Financial Statements
Highlights of the 1st Quarter 1999 Filing
CONTENTS:
FINANCIAL SUMMARY
OPERATIONS ISSUES
Individual Evaluation Process
New Claim Filings
LEGAL ISSUES
ASSET MANAGEMENT ISSUES
Trust operating expenses for the three months ended March 31, 1999 were $3.5 million, compared to $2.4 million for the same period in 1998. Over $700,000 of the increase for the First Quarter of 1999 is due to increase spending associated with ongoing litigation, principally the Adamslitigation (see Legal Issues below). Asset management expenses related to the Trust’s majority share holdings in the Johns Manville Corporation (“JM”) were approximately $900,000 for the quarter compared to $133,000 for the same period in 1998 as the Trust continued to explore strategic alternatives, including the possible sale or merger of the Corporation (see Asset Management Issues below).
During the First Quarter of 1999, Net Claimants’ Equity increased by an additional $93 million, principally due to the unrealized gain in the Johns Manville common stock of approximately $101 million. In addition, investment income of $12 million, a $13.7 million decrease in outstanding claim offers and a JM dividend of $7.5 million increased Net Claimants’ Equity by an additional $33 million. Net Claimants’ Equity was reduced due to the $37 million in settlement and payment of claims and $4.3 million in total Trust expenses. During the quarter the Trust settled 9,763 claims for $37 million compared to 6,128 claims for $26 million for the first three months of 1998. Since the implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid over $880 million in claim payments and settled almost 204,000 claims. Excluding dispute resolution and asset management costs, operations expenses of the TDP (from early 1995 through 1998), represent 4.3% of all expenditures (including claims payments).
As described in Legal Issues below, certain aspects of the Trust’s audit and claims payment policies are the subject of litigation. The following description of Trust operations is intended to review the policies extant during the First Quarter of 1999, and does not reflect any changes in those policies which may occur as a result of that litigation.
As stated above, the Trust settled over 9,700 claims during the First Quarter of 1999, and paid out over $37 million to claimants since the beginning of the year. Only 17,500 claims are not yet eligible for payment, with fewer than 8,000 of the most recently filed claims yet to be placed in a TDP disease category. Thus, the Trust has made eligible for payment(1) all claims which were filed through approximately the Third Quarter of 1998, and barring substantial changes in current policies and procedures, before the end of 1999, claims would be made eligible for payment within 90 to 120 days of being filed.(2)
(1)When a claim becomes eligible for payment, the claimant receives either a check, or a letter describing any deficiencies which must be corrected in order to receive a payment offer.
(2)While we continue to place newly filed claims in disease categories, we do not plan to extend the FIFO range (making more claims eligible for payment) until the outcome of the Adams litigation (described below in Legal Issues) is known. It is also important to note that pursuant to the TDP, the Trust is required to give co-defendants 60 days notice of an intent to make a claim eligible for offer.
Senior staff of the Claims Resolution Management Corporation, which handles the processing and payment of Trust claims, made numerous trips to law firms in recent months to discuss the Trust’s medical audit policy changes announced last August. The visits have been cordial and useful, and staff members emphasized the Trust’s desire to process the review of claimant’s x-rays expeditiously, and to provide various avenues for review should the claimant not be satisfied with the Trust’s determination of the claim’s appropriate disease category. As a result of those visits, as well as the establishment of a six-month deadline response to requests for x-rays, during the First Quarter of 1999, the Trust received over 20,000 x-rays, and commitments from law firms to send an additional 11,500 x-rays on a confirmed, regular schedule.(3) Encouraging a higher level of response to these long-outstanding x-ray requests was intended to allow the Trust to increase the number of offers and reduce the backlog of unsettled claims.
(3)To minimize any delay caused by the temporary surge in volume, the Trust implemented special tracking procedures, and had increased the number of independent B-readers from six to twelve (some of whom were suggested by the plaintiffs’ bar and all of whose curriculum vitae were provided to the Selected Counsel to the Beneficiaries prior to the use of the B-readers’ services). In light of recent settlement discussions regarding the Adams litigation, however, all Trust x-ray reading activity has been halted.
The bulk of the backlog of unsettled claims was largely created by the identification (through a 5% random medical audit) of populations of claims the Trust considered unreliably diagnosed because a firm had failed to meet the 1995 Medical Audit benchmarks. The audited claims in that population had failed medical audit review at a rate of greater than 60%.
Nonetheless, the Trustees are mindful of the need to pay claims expeditiously, and are aware that there are numerous alternatives to establishing the relative merits of a claim. Therefore, the Trustees and CRMC staff have been discussing the issue with various members of the plaintiffs’ bar associated with the Adams litigation, and will review those policies accordingly.
In the First Quarter of 1999, 400 claims were resolved through the Individual Evaluation (“IE”) process. In order to reduce the wait time for claims in IE, an additional Claims Settlement Negotiator was assigned to the IE staff in mid-March.
Resolution of claims which have requested individual evaluation can occur in a number of different ways, and do not always result in an offer of an individually evaluated amount. Of the 400 resolved claims, 90 were a result of claims being withdrawn from IE in order to receive a matrix offer. In most of those instances, new information was supplied and the claim qualified for the matrix category originally alleged. There were 81 accepted offers and 76 last best offers issued by the Trust. An additional 153 claims were denied primarily for vague medical reports which were insufficient to support the diagnosis of an asbestos-related disease. Last best offers and denials can, of course, proceed to arbitration (see Legal Issues below), but most do not. In many instances, the last best offer is accepted and the denial expires due to non-response. Of the checks issued for individually evaluated amounts (some of which were generated during prior periods), 107 were cashed during the quarter. At quarter-end, there were 3,230 pending requests for IE (as compared to 3,551 at the end of the First Quarter of 1998). Of those, 617 were in negotiation, and the remainder are in queue awaiting assignment to one of the five staff negotiators.
During the First Quarter of 1999, approximately 5,600 new Proofs of Claim (POCs) were received. This volume was down from 1998’s volume of 9,100 claims, but similar to 1997 filing rates of 5,250. As of March 31st, the total number of claims filed was over 401,000. Monthly filing patterns are depicted on Chart 1, titled “Total POC Filings 1996-1999.”
As of March 31st, there were 37,400 void or disqualified claims including over 20,000 filed by Maritime Asbestosis Legal Clinic (“MALC”) which may be refiled under the terms of the Settlement Agreement entered into between the parties (see Legal Issues below). To date the Trust has received 216 MALC filings to replace disqualified claims.
At the end of the First Quarter the Trust had 28,700 expired offers. About 80% of which were Category Zero offers (denial or deficiency notices). Our experience is that about 28% of all expired offers eventually are reactivated. A total of approximately 13,300 claims have expired, and were subsequently reactivated.
During the First Quarter, the number of claims in the Trust’s Alternative Dispute Resolution (“ADR”) program continued to increase. As of March 31, 1999, the Trust had 365 pending ADR claims (there were 297 as of December 31, 1998). Of that number, 286 claims were awaiting claimants’ position papers to be submitted to arbitrators and 14 additional claims were awaiting claimants’ rebuttal statements to be submitted to arbitrators.
On February 19, 1999, the Court approved a Stipulation and Order dismissing the litigation brought against the Trust by the Maritime Asbestosis Legal Clinic following a Settlement Agreement entered into between the parties.
Working with outside counsel, the Trust General Counsel’s Office during the First Quarter assisted in discovery, production of documents, and trial preparation in the eight lawsuits and two interventions filed against the Trustees, the Trust, and in some cases, Trust employees, by a number of parties, challenging the Trust’s medical audit program and procedures (Adams v. Falise). In recent weeks, that litigation has resulted in substantive settlement discussions, and a resolution of the issue is expected shortly.
Discovery in the litigation filed by the Trust against seven tobacco manufacturers, pursuant to orders issued by Magistrate Judge Steven M. Gold, continued during the First Quarter. Trust legal staff has assisted outside counsel in examining Trust documents, JM documents, and other discovery.
During the First Quarter, the General Counsel’s Office also completed a production of documents based on the request of those undertaking due diligence research to determine whether to respond to the Trust’s and JM’s invitation to submit bids to acquire JM as a part of the exploration of strategic alternatives to maximize JM’s shareholder value. Thus, with the medical audit litigation, the tobacco litigation, and the due diligence described here, three very substantial document productions were completed.
As previously reported to you in our letter of February 25, 1999 that accompanied the December 31, 1998 financial statements of the Trust, JM and the Trust announced that they would undertake a review of strategic alternatives available to maximize JM’s shareholder value. Such alternatives included the possible sale or merger of JM. On April 20, 1999, JM and the Trust announced that discussions between their financial advisors and potentially interested parties did not result in an acceptable offer for the sale or merger of the company. However, we reported that we are continuing to explore other options to maximize shareholder value, including a secondary public offering by the Trust of a portion of its Johns Manville stock, as well as a buyback of stock by Johns Manville. The full text of the announcement is attached.
In the days immediately after the announcement, the price of JM’s stock in trading on the New York Stock Exchange fell about $3.50 per share, reducing the market value of the Trust’s JM holdings by about $440 million. Nevertheless, even without any sale or liquidation of our JM holdings, the Trust’s balance sheet remains strong, with nearly $1 billion in other diversified investments, which is adequate to cover the Trust’s cash requirements for several years. Our confidence is further reinforced by JM’s recently-announced continued record results for the First Quarter of 1999. For its part, the Trust remains committed to an orderly further diversification of the Trust estate over time.
To obtain a complete copy of the quarterly filing, please contact Manville Trust in care of: inquiry@claimsres.com.