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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6541
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LOEWS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-2646102
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
667 MADISON AVENUE, NEW YORK, N.Y. 10021-8087
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(Address of principal executive offices) (Zip Code)
(212) 521-2000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Class Outstanding at May 1, 1998
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Common stock, $1 par value 115,000,000 shares
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Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
March 31, 1998 and December 31, 1997 .......................... 3
Consolidated Condensed Statements of Operations--
Three months ended March 31, 1998 and 1997 .................... 4
Consolidated Condensed Statements of Cash Flows--
Three months ended March 31, 1998 and 1997 .................... 5
Notes to Consolidated Condensed Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
Part II. Other Information
Item 1. Legal Proceedings ......................................... 53
Item 6. Exhibits and Reports on Form 8-K .......................... 54
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- ---------------------------------------------------------------------------------
(Amounts in millions of dollars) March 31, December 31,
1998 1997
------------------------------
Assets:
Investments:
Fixed maturities, amortized cost of $31,094.4
and $30,201.6 ................................ $31,558.3 $30,723.2
Equity securities, cost of $1,259.3 and
$1,102.6 ..................................... 1,384.6 1,163.3
Other investments ............................. 1,081.7 978.4
Short-term investments ........................ 8,019.6 8,754.2
------------------------------
Total investments .......................... 42,044.2 41,619.1
Cash ............................................ 298.8 497.8
Receivables-net ................................. 13,913.7 13,325.9
Property, plant and equipment-net ............... 2,591.4 2,590.2
Deferred income taxes ........................... 995.6 944.3
Goodwill and other intangible assets-net ........ 754.0 751.4
Other assets .................................... 1,819.7 1,895.1
Deferred policy acquisition costs of insurance
subsidiaries ................................... 2,291.1 2,141.7
Separate Account business ....................... 5,736.3 5,811.6
------------------------------
Total assets ............................... $70,444.8 $69,577.1
==============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $40,408.6 $39,497.4
Payable to brokers .............................. 1,806.2 1,559.2
Securities sold under repurchase agreements ..... 545.9 152.7
Long-term debt, less unamortized discount ....... 5,749.3 5,752.6
Other liabilities ............................... 4,212.0 4,749.1
Separate Account business ....................... 5,736.3 5,811.6
------------------------------
Total liabilities .......................... 58,458.3 57,522.6
Minority interest ............................... 2,457.1 2,389.4
Shareholders' equity ............................ 9,529.4 9,665.1
------------------------------
Total liabilities and shareholders' equity . $70,444.8 $69,577.1
==============================
See accompanying Notes to Consolidated Condensed Financial Statements.
Page 3
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
- ---------------------------------------------------------------------------------
(In millions, except per share data) Three Months Ended March 31,
1998 1997
----------------------------
Revenues:
Insurance premiums:
Property and casualty ....................... $ 2,527.0 $2,470.5
Life ........................................ 840.0 875.0
Investment income, net of expenses ............ 630.6 615.4
Investment (losses) gains ..................... (350.6) 28.9
Manufactured products (including excise taxes
of $109.0 and $110.1) ........................ 596.7 541.1
Other ......................................... 551.4 408.2
---------------------------
Total ...................................... 4,795.1 4,939.1
---------------------------
Expenses:
Insurance claims and policyholders' benefits .. 2,849.8 2,892.4
Amortization of deferred policy acquisition
costs ........................................ 588.3 520.3
Cost of manufactured products sold ............ 234.6 237.2
Selling, operating, advertising and
administrative expenses ...................... 1,056.0 791.3
Interest ...................................... 93.8 74.8
---------------------------
Total ...................................... 4,822.5 4,516.0
---------------------------
(27.4) 423.1
---------------------------
Income tax (benefit) expense .................. (21.7) 126.4
Minority interest ............................. 78.0 57.4
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Total ...................................... 56.3 183.8
---------------------------
Net (loss) income ............................... $ (83.7) $ 239.3
===========================
Net (loss) income per share ..................... $ (.73) $ 2.08
===========================
Cash dividends per share ........................ $ .25 $ .25
===========================
Weighted average number of shares outstanding ... 115.0 115.0
===========================
See accompanying Notes to Consolidated Condensed Financial Statements.
Page 4
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
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(Amounts in millions) Three Months Ended March 31,
1998 1997
----------------------------
Operating Activities:
Net (loss) income ............................. $ (83.7) $ 239.3
Adjustments to reconcile net (loss) income to
net cash used by operating activities-net ..... 463.8 143.1
Changes in assets and liabilities-net:
Reinsurance receivable ...................... (47.0) 160.5
Other receivables ........................... (743.8) (384.6)
Deferred policy acquisition costs ........... (149.4) (129.9)
Insurance reserves and claims ............... 916.1 574.2
Other liabilities ........................... (263.2) (1,045.0)
Trading securities .......................... (415.7) (20.2)
Other-net ................................... 21.0 (41.1)
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(301.9) (503.7)
---------------------------
Investing Activities:
Purchases of fixed maturities ................. (11,365.8) (9,841.8)
Proceeds from sales of fixed maturities ....... 10,240.9 9,632.0
Proceeds from maturities of fixed maturities .. 676.1 603.2
Change in securities sold under repurchase
agreements ................................... 393.2 1,746.8
Purchases of equity securities ................ (307.0) (408.9)
Proceeds from sales of equity securities ...... 192.5 300.5
Change in short-term investments .............. 535.8 (1,386.3)
Purchases of property, plant and equipment .... (99.5) (130.3)
Change in other investments ................... (125.7) 53.3
---------------------------
140.5 568.5
---------------------------
Financing Activities:
Dividends paid to shareholders ................ (28.8) (28.7)
Issuance of long-term debt .................... 297.7 395.3
Principal payments on long-term debt .......... (301.6) (212.2)
Net change in revolving line of credit ........ (63.0)
Receipts credited to policyholders ............ 1.5 2.5
Withdrawals of policyholder account balances .. (6.4) (6.3)
---------------------------
(37.6) 87.6
---------------------------
Net change in cash .............................. (199.0) 152.4
Cash, beginning of period ....................... 497.8 305.7
---------------------------
Cash, end of period ............................. $ 298.8 $ 458.1
===========================
See accompanying Notes to Consolidated Condensed Financial Statements.
Page 5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- --------------------------------------------------------------------------------
(Dollars in millions, except per share data)
1. General:
Reference is made to the Notes to Consolidated Financial Statements in the
1997 Annual Report to Shareholders which should be read in conjunction with
these consolidated condensed financial statements.
Comprehensive income
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 130, "Reporting Comprehensive Income." Comprehensive income includes all
changes to shareholders' equity, including net (loss) income, except those
resulting from investments by owners and distributions to owners. For the
three months ended March 31, 1998 and 1997, comprehensive (loss) income
totaled $(106.9) and $(87.4), respectively. Comprehensive (loss) income
includes net (loss) income, unrealized appreciation (depreciation) and
foreign currency translation gains or losses.
Net (loss) income per share
The Company adopted SFAS No. 128, "Earnings Per Share," which requires
presentation of basic and diluted earnings per share for entities with
complex capital structures. Basic earnings per share excludes dilution and
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The
Company does not have any dilutive instruments related to its common shares.
Accordingly, basic and diluted earnings per share are the same.
Reclassifications
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in 1998.
2. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line with CNA's retained amount varying by type of coverage.
Generally, reinsurance coverage for property risks is on an excess of loss,
per risk basis. Liability coverages are generally reinsured on a quota share
basis in excess of CNA's retained risk. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liability.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after
careful review of the nature of the contract and a thorough assessment of
the reinsurers' credit quality and claim settlement performance. Further,
for carriers that are not authorized reinsurers in CNA's states of domicile,
CNA receives collateral, primarily in the form of bank letters of credit,
securing a large portion of the recoverables.
Page 6
The effects of reinsurance on earned premiums, are as follows:
%
Direct Assumed Ceded Net Assumed
-----------------------------------------------------
Three Months Ended March 31, 1998
---------------------------------
Property and casualty ............... $1,817.0 $373.0 $138.0 $2,052.0 18.2%
Accident and health ................. 1,090.0 78.0 91.0 1,077.0 7.2
Life ................................ 251.0 36.0 49.0 238.0 15.1
---------------------------------------------------
Total ............................ $3,158.0 $487.0 $278.0 $3,367.0 14.5%
===================================================
Three Months Ended March 31, 1997
---------------------------------
Property and casualty ............... $2,164.0 $236.0 $228.0 $2,172.0 10.9%
Accident and health ................. 944.0 29.0 31.0 942.0 3.1
Life ................................ 227.0 29.0 24.0 232.0 12.5
---------------------------------------------------
Total ............................ $3,335.0 $294.0 $283.0 $3,346.0 8.8%
===================================================
In the above table, life premium revenue is from long duration contracts
and the property and casualty earned premium is from short duration
contracts. Approximately three quarters of accident and health earned
premiums are from short duration contracts.
Insurance claims and policyholders' benefits are net of reinsurance
recoverable of $179.0 and $247.5 for the three months ended March 31, 1998
and 1997, respectively.
3. Receivables:
The Company's receivables are comprised of the following:
March 31, December 31,
1998 1997
---------------------------
Reinsurance .................................. $ 5,773.0 $ 5,726.0
Other insurance .............................. 7,005.7 6,333.9
Security sales ............................... 553.4 755.8
Accrued investment income .................... 445.5 422.8
Other ........................................ 457.0 405.4
---------------------------
Total ................................. 14,234.6 13,643.9
Less allowance for doubtful accounts and
cash discounts .............................. 320.9 318.0
---------------------------
Receivables-net ....................... $13,913.7 $13,325.9
===========================
Page 7
4. Shareholders' equity:
March 31, December 31,
1998 1997
---------------------------
Preferred stock, $.10 par value,
Authorized--100,000,000 shares
Common stock, $1 par value:
Authorized--400,000,000 shares
Issued and outstanding--115,000,000 shares . $ 115.0 $ 115.0
Additional paid-in capital ................... 165.8 165.8
Earnings retained in the business ............ 8,782.9 8,895.4
Unrealized appreciation ...................... 465.7 488.9
---------------------------
Total ................................. $9,529.4 $9,665.1
===========================
5. Legal Proceedings and Contingent Liabilities:
INSURANCE RELATED
Fibreboard Litigation
---------------------
CNA's primary property and casualty subsidiary, Continental Casualty
Company ("Casualty"), has been party to litigation with Fibreboard
Corporation ("Fibreboard") involving coverage for certain asbestos-related
claims and defense costs (San Francisco Superior Court, Judicial Council
Coordination Proceeding 1072). As described below, Casualty, Fibreboard,
another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation),
and a negotiating committee of asbestos claimant attorneys (collectively
referred to as "Settling Parties") have reached a Global Settlement (the
"Global Settlement") to resolve all future asbestos-related bodily injury
claims involving Fibreboard, which is subject to court approval.
Casualty, Fibreboard and Pacific Indemnity have also reached an agreement
(the "Trilateral Agreement") on a settlement to resolve the coverage
litigation in the event the Global Settlement does not obtain final court
approval.
On July 27, 1995, the United States District Court for the Eastern
District of Texas entered judgment approving the Global Settlement Agreement
and the Trilateral Agreement. As expected, appeals were filed as respects to
both of these decisions. On July 25, 1996, a panel of the United States
Fifth Circuit Court of Appeals in New Orleans affirmed the judgment
approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the
judgment approving the Trilateral Agreement by a 3 to 0 vote. Petitions for
rehearing by the panel and Suggestions for Rehearing by the entire Fifth
Circuit Court of Appeals as respects to the decision on the Global
Settlement Agreement were denied. Two petitions for certiorari were filed in
the Supreme Court as respects the Global Settlement Agreement. On June 27,
1997, the Supreme Court granted these petitions, vacated the Fifth Circuit's
judgment as respects to the Global Settlement Agreement, and remanded the
matter to the Fifth Circuit for reconsideration in light of the Supreme
Court's decision in Amchem Products Co. v. Windsor.
On January 27, 1998, a panel of the United States Fifth Circuit Court of
Appeals again approved the Global Settlement Agreement by a 2 to 1 vote. Two
sets of Objectors filed petitions for certiorari which were docketed on
April
Page 8
16 and 17, 1998, by the United States Supreme Court. The Settling Parties
will file papers in opposition of the petitions on May 18, 1998.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
Global Settlement Agreement - On April 9, 1993, Casualty and Fibreboard
entered into an agreement pursuant to which, among other things, the parties
agreed to use their best efforts to negotiate and finalize a global class
action settlement with asbestos-related bodily injury and death claimants.
On August 27, 1993, the Settling Parties reached an agreement in principle
for an omnibus settlement to resolve all future asbestos-related bodily
injury claims involving Fibreboard. The Global Settlement Agreement was
executed on December 23, 1993. The agreement calls for contribution by
Casualty and Pacific Indemnity of an aggregate of $1,530.0 to a trust fund
for a class of all future asbestos claimants, defined generally as those
persons whose claims against Fibreboard were neither filed nor settled
before August 27, 1993. An additional $10.0 is to be contributed to the fund
by Fibreboard. As indicated above, the Global Settlement approval has been
approved by the Fifth Circuit a second time, but the Objectors have
petitioned the Supreme Court for review of the decision. There is limited
precedent with settlements which determine the rights of future personal
injury claimants to seek relief.
Through March 31, 1998, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 135,400 claims, for an
estimated settlement amount of approximately $1,600.0 plus any applicable
interest. Final court approval of the Trilateral Agreement obligates
Casualty to pay under these settlements. Approximately $1,600.0 (including
interest of $182.0) was paid through March 31, 1998. Such payments have been
partially recovered from Pacific Indemnity. Casualty may negotiate other
agreements for unsettled claims.
Final court approval of the Trilateral Agreement and its implementation
resolved Casualty's exposure with respect to the Fibreboard asbestos claims.
Casualty does not anticipate further material exposure with respect to the
Fibreboard matter, and subsequent adverse reserve adjustments, if any, are
not expected to materially affect the results of operations or equity of the
Company.
Tobacco Litigation
------------------
CNA's primary property/casualty subsidiaries have been named as defendants
as part of a "direct action" lawsuit, Richard P. Ieyoub v. The American
Tobacco Company, et al., filed by the Attorney General for the State of
Louisiana, in state court, Calcasieu Parish, Louisiana. In that suit, filed
against certain tobacco manufacturers and distributors (the "Tobacco
Defendants") and over 100 insurance companies, the State of Louisiana seeks
to recover medical expenses allegedly incurred by the State as a result of
tobacco-related illnesses.
The original suit was filed on March 13, 1996, against the Tobacco
Defendants only. The insurance companies were added to the suit in March
1997 under a "direct action" procedure in Louisiana. Under the direct action
statute, the Louisiana Attorney General is pursuing liability claims against
the Tobacco Defendants and their insurers in the same suit, even though none
of the Tobacco Defendants has made a claim for insurance coverage.
In June of 1997, the United States District Court for the Western District
of Louisiana, Lake Charles Division, granted a petition to remove this
litigation to the federal district court. The district court's decision is
currently on appeal to the United States Fifth Circuit Court of Appeals.
During the pending appeal, all proceedings in state court and in the federal
Page 9
district court are stayed. Because of the uncertainties inherent in
assessing the risk of liability at this very early stage of the litigation,
management is unable to make a meaningful estimate of the amount or range of
any loss that could result from an unfavorable outcome of the pending
litigation. However, management believes that the ultimate outcome of the
pending litigation should not materially affect the results of operations or
equity of the Company.
Environmental Pollution and Asbestos
------------------------------------
The CNA property and casualty insurance companies have potential exposures
related to environmental pollution and asbestos claims.
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent
of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern
the clean-up and restoration of abandoned toxic waste sites and formalize
the concept of legal liability for clean-up and restoration by potentially
responsible parties ("PRP's"). Superfund and the mini-Superfunds
(Environmental Clean-up Laws or "ECLs") establish mechanisms to pay for
clean-up of waste sites if PRPs fail to do so, and to assign liability to
PRPs. The extent of liability to be allocated to a PRP is dependent on a
variety of factors. Further, the number of waste sites subject to clean-up
is unknown. To date, approximately 1,300 clean-up sites have been identified
by the Environmental Protection Agency on its National Priorities List
("NPL"). The addition of new clean-up sites to the NPL has slowed in recent
years. Many clean-up sites have been designated by state authorities as
well.
Many policyholders have made claims against various CNA insurance
subsidiaries for defense costs and indemnification in connection with
environmental pollution matters. CNA and the insurance industry are
disputing coverage for many such claims. Key coverage issues include whether
clean-up costs are considered damages under the policies, trigger of
coverage, applicability of pollution exclusions and owned property
exclusions, the potential for joint and several liability and definition of
an occurrence. To date, courts have been inconsistent in their rulings on
these issues.
A number of proposals to reform Superfund have been made by various
parties. However, no reforms were enacted by Congress in 1997 and it is
unclear as to what positions Congress or the Administration will take and
what legislation, if any, will result. If there is legislation, and in some
circumstances even if there is no legislation, the federal role in
environmental clean-up may be significantly reduced in favor of state
action. Substantial changes in the federal statute or the activity of the
EPA may cause states to reconsider their environmental clean-up statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to
clean-up, and the standards for clean-up and liability, CNA's ultimate
liability for environmental pollution claims may vary substantially from the
amount currently recorded.
As of March 31, 1998 and December 31, 1997, CNA carried approximately
$701.0 and $773.0, respectively, of claim and claim expense reserves, net of
reinsurance recoverables, for reported and unreported environmental
pollution claims. The reserves relate to claims for accident years 1988 and
prior, after
Page 10
which CNA adopted the Simplified Commercial General Liability coverage form
which included an absolute pollution exclusion. There was no unfavorable
reserve development for the three months ended March 31, 1998 and 1997.
CNA's insurance subsidiaries have exposure to asbestos claims, including
those attributable to CNA's litigation with Fibreboard Corporation (see
above). Estimation of asbestos claim reserves involves many of the same
limitations discussed above for environmental pollution claims such as
inconsistency of court decisions, specific policy provisions, allocation of
liability among insurers, missing policies and proof of coverage. As of
March 31, 1998 and December 31, 1997, CNA carried approximately $1,300.0 and
$1,400.0, respectively, of claim and claim expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related
claims. Unfavorable reserve development for the three months ended March 31,
1998 and 1997 totaled $14.0 and $12.0, respectively.
The following tables provide additional data related to CNA's environmental
pollution and asbestos-related claims activity.
March 31, 1998 December 31, 1997
----------------------------------------------------
Environmental Environmental
Pollution Asbestos Pollution Asbestos
----------------------------------------------------
Reported Claims:
Gross revenues .................... $318.0 $1,228.0 $ 279.0 $1,384.0
Less reinsurance recoverable ...... (42.0) (106.0) (36.0) (117.0)
------------------------------------------------
Net reported claims ............... 276.0 1,122.0 243.0 1,267.0
Net unreported claims ............... 425.0 178.0 530.0 133.0
------------------------------------------------
Net reserves ........................ $701.0 $1,300.0 $ 773.0 $1,400.0
================================================
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claims and claim expenses.
Management will continue to monitor these liabilities and make further
adjustments as warranted.
NON-INSURANCE
Tobacco Litigation -- Lawsuits continue to be filed with increasing
frequency against Lorillard and other manufacturers of tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from an individual's use of cigarettes, addiction to smoking, or exposure to
environmental tobacco smoke. Tobacco litigation includes claims brought by
individual plaintiffs ("Conventional Product Liability Cases"); claims
brought as class actions on behalf of a large number of individuals for
damages allegedly caused by smoking ("Class Actions"); claims brought on
behalf of governmental entities and others, including private citizens suing
on behalf of taxpayers, labor unions, Indian Tribes and private companies,
seeking, among other alleged damages, reimbursement of health care costs
allegedly incurred as a result of smoking ("Reimbursement Cases"); and
claims for contribution and/or indemnity of asbestos claims by asbestos
manufacturers ("Claims for Contribution"). In addition, claims have been
brought against Lorillard seeking damages resulting from exposure to
asbestos fibers which had been incorporated, for a limited period of time,
ending more than forty years ago, into filter material used in one brand of
cigarettes manufactured by Lorillard ("Filter Cases").
In these actions, plaintiffs claim substantial compensatory, statutory and
punitive damages in amounts ranging into the billions of dollars. These
claims
Page 11
are based on a number of legal theories including, among other things,
theories of negligence, fraud, misrepresentation, strict liability, breach
of warranty, enterprise liability, civil conspiracy, intentional infliction
of harm, violation of anti-trust laws and state consumer protection
statutes, and failure to warn of the allegedly harmful and/or addictive
nature of tobacco products.
On June 20, 1997, together with other companies in the United States
tobacco industry, Lorillard entered into a Memorandum of Understanding to
support the adoption of federal legislation and any necessary ancillary
undertakings incorporating the features described in the proposed resolution
attached to the Memorandum of Understanding (together, the "Proposed
Resolution"). The Proposed Resolution can be implemented only by federal
legislation. If enacted into law, the legislation would resolve many of the
regulatory and litigation issues affecting the United States tobacco
industry thereby reducing uncertainties facing the industry. Lorillard and
other companies have announced that they will not seek ratification of
proposed legislation that has been introduced in Congress because it would
significantly modify the agreement reached on June 20, 1997. (See Item 1 -
Lorillard, Inc. - "Proposed Resolution of Certain Regulatory and Litigation
Issues" in the Company's annual report on Form 10-K for the year ended
December 31, 1997.)
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 615 cases
filed by individual plaintiffs against manufacturers of tobacco products
pending in the United States federal and state courts in which individuals
allege they or their decedents have been injured due to smoking cigarettes,
due to exposure to environmental tobacco smoke, or due to nicotine
dependence. Lorillard is a defendant in approximately 200 of these cases.
The Company is a defendant in 16 cases, eight of which have not been served.
Plaintiffs in these cases seek unspecified amounts in compensatory and
punitive damages in many cases, and in other cases damages are stated to
amount to as much as $100.0 million in compensatory damages and $600.0
million in punitive damages.
On March 19, 1998, the jury in Dunn v. RJR Nabisco Holdings Corporation,
et al. (Superior Court, Delaware County, Indiana, filed May 28, 1993)
returned a unanimous verdict in favor of the defendant cigarette
manufacturers and their parent entities, including the Company, in the trial
of a suit brought by the family of a woman who died of cancer, allegedly
caused by exposure to environmental tobacco smoke. Plaintiffs have filed a
motion seeking a new trial. The court has not ruled on the motion to date.
On September 26, 1997, a jury in the case of Gordon v. R.J. Reynolds
Tobacco Company, et al. (Superior Court, Middlesex County, Massachusetts),
returned a special verdict favorable to the defendants, which included
Lorillard. The court entered judgment in favor of the defendants. Trial was
held on the limited issue of the cigarettes smoked by the decedent and the
time period in which she smoked them. Plaintiff has filed a motion for new
trial, which is pending.
During 1997, juries returned verdicts in favor of the defendants in trials
in two smoking and health cases in which Lorillard was not a party, Connor
v. R.J. Reynolds Tobacco Company (verdict returned May 5, 1997) and
Karbiwnyk v. R.J. Reynolds Tobacco Company (verdict returned October 31,
1997) (both cases were tried in the Circuit Court of Duval County, Florida).
Appeals are not pending in either case.
An attorney who represents plaintiffs in a class action pending in
Illinois has filed a motion to consolidate and transfer all tobacco lawsuits
pending in U.S. federal courts to the U.S. Judicial Panel for Multidistrict
Litigation.
CLASS ACTIONS - There are 62 purported class actions pending against
cigarette manufacturers and other defendants, including the Company. Four
Page 12
cases have not been served. Most of the suits seek class certification on
behalf of residents of the states in which the cases have been filed,
although some suits seek class certification on behalf of residents of
multiple states. All but one of the purported class actions seek class
certification on behalf of individuals who smoked cigarettes or were exposed
to environmental tobacco smoke. One case seeks class certification on behalf
of individuals who have paid insurance premiums to Blue Cross and Blue
Shield organizations. Plaintiffs in a number of Reimbursement cases also
seek certification as class actions (see Reimbursement Cases, below).
Theories of liability asserted in the purported class actions include a
broad range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages.
Plaintiffs in many of the cases seek medical monitoring. Plaintiffs in
several of the purported class actions are represented by a well-funded and
coordinated consortium of over 60 law firms from throughout the United
States. Lorillard is a defendant in 57 of the 62 cases seeking class
certification. The Company is a defendant in 26 of the purported class
actions, three of which has not been served. Many of the purported class
actions are in the pre-trial, discovery stage.
Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade
County, Florida, October 31, 1991). On October 10, 1997, the parties to this
class action brought on behalf of flight attendants claiming injury as a
result of exposure to environmental tobacco smoke executed a settlement
agreement which was finally approved by the court on February 3, 1998. The
settlement agreement requires Lorillard and three other cigarette
manufacturers jointly to pay $300.0 million in three annual installments to
create and endow a research institute to study diseases associated with
cigarette smoke. None of these payments are to be made until all appeals
have been exhausted and judgment becomes final. The amount to be paid by
Lorillard is to be based upon each of the four settling defendants' share of
the United States market for the sale of cigarettes. Lorillard presently has
approximately 8.8% of the cigarette market in the United States. Based on
this calculation, Lorillard is expected to pay approximately $26.0 million
of the proposed settlement amount. The plaintiff class members are permitted
to file individual suits, but these individuals may not seek punitive
damages for injuries that arose prior to January 15, 1997 which enabled them
to be members of the class. The defendants that executed the settlement
agreement have paid a total of $49.0 million as fees and expenses of the
attorneys who represented plaintiffs. Certain of the absent class members
objected to the settlement agreement and some have noticed an appeal from
the February 3, 1998 order.
Castano, et al. v. The American Tobacco Company, Inc. et al. (U.S.
District Court, Eastern District, Louisiana, March 29, 1994). This case was
initiated as a class action on behalf of nicotine dependent smokers in the
United States. During 1998, Lorillard Tobacco Company and certain other
cigarette manufacturer defendants agreed with the plaintiffs to dismiss this
action without prejudice and to toll the statute of limitations as to
plaintiffs' claims. Lorillard Tobacco Company paid $1.0 million to reimburse
the costs and expenses of plaintiffs' counsel. This amount will be credited
against any award of costs and expenses incurred in connection with this
suit that plaintiffs' counsel may obtain in the future as a result of the
federal legislation implementing the Proposed Resolution, or against any
judgment or settlements that such counsel may obtain in the future in
similar actions.
Granier v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed September 26, 1994).
Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994). Class certification has been granted as to
Florida citizens who allege they, or their survivors, have, have had or have
Page 13
died from diseases and medical conditions caused by smoking cigarettes. The
Florida Supreme Court has denied defendants' appeal. Trial is scheduled to
begin on July 6, 1998.
Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court,
Madison County, Indiana, filed May 3, 1996). The Company is a defendant in
the case.
Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore
City, Maryland, filed May 24, 1996). During January of 1998, the court
granted plaintiffs' motion for class certification on behalf of Maryland
residents who had, presently have, or died from diseases, medical conditions
or injuries caused by smoking cigarettes or using smokeless tobacco
products; nicotine dependent persons in Maryland who have purchased and used
cigarettes and smokeless tobacco products manufactured by the defendants;
and Maryland residents who require medical monitoring. Defendants have filed
a petition for writ of mandamus or prohibition from the class certification
order with the Maryland Court of Special Appeals.
Scott v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed May 24, 1996). The Company is a defendant
in the case. Class certification has been granted on behalf of Louisiana
citizens who require medical monitoring. Defendants have noticed an appeal
from the class certification order with the Louisiana Court of Appeals.
Small v. Lorillard Tobacco Company, Inc., et al., Hoskins v. R.J. Reynolds
Tobacco Company, et al., Frosina v. Philip Morris Incorporated, et al.,
Hoberman v. Brown & Williamson Tobacco Corporation, et al., and Zito v.
American Tobacco Company, et al. (Supreme Court, New York County, New York,
filed June 19, 1996). Small is the only one of these cases to name Lorillard
as a defendant. Small formerly was known as Mroczowski. Plaintiffs' motions
for class certification on behalf of New York residents who are nicotine
dependent has been granted. Defendants in the five actions have noticed
appeals from the orders that granted class certification.
Reed v. Philip Morris Incorporated, et al. (Superior Court, District of
Columbia, filed June 21, 1996). The court has denied plaintiff's motion for
class certification.
Barnes v. The American Tobacco Company, et al. (U.S. District, Eastern
District, Pennsylvania, filed August 8, 1996). The District Court has
vacated its prior order that granted class certification on behalf of
Pennsylvania smokers who require medical monitoring. The court also granted
defendants' motion for summary judgment. Plaintiffs have noticed an appeal
from both orders to the U.S. Court of Appeals for the Third Circuit.
Lyons v. The American Tobacco Company, et al. (U.S. District Court,
Southern District, Alabama, filed August 8, 1996).
Chamberlain v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Ohio, filed August 14, 1996). The Company is a defendant
in the case.
Thompson v. American Tobacco Company, Inc., et al. (U.S. District Court,
Minnesota, filed September 4, 1996). The Company is a defendant in the case.
Perry v. The American Tobacco Company, et al. (Circuit Court, Coffee
County, Tennessee, filed September 30, 1996). Plaintiffs seek class
certification on behalf of individuals who have paid medical insurance
premiums to a Blue Cross and Blue Shield organization.
Connor v. The American Tobacco Company, et al. (Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996).
Ruiz v. The American Tobacco Company, et al. (U.S. District Court, Puerto
Page 14
Rico, filed October 23, 1996). The court denied plaintiffs' motion for class
certification.
Hansen v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Arkansas, filed November 4, 1996). The Company is a
defendant in the case. Parties have completed briefing of plaintiffs' motion
for class certification. The court has indicated to the parties that it will
rule on the class certification motion without hearing argument.
McCune v. American Tobacco Company, et al. (Circuit Court, Kanawha County,
West Virginia, filed January 31, 1997). The Company is a defendant in the
case.
Baker v. American Tobacco Company, et al. (Circuit Court, Wayne County,
Michigan, filed February 4, 1997).
Woods v. Philip Morris Incorporated, et al. (Circuit Court, McDowell
County, West Virginia, filed February 4, 1997).
Green v. American Tobacco Company, et al. (U.S. District Court, Kansas,
filed February 6, 1997). The Company is a defendant in the case.
Peterson v. American Tobacco Company, et al. (U.S. District Court, Hawaii,
filed February 6, 1997). The Company is a defendant in the case.
Walls v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Oklahoma, filed February 6, 1997).
Selcer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Nevada, filed March 3, 1997). The Company is a defendant in the case.
White v. Philip Morris, Inc. et al. (Chancery Court, Jefferson County,
Mississippi, filed April 18, 1997). The Company is a defendant in the case.
Insolia v. Philip Morris Incorporated, et al. (U.S. District Court,
Western District, Wisconsin, filed April 21, 1997).
Geiger v. The American Tobacco Company, et al. (Supreme Court, Queens
County, New York, filed April 30, 1997). Plaintiffs' motion for class
certification was granted on an interim basis and the court certified a
class comprised of New York residents who allege lung cancer or throat
cancer as a result of smoking cigarettes. Defendants have noticed an appeal
from the class certification ruling to the Appellate Division of the New
York Supreme Court.
Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
District, Texas, Texarkana Division, filed May 5, 1997).
Clay v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Southern District, Illinois, Benton Division, filed May 22, 1997).
Anderson v. The American Tobacco Company, Inc., et al. (U.S. District
Court, Eastern District, Tennessee, filed May 23, 1997). The Company is a
defendant in the case.
Taylor v. The American Tobacco Company, Inc., et al. (Circuit Court, Wayne
County, Michigan, filed May 23, 1997).
Lyons v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Northern District, Georgia, filed May 27, 1997). The Company is a
defendant in the case.
Cosentino v. Philip Morris Incorporated, et al. (Superior Court, Middlesex
County, New Jersey, filed May 28, 1997).
Page 15
Kirstein v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed May 28, 1997).
Tepper v. Philip Morris Incorporated, et al. (Superior Court, Bergen
County, New Jersey, filed May 28, 1997).
Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997).
Lippincott v. American Tobacco Company, Inc., et al. (Superior Court,
Camden County, New Jersey, filed June 13, 1997).
Brammer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, Iowa, filed June 20, 1997). The Company is a defendant in
the case.
Knowles v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed June 30, 1997). The Company is a
defendant in the case.
Daley v. American Brands, Inc., et al. (U.S. District Court, Northern
District, Illinois, filed July 7, 1997).
Piscitello v. Philip Morris, Incorporated, et al. (Superior Court,
Middlesex County, New Jersey, filed July 28, 1997). The Company is a
defendant in the case.
Azorsky v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Western District, Pennsylvania, filed August 15, 1997).
McCauley v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Northern District, Georgia, filed August 15, 1997). The court entered
an order sua sponte that dismissed plaintiffs' class action allegations.
Bush v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, Texas, filed September 10, 1997).
Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
Southern District, New York, filed September 29, 1997). The Company is a
defendant in the case.
Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
filed October 8, 1997). The Company is a defendant in the case.
Newborn v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Western District, Tennessee, filed October 9, 1997).
Young v. The American Tobacco Company, et al. (Civil District Court,
Orleans Parish, Louisiana, filed November 12, 1997). The Company is a
defendant in the case.
Aksamit v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, South Carolina, filed November 20, 1997). The Company is a defendant
in the case. Trial is scheduled to begin on August 20, 1998.
DiEnno v. Liggett Group, Inc., et al. (U.S. District Court, Nevada, filed
December 22, 1997).
McCauley v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Southern District, Georgia, filed December 31, 1997). To date, none
of the defendants have received service of process.
Herrera v. The American Tobacco Company, et al. (U.S. District Court,
Central District, Utah, filed January 28, 1998). The Company is a defendant
in
Page 16
the case.
Jackson v. Philip Morris Incorporated, et al. (U.S. District Court,
Central District, Utah, filed on or about February 13, 1998). The Company is
a defendant in the case.
Parsons v. AC&S, et al. (Circuit Court, Kanawha County, West Virginia,
filed February 27, 1998). The Company is a defendant in the case.
Mendys v. Lorillard Tobacco Company, et al. (Circuit Court, Cook County,
Illinois, filed March 17, 1998).
Daniels v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Southern District, California, filed April 2, 1998). The Company is a
defendant in the case. To date, none of the defendants have received
service of process.
Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Nevada, filed April 3, 1998). The Company is a defendant in the case. To
date, none of the defendants have received service of process.
Avallone v. The American Tobacco Company, Inc., et al. (Superior Court,
Atlantic County, New Jersey, filed April 23, 1998). The Company is a
defendant in the case. To date, none of the defendants have received service
of process.
REIMBURSEMENT CASES - Approximately 120 actions are pending in which
governmental entities, private citizens, or other organizations, including
labor unions and Indian Tribes, seek recovery of funds expended by them to
provide health care to individuals with injuries or other health effects
allegedly caused by use of tobacco products or exposure to cigarette smoke.
These cases are based on, among other things, equitable claims, including
indemnity, restitution, unjust enrichment and public nuisance, and claims
based on antitrust laws and state consumer protection acts. Plaintiffs in a
number of these actions seek certification as class actions. Plaintiffs seek
damages in each case that range from unspecified amounts to the billions of
dollars. Most plaintiffs seek punitive damages and some seek treble damages.
Plaintiffs in many of the cases seek medical monitoring. Lorillard is named
as a defendant in all such actions. The Company is named as a defendant in
18 of them.
State Or Local Governmental Reimbursement Cases - To date, suits filed by
41 states, the Commonwealth of Puerto Rico, and the Republic of The Marshall
Islands are pending. In addition, cities, counties or other local
governmental entities have filed eight such suits. The Company is a
defendant in 14 cases filed by state or local governmental entities. Since
January 1, 1997, cases brought by Florida, Minnesota, Mississippi and Texas
have been settled (see "Settlements of Reimbursement Cases"). Many of the
pending Reimbursement Cases are in the pre-trial, discovery stage.
The governmental entities pursuing the Reimbursement Cases are doing so at
the urging and with the assistance of well known members of the plaintiffs
bar who have been meeting with attorneys general in other states to
encourage them to file similar suits.
Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson
County, Mississippi, filed May 23, 1994). On July 2, 1997, Lorillard and
other defendants entered into a Memorandum of Understanding with the State
of Mississippi which settled the State's claims for monetary damages. See
"Settlements of Reimbursement Cases" below.
State of Minnesota, et al. v. Philip Morris Incorporated, et al.,
(District Court, Ramsey County, Minnesota, filed August 17, 1994). Blue
Cross and Blue Shield of Minnesota ("Blue Cross") also is plaintiff in the
case. On May 8, 1998, the parties reached an agreement to settle the matter.
See "Settlements
Page 17
of Reimbursement Cases" below.
McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha
County, West Virginia, filed September 20, 1994 by the West Virginia
Attorney General and state agencies). The Company is a defendant in the
case.
The State of Florida, et al. v. The American Tobacco Company, et al.
(Circuit Court, Palm Beach County, Florida, filed February 21, 1995). The
trial court granted the Company's motion to dismiss. The Florida Court of
Appeal affirmed the order dismissing the Company. On August 25, 1997,
Lorillard Tobacco Company and other defendants entered into a Memorandum of
Understanding with the State of Florida which settled the State's claims for
monetary damages. See "Settlements of Reimbursement Cases" below. The
remaining claims have now been dismissed.
Commonwealth of Massachusetts v. Philip Morris Inc., et al. (Superior
Court, Middlesex County, Massachusetts, filed December 19, 1995). The court
has scheduled trial in this matter to begin on February 1, 1999.
Ieyoub v. The American Tobacco Company, et al. (U.S. District Court,
Western District, Louisiana, filed March 13, 1996 by the Louisiana Attorney
General). The Company is a defendant in the case.
The State of Texas v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, Texas, filed March 28, 1996). On January 16, 1998,
Lorillard Tobacco Company and other defendants entered into a Memorandum of
Understanding with the State of Texas which settled the State's claims for
monetary damages. See "Settlements of Reimbursement Cases" below. Certain
Texas counties and some Texas hospital districts have filed motions to
intervene and for declaratory judgment in order to contest the settlement.
The court has not ruled on the motions to date.
State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court,
Baltimore City, Maryland, filed May 1, 1996).
State of Washington v. The American Tobacco Company, et al. (Superior
Court, King County, Washington, filed June 5, 1996). The court has scheduled
the case for trial on September 14, 1998.
City and County of San Francisco, et al. v. Philip Morris Incorporated, et
al. (U.S. District Court, Northern District, California, filed June 6, 1996
by various California cities and counties).
State of Connecticut v. Philip Morris Incorporated, et al. (Superior
Court, Litchfield District, Connecticut, filed July 18, 1996).
County of Los Angeles v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, San Diego County, filed August 5, 1996). The court has scheduled a
bench trial to begin on February 5, 1999 in this matter and in two other
cases that assert allegations that defendants violated certain provisions of
the California Business and Professions Code. Immediately after the
completion of the bench trial, the court will convene a jury as to the
remainder of the plaintiff's claims in County of Los Angeles.
State of Arizona v. The American Tobacco Company, et al. (Superior Court,
Maricopa County, Arizona, filed August 20, 1996). The court has scheduled
the case for trial on March 4, 1999.
State of Kansas v. R.J. Reynolds Tobacco Company, et al. (District Court,
Shawnee County, Kansas, filed August 20, 1996).
Kelley v. Philip Morris Incorporated, et al. (Circuit Court, Ingham
County, Michigan, filed August 21, 1996 by the Attorney General of
Michigan).
Page 18
State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al.
(District Court, Cleveland County, Oklahoma, filed August 22, 1996). The
Company is a defendant in the case. The court has scheduled the case for
trial on November 12, 1998.
People of the State of California v. Philip Morris Incorporated, et al.
(Superior Court, San Francisco County, California, filed September 5, 1996
by various California counties and cities and local chapters of various
medical societies and associations). The court has scheduled the case for
trial on March 1, 1999.
State of New Jersey v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Middlesex County, New Jersey, filed September 10, 1996).
State of Utah v. R.J. Reynolds Tobacco Company, et al. (U.S. District
Court, Central Division, Utah, filed September 30, 1996). The Company is a
defendant in the case.
City of New York, et al. v. The Tobacco Institute, et al. (Supreme Court,
New York County, filed October 17, 1996).
People of the State of Illinois v. Philip Morris, Inc., et al. (Circuit
Court, Cook County, Illinois, filed November 12, 1996).
State of Iowa v. R.J. Reynolds Tobacco Company, et al. (District Court,
Fifth Judicial District, Polk County, Iowa, filed November 27, 1996). The
Company is a defendant in the case. The Supreme Court of Iowa has affirmed
the trial court's order dismissing plaintiff's claims of deception,
voluntary assumption of a special duty and indemnity. Plaintiff did not
attempt to appeal the dismissal of its claim of unjust
enrichment/restitution.
County of Erie v. The Tobacco Institute, Inc., et al. (Supreme Court, Erie
County, New York, filed January 14, 1997).
State of New York v. The American Tobacco Company, et al. (Supreme Court,
New York County, New York, filed January 21, 1997). The Company is a
defendant in the case.
State of Hawaii v. Brown & Williamson Tobacco Corporation, et al. (Circuit
Court, First Circuit, Hawaii, filed January 31, 1997). The Company is a
defendant in the case.
State of Wisconsin v. Philip Morris Incorporated, et al. (Circuit Court,
Dane County, Wisconsin, filed February 5, 1997).
State of Indiana v. Philip Morris Incorporated, et al. (Superior Court,
Marion County, Indiana, filed February 19, 1997).
State of Alaska v. Philip Morris, Incorporated, et al. (Superior Court,
First Judicial District, Alaska, filed April 14, 1997).
County of Cook v. Philip Morris, Incorporated, et al. (Circuit Court, Cook
County, Illinois, filed April 18, 1997).
Commonwealth of Pennsylvania v. Philip Morris, Inc., et al. (Court of
Common Pleas, Philadelphia County, Pennsylvania, filed April 23, 1997).
State of Arkansas v. The American Tobacco Company, et al. (Sixth Division,
Chancery Court, Pulaski County, Arkansas, filed May 5, 1997).
State of Montana v. Philip Morris, Incorporated, et al. (First Judicial
Court, Lewis and Clark County, Montana, filed May 5, 1997).
State of Ohio v. Philip Morris, Incorporated, et al. (Court of Common
Pleas,
Page 19
Franklin County, Ohio, filed on May 8, 1997).
State of Missouri v. American Tobacco Company, Inc., et al. (Circuit
Court, City of St. Louis, Missouri, filed May 12, 1997). The Company is a
defendant in the case.
State of South Carolina v. Brown & Williamson Tobacco Corporation, et al.
(Court of Common Pleas, Richland County, South Carolina, filed May 12,
1997). The Company is a defendant in the case.
State of Nevada v. Philip Morris, Incorporated, et al. (Second Judicial
District, Washoe County, Nevada, filed May 21, 1997).
University of South Alabama v. The American Tobacco Company, et al. (U.S.
District Court, Southern District, Alabama, filed May 23, 1997). The Company
is a defendant in the case. Plaintiff noticed an appeal to the U.S. Court of
Appeals for the Fifth Circuit from the trial court's order that dismissed
the action.
State of New Mexico v. The American Tobacco Company, et al. (First
Judicial District Court, Santa Fe County, New Mexico, filed May 27, 1997).
City of Birmingham, Alabama, and The Greene County Racing Commission v.
The American Tobacco Company, et al. (U.S. District Court, Northern
District, Alabama, filed May 28, 1997). The Company is a defendant in the
case.
State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
Chittenden County, Vermont, filed May 29, 1997).
State of New Hampshire v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Merrimack County, New Hampshire, filed June 4, 1997).
State of Colorado v. R.J. Reynolds Tobacco Co., et al. (District Court,
City and County of Denver, Colorado, filed June 5, 1997).
State of Idaho v. Philip Morris, Inc., et al. (District Court, Fourth
Judicial District, Ada County, Idaho, filed June 9, 1997).
State of Oregon v. The American Tobacco Company, et al. (Circuit Court,
Multnomah County, Oregon, filed June 9, 1997).
People of the State of California v. Philip Morris, Inc., et al. (Superior
Court, Sacramento County, California, filed June 12, 1997).
State of Maine v. Philip Morris, Incorporated, et al. (Superior Court,
Kennebec County, Maine, filed June 17, 1997).
Rossello, et al. v. Brown & Williamson Tobacco Corporation, et al. (U.S.
District Court, Puerto Rico, filed June 17, 1997). The Company is a
defendant in the case.
State of Rhode Island v. American Tobacco Company, Inc., et al. (Superior
Court, Providence, Rhode Island, filed June 17, 1997). The Company is a
defendant in the case.
State of Georgia v. Philip Morris, Inc., et al. (Superior Court, Fulton
County, Georgia, filed August 29, 1997).
Republic of the Marshall Islands v. The American Tobacco Company, et al.
(High Court, Republic of the Marshall Islands, filed October 20, 1997). The
Company is a defendant in the case.
State of South Dakota and South Dakota Department of Social Services v.
Philip Morris, Inc., et al. (Circuit Court, Sixth Judicial Circuit, Hughes
Page 20
County, South Dakota filed February 23, 1998).
Private Citizens' Reimbursement Cases - There are five suits pending in
which plaintiffs are private citizens. Four of the suits have been filed by
private citizens on behalf of taxpayers of their respective states, although
governmental entities have filed a reimbursement suit in one of the four
states. The Company is a defendant in three of the five pending private
citizen Reimbursement Cases. Lorillard is a defendant in each of the cases.
Each of these cases is in the pre-trial discovery stage.
Crozier v. The American Tobacco Company, et al. (Circuit Court, Montgomery
County, Alabama, filed August 8, 1996). The Company is a defendant in the
case. The suit is on behalf of taxpayers of Alabama. This case is now known
as Holmes v. The American Tobacco Company, et al.
Coyne v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Ohio, filed September 17, 1996). The Company is a
defendant in the case. The suit is on behalf of taxpayers of Ohio. The court
has granted defendants' motion to dismiss. The plaintiffs have noticed an
appeal from the court's order granting a motion to dismiss.
Beckom v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Tennessee, filed May 8, 1997). The Company is a defendant
in the case. The suit is on behalf of taxpayers of Tennessee.
Mason v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Texas, filed December 23, 1997). The suit is on behalf of
taxpayers of the U.S. as to funds expended by the Medicaid program.
The State of North Carolina, et al. v. The American Tobacco Company, et
al. (U.S. District Court, Middle District, North Carolina, filed February
13, 1998).
Reimbursement Cases By Indian Tribes - Indian Tribes have filed five
reimbursement suits in their tribal courts, two of which have been
dismissed. Lorillard is a defendant in each of the cases. The Company is not
named as a defendant in any of the five tribal suits filed to date. Each of
the pending cases is in the pre-trial, discovery stage.
The Lower Brule Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Lower Brule Sioux Tribe, filed on an unknown date, first
amended complaint filed May 28, 1997).
Muscogee Creek Nation v. The American Tobacco Company, et al. (District
Court, Muscogee Creek Nation, Okmulgee District, filed June 20, 1997).
Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).
Reimbursement Cases By Labor Unions - Labor unions have filed
approximately 58 reimbursement suits in various states in federal or state
courts, although one has not been served to date. Lorillard is named as a
defendant in each of the suits filed to date by unions. The Company is a
defendant in one of the pending suits but has not received service of
process to date. Each of these cases is in the pre-trial, discovery stage.
Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 25, 1997).
Iron Workers Local Union No. 17 Insurance Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Northern District, Ohio, Eastern
Division, filed May 20, 1997). The court has scheduled trial in this matter
to begin on February 22, 1999.
Page 21
Northwest Laborers-Employers Health and Security Trust Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, Western District,
Washington, filed May 21, 1997). The court has granted plaintiffs' motion
for class certification on behalf of "all existing jointly-administered and
collectively bargained-for health and welfare trusts in [the State of]
Washington, and/or the trustees of such entities, that have provided or paid
for health care and/or addiction treatment costs or services for employees
or other beneficiaries." The United States Court of Appeals for the Ninth
Circuit has declined to review the ruling at this time.
Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et
al. (U.S. District Court, Massachusetts, filed June 2, 1997).
Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, Southern District, Illinois, filed on or about June 9,
1997).
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip
Morris, Inc., et al. (U.S. District Court, Hawaii, filed June 13, 1997).
Laborers Local 17 Health and Benefit Fund and The Transport Workers Union
New York City Private Bus Lines Health Benefit Trust v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 19,
1997).
Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Eastern District, Louisiana, filed June 20, 1997).
Kentucky Laborers District Council Health and Welfare Trust Fund v. Hill &
Knowlton, Inc., et al. (U.S. District Court, Western District, Kentucky,
Louisville Division, filed June 20, 1997).
Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, Oregon, filed June 20,
1997). The court has scheduled the case for trial on an unspecified day
during January 1999.
United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 25,
1997).
Connecticut Pipe Trades Health Fund and International Brotherhood of
Electrical Workers Local 90 Benefit Plan v. Philip Morris, Inc., et al.
(U.S. District Court, Connecticut, filed July 1, 1997).
Seafarers Welfare Plan and United Industrial Workers Welfare Plan v.
Philip Morris, Inc., et al. (U.S. District Court, Maryland, Southern
Division, filed July 2, 1997).
Laborers and Operating Engineers Utility Agreement Health and Welfare
Trust Fund for Arizona v. Philip Morris Incorporated, et al. (U.S. District
Court, Arizona, filed July 7, 1997).
West Virginia Laborers Pension Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Southern District, West Virginia, Huntington Division, filed
July 11, 1997).
Rhode Island Laborers Health and Welfare Fund v. Philip Morris
Incorporated, et al. (U.S. District Court, Rhode Island, filed July 20,
1997).
Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et
al. (U.S. District Court, Southern District, New York, filed July 28, 1997).
Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Eastern District, Louisiana,
filed August
Page 22
15, 1997). This action has been consolidated with the case of Ark-La-Miss
Laborers Welfare Fund.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Pennsylvania, filed
August 21, 1997). The court has granted defendants' motion to dismiss the
case. The time for plaintiff to appeal the decision has not expired.
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Eastern District, Missouri, filed
September 2, 1997).
Arkansas Carpenters Health & Welfare Fund v. Philip Morris, Inc., et al.
(U.S. District Court, Eastern District, Arkansas, filed September 4, 1997).
Southeast Florida Laborers District Council Health and Welfare Trust Fund
v. Philip Morris, Inc., et al. (U.S. District Court, Southern District,
Florida, filed September 11, 1997). The court has granted defendants' motion
to dismiss the case. The time for plaintiff to appeal the decision has not
expired.
West Virginia--Ohio Valley Area International Brotherhood of Electrical
Workers Welfare Fund v. The American Tobacco Company, et al. (U.S. District
Court, West Virginia, filed September 11, 1997).
Teamsters Union No. 142, Health and Welfare Trust Fund and Sheet Metal
Workers Local Union No. 20 Welfare and Benefit Fund v. Philip Morris
Incorporated, et al. (Circuit Court, St. Joseph County, Indiana, filed
September 12, 1997).
Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
Company, et al. (Superior Court, Los Angeles County, California, filed
September 16, 1997).
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris Inc., et al.
(U.S. District Court, Southern District, New York, filed September 17,
1997).
New Jersey Carpenters Health Fund, et al. v. Philip Morris, Inc., et al.
(U.S. District Court, New Jersey, filed September 25, 1997).
New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et
al. v. Philip Morris, Inc., et al. (Second Judicial District Court,
Bernalillo County, New Mexico, filed October 10, 1997).
Central States Joint Board v. Philip Morris, Inc., et al. (U.S. District
Court, Northern District, Illinois, filed October 20, 1997).
International Brotherhood of Teamsters Local 734 v. Philip Morris, Inc.,
et al. (U.S. District Court, Northern District, Illinois, filed October 20,
1997).
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et
al. (U.S. District Court, Eastern District, Texas, Beaumont Division, filed
October 31, 1997).
United Food and Commercial Workers Unions and Employers Health and Welfare
Fund, et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern
District, Alabama, filed November 13, 1997).
B.A.C. Local 32 Insurance Trust Fund, et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Eastern District, Michigan, filed
November 14, 1997).
Screen Actors Guild-Producers Health Plan, et al. v. Philip Morris, Inc.,
et al. (Superior Court, Los Angeles County, California, filed November 20,
1997).
Page 23
IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc. et al. (U.S.
District Court, Southern District, New York, filed November 25, 1997).
IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al. (U.S. District
Court, Southern District, New York, filed November 25, 1997).
Local 138, 138A and 138B International Union of Operating Engineers
Welfare Fund v. Philip Morris, Inc., et al. (U.S. District Court, Southern
District, New York, filed November 25, 1997).
Local 840, International Brotherhood of Teamsters Health and Insurance
Fund v. Philip Morris, Inc., et al. (U.S. District Court, Southern District,
New York, filed November 25, 1997).
Long Island Council of Regional Carpenters Welfare Fund v. Philip Morris,
Inc., et al. (U.S. District Court, Southern District, New York, filed
November 25, 1997).
Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris,
Inc., et al. (U.S. District Court, Southern District, New York, filed
December 8, 1997).
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al.
(U.S. District Court, Southern District, New York, filed December 8, 1997).
Local 1199 National Benefit Fund for Health and Human Services Employees
v. Philip Morris, Inc., et al. (U.S. District Court, Southern District, New
York, filed December 8, 1997).
Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Michigan, filed December 30, 1997).
Carpenters & Joiners Welfare Fund, et al. v. Philip Morris Incorporated,
et al. (U.S. District Court, Minnesota, filed December 31, 1997).
Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip
Morris, Inc., et al. (Circuit Court, Thirteenth Judicial District,
Tennessee, filed January 7, 1998).
Belk, et al., Trustees of IBEW-NECA Local 505 Health and Welfare Fund v.
Philip Morris, Inc., et al. (U.S. District Court, Southern District,
Alabama, filed February 19, 1998). Plaintiffs have sought to voluntarily
dismiss the action without prejudice. Defendants have opposed this request
and have asked the court to enter an order dismissing the action with
prejudice. The court has not ruled on either request to date.
National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
(U.S. District Court, Eastern District, New York, filed February 27, 1998).
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Eastern District, Wisconsin, filed March 4, 1998). To date,
none of the defendants have received service of process.
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al.
(Circuit Court, Milwaukee County, Wisconsin, filed March 30, 1998).
United Association of Plumbing and Pipefitters Industry Local 467, et al.
v. Philip Morris Incorporated, et al. (U.S. District Court, Northern
District, California).
Newspaper Periodical Drivers Local 921 San Francisco Newspaper Agency
Health & Welfare Fund v. Philip Morris, Inc., et al. (U.S. District Court,
Northern District, California, filed April 15, 1998).
Page 24
Teamsters Benefit Trust v. Philip Morris, Inc., et al. (U.S. District
Court, Northern District, California, filed April 15, 1998).
United Association Local 159 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 15, 1998).
Bay Area Automotive Group Welfare Fund v. Philip Morris, Inc., et al.
(U.S. District Court, Northern District, California, filed April 16, 1998).
Pipe Trades District Council No. 36 Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 16, 1998).
Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris, Inc.,
et al. (U.S. District Court, Northern District, California, filed April 16,
1998).
United Association Local No. 343 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 16, 1998).
San Francisco Newspaper Publishers and Northern California Newspaper Guild
Health & Welfare Trust v. Philip Morris, Inc., et al. (U.S. District Court,
Northern District, California, filed April 17, 1998).
Reimbursement Cases By Private Companies - Private companies have filed
six Reimbursement Case to date. Lorillard is named as a defendant in each of
the cases filed by private companies. The Company is not a defendant in the
case filed by private companies.
Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al.
(District Court, Second Judicial District, Ramsey County, Minnesota, filed
March 11, 1998).
Williams and Drake Company v. The American Tobacco Company, et al. (U.S.
District Court, Western District, Pennsylvania, filed March 23, 1998).
Conwed Corporation, et al. v. R.J. Reynolds Tobacco Company, et al.
(District Court, Second Judicial District, Ramsey County, Minnesota, filed
April 10, 1998).
Arkansas Blue Cross and Blue Shield, et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Northern District, Illinois,
filed April 29, 1998).
Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Eastern District, New York, filed
April 29, 1998).
Regence Blueshield, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Western District, Washington, filed April 29, 1998).
CONTRIBUTION CLAIMS - In addition to the foregoing cases, seven cases are
pending in which private companies seek recovery of funds expended by them
to individuals whose asbestos disease or illness was alleged to have been
caused in whole or in part by smoking-related illnesses. Three of the cases
have not been served. Lorillard is named as a defendant in each action. The
Company is named as a defendant in two of the cases, including one that has
not been served. Each of these cases is in the pre-trial, discovery stage.
Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (U.S. District
Court, Middle District, Florida, filed September 15, 1997). The Company is a
defendant in the case. To date, neither Lorillard nor the Company have
Page 25
received service of process.
Raymark Industries v. Brown & Williamson Tobacco Corporation, et al. (U.S.
District Court, Northern District, Georgia, filed September 15, 1997). The
Company is a defendant in the case.
Fibreboard Corporation and Owens-Corning v. The American Tobacco Company,
et al. (Superior Court, Alameda County, California, filed December 11,
1997).
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
(Supreme Court, New York County, New York, filed December 19, 1997). The
Company is a defendant in the case.
Falise, et al., as Trustees of the Manville Personal Injury Settlement
Trust v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed December 31, 1997).
H.K. Porter Company v. B.A.T. Industries, PLC, et al. (U.S. District
Court, Southern District, New York, filed December 31, 1997). To date, none
of the defendants have received service of process.
Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Duval County, Florida, filed December 31, 1997). To date, none of the
defendants have received service of process.
Raymark Industries v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, New York, filed January 30, 1998). To date, none of
the defendants have received service of process.
FILTER CASES - A number of cases have been filed against Lorillard seeking
damages for cancer and other health effects claimed to have resulted from
exposure to asbestos fibers which were incorporated, for a limited period of
time, ending more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Sixteen such cases
are pending in federal and state courts. Allegations of liability include
negligence, strict liability, fraud, misrepresentation and breach of
warranty. Plaintiffs seek unspecified amounts in compensatory and punitive
damages in many cases, and in other cases damages are stated to amount to as
much as $15.0 million in compensatory damages and $100.0 million in punitive
damages. In the one case of this type that has been tried during 1997, the
jury returned a verdict in favor of Lorillard. Trials were held in three
cases of this type during 1996. In two of the cases, the juries returned
verdicts in favor of Lorillard. In the third case, the jury returned a
verdict in favor of plaintiffs. The verdict, which Lorillard has appealed,
requires Lorillard to pay the amount of one hundred forty thousand dollars,
although the award subsequently was reduced to seventy thousand dollars.
Trials were held in three cases of this type during 1995. In two of the
cases, the juries returned verdicts in favor of Lorillard. In the third
case, the jury returned a verdict in favor of plaintiffs, which was upheld
on appeal. The Company has paid the compensatory judgment award, trial costs
and interest thereon in the amount of $1.6 million on December 30, 1997. The
United States Supreme Court denied the Company's petition for writ of
certiorari as to the punitive damages award.
In addition to the foregoing litigation, one pending case, Cordova v.
Liggett Group, Inc., et al. (Superior Court, San Diego County, California,
filed May 12, 1992), alleges that Lorillard and other named defendants,
including other manufacturers of tobacco products, engaged in unfair and
fraudulent business practices in connection with activities relating to the
Council for Tobacco Research-USA, Inc., of which Lorillard is a sponsor, in
violation of a California state consumer protection law by misrepresenting
to or concealing from the public information concerning the health aspects
of smoking. The court has scheduled a bench trial to begin on February 5,
1999 in
Page 26
this matter and in two other cases that assert allegations that defendants
violated certain provisions of the California Business and Professions Code.
Additionally, another pending case, Mangini v. Brown & Williamson Tobacco
Corporation, et al. (Superior Court, San Francisco County, California, filed
March 26, 1998), alleges that Lorillard and other named defendants, which
are other cigarette manufacturers, violated certain provisions of the
California Business and Professions Code due to its advertising programs
that purportedly target youth smokers and policies concerning usage of
outdoor advertisements.
DOCUMENT DISCOVERY ISSUES - Plaintiffs in a number of the cases pending
against the tobacco industry, including cases against Lorillard and the
Company, have challenged the claims made by Lorillard and other companies in
the tobacco industry that certain documents sought by plaintiffs are
protected from disclosure by the attorney-client privilege, joint defense
privilege and work product doctrine. These challenges include, among other
things, allegations that such documents do not contain legal advice or were
not prepared for litigation purposes and, thus, are not privileged or
protected as attorney work product. Certain plaintiffs in these cases have
also alleged that defendants' privileged documents should be discoverable
pursuant to the so-called crime/fraud exception which negates the privilege
as to documents found to have been related to and prepared in furtherance of
an alleged crime or fraud. In addition, several plaintiffs have argued that
defendants have "waived" their privileges as to a number of documents. Such
arguments by plaintiffs generally pertain to certain industry documents
which were subpoenaed by the House Commerce Committee (see discussion
below).
Various courts have addressed these issues and have arrived at differing
conclusions as to whether the privilege for some of defendants' documents
should be maintained. Some of these rulings are final and, as a result,
certain documents as to which defendants have claimed a privilege have been
released to plaintiffs.
In addition, on December 5, 1997, certain documents as to which defendants
had claimed privilege were provided to the Chairman of the House Commerce
Committee in response to a subpoena. These documents were subsequently made
available on the Internet.
On February 19, 1998, the Committee subpoenaed an additional approximately
39,000 documents which Lorillard and other companies in the tobacco industry
have asserted to be privileged. These documents were the subject of a March
7, 1998 ruling in the Reimbursement Case brought by the State of Minnesota,
in which the judge ordered that the documents should be released on the
basis of the crime/fraud exception. Defendants exhausted their remedies
through the state's judicial system as well as the U.S. Supreme Court. On
April 6, 1998, the U.S. Supreme Court denied defendants' application for a
Stay and, in accordance with the March 7, 1998 ruling of the district court,
such documents were released to plaintiffs in Minnesota. Also on April 6,
1998 and pursuant to the February 19, 1998 subpoena, documents were
submitted to the Committee. The Committee subsequently made available on the
Internet the vast majority of those documents.
Under the Proposed Resolution, Lorillard and the other companies in the
tobacco industry agreed to establish an industry-funded document depository
to allow public viewing of certain industry documents. In recent
Congressional testimony, representatives of the tobacco companies offered to
make tens of millions of pages of documents public prior to the enactment of
any comprehensive legislation to demonstrate their commitment to the
principles set forth in the Proposed Resolution. On February 27, 1998,
Lorillard and other companies in the tobacco industry posted on the Internet
the first installment of these documents for public access. In addition, the
court in the Reimbursement Case brought by the State of Minnesota has
granted defendants' request to allow public access to the document
depository established in that case. The publicly available materials will
not include
Page 27
documents containing trade secret information, certain personnel and third
party information, or documents for which attorney-client privilege or work
product doctrine claims have been asserted.
Tobacco industry documents have generated extensive media coverage
recently and have become a focal point in the litigation. The Company cannot
predict the effect disclosure of these documents may have on pending
litigation or Congressional consideration of the Proposed Resolution.
SETTLEMENTS OF REIMBURSEMENT CASES - In furtherance of the Proposed
Resolution, Lorillard and other companies in the United States tobacco
industry (the "Settling Defendants") have settled Reimbursement Cases
brought by the States of Mississippi, Florida, Texas and Minnesota. The
Mississippi action was settled in July 1997, Florida was settled in
September 1997, Texas was settled in January 1998 and Minnesota was settled
in May of 1998. Claims of Blue Cross and Blue Shield of Minnesota asserted
against the Settling Defendants together with the state's claims in its
lawsuit were separately settled as well. These settlements resulted in a
pre-tax charge to earnings of $163.4 million in the third and fourth quarter
of 1997 and $142.4 million (including $126.0 million related to the
settlement of litigation in Minnesota) in the first quarter of 1998.
Under the Mississippi settlement agreement, the Settling Defendants paid
$170.0 million representing Mississippi's estimated share of the $10.0
billion initial payment under the Proposed Resolution, and paid an
additional $15.0 million to reimburse Mississippi and its private counsel
for out-of-pocket costs. The Settling Defendants also paid approximately
$62.0 million to support a pilot program aimed at reducing the use of
tobacco products by persons under the age of eighteen. Lorillard's share of
all the foregoing payments, approximately $19.5 million, was charged to
expense in 1997.
Beginning December 31, 1998, the Settling Defendants will pay Mississippi
amounts based on its anticipated share of the annual industry payments under
the Proposed Resolution. These payments, which (except for the payment with
respect to 1998) will be adjusted as provided in the Proposed Resolution,
are estimated to be $68.0 million with respect to 1998 and will increase
annually thereafter to an estimated $136.0 million by 2003, continuing at
that level thereafter, and will be allocated among the Settling Defendants
in accordance with their relative unit volume of domestic tobacco product
sales.
Under the Florida settlement agreement, the Settling Defendants paid
$550.0 million, representing Florida's estimated share of the $10.0 billion
initial payment under the Proposed Resolution, and also reimbursed Florida's
expenses and those of its private counsel. The Settling Defendants also paid
$200.0 million to support a pilot program by Florida aimed at reducing the
use of tobacco products by persons under the age of eighteen. Lorillard's
share of all the foregoing payments, approximately $59.5 million, was
charged to expense in 1997.
On September 15, 1998, and annually thereafter on December 31, the
Settling Defendants will make ongoing payments to Florida in the following
estimated amounts - 1998: $220 million; 1999: $247.5 million; 2000: $275
million; 2001: $357.5 million; 2002: $357.5 million; and each year
thereafter $440 million. These amounts are projected to approximate that
portion of the annual industry payments under the Proposed Resolution which
is contemplated to be paid to Florida. These payments (except for the
payment with respect to 1998) will be adjusted as provided in the Proposed
Resolution and will be allocated among the Settling Defendants in accordance
with their relative unit volume of domestic tobacco product sales.
Under the Texas settlement agreement, the Settling Defendants agreed to
pay Texas an up-front payment of $725.0 million in 1998, representing
Texas's estimated share of the $10.0 billion initial payment under the
Proposed Resolution, and agreed to reimburse Texas and its private counsel
for expenses
Page 28
in the estimated amount of $45.0 million. The Settling Defendants also
agreed to pay Texas $264.0 million to support a pilot program aimed at
reducing the use of tobacco by persons under the age of eighteen.
Lorillard's share of all of the foregoing payments, approximately $84.4
million, was charged to expense in 1997. Several counties and hospital
districts in the State of Texas have moved to intervene in this action to
amend and/or limit the operation of the court's judgment approving the
settlement. In addition, the Governor of Texas has also moved to intervene
and has filed a notice of appeal with respect to the judgment in this
action. It is unclear what effect these actions would have upon the Texas
settlement agreement.
Beginning in November and December 1998, and on December 31 of each
subsequent year, the Settling Defendants will pay Texas 7.25% of the annual
industry payments contemplated to be paid to the states under the Proposed
Resolution. These payments, which (except for the payments with respect to
1998) will be adjusted as provided in the Proposed Resolution, will be in
the following estimated amounts - 1998: $290.0 million; 1999: $326.0
million; 2000: $363.0 million; 2001: $471.0 million; 2002: $471.0 million;
and 2003 and each year thereafter: $580.0 million. These payments will be
allocated among the Settling Defendants in accordance with their relative
unit volume of domestic tobacco product sales.
Under the Minnesota settlement, the Settling Defendants agreed to pay to
the State of Minnesota a series of six payments over five years as follows:
$240 million by September 5, 1998; $220.8 million by January 4, 1998; $242.6
million by January 3, 2000; $242.6 million by January 2, 2001; $242.6
million by January 2, 2002; and $121.6 million by January 2, 2003. The last
four of these payments will be adjusted for inflation, changes in domestic
sales volume, and, under specified circumstances increases in net operating
profits from domestic sales. Lorillard's share of the payment due in
September 1998 will be $17.5 million; all remaining payments will be
allocated pro rata among the Settling Defendants in accordance with their
relative unit volume of domestic cigarette sales.
In the event a Settling Defendant defaults on its obligation to make
timely payment of the above amounts, the remaining Settling Defendants may,
in their absolute discretion, pay the missing payment to the state. If the
remaining defendants elect not to satisfy the missing payment, each Settling
Defendant can be required by the state to pay its share of the remaining
payments scheduled above within 30 days of the default, subject to inflation
and volume adjustments. The Settlement Agreement does not obligate any
Settling Defendant to pay the share of another Settling Defendant. A similar
provision applies to Blue Cross pursuant to their Settlement Agreement.
In addition, beginning on December 31, 1998, and on December 31 of each
subsequent year, the Settling Defendants will make ongoing payments to the
State of Minnesota in the following aggregate amounts: 1998 = $102.0
million; 1999 = $114.8 million; 2000 = $127.5 million; 2001 = $165.8
million; 2002 = $165.8 million; and each year thereafter: $204.0 million.
Beginning with the 1999 payment, each payment will be adjusted for inflation
and changes in domestic sales volume. These payments will be allocated pro
rata among the Settling Defendants in accordance with their relative unit
volume of domestic cigarette sales. Settling Defendants also have agreed to
fund national cigarette research and tobacco control programs at an annual
aggregate cost of $10.0 million over the next ten years, such payments to be
allocated pro rata in accordance with the Settling Defendants' relative unit
volume of domestic cigarette sales.
In the event that there is a challenge to any provision of the settlement
with the state by anyone other than the Attorney General of the State of
Minnesota, Blue Cross or a Settling Defendant ("a third-party challenge"),
any amounts required to be paid by the Settling Defendants pursuant to the
settlement will be paid into escrow. If, as a result of such a challenge,
any of certain material terms of the settlement are modified or rendered
Page 29
unenforceable, the state and Settling Defendants will negotiate an
equivalent or comparable substitute term or other appropriate credit or
adjustment. In the event that the parties are unable to agree on such a
substitute term or appropriate credit or adjustment, then the parties will
submit the issue to the Court for resolution, subject to any available
appeal rights. In the event that any third-party challenge is not made until
after December 31,1998, the payments due the state in September 1998 and in
January of 1999 through 2003 will be payable directly to the state
regardless of such challenge, while other payments due under the settlement
will be paid into escrow pending resolution of the challenge. In the event
that the Court determines that there has been a failure of consideration
legally sufficient to warrant termination of the settlement with the state,
then the settlement may be terminated by the adversely affected party. In
the event of such termination, the state's lawsuit will be reinstated.
Under the Minnesota Settlement, the Settling Defendants have also agreed
to pay Blue Cross and Blue Shield of Minnesota separate payments of $160.0
million by September 5, 1998; $79.2 million by January 4, 1999; $57.5
million by January 3, 2000; $57.5 million by January 2, 2001; $57.5 million
by January 3, 2002; and $57.5 million by January 2, 2003. The last four
payments will be subject to inflation and volume adjustments. All payments
to be made after 1998 will be allocated according to the Settling
Defendants' relative unit volume of domestic cigarette sales.
Settling Defendants also agreed with the State of Minnesota among other
things: (i) not to oppose passage of specified future legislative proposals
or administrative rules in Minnesota regarding youth tobacco use, but
retained the right to challenge such laws or rules if adopted; (ii) not to
facially challenge the enforceability or constitutionality of existing
Minnesota tobacco control laws or to support legislation that would pre-empt
Minnesota's rights under the settlement; (iii) to disclose specified future
payments for lobbying or related purposes in the state; (iv) to cease
billboard and transit advertisements of tobacco products in Minnesota; and
(v) not to make payments for tobacco product placement in movies nationwide.
The Settling Defendants also agreed to the entry of a consent judgment
enjoining them from (a) offering or selling non-tobacco services or
merchandise in Minnesota bearing the name or logo of a tobacco brand; (b)
making any material misstatement of fact regarding the health consequences
of using tobacco products; (c) entering into any contract, combination or
conspiracy to limit health information or research into smoking and health
or product development; and (d) taking any action to target children in
Minnesota in the advertising, promotion or marketing of cigarettes. The
Settling Defendants also agreed to disband the Council for Tobacco Research-
U.S.A. Inc., and to maintain the Minnesota document depository at an
industry expense for at least ten years.
The Settling Defendants have agreed to pay reasonable attorney's fees of
private contingency fee counsel of Mississippi, Florida and Texas as set by
a panel of independent arbitrators. Each of these payments would be
allocated among the Settling Defendants in accordance with their relative
unit volume of domestic tobacco product sales and will be subject to an
aggregate national annual cap of $500.0 million. Certain of Florida's
private contingency fee counsel have challenged the attorneys' fees
provision set forth in the Florida settlement agreement, arguing that the
settlement agreement has no effect on their rights under their contingency
fee agreement with Florida. In November 1997, the court ordered all parties
to comply with the provisions for obtaining attorneys' fees, as set forth in
the settlement agreement. Certain contingency fee counsel are appealing this
ruling. One of these contingency fee counsel has filed suit against certain
companies in the tobacco industry, although not Lorillard, alleging, among
other things, tortious interference with such counsel's contingency fee
agreement with the State.
Under the Minnesota settlement, the Settling Defendants have, in addition,
agreed to pay attorneys fees of private counsel for the State in the amount
of $440.8 million, payable in the following installments: $74.8 million on
Page 30
September 5, 1998; $100.0 million on January 31, 1999; $100.0 million on
April 15, 1999; $100.0 million on January 31, 2000; and $66.1 million on
July 1, 2000. Settling Defendants also agreed to pay $4.0 million in costs
to the State's attorneys on May 18, 1998. In addition, Settling Defendants
have agreed to pay attorneys fees of private counsel for Blue Cross in the
amount of $117.3 million, to be paid as follows: $60.0 million on July 1,
1998; and $57.3 million on September 4, 1998; as well as costs of $4.0
million, payable on May 18, 1998. These payments will be allocated pro rata
among the Settling Defendants' relative unit volume of domestic cigarette
sales. The attorneys fee payments to be made pursuant to the Minnesota
settlement are not subject to, and do not count against, the $500 million
annual cap on attorneys fees applicable to the Mississippi, Florida and
Texas settlements.
If legislation implementing the Proposed Resolution or its substantial
equivalent is enacted, the settlements with Mississippi, Florida and Texas
will remain in place, but the terms of the federal legislation will
supersede these settlement agreements (except for the terms of the pilot
programs and payments thereunder, the initial payments and the annual
payments with respect to 1998), and the other payments described above will
be adjusted so that Mississippi, Florida and Texas will receive the same
payments as they would receive under such legislation. The settlement with
the State of Minnesota provides that enactment of federal tobacco-related
legislation, if any, will not affect the payments required to be made
pursuant to that settlement except as follows: if federal tobacco-related
legislation resolving State Attorney General health care cost recovery
actions is enacted on or before November 30, 2000, and if such legislation
provides for payments by tobacco companies (whether by settlement payment,
tax or any other means), all or part of which is made available to states,
the State of Minnesota must elect to receive any funds that are (i)
unrestricted as to their use, or (ii) are restricted to any form of health
care or to any use related to tobacco (collectively "Federal Settlement
Funds"), and the Settling Defendants will receive a dollar-for-dollar offset
of Federal Settlement Funds against ongoing payments up to the full amount
of such payments, provided however, that (i) there will be no offset on
account of any federal program, subsidies, payments, credits or other aid to
the state that are not conditioned or tied to the settlement of a state
tobacco-related suit or the relinquishment of state tobacco-related claims;
(ii) the state relinquishes no rights or benefits under the Settlement
Agreement except for payments subject to the offset; (iii) there are no
federally imposed preconditions to the receipt of Federal Settlement Funds
other than the settlement of any state tobacco-related lawsuit or the
relinquishment of state tobacco-related claims, actions or expenditures
related to tobacco, including but not limited to, education, cessation,
control or enforcement, or actions or expenditures related to health care;
(iv) if the Settling Defendants enter into any pre-verdict settlement
agreement of similar litigation brought by a non-federal governmental
plaintiff that does not require such an offset, the foregoing offset will be
null and void; and (v) if the Settling Defendants enter into any pre-verdict
settlement agreement of similar litigation brought by a non-federal
governmental plaintiff that has an offset term more favorable to the
plaintiff, the Settlement Agreement will, at the option of the state, be
revised to include a comparable term. Nothing in the Settlement Agreement
will reduce the total amounts payable to the state thereunder beyond the
amount of Federal Settlement Funds actually received by Minnesota.
If the Settling Defendants enter into any future pre-verdict settlement
agreement of similar litigation on terms more favorable to a non-federal
governmental plaintiff, the settlement with the State of Minnesota will not
otherwise be revised except to the extent such future settlement agreement
provides for joint and several liability for monetary payments, for a parent
company guaranty or other credit assurance, or for the implementation of
different non-economic tobacco-related public health measures.
Counsel for Lorillard have to date been contacted by counsel for the
States of Texas, Florida and Mississippi seeking to discuss the issue of
what effect,
Page 31
if any, the Minnesota settlement has upon the terms of the prior settlements
with those states pursuant to the "most favored nation" provision of those
prior state settlements. That provision provides that, in the event the
Settling Defendants enter into a subsequent pre-verdict settlement with a
non-federal governmental entity on terms more favorable to such entity than
the terms of the prior state settlement (after due consideration of relevant
differences in population or other appropriate factors), the terms of the
prior state settlement will be revised to provide treatment at least as
relatively favorable. Lorillard cannot presently determine what the result
of any discussions with Texas, Florida or Mississippi regarding the Most
Favored Nation provision may be, nor can it determine what the result of any
litigation with any of those states concerning that issue may be. A
determination of this issue adverse to Lorillard could result in an
obligation on the part of Lorillard to make additional substantial payments
to one or more of those states. The Company cannot estimate at this time the
effect such claims may have on the Company's results of operations or
financial condition.
If the federal legislation implementing the Proposed Resolution or its
substantial equivalent is enacted, the parties contemplate that Mississippi,
Florida and Texas and any other state that has made an exceptional
contribution to secure resolution of these matters (excluding Minnesota) may
apply to a panel of independent arbitrators for reasonable compensation for
its efforts in securing the Proposed Resolution. The Settling Defendants
have agreed not to oppose applications for $75.0 million by Mississippi,
$250.0 million by Florida and $329.5 million by Texas, subject to a
nationwide annual cap for all such payments of $100.0 million. There is no
such provision in the Minnesota settlement.
Finally, the settlement agreements provide that they are not an admission
or concession or evidence of any liability or wrongdoing on the part of any
party, and were entered into by the Settling Defendants solely to avoid the
further expense, inconvenience, burden and uncertainty of litigation.
LIGGETT SETTLEMENT - Liggett Group, Inc. and its parent company, Brooke
Group, Ltd., Inc. ("Liggett"), and the Attorneys General for a total of 40
states, have announced that they have reached agreements (the "Liggett
Settlements") to settle the reimbursement claims made by those states. The
proposed settlements reportedly will require Liggett: to make one-time
payments to each of the settling states in an amount of as much as $1.0
million; to pay to the settling states an aggregate percentage of as much as
30% of its pre-tax profits annually for the next 25 years; to acknowledge
that cigarette smoking is addictive (Liggett has supplemented the warning
notices it places on its cigarette packages to reflect that acknowledgment);
to acknowledge that cigarette smoking causes disease; to acknowledge that
cigarette companies have targeted marketing programs towards minors; and to
cooperate in suits against the other cigarette manufacturers by releasing
Liggett documents to the Attorneys General and to allow its employees to
testify in these matters. The Liggett Settlements also purport to be on
behalf of "all persons who, prior to or during the term of [the Liggett
Settlements], have smoked cigarettes or have used other tobacco products and
have suffered or claim to have suffered injury as a consequence thereof."
Pursuant to the Liggett Settlements described above, Liggett has submitted
numerous documents from its files to courts and defendants in several of the
Reimbursement Cases and in other cases as well. Liggett has also served
descriptive logs of such documents on counsel for plaintiffs and defendants
in those cases. Defendants have reviewed the Liggett logs and the Liggett
documents to determine which Liggett documents are subject to a joint-
defense privilege claim by other defendants.
DEFENSES - One of the defenses raised by Lorillard in certain cases is
preemption by the Federal Cigarette Labeling and Advertising Act (the
"Labeling Act"). In the case of Cipollone v. Liggett Group, Inc., et al.,
the United States Supreme Court, in a plurality opinion issued on June 24,
1992,
Page 32
held that the Labeling Act as enacted in 1965 does not preempt common law
damage claims but that the Labeling Act, as amended in 1969, does preempt
claims against tobacco companies arising after July 1, 1969, which assert
that the tobacco companies failed to adequately warn of the alleged health
risks of cigarettes, sought to undermine or neutralize the Labeling Act's
mandatory health warnings, or concealed material facts concerning the health
effects of smoking in their advertising and promotion of cigarettes. The
Supreme Court held that claims against tobacco companies based on fraudulent
misrepresentation, breach of express warranty, or conspiracy to misrepresent
material facts concerning the alleged health effects of smoking are not
preempted by the Labeling Act. The Supreme Court in so holding did not
consider whether such common law damage actions were valid under state law.
The effect of the Supreme Court's decision on pending and future cases
against Lorillard and other tobacco companies will likely be the subject of
further legal proceedings. Additional litigation involving claims such as
those held to be preempted by the Supreme Court in Cipollone could be
encouraged if legislative proposals to eliminate the federal preemption
defense, pending in Congress since 1991, are enacted. It is not possible to
predict whether any such legislation will be enacted.
Lorillard believes that it has a number of defenses to pending cases, in
addition to defenses based on preemption described above, and Lorillard will
continue to maintain a vigorous defense in all such litigation. These
defenses, where applicable, include, among others, statutes of limitations
or repose, assumption of the risk, comparative fault, the lack of proximate
causation, and the lack of any defect in the product alleged by a plaintiff.
Lorillard believes that some or all of these defenses may, in many of the
pending or anticipated cases, be found by a jury or court to bar recovery by
a plaintiff. Application of various defenses, including those based on
preemption, are likely to be the subject of further legal proceedings in the
Class Action cases and in the Reimbursement Cases.
Other Legal Proceedings: In September 1997, a purported class action was
commenced by private plaintiffs in Alabama state court alleging that the
U.S. tobacco companies and others conspired to fix cigarette prices in
Alabama, that agreements leading to price increases were reached during the
negotiations leading to the Proposed Resolution, and that prices were
increased pursuant to the alleged conspiracy in 1997 (Mosley, et al. v.
Philip Morris Companies Inc., et al.). The parties have settled this action
for a payment by defendants in an aggregate amount approximating sixty
thousand dollars to cover costs incurred by plaintiff's counsel.
Department of Justice Investigation - Early in 1994, the Energy and
Commerce Subcommittee on Health and the Environment of the U.S. House of
Representatives (the "Subcommittee") launched an oversight investigation
into tobacco products, including possible regulation of nicotine-containing
cigarettes as drugs. During the course of such investigation, the
Subcommittee held hearings at which executives of each of the major tobacco
manufacturers testified. Following the November 1994 elections, the incoming
Chairman of the Energy and Commerce Committee indicated that this
investigation by the Subcommittee would not continue, and on December 20,
1994, the outgoing majority staff of the Subcommittee issued two final
reports. One of these reports questioned the scientific practices of what it
characterized as the tobacco industry's "long-running campaign" related to
ETS, but reached no final conclusions. The second report asserted that
documents obtained from American Tobacco Company, a competitor of
Lorillard's, "reflect an intense research and commercial interest in
nicotine."
The U.S. Department of Justice is investigating allegations of perjury in
connection with the testimony provided by tobacco industry executives,
including Lorillard executives, to the Subcommittee in April 1994. Lorillard
has not received any request for documents or testimony. It is impossible at
this time to predict the outcome of this investigation.
Page 33
In 1996 Lorillard responded to a grand jury subpoena for documents in
connection with a grand jury investigation commenced in 1992 by the United
States Attorney's Office for the Eastern District of New York regarding
possible fraud by Lorillard and other tobacco companies relating to smoking
and health research undertaken or administered by the Council for Tobacco
Research - USA, Inc. There have been no requests for any testimony by any
Lorillard personnel. At the present time, Lorillard is unable to predict
whether the United States Attorney's Office will ultimately determine to
bring any proceeding against Lorillard. An adverse outcome of this
investigation could result in criminal, administrative or other proceedings
against Lorillard.
In March 1996, the Company and Lorillard each received a grand jury
subpoena duces tecum from the United States Attorney's Office for the
Southern District of New York seeking documents, advertisements or related
materials distributed by the Company and Lorillard to members of the general
public relating to, among other things, the health effects of cigarettes,
nicotine or tobacco products, the addictiveness of such products, and
Congressional hearings relating to cigarettes or the tobacco industry. The
Company and Lorillard responded to the subpoena. The Company and Lorillard
were informed in the latter part of 1996 that responsibility for this
investigation has been transferred from the United States Attorney's Office
for the Southern District of New York to the United States Department of
Justice in Washington, D.C. It is impossible at this time to predict the
ultimate outcome of this investigation.
While Lorillard intends to defend vigorously all smoking and health
related litigation which may be brought against it, it is not possible to
predict the outcome of any of this litigation. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be
decided unfavorably.
Many of the recent developments in relation to smoking and health
discussed above have received wide-spread media attention including the
release of documents by the industry. These developments may reflect
adversely on the tobacco industry and could have adverse effects on the
ability of Lorillard and other cigarette manufacturers to prevail in smoking
and health litigation.
Except for the effect of the Proposed Resolution if implemented as
described above, management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome of
pending litigation. It is possible that the Company's results of operations
or cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an unfavorable outcome of certain
pending litigation.
Other Litigation -- The Company and its subsidiaries are also parties to
other litigation arising in the ordinary course of business. The outcome of
this other litigation will not, in the opinion of management, materially
affect the Company's results of operations or equity.
6. In the opinion of Management, the accompanying consolidated condensed
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1998 and December 31, 1997 and the results of operations and
changes in cash flows for the three months ended March 31, 1998 and 1997,
respectively.
Results of operations for the first three months of each of the years is
not necessarily indicative of results of operations for that entire year.
Page 34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-----------------------------------------------------------------------
Liquidity and Capital Resources:
- -------------------------------
Insurance
- ---------
Property and casualty and life insurance operations are conducted through
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 84% owned
subsidiary of the Company.
For the first three months of 1998, statutory surplus of the property and
casualty insurance subsidiaries was approximately $7.0 billion, compared to
approximately $7.1 billion on December 31, 1997. The statutory surplus of the
life insurance subsidiaries remained at approximately $1.2 billion.
The liquidity requirements of CNA have been met primarily by funds generated
from operating, investing and financing activities. The principal cash flow
sources of CNA's property and casualty and life insurance subsidiaries are
premiums, investment income, and sales and maturities of investments. The
primary operating cash flow uses are payments for claims, policy benefits and
operating expenses.
For the first three months of 1998, CNA's operating activities reflect net
negative cash flows of approximately $240.6 million, compared to negative cash
flows of $737.5 million in 1997. CNA had substantially lower operating cash flow
in 1997, primarily due to claim payments resulting from the settlement of the
Fibreboard litigation.
Net cash flows from operations are invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries consider the cash
flow requirements of the insurance products sold and the tax attributes of the
various types of marketable investments.
CNA and the insurance industry are exposed to liability for environmental
pollution, primarily related to toxic waste site clean-up. See Note 5 of the
Notes to Consolidated Condensed Financial Statements for further discussion of
environmental pollution exposures.
On January 8, 1998, CNA issued $150.0 million principal amount of 6.45% senior
notes due January 15, 2008 and $150.0 million principal amount of 6.95% senior
notes due January 15, 2018. The net proceeds were used to pay down bank loans
drawn under a revolving credit facility. Concurrent with the reduction in bank
debt, CNA terminated $300.0 million notional amount of interest rate swaps.
On April 15, 1998, CNA issued $500.0 million principal amount of 6.50% senior
notes due April 15, 2005. The net proceeds were used to refinance the existing
bank debt outstanding under CNA's revolving credit facility and to refinance a
portion of CNA's outstanding commercial paper.
Cigarettes
- ----------
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.
Lorillard and other cigarette manufacturers continue to be confronted with an
increasing level of litigation and regulatory issues.
The volume of lawsuits against Lorillard and other manufacturers of tobacco
Page 35
products seeking damages for cancer and other health effects claimed to have
resulted from an individual's use of cigarettes, addiction to smoking, or
exposure to environmental tobacco smoke has increased substantially through 1997
and in 1998. See Note 5 of the Notes to Consolidated Condensed Financial
Statements. In a number of cases, the Company is named as a defendant. Tobacco
litigation includes claims brought by individual plaintiffs and claims brought
as class actions on behalf of a large number of individuals for damages
allegedly caused by smoking; and claims brought on behalf of governmental
entities, private citizens, or other organizations seeking reimbursement of
health care costs allegedly incurred as a result of smoking. In addition, claims
have been brought against Lorillard seeking damages resulting from exposure to
asbestos fibers which had been incorporated, for a limited period of time,
ending more than forty years ago, into filter material used in one brand of
cigarettes manufactured by Lorillard. In the foregoing actions, plaintiffs claim
substantial compensatory and punitive damages in amounts ranging into the
billions of dollars.
In 1997, Lorillard, together with other companies in the United States tobacco
industry, reached agreements to settle certain tobacco related litigation. See
"Settlements of Reimbursement Cases" and "Broin v. Philip Morris Companies, Inc.
et al." in Note 5 of the Notes to Consolidated Condensed Financial Statements.
FDA Regulations
The Food and Drug Administration ("FDA") has published regulations (the "FDA
Regulations") severely restricting cigarette advertising and promotion and
limiting the manner in which tobacco products can be sold. The FDA premised its
regulations on the need to reduce smoking by underage youth and young adults.
The FDA Regulations include:
(i) Regulations making unlawful the sale by retail merchants of cigarettes
to anyone under age 18. These regulations also require retail merchants
to request proof of age for any person under age 27 who attempts to
purchase cigarettes.
(ii) Regulations limiting all cigarette advertising to a black and white,
text only format in most publications and outdoor advertising such as
billboards, regulations prohibiting billboards advertising cigarettes
within 1,000 feet of a school or playground, banning the use of
cigarette brand names, logos and trademarks on premium items and
prohibiting the furnishing of any premium item in consideration for the
purchase of cigarettes or the redemption of proofs-of-purchase coupons.
(iii) Regulations prohibiting the use of cigarette brand names to sponsor
sporting and cultural events.
Lorillard and other cigarette manufacturers have filed a lawsuit, Coyne Beahm,
Inc., et al. v. United States Food & Drug Administration, et al., in the United
States District Court for the Middle District of North Carolina challenging the
FDA's assertion of jurisdiction over cigarettes. The Court granted, in part, and
denied, in part, plaintiffs' motion for summary judgment. The Court held that if
an adequate factual foundation is established, the FDA has the authority to
regulate tobacco products as medical devices under the Federal Food, Drug &
Cosmetic Act, may impose restrictions regarding access to tobacco products by
persons under the age of 18, and may impose labeling requirements on tobacco
products' packaging. The Court, however, also held that the FDA is not
authorized to regulate the promotion or advertisement of tobacco products. The
Court also stayed the effective date for the FDA Regulations relating to
advertising and promotion of tobacco products, but allowed the access
restrictions to take effect as of February 27, 1997. Both the plaintiffs and the
defendants have filed an appeal of the District Court's ruling to the Fourth
Circuit Court of Appeals, and oral arguments are scheduled to be heard by that
Court on June 8, 1998.
Page 36
Proposed Resolution of Certain Regulatory and Litigation Issues
On June 20, 1997, Lorillard, together with other companies in the United
States tobacco industry, entered into a Memorandum of Understanding to support
the adoption of federal legislation and any necessary ancillary undertakings,
incorporating the features described in the proposed resolution attached to the
Memorandum of Understanding (together, the "Proposed Resolution"). The Proposed
Resolution would permit extensive regulation of the industry by the FDA and
would impose large monetary obligations on the industry to be paid to the
federal government and to the states. The Proposed Resolution would require the
manufacturers to sign private contracts, or Protocols, which embody significant
restrictions on the industry's commercial free speech advertising. In return,
the Proposed Resolution would resolve much of the industry's litigation and
establish a rational litigation system for future lawsuits. The Proposed
Resolution, by the nature of its terms, could be implemented only by federal
legislation. Incorporated by reference into this filing is the discussion of the
Proposed Resolution in the Company's annual report on Form 10-K for the year
ended December 31, 1997.
Since the Proposed Resolution was announced, it has been the subject of
intense review and criticism by the White House, the public health community,
and other interested parties. Certain members of Congress have offered, or
indicated that they intend to offer, alternative legislation. No bill introduced
would adopt the Proposed Resolution as agreed to. Over 50 bills have been
introduced in Congress regarding the issues raised in the Proposed Resolution,
including bills seeking more stringent regulation of tobacco products by the
Food and Drug Administration and more punitive monetary payments by the
companies. One particular bill initially introduced by Senator John McCain from
Arizona, has been approved by the Senate Commerce Committee on April 1, 1998, by
a 19-1 vote, as approved, the "McCain bill."
The McCain bill includes, among other things, provisions regarding FDA
regulation, licensing of tobacco manufacturers and retailers, surcharges against
the industry for failure to achieve underage smoking reduction goals,
advertising restrictions and labeling requirements, industry payments, smoking
restrictions, civil liability limitations, a method for determining the amount
and payment of attorneys' fees, and public disclosure of industry documents.
Monetary Penalties: Under the McCain bill, five companies, including
Lorillard, would be responsible for the initial lump sum payment of $10.0
billion. Lorillard's share would be 7.1% of the $10.0 billion payment. Annual
payments would begin in the calendar year following enactment. The base figures
would be: $14.4 billion in Year 1, $15.4 billion in Year 2, $17.7 billion in
Year 3, $21.0 billion in Year 4, $23.6 billion in Year 5, and $21.0 billion in
Year 6 and thereafter. The first six years of payments will not be adjusted for
volume reductions. The annual payments are to be allocated among manufacturers
on the basis of relative domestic sales volume.
Surcharges for Failure to Achieve Underage Smoking Reduction Goals: The
McCain bill imposes substantial surcharges on the industry if statutorily
required reductions in underage smoking are not achieved within specified time
periods. There is an annual cap of $3.5 billion, and assessments are not tax
deductible. If the usage reduction target is missed by more than 20 percentage
points, the company or companies that manufacture the missed brands
automatically lose their annual liability caps included in the bill.
Civil Liability: The McCain bill includes a $6.5 billion cap on yearly civil
liability payments. The McCain civil liability payments are not adjusted for
volume declines, and are not credited against the annual monetary payments
discussed above. The cap system settles all addiction claims, all claims brought
by State Attorneys General, and lawsuits brought by states, counties, cities and
other political entities (except for the United States). The McCain bill
includes no limits on punitive damages for alleged past conduct or for post-Act
conduct that does not comply with the Act. Class actions would remain available
under the
Page 37
legislation. There are numerous ways that a participating manufacturer could
lose these very limited civil liability protections.
Advertising Restrictions: The McCain bill would enact into law the FDA
Regulations discussed above, and goes beyond the FDA in that it imposes
additional restrictions on advertising through a Protocol mechanism that
manufacturers would be required to sign in order to receive the benefit of the
bill's limited civil liability restrictions.
FDA Regulation: Under the McCain bill, tobacco products would be regulated
pursuant to a separate chapter of the Food, Drug and Cosmetic Act. The agency
would have authority to immediately require additional testing or modification
of a tobacco product if the agency finds that it would protect public health.
This includes the authority to ban tobacco products without approval from
Congress.
Environmental Tobacco Smoke ("ETS"): The McCain bill would establish national
standards for any building (other than restaurants (non-fast food), bars,
private clubs, hotel rooms and common areas, casinos, bingo parlors, tobacco
shops and prisons) regularly entered by 10 or more individuals at least one day
per week. Federal, state or local laws that provide greater protection from ETS
would not be pre-empted.
On April 18, 1998, Lorillard, along with the other signatory companies to the
Proposed Resolution, announced a withdrawal from the legislative process to
enact a comprehensive tobacco settlement. Lorillard remains committed to the
Proposed Resolution, but does not believe that the current political process in
Washington can produce legislation that is fair to the industry.
For information with respect to these matters, as well as with respect to
discussions regarding an attempt to achieve a comprehensive legislative
resolution to litigation and regulatory issues affecting the United States
tobacco industry, see Note 5 of the Notes to Consolidated Condensed Financial
Statements.
Proposed Excise Tax Increases
The United States federal excise tax on cigarettes is presently $12 per 1,000
cigarettes ($0.24 per pack of 20 cigarettes). In early August of 1997, the
United States Congress approved and the President signed into law an increase in
the federal excise tax on cigarettes of $7.50 per 1,000 cigarettes ($0.15 per
pack of 20 cigarettes). This increase is phased in at a rate of $5.00 per 1,000
cigarettes in the year 2000 and an additional $2.50 per 1,000 cigarettes in the
year 2002. Various states have proposed, and certain states have recently
passed, increases in their state tobacco excise taxes. Such actions may
adversely affect Lorillard's volume, operating revenues and operating income.
Hotels
- ------
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Loews Hotels
has entered into an agreement with the owners of the Universal Florida resort to
develop hotels at the resort. Capital expenditures in relation to the Universal
Florida hotel project are expected to be funded by a combination of equity
contributions by the development partners and mortgages. Loews Hotels expects to
obtain its share of the equity contributions for the development and acquisition
of hotels (anticipated to amount to approximately $138.0 million during the next
three years for existing development projects) under arrangements with the
Company.
Page 38
Offshore Drilling
- -----------------
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore Drilling, Inc. is a 50.3% owned subsidiary of the Company.
Diamond Offshore continues to benefit from increased demand and from the tight
supply of major offshore drilling rigs worldwide. These conditions are due, in
part, to the impact of technological advances, including 3-D seismic, horizontal
drilling, and subsea completion procedures, on oil and gas exploration and
development economics. To address the current tight supply situation, customers
seek to contract rigs for term commitments (as opposed to contracts for the
drilling of a single well or a group of wells) in many cases, and often will pay
for upgrades and modifications necessary for more challenging drilling locations
in order to assure rig availability. Diamond Offshore seeks to have a foundation
of long-term contracts with a reasonable balance of short-term or well-to-well
contracts to minimize risk while participating in the benefit of increasing
dayrates in a rising market.
For the first three months of 1998, Diamond Offshore's cash provided by
operating activities amounted to $119.9 million, compared to $73.7 million in
1997. The significant improvement in operating cash flow reflects the current
conditions in the offshore drilling industry, namely improved dayrates and an
increasing number of term contracts for rigs in certain markets.
Diamond Offshore continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and harsh
environment operations. Diamond Offshore expects to spend approximately $108.5
million during 1998 for rig upgrades. Diamond Offshore expended $20.3 million,
including capitalized interest expenses, for significant rig upgrades during the
three months ended March 31, 1998. The rig upgrade projects include the
conversion of an accommodation vessel to a semisubmersible drilling unit capable
of operating in harsh environments and ultra-deep water. Upon completion of the
conversion, the rig will begin a five year commitment in the Gulf of Mexico,
which is anticipated to commence in late 1999. In addition, leg strengthening
and other modifications for another jack-up rig operating in the Gulf of Mexico
are anticipated to be completed in the first half of 1998. Diamond Offshore has
also budgeted $126.7 million for 1998 capital expenditures associated with its
continuing rig enhancement program, spare equipment and other corporate
requirements. These expenditures include purchases of anchor chain, drill pipe,
riser, and other drilling equipment. During the first quarter of 1998, $16.8
million was expended on this program.
The cash required to fund rig upgrades and Diamond Offshore's continuing rig
enhancement program is anticipated to be provided by its operating cash flow, as
well as available cash on hand.
Diamond Offshore completed the upgrade of the Ocean Clipper I in July 1997,
however, the drillship has continued to experience certain subsea system
difficulties primarily associated with new technology for operations in deep
water as well as difficulties with the vessel's thrusters. While the drillship
is operating under its drilling contract in the Gulf of Mexico, Diamond Offshore
continues to participate in developing design revisions that will provide long-
term benefits to the affected systems. Results of operations are likely to be
adversely impacted by additional downtime from such difficulties, but Diamond
Offshore cannot predict the extent of such adverse impact.
In February 1998, a fire was detected in the engine room of the Ocean Victory,
which was operating in the Gulf of Mexico. Although the fire was contained and
extinguished, damage was done to the power and electrical systems aboard the
rig. The rig is currently in the shipyard for necessary repairs, which are
expected to be completed by mid-1998. Diamond Offshore expects that its
insurance will cover the cost of such repairs, however the loss of revenue
during the repair period is not covered by insurance. As a result, the loss of
revenues will reduce Diamond
Page 39
Offshore's results of operations for 1998.
The ability to minimize costs and downtime is critical to Diamond Offshore's
results of operations. The improved opportunities for the offshore contract
drilling industry worldwide have resulted in increased demand for and a shortage
of experienced personnel and equipment, including drill pipe and riser,
necessary on offshore drilling rigs. Diamond Offshore does not consider the
shortage of such personnel and equipment currently to be a material factor in
its business. However, because of the increased demand for oil field services, a
significant increase in costs, including compensation and training, may occur if
present trends continue for an extended period. In addition, because of periodic
inspections required by certain regulatory agencies, 15 of Diamond Offshore's
rigs will be in the shipyard for a portion of 1998. At March 31, 1998, five of
these 15 inspections were completed and one was in progress. Diamond Offshore
intends to focus on returning these rigs to operations as soon as reasonably
possible, in order to minimize the downtime and associated loss of revenues.
In addition, the recent improvement in the current results of operations and
prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by Diamond Offshore's
competitors. A significant increase in the supply of technologically advanced
rigs capable of drilling in deep water may have an adverse effect on the average
operating dayrates for Diamond Offshore's rigs, particularly its more advanced
semisubmersible units, and on the overall utilization level of Diamond
Offshore's fleet. In such case, Diamond Offshore's results of operations would
be adversely affected.
The offshore contract drilling industry historically has been highly
competitive and cyclical and although not currently a material factor in Diamond
Offshore's markets, weak commodity prices, economic problems in countries
outside the United States, or a number of other influencing factors could
curtail spending by oil and gas companies and possibly depress the offshore
drilling industry. Therefore, Diamond Offshore cannot predict whether and, if
so, to what extent, current market conditions will continue.
Watches and Clocks
- ------------------
Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Bulova's cash
and cash equivalents, and investments amounted to $47.0 million at March 31,
1998, as compared to $29.1 million at December 31, 1997. Funds for other capital
expenditures and working capital requirements are expected to be provided from
operations.
Investments:
- -----------
Investment activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments. Equity securities, which are considered
part of the Company's trading portfolio, short sales and derivative instruments
are marked to market and reported as investment gains or losses in the income
statement. The remaining securities are carried at fair value with a net
unrealized loss of $4.0 and $3.2 million at March 31, 1998 and December 31,
1997, respectively.
The Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) for its asset and liability
management activities, (ii) for income enhancements for its portfolio management
strategy, and (iii) to benefit from anticipated future movements in the
underlying markets that Company management expects to occur. If such movements
do
Page 40
not occur or if the market moves in the opposite direction from what management
expects, significant losses may occur.
Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote.
The Company does not believe that any of the derivative instruments utilized
by it are unusually complex or volatile, nor do these instruments contain
imbedded leverage features which would expose the Company to a higher degree of
risk. See "Results of Operations" and "Quantitative and Qualitative Disclosures
about Market Risk" for additional information with respect to derivative
instruments, including recognized gains and losses on these instruments. See
also Note 4 of the Notes to Consolidated Financial Statements in the 1997 Annual
Report on Form 10-K.
Insurance
- ---------
A summary of CNA's general account fixed maturity securities portfolio and
short-term investments, at carrying value, are as follows:
Change in
Unrealized
March 31, December 31, Gains
1998 1997 (Losses)
------------------------------------
(In millions)
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies . $12,373.0 $12,980.0 $ (37.0)
Asset-backed securities ............. 5,370.0 4,804.0 (8.0)
Tax exempt securities ............... 5,148.0 4,724.0 (37.0)
Taxable ............................. 6,906.0 7,040.0 24.0
---------------------------------
Total fixed income securities .. 29,797.0 29,548.0 (58.0)
Stocks ................................ 982.0 814.0 62.0
Short-term and other investments....... 5,926.0 5,829.0 (34.0)
Derivative security investments ....... 11.0 12.0
---------------------------------
Total .......................... $36,716.0 $36,203.0 $ (30.0)
=================================
Short-term investments:
Commercial paper .................... $ 2,064.0 $ 1,850.0
Security repurchase collateral ...... 548.0 154.0
Escrow .............................. 990.0 1,065.0
Others .............................. 1,293.0 1,815.0
Other investments ..................... 1,042.0 957.0
-----------------------
Total short-term and other
investments ................... $ 5,937.0 $ 5,841.0
=======================
CNA's general account investment portfolio is managed to maximize after tax
Page 41
investment return, while minimizing credit risks, with investments concentrated
in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of CNA's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, tax and credit considerations, or other similar factors. Accordingly, the
fixed maturity securities are classified as available for sale.
CNA invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk (principally interest rate,
equity price and foreign currency risk). CNA also uses derivatives to mitigate
the risk associated with its indexed group annuity contract by purchasing S&P
500 futures contracts in a notional amount equal to the original customer
deposit.
CNA considers its derivatives as being held for purposes other than trading.
Derivative securities, except for interest rate swaps associated with certain
corporate borrowings, are recorded at fair value at the reporting date with
changes in market value reflected in investment gains and losses. The interest
rate swaps on corporate borrowings are accounted for on the accrual basis with
the related income or expense recorded as an adjustment to interest expense.
The general account portfolio consists primarily of high quality (BBB or
higher) marketable fixed maturity securities, approximately 95.6% of which are
rated as investment grade. At March 31, 1998, tax exempt securities and short-
term investments excluding collateral for securities sold under repurchase
agreements, comprised approximately 14.0% and 11.8%, respectively, of the
general account's total investment portfolio compared to 13.1% and 13.1%,
respectively, at December 31, 1997. Historically, CNA has maintained short-term
assets at a level that provided for liquidity to meet its short-term
obligations, as well as reasonable contingencies and anticipated claim payout
patterns. Short-term investments at both March 31, 1998 and December 31, 1997
are substantially higher than historical levels in anticipation of additional
Fibreboard-related claim payments. The increase in short-term investments at
March 31, 1998 compared to December 31, 1997, is due to increased collateral
related to security repurchase transactions. Collateral for securities sold
under repurchase agreements increased $394.0 million to $548.0 million. At March
31, 1998, the major components of the short-term investment portfolio consist
primarily of high grade commercial paper and U.S. Treasury bills.
As of March 31, 1998, the market value of CNA's general account investments in
fixed maturities was $29.8 billion and was greater than amortized cost by
approximately $470.0 million. This compares to a market value of $29.5 billion
and $528.0 million of net unrealized investment gains at December 31, 1997. The
gross unrealized investment gains and losses for the fixed maturity securities
portfolio at March 31, 1998, were $579.0 and $109.0 million, respectively,
compared to $644.0 and $116.0 million, respectively, at December 31, 1997. The
decline in unrealized investment gains is attributable, in large part, to CNA
taking advantage of favorable market conditions by selling securities and
recognizing investment gains.
Net unrealized investment gains on general account fixed maturities at March
31, 1998 include net unrealized investment gains on high yield securities of
$31.0 million, compared to net unrealized investment losses of $2.0 million at
December 31, 1997. High yield securities are bonds rated as below investment
grade by bond rating agencies, plus private placements and other unrated
securities which, in the opinion of management, are below investment grade
(below BBB). Fair values of high yield securities in the general account
decreased $200.0 million to approximately $1.3 billion at March 31, 1998 when
compared to December 31, 1997.
At March 31, 1998, total Separate Account cash and investments amounted to
approximately $5.6 billion with taxable fixed maturity securities representing
approximately 80% of the Separate Accounts' portfolios. Approximately 70.6% of
Page 42
Separate Account investments are used to fund guaranteed investments for which
CNA's life insurance affiliate guarantees principal and a specified return to
the contract holders. The duration of fixed maturity securities included in the
guaranteed investment portfolio are matched approximately with the corresponding
payout pattern of the liabilities of the guaranteed investment contracts. The
fair value of all fixed maturity securities in the guaranteed investment
portfolio was $3.6 billion at March 31, 1998 and $3.8 billion at December 31,
1997. At March 31, 1998, amortized cost was less than fair value by
approximately $88.0 million, as compared to approximately $71.0 million at
December 31, 1997. The gross unrealized investment gains and losses for the
guaranteed investment fixed maturity securities portfolio at March 31, 1998 were
$102.0 and $14.0 million, respectively, as compared to an unrealized gain of
$87.0 million and an unrealized loss of $16.0 million at December 31, 1997.
Carrying values of high yield securities in the guaranteed investment
portfolio were $220.0 and $310.0 million at March 31, 1998 and December 31,
1997, respectively. Net unrealized investment losses on high yield securities
held in such Separate Accounts were $2.0 million at March 31, 1998, compared to
$1.0 million at December 31, 1997.
High yield securities generally involve a greater degree of risk than that of
investment grade securities. Expected returns should, however, compensate for
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. At March 31, 1998, CNA's concentration in
high yield bonds, including Separate Accounts, was approximately 2.8% of its
total assets. In addition, CNA's investment in mortgage loans and investment
real estate are substantially below the industry average, representing less than
one quarter of one percent of its total assets.
Included in CNA's fixed maturity securities at March 31, 1998 (general and
guaranteed investment portfolios) are $7.7 billion of asset-backed securities,
consisting of approximately 36.5% in collateralized mortgage obligations
("CMO's"), 28.4% in corporate asset-backed obligations, 24.6% in corporate
mortgage backed security pass thru obligations, and 10.5% in U.S. government
agency issued pass-through certificates. The majority of CMO's held are
corporate mortgaged backed securities, which are actively traded in liquid
markets and are priced by broker-dealers. At March 31, 1998, the fair value of
asset-backed securities exceeded the amortized cost by approximately $119.0
million compared to $114.0 million at December 31, 1997. CNA limits the risks
associated with interest rate fluctuations and prepayment by concentrating its
CMO investments in early planned amortization classes with relatively short
principal repayment windows.
At March 31, 1998, 43.1% of the general account's fixed maturity securities
portfolio was invested in U.S. government securities, 33.1% in other AAA rated
securities and 13.0% in AA and A rated securities. CNA's guaranteed investment
fixed maturity securities portfolio is comprised of 4.4% U.S. government
securities, 63.2% in other AAA rated securities and 13.9% in AA and A rated
securities. These ratings are primarily from Standard and Poor's (95.6% of the
general account and 93.8% of the guaranteed investment fixed maturity account).
Page 43
Results of Operations:
- ----------------------
Revenues decreased by $144.0 million, or 2.9%, and net income decreased by
$323.0 million, for the three months ended March 31, 1998 as compared to the
prior year. The following table sets forth the major sources of the Company's
consolidated revenues and net (loss) income.
Three Months Ended
March 31,
-----------------------
1998 1997
-----------------------
(In millions)
Revenues (a):
Property and casualty insurance .................... $3,299.6 $3,075.3
Life insurance ..................................... 1,029.8 1,041.4
Cigarettes ......................................... 575.7 516.4
Hotels ............................................. 48.5 45.9
Offshore drilling .................................. 292.6 207.5
Watches and clocks ................................. 32.3 30.1
Investment (loss) income-net
(non-insurance companies) ......................... (481.1) 26.5
Other and eliminations--net ........................ (2.3) (4.0)
-----------------------
$4,795.1 $4,939.1
=======================
Net (loss) income (a):
Property and casualty insurance .................... $ 168.3 $ 120.7
Life insurance ..................................... 41.5 34.7
Cigarettes ......................................... 22.1 79.5
Hotels ............................................. 1.5 .2
Offshore drilling .................................. 37.8 26.8
Watches and clocks ................................. 2.3 1.5
Investment (loss) income-net
(non-insurance companies) ......................... (315.1) 14.5
Corporate interest expense ......................... (22.3) (15.8)
Unallocated corporate expense and other-net ........ (19.8) (22.8)
-----------------------
$ (83.7) $ 239.3
=======================
Page 44
(a) Includes investment (losses) gains as follows:
Three Months Ended
March 31,
----------------------
1998 1997
----------------------
Revenues:
Property and casualty insurance .................... $ 134.6 $ 18.3
Life insurance ..................................... 48.2 29.1
Investment (loss) income-net ....................... (533.4) (18.5)
----------------------
$(350.6) $ 28.9
======================
Net (loss) income:
Property and casualty insurance .................... $ 72.3 $ 10.1
Life insurance ..................................... 25.7 14.9
Investment (loss) income-net ....................... (346.7) (13.9)
----------------------
$(248.7) $ 11.1
======================
Insurance
- ---------
Property and casualty revenues, excluding investment gains, increased by
$108.0 million, or 3.5%, for the three months ended March 31, 1998, as compared
to the same period a year ago.
Property and casualty premium revenues increased by $56.5 million, or 2.3%,
for the three months ended March 31, 1998, from the prior year's comparable
period. The increase is attributable to higher involuntary risk earned premiums
of approximately $138.0 million and an increase in personal lines premiums of
approximately $42.0 million, partially offset by lower commercial lines premiums
of approximately $116.0 million. Involuntary risk premium for the first quarter
of 1997 was $(75) million, reflecting reductions in estimates of premium for
1996 and prior periods, primarily in the workers' compensation line of business.
The decrease in involuntary risk premium in 1997, stemmed from a greater
willingness on the part of the involuntary market, including CNA, to write these
types of risks. The increase in personal lines continues the trend seen in 1997
and is attributable to growth in private passenger automobile business and
individual long-term care. The decrease in commercial lines is primarily due to
a decrease in accident and health business. Net investment income decreased by
$8.0 million, or 1.7%, for the three months ended March 31, 1998, compared with
the same period in the prior year, due to lower yielding investments. The bond
segment of the investment portfolio yielded 6.4% in the first quarter of 1998
compared with 6.7% for the same period a year ago.
Life insurance revenues, excluding investment gains, decreased by $30.7
million, or 3.0%, as compared to the same period a year ago. Life premium
revenues decreased by $35.0 million, or 4.0%, for the three months ended March
31, 1998. The decline reflects lower premiums from CNA's Federal Employees
Health Benefit Plan ("FEHBP") and reduced individual annuities, partially offset
by growth in term business. The decrease in individual annuity premiums is
mainly due to a shift in marketing efforts towards more profitable products. The
decrease in FEHBP premiums is the result of lower claims submitted during the
first three months of 1998 as compared to the same period for 1997. Life net
investment income increased by $6.0 million, or 5.7%, for the three months ended
March 31, 1998, compared to the same period a year ago, due to a larger asset
base generated from increased cash flows. The bond segment of the life
investment portfolio yielded approximately 6.9% and 6.8% in the three months
ended March 31, 1998 and 1997, respectively.
Page 45
Property and casualty underwriting losses for the three months ended March 31,
1998 were $288.0 million, compared to $293.2 million for the same period in
1997. The decrease in operating income stems primarily from reduced investment
income, including a reduction in tax exempt interest and dividends which was
partially offset by lower catastrophe losses. Pre-tax catastrophe losses were
approximately $24.0 million in the first quarter of 1998 as compared to $31.0
million in 1997.
The components of CNA's investment gains are as follows:
Three Months Ended
March 31,
----------------------
1998 1997
----------------------
(In millions)
Bonds:
U.S. Government..................................... $ 50.0 $ 5.9
Taxable ............................................ 29.0 .5
Asset-backed........................................ 13.0 6.8
Tax exempt ......................................... 16.0 10.4
----------------------
Total bonds................................... 108.0 23.6
Stocks............................................... (4.0) 29.7
Derivative instruments .............................. (7.0) 3.3
Separate Accounts and other ......................... 86.0 9.4
----------------------
Total investment gains ....................... $183.0 $66.0
======================
CNA's primary property and casualty subsidiary, Continental Casualty Company
("Casualty"), is party to litigation with Fibreboard Corporation ("Fibreboard")
involving coverage for certain asbestos-related claims and defense costs (see
Note 5 of the Notes to Consolidated Condensed Financial Statements).
Cigarettes
- ----------
Revenues increased by $59.3 or 11.5% and net income declined by $57.4 million,
or 72.2%, respectively, for the three months ended March 31, 1998 as compared to
the corresponding period of the prior year.
The increase in revenues is primarily composed of an increase of approximately
$58.1 million, or 11.3%, due to higher average unit prices, partially offset by
a decrease of approximately $4.9 million, or 1.0%, reflecting lower unit sales
volume for the three months ended March 31, 1998, as compared to the prior year.
Net income for the three months ended March 31, 1998 includes a pre-tax charge
of $126.0 million ($75.3 million after taxes) to reflect the settlement of
tobacco litigation in Minnesota. Excluding this charge, net income would have
increased by $17.9 million, or 22.5%, as a result of the improved revenues,
partially offset by higher legal expenses and costs associated with the
settlement of certain tobacco related litigation.
Lorillard's unit sales volume declined by 2.2%, while Newport's sales volume
increased by 2.3%, for the quarter ended March 31, 1998, as compared to the
corresponding period of the prior year. Newport, a full price brand, accounted
for 78.2% of Lorillard's unit sales. Discount brand sales have decreased from an
average of 31.4% of industry sales during 1994 to an average of 27.0% during
Page 46
1997. At March 31, 1998, they represented 26.8% of industry sales.
Hotels
- ------
Revenues and net income increased by $2.6 and $1.3 million for the three
months ended March 31, 1998, as compared to the prior year, due primarily to
higher overall average room rates and increased occupancy rates at the New York
hotels. These increases were partially offset by lower results from the Loews
Monte Carlo hotel.
Offshore drilling
- -----------------
Revenues and net income increased by $85.1 and $11.0 million, or 41.0% and
41.0%, respectively, for the three months ended March 31, 1998, as compared to
the prior year.
Revenues from semisubmersible rigs increased by $64.7 million, or 31.2%, for
the three months ended March 31, 1998. The revenue increase is due to higher
dayrates ($57.1 million) and increased utilization rates ($23.8 million)
recognized by semisubmersible rigs located in the North Sea and the Gulf of
Mexico. These increases were partially offset by revenues foregone ($14.6
million) during mandatory inspections. Revenues from jackup rigs increased by
$16.5 million, or 8.0%, due to improvements in dayrates, primarily in the Gulf
of Mexico ($20.5 million).
Net income for the three months ended March 31, 1998 increased due primarily
to the higher revenues discussed above, partially offset by increased operating
costs associated with mandatory inspections and additional repairs during the
three months ended March 31, 1998.
Watches and Clocks
- ------------------
Revenues and net income increased by $2.2 and $.8 million, or 7.3% and 53.3%,
respectively, for the three months ended March 31, 1998 as compared to the prior
year, due primarily to increased watch unit prices and sales volume. Net income
also benefited from an increased gross profit percentage attributable to a
favorable product sales mix, partially offset by higher advertising costs.
Other
- -----
Revenues and net income decreased by $505.9 and $333.1 million, respectively,
for the three months ended March 31, 1998 as compared to the prior year.
Page 47
The components of investment gains (losses) included in Investment (loss)
income-net are as follows:
Three Months Ended
March 31,
1998 1997
------------------
(In millions)
Revenues:
Derivative instruments (1) ........................... $(378.6) $(23.3)
Short-term investments, primarily U.S. government
securities .......................................... (8.7) 1.0
Equity securities, including short positions (1) ..... (146.6) (14.0)
Other ................................................ .5 17.8
------------------
(533.4) (18.5)
Income tax benefit ..................................... 186.7 6.5
Minority interest ...................................... (1.9)
------------------
Net loss .......................................... $(346.7) $(13.9)
==================
(1) Includes losses on short sales, equity index futures and options
aggregating $542.3 and $46.2 for the three months ended March 31, 1998 and
1997, respectively. The Company continues to maintain these positions and
has experienced additional significant losses since March 31, 1998.
Exclusive of securities transactions, revenues increased $9.0 million, or
22.0%, for the three months ended March 31, 1998 due primarily to higher
interest income. Net loss increased by $.3 million, or 2.9%, for the three
months ended March 31, 1998 due primarily to higher interest expenses, partially
offset by the increased interest income.
Year 2000 Issue
- ---------------
Most of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs contain time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment of the scope of this problem and is
working to modify or replace the affected software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project cost is estimated at approximately $70.0 to $80.0
million. To date, the Company has incurred and expensed approximately $35.0
million.
The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company. In addition, due to the interdependent
Page 48
nature of computer systems, the Company may be adversely impacted depending upon
whether it or other entities not affiliated with the Company (vendors and
business partners) address this issue successfully. In addition, property and
casualty insurance subsidiaries may have an underwriting exposure related to the
Year 2000. Although CNA has not received any claims for coverage from its
policyholders based on losses resulting from Year 2000 issues, there can be no
assurance that policyholders will not suffer losses of this type and seek
compensation under CNA's insurance policies. If any claims are made, coverage,
if any, will depend on the facts and circumstances of the claim and the
provisions of the policy. At this time, CNA is unable to determine whether the
adverse impact, if any, in connection with the foregoing circumstances would be
material.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Accounting Standards
- --------------------
In December 1997, the AICPA's Accounting Standards Executive Committee issued
SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting by all entities that are
subject to insurance-related assessments. It requires that entities recognize
liabilities for insurance-related assessments when all of the following criteria
have been met: an assessment has been imposed or a probable assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements; and the amount
of the assessment can be reasonably estimated. This SOP is effective for fiscal
years beginning after December 15, 1998. The Company is currently evaluating the
effects of this SOP on its accounting for insurance-related assessments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement standardizes
disclosure requirements for pension and other postretirement benefits to the
extent practicable, requires additional information on changes in benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful to users
of financial statements. It also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement supersedes
the disclosure requirements of a number of earlier opinions of the FASB and does
not address measurement or recognition. It is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
effects of this Statement on its benefit plan disclosures.
In March 1998, the AICPA's Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for costs of computer
software developed or obtained for internal use and for determining whether
computer software is for internal use. For purposes of this SOP, internal-use
software is software acquired, internally developed or modified solely to meet
the entity's internal needs for which no substantive plan exists or is being
developed to market the software externally during the software's development or
modification. Accounting treatment for costs associated with software developed
or obtained for internal use, as defined by this SOP, is based upon a number of
factors, including the point in time during the project that costs are incurred
as well as the types of costs incurred. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the effects of this SOP.
Page 49
Forward-Looking Statements
- --------------------------
When included in this Report, the words "believes," "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, competition, changes in financial
markets (interest rate, currency, commodities and stocks), changes in foreign,
political, social and economic conditions, regulatory initiatives and compliance
with governmental regulations, judicial decisions and rulings in smoking and
health litigation, the impact of bills introduced in Congress in relation to
tobacco operations, implementation of the Proposed Resolution, changes in
foreign and domestic oil and gas exploration and production activity, customer
preferences and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
Loews Corporation is a large diversified financial services company. As such,
it has significant amounts of financial instruments that involve market risk.
The Company's measure of market risk exposure represents an estimate of the
change in fair value of its financial instruments. Changes in the trading
portfolio would be recognized as net losses in the income statement. Market risk
exposure is presented for each class of financial instrument held by the Company
at March 31, assuming immediate adverse market movements of the magnitude
described below. The Company believes that the various rates of adverse market
movements represent a measure of exposure to loss under hypothetically assumed
adverse conditions. The estimated market risk exposure represents the
hypothetical loss to future earnings and does not represent the maximum possible
loss nor any expected actual loss, even under adverse conditions, because actual
adverse fluctuations would likely differ. In addition, since the Company's
investment portfolio is subject to change based on its portfolio management
strategy as well as in response to changes in the market, these estimates are
not necessarily indicative of the actual results which may occur.
The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than trading
purposes.
Page 50
Trading portfolio:
March 31, 1998
- --------------------------------------------------------------------------------
Fair Value Market
Category of risk exposure: Asset (Liability) Risk
- --------------------------------------------------------------------------------
(In millions)
Equity markets (1):
Equity securities $ 209.3 $ 52.8
Options purchased 193.3 (177.1)
Options written (18.9) (3.3)
Futures (263.7)
Short sales (996.8) (249.2)
Commodities:
Oil (2):
Energy purchase obligations (11.6) (6.5)
Gold (3):
Options purchased 10.3 (10.3)
Options written (3.4) 3.4
Other (4) (10.4)
- --------------------------------------------------------------------------------
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of (1) an
increase in equity prices of 25%, (2) a decline in oil prices of 20%,
(3) an increase in gold prices of 20% and (4) a decrease of 10%. Adverse
changes on options which differ from those presented above would not
necessarily result in a proportionate change to the estimated market
risk exposure.
The most significant areas of market risk in the Company's trading portfolio
result from positions held in S&P futures contracts, short sales of certain
equity securities and put options purchased on the S&P 500 index. The Company
enters into these positions primarily to benefit from anticipated future
movements in the underlying markets that Company management expects to occur. If
such movements do not occur or if the market moves in the opposite direction
from what management expects, significant losses may occur. The Company
continues to maintain these positions and has experienced additional significant
losses since March 31, 1998.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company and
has responsibility to ensure that the investment positions are consistent with
that strategy and the level of risk acceptable to it. The Company may manage
risk by buying or selling instruments or entering into offsetting positions.
Page 51
Other than trading portfolio:
March 31, 1998
- --------------------------------------------------------------------------------
Fair Value Market
Category of risk exposure: Asset (Liability) Risk
- --------------------------------------------------------------------------------
(In millions)
Equity market (1):
Equity securities:
CNA Financial general accounts (a) $ 982.0 $ (263.0)
CNA Financial separate accounts 225.0 (56.0)
Equity index futures, separate accounts (b) (200.0)
Interest rate (2):
Fixed maturities (a) 31,558.3 (1,484.0)
Short-term investments (a) 8,019.6 (6.0)
Interest rate swaps (1.0) 13.0
Separate Accounts:
Fixed maturities 4,490.0 (205.0)
Short-term investments 737.0 (1.0)
Long-term debt (5,841.1)
- --------------------------------------------------------------------------------
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of (1) a
decrease in equity prices of 25% and (2) an increase in interest rates
of 100 basis points.
(a) Certain securities are denominated in foreign currencies. Assuming a 20%
decline in the underlying exchange rates would result in an aggregate
foreign currency exchange rate risk of $(298.0).
(b) This market risk would be offset by decreases in liabilities to customers
under variable insurance contracts.
Equity Price Risk - The Company has exposure to equity price risk as a result
of its investment in equity securities and equity derivatives. Equity price risk
results from changes in the level or volatility of equity prices which affect
the value of equity securities or instruments which derive their value from such
securities or indexes. Equity price risk was measured assuming an instantaneous
25% change in the underlying reference price or index from its level at March
31, 1998, with all other variables held constant.
Interest Rate Risk - The Company has exposure to interest rate risk, arising
from changes in the level or volatility of interest rates or the shape and slope
of the yield curve. The Company attempts to mitigate its exposure to interest
rate risk by utilizing instruments such as interest rate swaps, interest rate
caps, commitments to purchase securities, options, futures and forwards. The
Company monitors its sensitivity to interest rate risk by evaluating the change
in its financial assets and liabilities relative to fluctuations in interest
rates. The evaluation is made using an instantaneous parallel yield curve shift
of varying magnitude on a static balance sheet to determine the effect such a
change in rates would have on the Company's market value at risk and the
resulting effect on shareholders' equity. The analysis presents the sensitivity
of the market value of the Company's financial instruments to selected changes
in market rates and prices which the Company believes are reasonably possible
over a one-year period.
The analysis assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of the period remains constant
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over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
time to maturity. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Accordingly the
analysis may not be indicative of, is not intended to, and does not provide a
precise forecast of the effect of changes of market interest rates on the
Company's earnings or shareholders' equity. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.
The Company's long-term debt, including interest rate swap agreements, as of
March 31, 1998 is denominated in U.S. Dollars. The Company's debt has been
primarily issued at fixed rates, and as such, interest expense would not be
impacted by interest rate shifts.
The sensitivity analysis assumes an instantaneous shift in market rates
increasing 100 basis points from their levels at March 31, 1998, with all other
variables held constant.
Foreign Exchange Risk - Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the value of
financial instruments. The Company has foreign exchange exposure when it buys or
sells foreign currencies or financial instruments denominated in a foreign
currency. This exposure is mitigated by the Company's asset/liability matching
strategy and through the use of futures for those instruments which are not
matched. The Company's foreign transactions are primarily denominated in
Canadian Dollars, British Pounds, German Deutschmarks and Japanese Yen. The
sensitivity analysis also assumes an instantaneous 20% change in the foreign
currency exchange rates versus the U.S. Dollar from their levels at March 31,
1998, with all other variables held constant.
Commodity Price Risk - The Company has exposure to commodity price risk as a
result of its investments in energy purchase obligations, gold options and other
investments. Commodity price risk results from changes in the level or
volatility of commodity prices that impact instruments which derive their value
from such commodities. Commodity price risk was measured assuming an
instantaneous change of 20% and 10% in the value of the underlying commodities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Note 5 of the Notes to Consolidated
Condensed Financial Statements in Part I.
2. Lorillard is involved in various lawsuits involving tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from the use of cigarettes or from exposure to tobacco smoke. Information
involving such lawsuits is incorporated by reference to Note 5 of the Notes to
Consolidated Condensed Financial Statements in Part I.
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Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits--
(10.1) State of Minnesota Settlement Agreement and Stipulation for Entry
of Consent Judgment.
(10.2) State of Minnesota Consent Judgment.
(10.3) State of Minnesota Settlement Agreement and Release.
(10.4) Agreement to Pay State of Minnesota Attorneys' Fees and Costs.
(10.5) Agreement to Pay Blue Cross and Blue Shield of Minnesota Attorneys'
Fees and Costs.
(10.6) State of Minnesota State Escrow Agreement.
(27.1) Financial Data Schedule for the three months ended March 31, 1998.
(b) Current reports on Form 8-K--
The Company filed a report on Form 8-K on February 3, 1998 stating that
together with other companies in the United States tobacco industry, the
Company's subsidiary, Lorillard Tobacco Company, entered into a
Comprehensive Settlement Agreement and Release with the State of Texas to
settle and resolve with finality all present and future economic claims by
the State and its subdivisions relating to the use of or exposure to
tobacco products.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LOEWS CORPORATION
-----------------
(Registrant)
Dated: May 15, 1998 By /s/ Peter W. Keegan
-------------------------
PETER W. KEEGAN
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
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