Highlights of the 2nd Quarter 1999 Filing
For the three months ended June 30, 1999, Trust operating expenses, which excludes the expenses of managing the Trust’s investment in the Johns Manville Corporation (“JM”), were $5.4 million, compared to $2.9 million for the same period in 1998. Almost $2.3 million of the increase is due to increased spending associated with ongoing tobacco litigation and the recently settled Adams v. Falise (Adams) litigation commenced by several law firms against the Trust and Trustees (see Legal Issues below). The JM asset management expenses were approximately $770,000 during the three months ended June 30,1999 compared to $129,000 for the same period in 1998. The increase was principally due to the Trust’s announced exploration of strategic alternatives, including the possible sale or merger of JM (see Asset Management Issues below).
During the quarter ended June 30, 1999, Net Claimants’ Equity decreased by approximately $504 million, principally due to the decrease in the market value of JM stock held by the Trust of approximately $422 million, which followed the announcement by JM and the Trust that discussions with interested parties did not result in an acceptable offer for the sale or merger of JM. Net Claimants’ Equity was further reduced by the addition of $67 million in outstanding claim offers and $36 million for the settlement and payment of claims and $6.1 million in total Trust expenses. During the Second Quarter, the Trust had non-JM investment income of $14.2 million, JM dividends of $7.5 million and an increase of $5.6 million in the value of the Trust Second Bond, principally due to the negotiated prepayment of this debt by JM.
The Trust settled 10,072 and 19,835 claims for the three and six months ended June 30, 1999 respectively, compared to 6,584 and 12,712 claims for the same periods in 1998. Total claim payments were $77.5 and $67.3 million for the six months ended June 30, 1999 and 1998, respectively. Since the implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid almost $920 million in claim payments and settled almost 184,000 claims. Excluding dispute resolution and asset management costs, operating expenses of the Trust from early 1995 through the second quarter of 1999 represent 4.8% of all expenditures (including claims payments).
Litigation regarding the administration of the Trust’s medical audit program (Adams) was settled during the Second Quarter of 1999. That settlement, in general terms, divided the Trust’s claimant population into two groups: 1) Claims filed through April 9, 1999, which would be subject to an audit (the “Retrospective Audit”) of seven doctors selected by the Trust; and; 2) Claims filed after that date, which would be subject to an audit process to be negotiated between the parties (the “Prospective Audit”).
On the Trust’s behalf, the Claims Resolution Management Corporation (“CRMC”) has been implementing the Retrospective Audit. Seven doctors have been chosen for audit, and 700 claims were randomly selected for review (100 per doctor), with firms representing those claims given 30 days to supplement the claim file in accordance with certain medical corroboration or co-defendant settlement amounts sufficient to “pass” the audit in accordance with the terms of the Adams settlement.
In the meantime, the CRMC issued offers of $99 million to approximately 30,000 claimants during the month of June, which offers had previously been held awaiting submission of the claimants’ x-rays for review but were not contingent on the results of the Retrospective Audit. The results of the Retrospective Audit are expected to be known by late summer. Claimants diagnosed by any audited physician who passes the Retrospective Audit will have their offers released. For those physicians who fail the audit, additional documentation regarding corroboration of that physician’s diagnosis, or certification of co-defendant settlements in an appropriate amount will be required in order to release those offers. There are approximately 43,000 claims with potential offers held awaiting the results of the Retrospective Audit.
The Trust, together with the Selected Counsel for the Beneficiaries (“SCB”) and the other litigants in Adams, have written a joint Memorandum to firms representing Trust claimants, describing the settlement. In addition, the Trust has put a copy of the Adams Stipulation of Settlement and Order on its website at www.mantrust.org. We have also provided answers to a list of Frequently Asked Questions regarding the settlement on that site.
The CRMC staff is working through tens of thousands of claims to ensure appropriate and prompt handling of claims in accordance with the Adams settlement provisions and deadlines, and expects to work constructively with the SCB and their designees in designing efficient and effective Prospective Audit policies.
In the Second Quarter of 1999, 826 claims were resolved through the Individual Evaluation (“IE”) process. This is a substantial increase over previous quarters. The increase is due to an increase in the Individual Evaluation staff implemented in March, and to claims which were re-evaluated and recategorized as a result of the Adams settlement described above.
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. Below is a table summarizing the disposition of claims which completed the Individual Evaluation process during the Second Quarter.
|Withdrawn from IE||
|The majority were recategorized as a result of the Adams settlement. The remainder provided new medical information sufficient for the claim to be categorized.|
|Claim value was individually negotiated.|
|Last Best Offer||
|When agreement as to claim value is not reached through negotiation, the Trust issues a “Last Best Offer” and the claimant has the option of accepting the offer by cashing the offer check, or proceeding to ADR.|
|Denied primarily for vague medical reports that did not fulfill the requirements of the TDP.|
|Total for 1999 to date: 1,226|
Last best offers and denials can, of course, proceed to arbitration (see Legal Issues below), but most do not. In many instances, last best offers are accepted and denials expire due to non-response. At quarter-end, there were 2,815 pending requests for IE (as compared to 3,374 at the end of the Second Quarter of 1998). Of those, 515 were in negotiation, and the remainder are in queue awaiting assignment to one of the five staff negotiators. The current wait from request for individual evaluation to assignment to active negotiation is approximately 18 months, and has been steadily declining over the past two years.
During the Second Quarter of 1999, approximately 8,200 new Proofs of Claim (POCs) were received, resulting in a six-month filing volume of 13,600. While this volume was down from 1998’s first six months volume of 17,900 claims, it appears that monthly filing volumes are steadily increasing to match 1998 levels. Annual POC filings of 30,000 are projected for 1999. As of June 30th, the total number of claims filed was nearly 410,000. Monthly filing patterns are depicted on Chart 1, titled “Total POC Filings 1996-1999.“
As of the end of the Second Quarter of 1999, the number of voided or disqualified claims was unchanged from the end of the First Quarter, at 37,400, including over 20,000 filed by Maritime Asbestosis Legal Clinic (“MALC”). The MALC claims are being refiled under the terms of a settlement agreement terminating litigation between the parties. To date the Trust has received 1,000 MALC filings to replace previously disqualified claims.
At the end of the Second Quarter the Trust had 31,700 expired offers compared to 28,700 at the end of the First Quarter. About 80% of the expired offers 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 16,100 expired claims have been subsequently reactivated.
During the Second Quarter, as a result of the settlement in Adams, the number of claims in the Trust’s Alternative Dispute Resolution (“ADR”) program decreased. As of June 30, 1999, the Trust had 202 pending ADR claims compared to 365 as of March 31, 1999. Of that number, 137 claims were awaiting claimants’ position papers to be submitted to arbitrators and four additional claims were awaiting claimants’ rebuttal statements to be submitted to arbitrators.
Working with outside counsel, the CRMC General Counsel’s Office during the Second Quarter assisted in discovery, production of documents, and trial preparation in Adams. On May 20, 1999, the Court approved a Stipulation of Settlement and Order which settled the lawsuit.
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 Second Quarter. CRMC legal staff has assumed a greater role than before in responding to the defendants’ discovery requests.
As of June 30, 1999, total investments were $2.758 billion, of which investments in JM securities were $1.733 billion (63%), other diversified equity were $243 million (9%) and fixed income investments were $782 million (28%). The allocation to equity investments was 71% of the portfolio, marginally higher than the Trustees self-imposed ceiling of 70%. However, with the sale of some JM stock held by the Trust (described below), the Trust is now back below this ceiling. Excluding JM assets, 76% of the portfolio is invested in fixed income securities. Fixed income investments included about $245 million in cash equivalents. These funds are readily available to pay claims, including claims being paid based on the settlement of the Adams litigation.
During the month of June, JM and the Trust announced the repurchase by the JM of the last remaining debt held by the Trust for approximately $33 million. This transaction was closed in June and therefore, reflected on the Statement of Net Claimants’ Equity. Initially JM’s largest creditor, the Trust has now completely monetizied all this debt and the proceeds have been reinvested in diversified investments.
Also during June, JM and the Trust announced the repurchase of a block of JM common stock held by the Trust. This stock repurchase did not close until July and therefore, is not recorded in the attached Financial Statements, although the transaction is disclosed in footnote 2 to the Financial Statements. The repurchase amount was approximately $167 million or 12 million shares. This transaction follows a smaller, but similar repurchase of stock completed in 1998. The Trust continues to own approximately 113 million shares or 77% of all the outstanding JM common stock. The proceeds of this transaction are currently invested in short-term fixed income securities. In total, the proceeds from these transactions will provide JM with $200 million in tax deductions this year.
The Trustees are actively continuing to explore other opportunities to enhance and preserve the Trust Estate, including further diversification of the Trust’s investments.
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