Highlights of the 2nd Quarter 2000 Filing
Operating expenses for the three months ended June 30, 2000 were approximately $5.9 million, compared to $5.4 million for the same period in 1999. Operating expenses for the six months ended June 30, 2000 were $12.0 million compared to $8.8 million for the six months ended June 30, 1999. The increase in operating expenses is attributable to litigation expenses associated with the Trust’s lawsuit against the tobacco companies. For the first six months of 2000, the Trust incurred approximately $7.0 million in tobacco litigation costs compared to $1.3 million for the same period in 1999. In the first six months of 1999, the Trust incurred $2.3 million in litigation costs associated with the Adams litigation, which was settled during the second quarter of 1999. Operating costs, excluding litigation costs, were approximately $4.9 million for the first six months of 2000 compared to $5.2 million for the same period in 1999. JM Asset management expenses relating to the Trust’s majority share holdings in Johns Manville Corporation (“JM”) were approximately $350,000 for the six months ended June 30, 2000 compared to $1.7 million for the same period in 1999. Costs associated with the sale of JM (See Asset Management) have not yet been recorded; such costs will be netted against the proceeds of the sale when it is consummated.
Net Claimants’ Equity increased for the quarter ended June 2000 by approximately $260 million principally due to an increase in the market value of the JM common stock from $10.62 per share at March 31, 2000 to $13.44 per share at June 30, 2000. The other significant additions to Net Claimants’ Equity during the three and six months ended June 30, 2000 were the recognition of $22.4 million and $35.9 million in non-JM investment income, $6.7 million and $13.5 million of JM dividends and a reduction in outstanding claim offers of $4.2 million and $24.7 million, respectively. The significant deductions from Net Claimants’ Equity during the three and six months ended June 30, 2000 were claim settlements of $61 million (approximately 16,000 claims) and $131 million (approximately 33,000 claims) and unrealized losses on non-JM available-for-sale securities of $22.7 million and $14.7 million, respectively.
During the quarter ended June 30, 2000, the Trust paid, including contribution and indemnity claims, $69 million compared to $39 million in claim payments for the same period in 1999. For the six months ending June 30, 2000, the Trust paid approximately $140 million, including contribution and indemnity claims, compared to $77 million for the six months ended June 30, 1999. Since implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid over $1.29 billion in total claim payments to TDP claimants and settled over 280,000 TDP claims. For that period, operating expenses, excluding class action and JM asset management expenses, which were more than offset by investment income, represent 5.0% of total expenditures and represent 4.0% of total expenditures excluding tobacco litigation costs.
As of June 30, 2000, the Trust had approximately $878 million in cash equivalents and investments, exclusive of the Trust’s investment in JM securities (valued at $1.5 billion as of June 30, 2000), and $2.33 billion in Net Claimants’ Equity.
The Trustees are pleased to note that on May 16, David Austern was elected President of the Claims Resolution Management Corporation (“CRMC”), which processes claims for the Trust. Mr. Austern has been General Counsel to the Trust, a responsibility he will retain for now, since its inception in 1988, and brings a wealth of experience to his new position.
During the Second Quarter, the Trust made nearly 19,000 offers, of which 11,377 were first time offers. These offers cover claims received or reactivated through December 1999, making the time from receipt of the claim to first offer about 6 months. This quarter the Trust began to issue first offers monthly compared to the previous practice of issuing offers in larger, less frequent payment batches. In July, the Trust will begin to issue first offers semi-monthly. Each month the Trust anticipates is will be extending the eligible FIFO range by 3,000 claims.
In the Second Quarter, the Trust settled nearly 16,000 claims for total payments of close to $61 million. The average settlement amount was $3,838. On June 30, 2000, the Trust had approximately 63,000 unsettled active claims, which was 26,800 less than at year-end and almost 57,500 less than the second quarter ending June 30, 1999. Within the unsettled active claim population, 48% are claims with outstanding offers or deficiency notices and 51% of the claims require an action by the Trust. In addition to the active unsettled claims, there are 38,100 deactivated claims where the offer or denial notice has now expired.
On June 30, 2000 the Trust had 20,113 claims which have not yet been assigned a Scheduled Value category. The Trust anticipates that these claims will be eligible to receive their first offer within six months.
Processing issues remain outstanding concerning the interpretation and application of the reporting requirements of Pulmonary Function Testing results for specific claim populations under the Adams Settlement. After discussions with the SCB and the Futures Representative, the Trust will continue to work directly with the firms involved to resolve these issues.
While the overwhelming majority of claimants settle their claims by accepting the Scheduled Value Offer, a small percentage opt for Individual Evaluation (“IE”) if the claim does not meet the criteria of any of the seven Scheduled Value categories or if the claimants believe the claim has a value higher than the Scheduled Value. On June 30, 2000, the Trust had 2,223 outstanding requests for IE, of which almost 58% were claims denied for not meeting the criteria of one of the seven Scheduled Value categories. During Second Quarter 2000, the Trust received 195 new requests for IE and resolved 378. On average, during 2000, the Trust has received fewer requests for IE than it has in prior years.
During the first two quarters of 2000, the CRMC received about 20,800 new claim filings compared to 13,900 receipts during the same six-month period of 1999, and 17,600 in the first six months of 1998. Approximately 200 law firms filed claims during the first two quarters of 2000 with 10 firms accounting for over 50% of the new filings. As the attached chart, “Total POC Filings by Month – Apr. 1997-June 2000” illustrates, the trend of increased claim filings shows no signs of abating. Since inception, the Trust has received 449,300 claims. Excluding claims that have been permanently disqualified from processing (i.e. void claims), approximately 412,300 potentially valid Trust claims have been filed since Trust inception.
At the end of June 2000, there were 38,100 expired offers. Nearly 75% of currently expired offers were denials (i.e., category zero) at the time of expiration.
On June 22, 2000, after more than eighteen months of examining, together with JM strategic alternatives to further diversify the Trust’s assets and maximize shareholder value for all JM stockholders, JM entered into a definitive merger agreement with an investor group led by Hicks, Muse, Tate & Furst Incorporated and Bears Stearns Merchant Fund Corp. (HB). Under the terms of the agreement, JM’s public shareholders (including the Trust) will receive, for each share of JM stock held at the time of the merger, $13.625 in cash and $2 in liquidation value of a 13 percent pay-in-kind preferred stock (PIK Preferred). However, as a condition of the transaction required by HB, the Trust is obligated to exchange some of its JM stock to continue its investment of approximately $50 million in the new common equity and equivalents of the corporation surviving the merger. Based on the 112,730,819 shares of JM common stock held by the Trust, the Trust will receive approximately $1.5 billion in cash and about $219 million in liquidation preference of PIK Preferred stock along with approximately 8.4 percent of the ongoing company’s common equity and equivalents. In addition, as part of the transaction, JM has agreed to pay the Trust $90 million in settlement of JM’s obligation for future income taxes of the Trust. The transaction is expected to close before the end of the year, subject to various conditions, including receipt of financing on terms set forth in commitment letters, and shareholder and regulatory approvals.
As of June 30, 2000, investments in JM constituted 63% of the Trust estate, diversified (Non-JM) equity investments were 11% and diversified (non-JM) fixed income securities were 26%. Assuming the transaction closes, investments in JM may be reduced to less than 10% of the Trust estate. This dramatic reduction in the concentration in JM securities is another enormous step forward in the Trustees’ long-term plan to diversify the Trust estate. In the coming months, the Trustees will be working with JM towards closing the transaction and planning for the re-investment of the proceeds from the transaction.
The Trust is obligated under the TDP to review this year its estimate of the pro rata percentage, currently 10%, that is paid on resolved claims. Such estimate may be significantly affected by the successful completion of the JM transaction and the outcome of the Trust’s litigation against cigarette manufacturers (see below). Any change in this estimate requires the concurrence of the Selected Counsel for the Beneficiaries and the Legal Representative for Future Claimants, who are being kept informed of our plans as they develop.
Some difficult and complex tasks still lie ahead, but the Trustees and Trust staff remain hopeful and committed to working together with the company and representatives of our beneficiaries to bring to a successful close this long chapter in the history of the Trust.
During the Second Quarter, the Trust’s General Counsel’s Office assisted in the merger of HB Merger LLC with and into the Johns Manville Corporation (See Asset Management). An Agreement and Plan of Merger in this matter was executed by the parties on June 22, 2000. An Application seeking Court approval of the merger will be filed with the United States Bankruptcy Court for the Southern District of New York.
Beauchemin v. Manville Personal Injury Settlement Trust, a case which challenges the Trust’s application of pulmonary function test standards was settled by the parties during the Second Quarter.
Discovery in the litigation filed by the Trust against seven cigarette manufacturers continued during the Second Quarter, with active participation by the CRMC General Counsel’s Office. A stay issued by the United States Court of Appeals for the Second Circuit has delayed the start of the trial date in this matter.
As of June 30, 2000, there were 372 pending claims in the Trust’s Alternative Dispute Resolution program, as compared to 324 claims at the end of the First Quarter. Two hundred and thirty-two of these claims were awaiting claimants’ position papers to be submitted to arbitrators and six additional claims were awaiting claimants’ rebuttal statements to be submitted to arbitrators.
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