1st Quarter 1998

Financial Statements

Highlights of the 1st Quarter 1998 Filing


CONTENTS:

FINANCIAL SUMMARY
OPERATIONS ISSUES
Settlement Activity
Medical Audit Program
Individual Evaluation Process
New Claim Filings
LEGAL ISSUES
ASSET MANAGEMENT ISSUES


FINANCIAL SUMMARY

Total Trust expenses for the three months ended March 31, 1998 were $2.58 million, compared to $2.64 million for the same period in 1997. Trust expenses for 1998 are projected to be greater than 1997 because the Trust expects to incur additional costs associated with litigation commenced by the Maritime Asbestosis Legal Clinic (“MALC”), further activity in connection with the Trust’s medical audit program and its efforts to obtain contribution and other payments from cigarette manufacturers. Increases for these expenses were offset by reductions in general administrative expenses and fixed asset acquisitions when compared to the first quarter of 1997.

During the first quarter of 1998, Net Claimants’ Equity increased by almost $340 million, principally due to the unrealized gain in the Johns Manville (“JM”) common stock of approximately $329 million. In addition, investment income of almost $16 million, unrealized gains on non-JM securities of $19 million and a JM dividend of $5.1 million increased Net Claimants’ Equity by an additional $40 million. Net Claimants’ Equity was reduced due to the $26 million settlement and payment of claims, $2.5 million increase in outstanding claim offers and $2.6 million in total Trust expenses. During the quarter the Trust settled 6,128 claims for $26.1 million compared to 11,773 claims for $54.6 million for the first three months of 1997. Since the implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid almost $722 million in claim payments (representing a liquidated value of $7.6 billion) and settled over 147,000 claims.

OPERATIONS ISSUES

Operations of the Trust during the first quarter of 1998 focused on a full review of the policies and processes of the Medical Audit Program. The current process requires at least seven months from the matrix review of a claim to eligibility of that claim for settlement and includes: the selection of a FIFO range of claims for audit, determining the TDP category for each claim, the choosing of a random statistical sample of those claims, notifying the firms of the identity of those claims, providing the firms with four months to respond, then processing and applying the results, most of which arrive at or beyond the four-month deadline. During the first two-and-a-half years of operation under the TDP, this elapsed time had little impact since there was a backlog of over 200,000 claims which were yet to be matrixed or eligible for offer under the new process. However, we processed that backlog, and a more efficient, effective methodology must be designed as we move forward. We are in active discussions with the Selected Counsel for the Beneficiaries, the Representative for Future Claimants and the Special Advisor on these issues and hope to have an announcement regarding a substantial re-design of the process in the next quarter. Even in advance of that announcement, however, we are revising our processes and software systems to streamline review procedures, further reducing the time from initial filing to offer eligibility.

Settlement Activity

In the meantime, because we are now essentially through the claims backlog, the number of claims eligible for settlement has diminished and is heavily concentrated in those claims requiring a response from the plaintiffs’ bar to medical audit in order to generate an offer (discussed below). The Trust’s 1998 Strategic Plan is to increase the FIFO range of claims eligible for offer by a total of 50,000, which would generally include claims received through the end of the first quarter of 1998. The speed of actual settlements will, in large measure, depend upon claimant’s counsel’s timely responses to requests for medical audit information.

During the first quarter of 1998, the Trust paid a total of 6,128 claims. Of those, 4,644 accepted their initial matrix offer, 1,378 accepted a matrix offer after a recategorization request, 100 claimants accepted a non-matrix, individually evaluated amount (discussed further below), and 6 claims were resolved through Alternative Dispute Resolution. During the same period, the Trust generated a total of 8,812 payment offers through various mechanisms.

Medical Audit Program

As has been done since the full implementation of the Medical Audit Program in late 1994, prior to making new offers, the Trust audits a 5% random selection of claims in the next eligible FIFO range. The results of the audit are used to determine which claims require submission of additional medical documentation prior to making an offer and which claims can be immediately released for payment.

In first quarter 1998, claims in the FIFO range 286,001 through 296,000 became eligible for first offer. Generally, these claims were filed with the Trust from June 1996 through December 1996.

The audit results discussed below apply only to this specific FIFO range. Of these 10,000 claims, 7,721 claimants represented by 30 law firms were subject to random audit. (An additional 2,059 claims are represented by firms with populations considered too small for a comprehensive audit, or were claims already in medical audit for reasons other than the random sample process. If the firm had already established a medical audit record in previous quarters, its claims are paid based on the firm’s prior period medical audit status.) Additionally, about 220 claims within the relevant FIFO range were either already settled or had been deactivated.

Currently, four firms representing 4,088 claimants in the FIFO range audited have adequate response and pass rates for their claims to be released for immediate payment without further review. These four law firms achieved an average pass rate of 97% for this population.

Medical audit status is still pending for 9 firms which represent a total of 1,664 claimants in the eligible FIFO range. These firms submitted their responses after the deadline and are still in the review process.

Seventeen firms of the audited group have inadequate response and/or pass rates and, therefore, for all these claims, the firms must send either an X-ray, corroborating medical reports or evidence of sufficient codefendant settlements prior to the Trust sending an offer. These firms represent 1,969 claimants, or approximately 20% of the claimants in the eligible FIFO range. Currently, the average response rate for these firms is 65% and the average pass rate is 36%.

Through the end of the first quarter of 1998, the Trust is holding approximately 60,600 claims or 20% out of the FIFO range from 1 to 296,000 pending a medical audit response from law firms placed on 100% medical audit. Despite this large number of claims currently eligible for offers, very few firms have submitted the additional material needed for their claims to be released for payment. The Trust is in active negotiations with representatives of the firms representing these claimants to encourage the firms to submit the required documentation. Those efforts have begun to bear fruit, as over 6,000 responses have recently been received. As previously noted, 19 law firms represent 75% of those 60,600 claims.

Based on a review of medical audit results program to-date, the Trust determined the overall quality of medical evidence submitted in support of cancer claims is sufficient and is not longer routinely auditing these categories of claims.

Individual Evaluation Process

In the first quarter of 1998, 440 claims were resolved through the Individual Evaluation (“IE”) process. Resolution of claims which have requested individual evaluation can occur through a number of different paths, and do not always result in an offer of an individually evaluated amount. Of the 440 resolved claims, 23 were a result of new information supplied and the claim qualifying for a higher matrix offer. Another 70 claims were reissued the previous matrix offer as counsel decided to forego their IE election. There were 73 accepted offers and 73 last best offers issued for a total of 146 offers. An additional 201 claims were denied primarily for vague medical reports which were insufficient to support the diagnosis of an asbestos-related disease. As noted in “Settlement Activity” above, of the checks issued for individually evaluated amounts (some of which were generated in prior periods), 100 were cashed during the quarter. At quarter-end, there were 3,551 pending requests for IE. Of those, 377 were in negotiation, the remainder are in queue awaiting assignment to one of the five staff negotiators.

A very small number of firms dominate the claims in individual evaluation in the early portion of the queue. While each month in 1998 has seen an increase in the number of claims resolved and removed from the IE queue, long response delays to Trust offers or requests for sufficient information to value a claim continues to significantly impede the settlement rate.

New Claim Filings

During the first quarter of 1998 the Trust received approximately 9,100 new claim filings. This volume of claims (which equates to annual filing volume of 35,000 new claims) was significantly greater than the same three-month periods of 1997 (5,250) and 1996 (6,650). It also represents an appreciable increase over the last quarter of 1997 when the Trust received about 7,500 new claims. As of March 31st, the total number of claims was approximately 369,600 (not including a 5,500 unscreened claim backlog). Total claim filings are depicted graphically on two attached charts. Chart 1, titled Qualified POC Filings, 1994-1998, shows monthly claim filings excluding void, deactivated and disqualified claims. Chart 2, titled Total POC Filings, 1994-1998, encompasses all claims filed with the Trust, regardless of their current status. Because it includes all claims received and processed by the Trust, it is a more accurate depiction of Trust-wide workload.

As of March 31st, there were 41,000 void or disqualified claims, including the 25,600 MALC claims discussed in the Trust’s 1997 year-end report to the Courts. In addition, there were approximately 24,100 offers in expired status. This reflects a very small increase in number since the end of 1997. Some eighty percent of these expired offers were Category Zero offers, meaning that the offer was actually a deficiency letter. We expect that some percentage of outstanding expired offers will eventually be reactivated and recategorized with better medical information under either of two programs offered by the Trust. Over 10,700 claims have been reactivated to-date.

LEGAL ISSUES

During the first quarter of 1998, the number of claims requesting Alternative Dispute Resolution (“ADR”) grew from 156 pending ADR claims as of the end of the year, to 185 pending claims as of the end of the first quarter. The number of claims awaiting position papers from claimant’s counsel continues to constitute a large percentage of the pending ADR claims.

Several face-to-face negotiations and exchanges of correspondence with MALC were undertaken in an effort to settle the pending litigation in the civil action brought by the MALC against the Trust and the Trust’s Third Party complaint against MALC. However, the cases remain unsettled.

The Trust’s civil action against the tobacco industry and its legislative efforts directed at receiving funds from Congressional legislation concerning tobacco continues, particularly with respect to the legislative efforts. With respect to proposed legislation, funds for asbestos trusts and defendants were included in several Congressional Bills which seek increased taxes on tobacco products.

ASSET MANAGEMENT ISSUES

Significant appreciation in the assets of the Trust more than offset claim payments and expenses such that total Trust assets actually increased over $100 million from a year earlier and approximately $329 million from year end. As of March 31, 1998, total Trust assets were $2.6 billion. Approximately 7% were invested in diversified equities, 32% in fixed income securities and the balance of 61% in the Trust’s majority ownership of the common stock of Johns Manville Corporation (“JM or the Company”). During the quarter the Trust conducted negotiations with JM for the sale back to JM of a small portion of the Trust’s JM stock in order to shelter the Company’s income from taxes and thereby enhance its earnings and the market value of its stock held by the Trust and to further diversify its investments. These efforts underscore the Trust’s long-standing commitment to working with the Company to create value for all its shareholders. The Trust continues to maintain adequate liquidity to pay claims as quickly as they can be resolved and grow the balance of the portfolio to maximize the pro rata distribution to all past, present and future beneficiaries.


To obtain a complete copy of the quarterly filing, please contact Manville Trust in care of: inquiry@claimsres.com.