Highlights of the 4th Quarter 2000 Filing
CONTENTS:
FINANCIAL SUMMARY
OPERATIONS ISSUES
2000 Overview
Individual Evaluation Process
New Claim Filings
LEGAL ISSUES
ASSET MANAGEMENT
Operating expenses, excluding tobacco litigation costs, for the year 2000 were $10.3 million compared to $12.9 million for 1999. Total operating expenses for the year ended December 31, 2000 were almost $25 million compared to 1999 expenses of $17.4 million. Almost 60% of total expenses in 2000 ($14.9 million) were associated with the tobacco litigation (which excludes salaries of in-house staff) compared to 26% ($4.6 million) in 1999. JM asset investment expenses related to managing the Trust’s investment in the Johns Manville Corporation (“JM” or “the Company”) were $676,000 in 2000 compared to $2.2 million in 1999. Investment banking and other expenses associated with the Trust’s sale in 2001 of its JM common stock (estimated at approximately $13 million) will be netted in 2001 against the proceeds received.
Net Claimants’ Equity decreased for the year ended December 2000 by approximately $318 million principally due to claim payments totaling approximately $266 million and to a decrease in the market value of the JM common stock of approximately $160 million. The decrease in market value of JM stock was more than offset by $78 million in non-JM investment income, JM dividends of $27 million, a $15 million reduction in outstanding claim offers, and a gain of $47 million on the sale back to JM of 10.5 million shares of JM common stock for $13 per share totaling $136.5 million in December 2000.
During 2000, the Trust paid almost 64,000 claimants approximately $255 million, plus $11 million paid for co-defendant and distributor contribution claims. For the years 2000 and 1999, the Trust paid over $558 million to almost 147,000 claimants, plus $16.8 million paid for co-defendant and distributor contribution claims. Since implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid over $1.3 billion to TDP claimants and settled over 310,000 TDP claims. For that period, operating expenses, excluding class action, tobacco litigation costs and JM asset management expenses, represent 4.1% of all claim payments. Since inception, the Trust has paid approximately $2.5 billion to claimants and as of December 31, 2000 had approximately $2.2 billion in assets (See Asset Management).
The Trust has now completed its sixth full year of operation under the TDP. By the end of 1994, the Trust had received over 248,000 Proof of Claim forms, and had a backlog of over 211,000 unsettled claims. This backlog of claims was created as a result of payment restraining orders during the five years of class action litigation that ultimately led to the approval of the TDP. This backlog included claims filed in 1988, which meant that some claimants had to wait seven years due to that litigation before their claims became eligible for settlement. By year-end 2000, the time from receipt of a new claim to first offer was reduced to four months.
During the six years following the implementation of the TDP, the Trust has received approximately 239,700 new claims, which brings total claims filed with the Trust as of December 31, 2000 to 487,700. The Trust has paid approximately 340,500 claims, of which 312,900 claims were paid under the TDP. Additionally, over 38,000 claim filings have been disqualified or voided. The majority of these claims are represented by the Maritime Asbestos Legal Clinic (MALC) and as part of a litigation settlement reached with MALC in 1999, we anticipate that most of these claims will be refiled in the future.
At the end of 2000, the Trust had 65,400 active, unsettled claims. This included 27,300 outstanding offers and deficiency notices, 10,600 claims scheduled for offer and 27,500 claims in process. The Trust also had 42,600 inactive, unsettled claims due to lapsed offers and deficiency notices.
While the majority of claimants settle their claims by accepting the Scheduled Value Offer, some claimants request 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. At year-end, the Trust had 1,679 outstanding requests for IE.
During 2000, 1,637 claims were resolved through the IE process of which 399 claims were resolved by issuing a matrix offer, as a result of new information being supplied by the claimants and the claim qualifying for a higher Scheduled Value. The Trust also issued 1,238 individually evaluated offers – 339 with an agreed upon value and 422 which were issued as a result of impasse. An additional 477 claims, which were initially denied because they did not meet the criteria of any of the seven Scheduled Value categories, were also denied after individual evaluation, either for a lack of adequate medical documentation or for providing no evidence of an asbestos-related disease.
In 2000, the Trust received 555 requests for IE. Since the implementation of the IE program in March of 1996, a total of 7,122 claims have been resolved through this process.
During 2000 59,200 new claims were filed with the Trust. This represented an 82% increase in volume over the 32,500 claims filed during 1999, and was the greatest volume of claims received in any year since 1989. That escalating trend has continued into 2001 and from our inquiries of other trusts, we have learned that some of them are experiencing a similar escalation. Of the total of 256 law firms that filed claims with the Trust during 2000, ten firms accounted for 54% of all claims filed during the year. The top 40 filers, about 15% of all filing firms, filed over 85% of this year’s claims. At the other end of the spectrum, about 45% (114 firms) filed 10 or fewer claims during the year.
Approximately 19,700 new claims were filed during the Fourth Quarter of 2000, bringing the total claims received to date by the Trust to about 487,700. Two charts are attached. Chart 1, Total POC Filings by Month, December 1997 – December 2000, compares monthly claim filing volumes in 2000 against the two prior years. Chart 2, Quarterly POC Filings 1995 – 2000, compares quarterly claim filing volumes for 2000 against the years 1995 through 1999.
At year end, approximately 42,600 claims of the above total received were in inactive status due to denials and expiration of the Trust’s offers, compared to 32,000 at the end of 1999. Some 76% of these were denials. Nineteen law firms each have a total of over 500 denials and expired offers and represent a combined 55% of all currently expired claims. Many claims are eventually reactivated; since the TDP expiration procedures were implemented in 1995, over 30,800 claims have expired and have been subsequently reactivated to restart the settlement process.
As previously reported to the Courts, during 1998, the Trustees established the Claims Resolution Management Corporation (the “CRMC”), a Virginia corporation that is owned by the Trust. The CRMC processes, values, and pays Trust claims pursuant to an agreement between the Trustees and the CRMC.
During 2000, the Trustees requested CRMC to determine whether, consistent with the Trust purpose, the electronic filing of claims was feasible. In September 2000, the CRMC reported to the Trust that such claim filing, as well as electronic processing and payment was both feasible and likely to be more efficient and cost effective. The Trust then authorized the development of an “e-Claims” system. By year-end, the Trust had spent $675,000 on e-Claims development costs and consultations with a widely representative group of claimants’ attorneys have produced an enthusiastic support of this initiative.
The target date for e-Claims implementation – assuming testing is successfully completed in a timely manner – is October 1, 2001.
During the Fourth Quarter, the Trust General Counsel’s office particiapted in the litigation filed by the Trust in the United States District Court for the Eastern District of New York in December 1997 against seven tobacco manufacturers. Trial began on December 4, 2000 and a mistrial was declared on January 25, 2001, after six days of jury deliberation.
In a related matter, the General Counsel’s office participated in In re Simon II litigation, a pending action which purports to consolidate for joint adjudication common liabliity and punitive issues in certain cases against cigarette manufacturers.
At the end of the Fourth Quarter, there were 283 pending claims in the Trust’s Alternative Dispute Resolution (“ADR”) program, as compared to 231 claims at the end of 1999. Some of these claims, however, were awaiting claimants’ position papers to be submitted to arbitrators and additional claims were awaiting claimants’ rebuttal statements to be submitted to arbitrators.
In December 2000, the Trustees negotiated the sale of JM to Berkshire Hathaway with Messrs. Warren Buffet and Charles Munger in a swift and simple manner, after a previous agreement to sell JM to units of Bear Stearns and Hicks Muse & Tate in a leveraged buy-out was terminated on December 8, 2000 because of incompleted financing. On February 26 of this year, the Trust received $1,419,000,647 in cash for the sale of its remaining shares of JM stock to Berkshire Hathaway, Inc. at $13 per share, including $90 million paid by JM in exchange for the Trust’s assumption of JM’s statutory and contractual obligations to pay the Trust’s future income taxes. In addition, the Trust received $136,500,000 in December, 2000 for its sale back to JM of 10.5 million shares of JM stock at $13 per share. On February 27, 2001, JM became a wholly-owned subsidiary of Berkshire Hathaway, Inc.
This was the final step in the Trustees’ long journey to diversify the Trust Estate away from its original heavy dependence on JM to generate the cash necessary to pay present and future beneficiaries, a journey rapidly accelerated in 1992. At inception of the Trust (11/28/88), the estimated market value of the Trust’s assets was approximately $2.2 billion of which JM assets were about 63% which, remarkably, are about the same amount and proportion as at the end of 2000, even after the Trust paid out over $2.5 billion to hundreds of thousand beneficiaries over that period. Because most of the JM assets were illiquid, over time the percentage of JM assets in the portfolio grew significantly after payment of claims from liquid assets, and at times exceeded 90% of the Trust’s corpus. For the period from inception until the end of 1991, the Trust received $1.1 billion in cash from the assets given to the Trust at consummation of JM’s bankruptcy. Thereafter, as a result of negotiations with JM to cash out a profit sharing plan and non-marketable bonds, public sales of securities and operating businesses, and the reinstatement of regular dividends, among other transactions, the Trustees generated an additional $2.6 billion in Trust assets. Since January 1, 1992, the total return to the Trust on the management of the JM common stock averaged 15.4% per year.
The work is far from over. The Trust has over $2.2 billion in remaining assets, but the expected present value of current and future claim liabilities dwarfs that amount. Mindful that the Trust cannot possibly pay this liability, the Trustees continue to pursue a strategy that addresses the daunting and very ambitious financial goals set forth in the Trust Agreement and the TDP, namely, to enhance and preserve the Trust Estate while attempting to pay all claimants, present and future, as equivalent a share as possible of their claims’ values. The Trustees are actively reviewing how the proceeds from the sale should be re-invested and paid out over the remaining life of the Trust. This review of investment policy, and in particular asset allocation, will be grounded in our evolving understanding of the Trust’s present and future claim liabilities and the expected risk and return characteristics of different investments. As of December 31, 2000 and pro forma for the sale of JM, the Trust’s asset mix has been changed from 67% in equities (59% in JM alone) to 8% in equities. After consulting with both our investment staff and outside investment experts, the Trustees have decided to restore the allocation to equities, setting a long-term target for equities allocation of 65%. However, this is a long-term target that will be changed from time to time as circumstances warrant and as a practical matter, the actual allocation at any time will be near, but not equal to the target. Maintaining flexibility is crucial to our ability to meet the challenge of very large and uncertain liabilities.
In light of the sale of JM and the surge in claim filings in 2000 that continues to this day, the Trust, with the consent of the SCB and the Representative of Future Claimants, has extended the deadline to complete its re-estimate of future claims and review the appropriate pro rata payment calculation until June 30, 2001. As in the past, the Trustees will proceed as expeditiously as prudence allows to re-estimate the pro rata percentage, while continuing to consult with representatives of our beneficiaries and keeping them informed of our progress.
To obtain a complete copy of the quarterly filing, please submit your request via e-mail to: inquiry@claimsres.com.