Capital Management Transaction where the amount returned to Securityholders, when aggregated with all other such Capital Management Transactions undertaken within the 36 months prior to the announcement of the Capital Management Transaction, does not exceed 15% of James Hardie’s Market Capitalisation; and
	–		any Capital Management Transaction in relation to Equity Securities of James Hardie where the aggregate amount returned to Securityholders in Capital Management Transactions does not exceed the amount of new capital raised since 1 December 2005, subject to certain adjustments;

>		any transaction where the ratio known as the “Valuation Ratio” (as explained further in Section 4.10 below) is equal to or greater than 2.75;
>		a member of the James Hardie Group makes a takeover bid for securities or substantially all of the assets of a company or enterprise to the extent that the consideration offered and given under the takeover bid is Equity Securities of James Hardie or the takeover bid is on arm’s-length terms (as explained in Section 4.11);
>		another entity gains control of James Hardie where that entity is an Excluded Related Entity (as explained in Section 4.12);
>		any transaction whereby an entity which becomes a Parent Entity or Sibling Entity assumes certain obligations of James Hardie to the NSW Government and the Trustee (as explained in Section 4.13); and
>		any transaction which occurs pursuant to a duly-approved plan following a Wind-Up Event or Reconstruction Event (as explained in Section 4.14).