================================================================================
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 June 30, 1997
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 1-6541
------
LOEWS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2646102
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
667 MADISON AVENUE, NEW YORK, N.Y. 10021-8087
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 521-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(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
--------- ---------
Class Outstanding at August 1, 1997
- -------------------------- -------------------------------
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--
June 30, 1997 and December 31, 1996 ........................... 3
Consolidated Condensed Statements of Income--
Three and six months ended June 30, 1997 and 1996 ............. 4
Consolidated Condensed Statements of Cash Flows--
Six months ended June 30, 1997 and 1996 ....................... 5
Notes to Consolidated Condensed Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 31
Part II. Other Information
Item 1. Legal Proceedings ......................................... 50
Item 4. Submission of Matters to a Vote of Security Holders ....... 50
Item 6. Exhibits and Reports on Form 8-K .......................... 52
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- --------------------------------------------------------------------------------
(Amounts in millions of dollars) June 30, December 31,
1997 1996
-----------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, amortized cost of $27,685.2
and $29,319.3 ................................ $27,753.8 $29,478.3
Equity securities, cost of $854.9 and $981.8 957.8 1,136.3
Other investments ............................. 958.0 997.9
Short-term investments ........................ 11,002.5 8,304.9
-----------------------------
Total investments .......................... 40,672.1 39,917.4
Cash ............................................ 478.2 305.7
Receivables-net ................................. 14,198.6 13,862.1
Property, plant and equipment-net ............... 2,437.2 2,225.1
Deferred income taxes ........................... 1,092.1 1,138.0
Goodwill and other intangible assets-net ........ 548.6 562.4
Other assets .................................... 1,916.4 1,697.2
Deferred policy acquisition costs of insurance
subsidiaries ................................... 2,122.9 1,854.2
Separate Account business ....................... 6,023.3 6,120.9
-----------------------------
Total assets ............................... $69,489.4 $67,683.0
=============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $40,971.6 $40,415.1
Accounts payable and accrued liabilities ........ 1,909.7 3,110.9
Payable for securities purchased ................ 1,831.8 966.4
Securities sold under repurchase agreements ..... 1,618.6 548.3
Long-term debt, less unamortized discount ....... 4,489.9 4,370.7
Deferred credits and participating policyholders'
equity ......................................... 1,727.1 1,538.6
Separate Account business ....................... 6,023.3 6,120.9
-----------------------------
Total liabilities .......................... 58,572.0 57,070.9
Minority interest ............................... 2,049.6 1,880.9
Shareholders' equity ............................ 8,867.8 8,731.2
-----------------------------
Total liabilities and shareholders' equity . $69,489.4 $67,683.0
=============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Income
- -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Property and casualty ................. $2,529.4 $2,478.6 $4,999.9 $ 4,986.4
Life .................................. 817.5 840.8 1,692.5 1,625.0
Investment income, net of expenses ...... 604.3 606.8 1,219.8 1,235.5
Investment (losses) gains ............... (295.4) 178.4 (266.6) 490.2
Manufactured products (including excise
taxes of $124.3, $121.9, $234.4 and
$231.2) ................................ 625.5 588.4 1,166.6 1,109.2
Other ................................... 467.8 351.6 876.0 642.8
--------------------------------------------------
Total ................................ 4,749.1 5,044.6 9,688.2 10,089.1
--------------------------------------------------
Expenses:
Insurance claims and policyholders'
benefits ............................... 2,860.1 2,774.5 5,752.5 5,561.4
Amortization of deferred policy
acquisition costs ...................... 595.9 484.4 1,116.2 1,057.0
Cost of manufactured products sold ...... 260.9 251.2 498.1 481.9
Selling, operating, advertising and
administrative expenses ................ 750.8 806.3 1,542.1 1,523.3
Interest ................................ 76.3 69.8 151.1 160.6
--------------------------------------------------
Total ................................ 4,544.0 4,386.2 9,060.0 8,784.2
--------------------------------------------------
205.1 658.4 628.2 1,304.9
--------------------------------------------------
Income taxes ............................ 69.7 226.4 196.1 445.1
Minority interest ....................... 71.6 53.3 129.0 112.3
--------------------------------------------------
Total ................................ 141.3 279.7 325.1 557.4
--------------------------------------------------
Net income ................................ $ 63.8 $ 378.7 $ 303.1 $ 747.5
==================================================
Net income per share ...................... $ .55 $ 3.25 $ 2.63 $ 6.38
==================================================
Cash dividends per share .................. $ .25 $ .25 $ .50 $ .50
==================================================
Weighted average number of shares
outstanding .............................. 115.0 116.6 115.0 117.2
==================================================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------
(Amounts in millions) Six Months Ended June 30,
1997 1996
----------------------------
<S> <C> <C>
Operating Activities:
Net income .................................... $ 303.1 $ 747.5
Adjustments to reconcile net income to net
cash provided by operating activities-net .... 518.4 (194.9)
Changes in assets and liabilities-net:
Reinsurance receivable ...................... 366.2 52.7
Other receivables ........................... (475.8) (427.1)
Deferred policy acquisition costs ........... (268.7) (204.6)
Insurance reserves and claims ............... 563.7 311.5
Accounts payable and accrued liabilities .... (1,200.9) (447.3)
Trading securities .......................... (364.5) (41.6)
Other-net ................................... 25.3 207.9
---------------------------
(533.2) 4.1
---------------------------
Investing Activities:
Purchases of fixed maturities ................. (19,476.5) (16,863.6)
Proceeds from sales of fixed maturities ....... 20,419.1 17,127.6
Proceeds from maturities of fixed maturities .. 1,105.4 1,311.3
Change in securities sold under repurchase
agreements ................................... 1,070.3 135.1
Purchases of equity securities ................ (563.9) (602.1)
Proceeds from sales of equity securities ...... 781.5 779.0
Change in short-term investments .............. (2,330.2) (1,424.1)
Purchases of property, plant and equipment .... (399.8) (209.5)
Change in other investments ................... 46.3 293.3
---------------------------
652.2 547.0
---------------------------
Financing Activities:
Dividends paid to shareholders ................ (57.5) (58.7)
Purchases of treasury shares .................. (137.6)
Issuance of long-term debt .................... 395.3 9.1
Principal payments on long-term debt .......... (204.1) (320.3)
Net change in revolving line of credit ........ (63.0) 70.0
Net change in short-term debt ................. (10.0) (4.8)
Receipts credited to policyholders ............ 4.3 8.6
Withdrawals of policyholder account balances .. (11.5) (17.9)
---------------------------
53.5 (451.6)
---------------------------
Net change in cash .............................. 172.5 99.5
Cash, beginning of period ....................... 305.7 241.7
---------------------------
Cash, end of period ............................. $ 478.2 $ 341.2
===========================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- --------------------------------------------------------------------------------
(Dollars in millions, except per share data)
1. Reference is made to Notes to Consolidated Financial Statements in the 1996
Annual Report to Shareholders which should be read in conjunction with these
consolidated condensed financial statements.
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in 1997.
2. 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, to provide greater
diversification of risk and to 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.
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 its states of domiciles,
CNA receives collateral primarily in the form of bank letters of credit,
securing a large portion of the recoverables.
The effects of reinsurance on earned premiums, are as follows:
<TABLE>
<CAPTION>
% %
Direct Assumed Ceded Net Assumed Direct Assumed Ceded Net Assumed
--------------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------------
---------------- 1997 -------------------- ---------------- 1996 -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life ....... $ 435.4 $ 60.5 $ 56.7 $ 439.2 13.8% $ 353.9 $ 57.2 $ 15.2 $ 395.9 14.4%
Accident and
health .... 1,856.1 57.3 65.2 1,848.2 3.1 1,658.4 89.4 33.2 1,714.6 5.2
Property and
casualty .. 4,303.5 560.0 458.5 4,405.0 12.7 4,249.1 1,002.8 751.0 4,500.9 22.3
--------------------------------------------------------------------------------------
Total .... $6,595.0 $ 677.8 $ 580.4 $6,692.4 10.1% $6,261.4 $1,149.4 $799.4 $6,611.4 17.4%
======================================================================================
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------------------------
---------------- 1997 -------------------- ---------------- 1996 -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life ....... $ 208.1 $ 31.8 $ 32.4 $ 207.5 15.3% $ 209.6 $ 30.3 $ 10.8 $ 229.1 13.2%
Accident and
health .... 911.0 29.7 34.3 906.4 3.3 827.2 44.6 4.5 867.3 5.1
Property and
casualty .. 2,139.5 323.6 230.1 2,233.0 14.5 2,043.4 588.1 408.5 2,223.0 26.5
--------------------------------------------------------------------------------------
Total .... $3,258.6 $ 385.1 $ 296.8 $3,346.9 11.5% $3,080.2 $ 663.0 $423.8 $3,319.4 20.0%
======================================================================================
</TABLE>
Page 6
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $146.5, $125.5, $394.0 and $604.0 for the three and six months
ended June 30, 1997 and 1996, respectively.
In the above table, life premium revenue is primarily 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.
3. The Company's receivables are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------------------
<S> <C> <C>
Reinsurance .................................. $ 6,598.8 $ 6,965.0
Other insurance .............................. 6,458.3 5,942.5
Security sales ............................... 525.9 299.7
Accrued investment income .................... 451.3 534.3
Other ........................................ 456.0 412.0
---------------------------
Total ................................. 14,490.3 14,153.5
Less allowance for doubtful accounts and
cash discounts .............................. 291.7 291.4
---------------------------
Receivables-net ....................... $14,198.6 $13,862.1
===========================
</TABLE>
4. Shareholders' equity:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------------------
<S> <C> <C>
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 ............ 8,462.4 8,216.8
Unrealized appreciation ...................... 124.6 233.6
--------------------------
Total ................................. $8,867.8 $8,731.2
==========================
</TABLE>
Page 7
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 or is subsequently successfully attacked. The implementation of
either the Global Settlement or the Trilateral Agreement would have the
effect of settling Casualty's litigation with Fibreboard.
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 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 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 the Global Settlement Agreement, and remanded to the Fifth Circuit
for reconsideration in light of the Supreme Court's decision in Amchem
Products Co. v. Windsor. The Fifth Circuit has not yet rendered a decision
on this remand.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
Global Settlement - 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 is
presently before the Fifth Circuit on remand by order of the Supreme Court
vacating the Fifth Circuit's previous decision approving the Global
Page 8
Settlement. There is limited precedent for settlements which determine the
rights of future claimants to seek relief.
Through June 30, 1997, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 134,800 claims, for an
estimated settlement amount of approximately $1,620.0 plus any applicable
interest. Final court approval of the Trilateral Agreement obligates
Casualty to pay under these settlements. Approximately $1,530.0 was paid
through June 30, 1997, including approximately $590.0 paid in the fourth
quarter of 1996 and the first quarter of 1997 as a result of the Trilateral
Agreement becoming final. As described above; such payments are partially
recoverable from Pacific Indemnity. Casualty may negotiate other agreements
with various classes of claimants including groups who may have previously
reached agreement with Fibreboard.
Final court approval of the Trilateral Agreement and its implementation has
eliminated any further material exposure with respect to the Fibreboard
matter, and subsequent reserve adjustments, if any, will not materially
affect the results of operations or equity of the Company.
Environmental Pollution and Asbestos - Related Claims
-----------------------------------------------------
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution and asbestos-related 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 PRP's fail to do so, and to assign liability to
PRP's. 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. On
the other hand, the Congressional Budget Office is estimating that there
will be 4,500 National Priority List sites, and other estimates project as
many as 30,000 sites that will require clean-up under ECLs. Very few sites
have been subject to clean-up to date. The extent of clean-up necessary and
the assignment of liability has not been established.
CNA and the insurance industry are disputing coverage for many such claims.
Key coverage issues include whether Superfund response costs are considered
damages under the policies, trigger of coverage, applicability of pollution
exclusions, the potential for joint and several liability and definition of
an occurrence. Similar coverage issues exist for clean-up of waste sites not
covered under Superfund. 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.
Despite Superfund taxing authority having expired at the end of 1995, no
reforms have yet been enacted by Congress. While the current Congress may
Page 9
address this issue, no predictions can be made as to 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
materially 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, the ultimate
exposure to CNA for environmental pollution claims cannot be meaningfully
quantified.
Claim and claim expense reserves represent management's estimates of
ultimate liabilities based on currently available facts and case law.
However, in addition to the uncertainties previously discussed, additional
issues related to, among other things, specific policy provisions, multiple
insurers and allocation of liability among insurers, consequences of conduct
by the insured, missing policies and proof of coverage make quantification
of liabilities exceptionally difficult and subject to adjustment based on
new data.
As of June 30, 1997 and December 31, 1996, CNA carried approximately $882.0
and $907.8, 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, which coincides with CNA's adoption of the Simplified Commercial
General Liability coverage form which included an absolute pollution
exclusion. There was no unfavorable reserve development for the six months
ended June 30, 1997 and 1996.
CNA has exposure to asbestos-related claims, including those attributable to
the Fibreboard claim (see discussion above). Estimation of asbestos-related
claim reserves encounter many of the same limitations discussed above for
environmental pollution claims such as inconsistency of court decisions,
specific policy provisions, multiple insurers and allocation of liability
among insurers, missing policies and proof of coverage.
As of June 30, 1997 and December 31, 1996, CNA carried approximately
$1,516.0 and $1,506.2, respectively, of claim and claim expense reserves,
net of reinsurance recoverables, for reported and unreported asbestos-
related claims. Unfavorable reserve development for the six months ended
June 30, 1997 and 1996 totaled $25.0 and $26.0, respectively.
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 potential liabilities and make further
adjustments as warranted.
Other reserve development for the six months ended June 30, 1997 and 1996
was favorable and aggregated $116.0 and $267.0, respectively. Reserve
development for the six months ended June 30, 1997 reflects continued
favorable claim frequency (rate of claim occurrence) and severity (average
cost per claim) experience in the workers' compensation line of business as
well as favorable experience in the surety line of business. Reserve
development for the six months ended June 30, 1996, was principally due to
favorable experience in workers' compensation.
These trends reflect the positive effects of changes in workers'
compensation laws, or moderate increases in medical costs, and a generally
Page 10
strong economy in which individuals return to the workplace more quickly.
CNA, consistent with sound reserving practices, regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and
circumstances emerge that indicate the previous estimates need to be
modified. The following table provides additional data related to CNA's
environmental pollution and asbestos-related claims reserves.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
----------------------------------------------------
Environmental Environmental
Pollution Asbestos Pollution Asbestos
----------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves:
Reported claims ................... $306.0 $1,517.0 $ 288.9 $1,551.4
Unreported claims ................. 659.0 105.0 714.0 94.0
------------------------------------------------
965.0 1,622.0 1,002.9 1,645.4
Less reinsurance recoverable ........ (83.0) (106.0) (95.1) (139.2)
------------------------------------------------
Net reserves ...................... $882.0 $1,516.0 $ 907.8 $1,506.2
================================================
</TABLE>
NON-INSURANCE
Tobacco Litigation
------------------
Lawsuits are being 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 ("Class Actions") for damages
allegedly caused by smoking; and claims brought on behalf of governmental
entities and others, including private citizens suing on behalf of
taxpayers, labor unions and tribes of Native Americans, seeking, among other
alleged damages, reimbursement of health care costs allegedly incurred as a
result of smoking ("Reimbursement Cases"). 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").
There has been a substantial increase in the number of cases filed. For
instance, eight suits seeking class certification that name Lorillard and/or
the Company as defendants were filed and served during the last two quarters
of 1996; at least twenty-four such suits (some of which have not been
served) have been filed during the first two quarters of 1997. Thirteen
reimbursement suits were filed by state or local governmental entities
during the last two quarters of 1996; at least twenty-eight reimbursement
suits have been filed by governmental entities during the first two quarters
of 1997 (some of which have not been served) as well as suits by four tribes
of Native Americans and seventeen suits by unions, some of which have not
been served. Conventional product liability cases also have been filed with
greater frequency in recent years. During 1994, approximately 30 such suits
were filed and served against U.S. cigarette manufacturers, including
Lorillard. Approximately 140 such suits were filed and served during 1995.
Approximately 340 such suits were filed and served during 1996. During the
Page 11
first two quarters of 1997, approximately 275 such suits have been filed and
served on the major U.S. cigarette manufacturers, including Lorillard.
In these actions, plaintiffs claim substantial compensatory, statutory and
punitive damages in amounts ranging into the billions of dollars. These
claims 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 consumer protection statutes, and failure
to warn of the allegedly harmful and/or addictive nature of tobacco
products. As noted below, several cases are scheduled for trial in 1997,
although trial dates are subject to change.
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 500 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 146 of these cases.
The Company is a defendant in seven of these cases.
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 in compensatory damages and $600.0 in punitive
damages.
On August 9, 1996 the jury in Carter v. Brown & Williamson Tobacco
Corporation (District Court, Duval County, Florida), returned a verdict in
favor of the plaintiffs and awarded them $0.8 in actual damages. Brown &
Williamson Tobacco Corporation, the only defendant in the case, has
appealed. The trial court has awarded plaintiffs' counsel $1.7 in attorneys'
fees.
On May 5, 1997, the jury in Dana Raulerson, as personal representative of
the estate of Jean Connor, deceased, v. R.J. Reynolds Tobacco Company
(District Court, Duval County, Florida), returned a verdict in favor of the
defendant R.J. Reynolds Tobacco Company. The jury determined that there was
no liability on the part of R.J. Reynolds Tobacco Company in the death of
Jean Connor. Plaintiff did not notice an appeal from the judgment that
ensued from the verdict.
CLASS ACTIONS - In addition to the foregoing cases, there are 49 purported
class actions pending against cigarette manufacturers. 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.
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 42 of the 49 cases seeking class
certification. Lorillard is a defendant in each purported class action
Page 12
listed below unless expressly stated to the contrary. The Company is a
defendant in 23 of the purported class actions. Unless otherwise noted, 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). This case is a class action on behalf of flight
attendants claiming injury as a result of exposure to environmental tobacco
smoke in the cabins of the aircraft. Jury selection commenced on June 2,
1997. Trial began on July 14, 1997. Trial presently is underway.
Castano v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed March 29, 1994). The U.S. District Court
for the Eastern District of Louisiana granted plaintiffs' motion for class
certification on behalf of U.S. residents who alleged nicotine dependency.
This order subsequently was reversed by the U.S. Court of Appeals for the
Fifth Circuit, and the class action ordered by the District Court was
decertified. The Court of Appeals directed the District Court to dismiss
plaintiffs' class action allegations. The Company is a defendant in the
case.
Granier v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed September 26, 1994).
Harris v. The American Tobacco Company, et al. (U.S. District Court, Middle
District, Pennsylvania, filed March 1, 1996). The Company is a defendant in
the case. The court entered an order on its own motion that dismissed the
class action allegations. The court has entered an order granting a motion
to dismiss filed by several of the defendants named in the complaint,
including the Company and Lorillard, but final judgment has not been entered
in their favor and the time for plaintiffs to notice an appeal has not
begun.
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
died from diseases and medical conditions caused by smoking cigarettes. The
Florida Supreme Court has denied defendants' appeal. Trial is scheduled to
begin on September 8, 1997, although the court has informed the parties that
it will vacate this trial date due to the pending Broin trial.
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).
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 by the Circuit Court of Orleans
Parish, Louisiana on behalf of Louisiana citizens who require medical
monitoring. Defendants have removed the case to U.S. District Court, Eastern
District, Louisiana and have asked the federal court to reconsider the state
court's class certification order.
Small v. Lorillard, et al., Hoskins v. R.J. Reynolds, et al., Frosina v.
Philip Morris, et al., Stewart-Lomanitz v. Brown & Williamson, et al., and
Zito v. American Tobacco, 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. The court has heard argument on plaintiffs' motions for
class certification on behalf of citizens of the State of New York who
allege nicotine dependency on behalf of themselves or their decedents. Trial
Page 13
is scheduled to begin on January 26, 1998.
Reed v. Philip Morris Incorporated, et al. (Superior Court, District of
Columbia, filed June 21, 1996). The Company is a defendant in the case.
Barnes v. The American Tobacco Company, et al. (U.S. District, Eastern
District, Pennsylvania, filed August 8, 1996). The Company is a defendant in
the case. Plaintiffs' motion for class certification has been denied as to a
claim for medical monitoring. Plaintiffs have filed a renewed motion for
class certification. Plaintiffs have amended their complaint in response to
the denial of class certification. Trial is scheduled to begin on October
14, 1997.
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.
Masepohl 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). The Company
was named as a defendant but has been voluntarily dismissed.
Ruiz v. The American Tobacco Company, et al. (U.S. District Court, Puerto
Rico, filed October 23, 1996).
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.
McCune v. American Tobacco Company, et al. (U.S. District Court, 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).
Ingle v. Philip Morris Incorporated, et al. (U.S. District Court, Southern
District, West Virginia, filed February 4, 1997).
Emig 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). Plaintiffs have filed a motion seeking leave
to amend the complaint to add the Company as a defendant. To date, none of
the defendants have received service of process.
Page 14
Insolia v. Philip Morris Incorporated, et al. (U.S. District Court,
Wisconsin, filed April 18, 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 on July 24, 1997 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 ruling.
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). To date,
none of the defendants have received service of process.
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. (United States
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). The Company is a defendant in the
case.
Enright v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed May 28, 1997). The Company is a defendant in the
case.
Tepper v. Philip Morris Incorporated, et al. (Superior Court, Bergen County,
New Jersey, filed May 28, 1997). The Company is a defendant in the case.
Langdeau v. The American Tobacco Company, et al. (Tribal Court, Lower Brule
Sioux Tribe, filed June 4, 1997).
Thomas v. American Tobacco Company, Inc., et al. (filed in Circuit Court,
Wayne County, Michigan; removed to U.S. District Court, Eastern District,
Michigan; filed June 6, 1997). The Company is a defendant in the case.
Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997). The Company is a defendant
in the case. To date, none of the defendants have received service of
process.
Lippincott v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed June 13, 1997). The Company is a defendant in the
case.
Brammer v. R.J. Reynolds Tobacco Company, et al. (filed in District Court,
Polk County, Iowa; removed to 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. (filed in District Court,
Orleans Parish, Louisiana; removed to U.S. District Court, Eastern District,
Page 15
Louisiana, filed June 30, 1997). The Company is a defendant in the case.
Daley v. American Brands, Inc., et al. (Circuit Court, Cook County,
Illinois, filed July 7, 1997). The Company is a defendant in the case. To
date, none of the defendants have received service of process.
Three additional purported pending class actions have been commenced against
other companies and are not pending against either Lorillard or the Company.
Class certification has been denied by the U.S. District Court for the
Western District of Missouri in one of the cases, Smith v. Brown &
Williamson Tobacco Corporation. The other two suits purportedly were filed
due to the Liggett Settlement, discussed below (Fletcher v. Liggett, pending
in Circuit Court, Mobile County, Alabama, and Walker v. Liggett, pending in
U.S. District Court, West Virginia). See "Liggett Settlement." In the case
of Walker v. Liggett, the United States District Court for the Southern
District of West Virginia issued an order on August 5, 1997 that denied
plaintiff's motion for class certification. The August 5, 1997, order also
vacated the court's order of May 15, 1997 that granted preliminary approval
of plaintiff's motion for class certification.
REIMBURSEMENT CASES - In addition to the above, approximately 65 actions are
pending in which governmental entities, private citizens, or other
organizations, including labor unions and tribes of Native Americans, 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 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 seventeen of them.
State Or Local Governmental Reimbursement Cases - Suits have been filed by
39 states, the Commonwealth of Puerto Rico, the Territory of Guam and the
Republic of The Marshall Islands, one of which has been dismissed.
Defendants have not received service of process of four of the cases.
Cities, counties or other local governmental entities have filed eight such
suits, all of which have been served. The Company has been named as a
defendant in twelve cases filed by state or local governmental entities.
Unless otherwise noted, each pending reimbursement suit is in the pre-trial,
discovery stage.
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 with regard to an agreement in principle to settle this case.
See "Mississippi Settlement" 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 court has granted defendants'
motion to dismiss eleven of the fourteen counts of the complaint and has
held that two of the plaintiffs in the action, the West Virginia Public
Employee Insurance Agency and West Virginia Department of Health and Human
Services, lack standing to sue for personal injuries. The Company is a
defendant in the case.
State of Minnesota, et al. v. Philip Morris Incorporated, et al., (District
Court, Ramsey County, Minnesota, filed August 17, 1994). Blue Cross and Blue
Page 16
Shield of Minnesota ("Blue Cross") also is plaintiff in the case. The
Minnesota Supreme Court has issued an order ruling that plaintiff Blue Cross
does not have standing to pursue tort claims against the defendants. The
Minnesota Supreme Court's order permits Blue Cross to proceed with its
claims that defendants violated antitrust and consumer protection statutes.
The Minnesota Supreme Court's order permits Blue Cross to pursue its
equitable claims for injunctive relief but bars Blue Cross from pursuing
money damages for the equitable claims. Trial is scheduled to begin on
January 19, 1998.
The State of Florida, et al. v. The American Tobacco Company, et al.
(Circuit Court, Palm Beach County, Florida, filed February 21, 1995). This
case has been brought under a Florida statute that permits the state to sue
a manufacturer under theories of negligence and strict liability to recover
Medicaid costs incurred by the state that are claimed to result from the use
of the manufacturer's product. The statute permits causation and damages to
be proven by statistical analysis, abrogates affirmative defenses, adopts a
"market share" liability theory but also allows joint and several liability,
and eliminates the statute of repose. An action for declaratory judgment was
commenced in Florida state court by companies and trade associations in
several potentially affected industries challenging the statute. A Florida
state court granted in part the motion for declaratory judgment. The Florida
Supreme Court affirmed in part and reversed in part the trial court's
judgment. The U.S. Supreme Court denied a petition for writ of certiorari
filed by the plaintiffs in the declaratory judgment action. Lorillard
understands that several other states, and the Congress, have considered or
are considering legislation similar to that passed in Florida. In the State
of Florida action, the trial court granted the Company's motion to dismiss.
Plaintiffs noticed an appeal to the Florida Court of Appeals, which heard
argument on July 10, 1997 and took the appeal under advisement. Plaintiffs
filed an amended complaint that added certain statutory counts, including
one under a Florida RICO statute that permits plaintiffs to seek treble
damages and a claim for punitive damages. The trial court has issued several
rulings that are adverse to defendants' interests and will substantially
limit or restrict the defenses available to them. Additional rulings have
been issued that will substantially limit the evidence defendants will be
permitted to submit at trial to rebut plaintiffs' claims. Other rulings are
favorable to plaintiffs as to the type or quantity of evidence that may be
submitted. The court began the jury selection process on August 1, 1997.
Opening statements are expected to be made in late August or early September
1997.
Commonwealth of Massachusetts v. Philip Morris Inc., et al. (Superior Court,
Middlesex County, Massachusetts, filed December 19, 1995).
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). Trial is scheduled to
begin on September 29, 1997.
State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court,
Baltimore City, Maryland, filed May 1, 1996). The court has granted in part
defendants' motion to dismiss and has dismissed nine of the thirteen counts
of the complaint.
State of Washington v. The American Tobacco Company, et al. (Superior Court,
King County, Washington, filed June 5, 1996). The court has granted in part
defendants' motion to dismiss and dismissed all of plaintiff's claims except
Page 17
anti-trust, violations of the Washington Consumers' Protection Act statutes
and conspiracy.
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). The court has dismissed
plaintiffs' breach of implied warranty claim and has dismissed plaintiffs'
conspiracy claim as a separate cause of action.
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 sustained
defendants' demurrer to plaintiff's fraud claim.
State of Arizona v. The American Tobacco Company, et al. (Superior Court,
Maricopa County, Arizona, filed August 20, 1996). The court has dismissed
plaintiff's claims of breach of assumed duty, performance of another's duty,
unjust enrichment and restitution, negligence per se, public nuisance and,
as to the claims that were dismissed, conspiracy. The court has dismissed
without prejudice plaintiffs' claims asserted under the Racketeering
Influenced and Corrupt Organizations Act.
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). The
court has dismissed plaintiff's claims of violation of the Michigan
Antitrust Reform Act, punitive damages and ad damnum allegations. The court
ruled that plaintiff is permitted to seek exemplary damages rather than
punitive damages.
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.
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).
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. (U.S. District
Court, Southern District, New York, 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.
County of Erie v. The Tobacco Institute, Inc., et al. (Supreme Court, Erie
Page 18
County, New York, filed January 14, 1997).
State of New York v. The American Tobacco Company, et al. (U.S. District
Court, Southern District, New York, filed January 21, 1997).
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. (U.S. District Court,
Northern District, 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). To date, none
of the defendants have received service of process.
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,
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). The Company is a
defendant in the case.
University of South Alabama v. The American Tobacco Company, et al. (filed
in Circuit Court, Mobile County, Alabama; removed to U.S. District Court,
Southern District, Alabama; filed May 23, 1997). The Company is a defendant
in the case.
State of New Mexico v. The American Tobacco Company, et al. (First Judicial
District Court, Santa Fe County, New Mexico, filed May 27, 1997). The
Company was named as a defendant but has been voluntarily dismissed.
City of Birmingham, Alabama, and The Greene County Racing Commission v. The
American Tobacco Company, et al. (filed in Circuit Court, Greene County,
Alabama; removed to U.S. District Court, Northern District, Alabama; filed
May 28, 1997). The Company is a defendant in the case.
Unpingco, et al. v. The American Tobacco Company, et al. (United States
Page 19
District Court, Territory of Guam, filed May 29, 1997).
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 Oregon v. The American Tobacco Company, et al. (Circuit Court,
Multnomah County, Oregon, filed June 9, 1997).
State of Idaho v. Philip Morris, Inc., et al. (District Court, Fourth
Judicial District, Ada County, Idaho, 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) (the caption of the complaint
does not list Loews Corporation or Lorillard as defendants but the text of
the complaint suggests that plaintiff intended to name both as defendants.)
To date, none of the defendants have received service of process.
Rossello, et al. v. Brown & Williamson Tobacco Corporation, et al. (United
States District Court, Puerto Rico, filed June 17, 1997).
State of Rhode Island v. American Tobacco Company, Inc., et al. (Superior
Court, Providence, Rhode Island, filed June 17, 1997). To date, none of the
defendants have received service of process.
Citizens of the Republic of the Marshall Islands v. The American Tobacco
Company, et al. (United States District Court, Hawaii, filed June 18, 1997).
Plaintiff voluntarily dismissed the action without prejudice on July 29,
1997.
The states pursuing the foregoing efforts 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.
Lorillard, other cigarette manufacturers and others have commenced suits in
eight states that seek declaratory judgment or injunctive relief as to the
authority of the states or state agencies to commence Reimbursement Cases or
to retain private counsel under a contingent fee contract to pursue such
actions. Nine such cases have been filed to date, in the states of Alaska,
Connecticut, Florida, Hawaii, Maryland, Massachusetts, New Jersey, Texas and
Utah. The case in Hawaii is scheduled for trial on December 9, 1997. The
suits in Connecticut and Maryland are on appeal following entry of orders
that dismissed the actions in favor of the defendant governmental entities.
The suits in Florida and Utah were concluded by orders not favorable to the
interests of the plaintiff cigarette manufacturers. The suits in
Massachusetts and Texas have been stayed until the reimbursement suits filed
by the respective states are resolved.
Private Citizens' Reimbursement Cases - Private citizens have filed suit
in five states on behalf of taxpayers of their respective states.
Governmental entities have filed reimbursement suits in two of the five
states. The Company and Lorillard are defendants in each of the five cases.
Page 20
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.
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.
White v. Philip Morris, Inc., et al. (U.S. District Court, Southern
District, Mississippi, filed April 18, 1997). The Company is a defendant in
the case. To date, none of the defendants have received service of process,
although one defendant filed an answer to the complaint and removed the case
to federal court.
Beckom, et al., ex. rel. State of Tennessee and Tennessee taxpayers v. The
American Tobacco Company, et al. (filed in Chancery Court, Monroe County,
Tennessee; removed to U.S. District Court, Eastern District, Tennessee;
filed May 8, 1997). The Company is a defendant in the case.
Woods v. The American Tobacco Company, et al. (Superior Court, Wake County,
North Carolina, filed July 10, 1997). The Company is a defendant in the
case.
Reimbursement Cases By Tribes Of Native Americans - Tribes of Native
Americans have filed four suits in their tribal courts. Lorillard is a
defendant in each of the four cases. The Company is not named as a defendant
in any of the four tribal suits filed to date. Each of these 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).
The Crow Tribe v. The American Tobacco Company, et al. (Tribal Court, Crow
Tribe, filed June 10, 1997).
Muscogee Creek Nation v. The American Tobacco Company, et al. (District
Court, Muscogee Creek Nation, Okmulgee District, filed June 20, 1997).
Chehalis Tribe v. The American Tobacco Company, et al. (Chehalis Tribal
Court, Chehalis Indian Reservation, Oakville, Washington, filed June 23,
1997).
Reimbursement Cases By Labor Unions - Labor unions have filed seventeen
suits in various states throughout the nation in federal or state courts,
although four of them have not been served to date. Lorillard is named as a
defendant in each of the suits filed to date by unions. The Company is not a
defendant in any of the cases filed to date by unions. 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. (United States District Court, Northern District, Ohio, Eastern
Division, filed May 20, 1997).
Northwest Laborers-Employers Health and Security Trust Fund, et al. v.
Page 21
Philip Morris, Inc., et al. (United States District Court, Western District,
Washington, filed May 21, 1997).
Central Illinois Carpenters Health and Welfare Trust Fund, et al. v. Philip
Morris, Inc., et al. (filed in Circuit Court, Third Judicial Circuit,
Madison County, Illinois; removed to U.S. District Court, Southern District,
Illinois; filed May 30, 1997). To date, none of the defendants have received
service of process.
Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et al.
(filed in Superior Court, Suffolk County, Massachusetts; removed to U.S.
District Court, Massachusetts; filed June 2, 1997).
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip
Morris, Inc., et al. (United States District Court, Hawaii, filed June 13,
1997).
Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v. Philip
Morris, Inc., et al. (filed in Circuit Court, Multnomah County, Oregon;
removed to U.S. District Court, Oregon; filed June 18, 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. (United States District Court, Southern District, New York, filed
June 19, 1997).
Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., et al. (United
States District Court, Eastern District, Louisiana, filed June 20, 1997).
Iowa Laborers District Council Health and Welfare Fund, et al. v. Philip
Morris, Inc., et al. (United States District Court, Central District, Iowa,
Southern Division, filed on an unknown date; plaintiff's first amended
complaint filed June 20, 1997). To date, none of the defendants have
received service of process.
Kentucky Laborers District Council Health and Welfare Trust Fund v. Hill &
Knowlton, Inc., et al. (United States District Court, Western District,
Kentucky, Louisville Division, filed June 20, 1997).
United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc.,
et al. (United States 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.
(United States District Court, Connecticut, filed July 1, 1997).
Seafarers Welfare Plan and United Industrial Workers Welfare Plan v. Philip
Morris, Inc., et al. (United States District Court, Maryland, Southern
Division, filed July 2, 1997). To date, none of the defendants have received
service of process.
Laborers and Operating Engineers Utility Agreement Health and Welfare Trust
Fund for Arizona v. Philip Morris Incorporated, et al. (United States
District Court, Arizona, filed July 7, 1997).
West Virginia Laborers Pension Fund v. Philip Morris, Inc., et al. (United
States District Court, Southern District, West Virginia, Huntington
Division, filed July 11, 1997).
Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated,
Page 22
et al. (Superior Court, Providence, Rhode Island, filed on or about July 20,
1997). 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. Seventeen such cases
are pending in federal and state courts against Lorillard. Allegations of
liability against Lorillard 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 $10.0 in compensatory
damages and $100.0 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
requires Lorillard to pay the amount of one hundred forty thousand dollars.
Lorillard has noticed an appeal to the California Court of Appeals. 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. The verdict requires Lorillard to
pay an amount between $1.8 and $2.0 in actual and punitive damages. The
precise amount to be paid by Lorillard will be determined at a later date if
the verdict withstands review by appellate courts. Lorillard has noticed an
appeal from the judgment in plaintiffs' favor.
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. Plaintiff seeks an injunction ordering defendants to undertake a
"corrective advertising campaign" in California to warn consumers of the
health hazards associated with smoking, to provide restitution to the public
for funds "unlawfully, unfairly, or fraudulently" obtained by defendants,
and to "disgorge" all revenues and profits acquired as a result of
defendants' "unlawful, unfair and/or fraudulent business practices."
LIGGETT SETTLEMENT - On March 20, 1997, Liggett Group, Inc. and its parent
company, Brooke Group, Ltd., Inc. ("Liggett"), and the Attorneys General for
twenty-two states, announced that they had reached agreement (the "Liggett
Settlement") to settle the reimbursement suits pending in those states. The
proposed settlements reportedly will require Liggett: to pay to the twenty-
two states an aggregate of 25% of its pre-tax profits annually for the next
twenty-five years, plus a one time payment of as much as an aggregate of
$25.0; 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
Settlement also purports to be on behalf of "all persons who, prior to or
during the term of [the Liggett Settlement], have smoked cigarettes or have
used other tobacco products and have suffered or claim to have suffered
injury as a consequence thereof."
Page 23
On March 20, 1997, Lorillard and three other cigarette manufacturers filed
suit in the Superior Court of Forsyth County, North Carolina against
Liggett. The court entered a temporary restraining order on March 20, 1997
that prohibits Liggett and certain persons related to it or acting in
concert with it from misusing or disclosing any privileged or confidential
information relating to plaintiffs, or involving matters in which plaintiffs
and Liggett share a common interest and resulting from communications
between counsel for plaintiffs and Liggett. The court further directed
Liggett to appear before the court to identify for an in camera inspection
all documents Liggett has disclosed; to show cause why Liggett and certain
related persons should not be enjoined from disclosing the privileged or
confidential information pending trial in this action; and to disclose to
the court under seal the identity of the individuals to whom Liggett has
disclosed the confidential and privileged information to date. Liggett has
noticed an interlocutory appeal from a preliminary injunction entered by the
trial court.
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 of attorney-client and joint-defense
privilege made by defendants as to documents sought by plaintiffs in the
course of discovery. These challenges include, among other things,
allegations that privileged documents are subject to the so-called
crime/fraud exception, which negates the privilege to documents found to
have been prepared in furtherance of a crime or fraud. Pursuant to the
Liggett Settlement 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. Plaintiffs in several of these cases have sought
court review of any such Liggett documents, as to which other defendants
claim a joint-defense privilege, to determine the applicability of the
privilege and crime/fraud exception to such documents.
In the case of Butler v. Philip Morris, Inc., et al., a Conventional Product
Liability Case, Liggett has, by order of the court, submitted documents in
its possession that are subject to claims of joint-defense privilege or
other protection from discovery, for in camera review and determination by
the court as to the validity of such claims. In addition, a Special Master
in the Butler case has reviewed documents for which defendants claim
privilege and which relate to Special Projects of the Council for Tobacco
Research to determine the validity of the claims of privilege and the
applicability of the crime/fraud exception to such documents. The Special
Master has filed conclusions under seal, which will be considered by the
court before an order on the issue is entered. The court has heard argument
on defendants' objections to the Special Master's Report and Recommendation
and has taken them under advisement. Butler is a conventional product
liability case pending in a state court in Mississippi alleging injury to an
individual from exposure to environmental tobacco smoke. The Company and
Lorillard are defendants in this case. Trial in this case is scheduled to
begin on June 8, 1998.
In the State of Florida v. The American Tobacco Company, et al., a
Reimbursement Case, on April 14, 1997, the court issued an order finding
that eight documents in an initial set of 13 documents submitted to it by
Liggett and to which other defendants claim a joint-defense privilege, were
subject to the crime/fraud exception, and therefore should be produced to
plaintiffs. Defendants in that case have appealed that ruling to the Fourth
District Court of Appeals. The Court of Appeals has entered orders affirming
Page 24
the trial court's ruling and denying defendants' motion for reconsideration
or, in the alternative, for certification of the order to the Florida
Supreme Court. Accordingly, those eight documents have been released to the
public and have received substantial media attention. Additional documents
from the files of Liggett, and other defendants, have also been submitted to
the court for a determination of the applicability of the crime/fraud
exception.
In State of Minnesota v. Philip Morris Incorporated, et al., a Reimbursement
Case, the district court issued an order on May 9, 1997, ordering that
documents provided to the court by Liggett, and as to which other defendants
claim a joint-defense privilege, be reviewed by a Special Master to
determine the validity of the privilege claims as to them, and whether the
crime/fraud exception applies to those documents. In addition, the court
ordered that the Special Master determine the applicability of the
crime/fraud exception to all documents to which defendants claim the
attorney-client or joint-defense privilege. The court ordered that the
approximately 220,000 documents be divided into several categories and
considered by category and not individually. The Special Master heard
argument on the Liggett documents during July 16-18, 1997 and took the
matters under advisement. Argument before the Special Master on documents
produced by other companies, including Lorillard, has not been set.
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, 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 various 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. Conversely, the court in the
State of Florida Reimbursement Case has ruled that a substantial number of
these defenses are unavailable based upon the Florida state statute under
which this case has been brought. (See "Reimbursement Cases -- the State of
Page 25
Florida" above.) Application of various defenses, including those of
preemption, are likely to be the subject of further legal proceedings in the
Class Action cases and in the Reimbursement Cases.
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
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 "Resolution"). The Resolution
can be implemented only by federal legislation and is subject to approval of
the boards of directors of the participating companies. (Lorillard's Board
of Directors approved the Resolution on June 25, 1997.) 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.
The Resolution is currently under review by the White House, Congress, the
public health community and other interested parties. The White House and
certain members of the public health community have expressed concern with
certain aspects of the Resolution and certain members of Congress have
indicated that they may offer alternative legislation. There can be no
assurance that federal legislation in the form of the Resolution will be
enacted, that it will be enacted without modification that is materially
adverse to Lorillard, that any modification would be acceptable to Lorillard
or that, if enacted, the legislation would not face legal challenges. If
such a comprehensive resolution were to be implemented, the Company believes
that its consolidated results of operations and financial position would be
materially adversely affected. The degree of the adverse impact would
depend, among other things, on the final form of implementing federal
legislation, the rates of decline in United States cigarette sales in the
premium and discount segments and Lorillard's share of the domestic premium
and discount cigarette segments. Moreover, the negotiation and signing of
the Resolution could affect other federal, state and local regulation of the
United States tobacco industry.
The Resolution includes provisions relating to advertising and marketing
restrictions, product warnings and labeling, access restrictions, licensing
of tobacco retailers, the adoption and enforcement of "no sales to minors"
laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals (summarized below), regulation of tobacco
products by the Food and Drug Administration (the "FDA"), public disclosure
of industry documents and research, smoking cessation programs, compliance
programs by the industry, public smoking and smoking in the workplace,
enforcement of the Resolution, industry payments (summarized below) and
litigation (summarized below). The complete text of the Resolution has been
filed with the Securities and Exchange Commission as Exhibit 10 to the
Company's Current Report on Form 8-K filed June 24, 1997. That complete text
is incorporated herein by reference, and the summary contained herein is
qualified by reference to that complete text.
Industry Payments
-----------------
The Resolution would require participant manufacturers to make substantial
payments in the year of implementation and thereafter ("Industry Payments").
Participating manufacturers would be required to make an aggregate $10,000
initial Industry Payment on the date federal legislation implementing the
terms of the Resolution is signed. This Industry Payment would be based on
relative market capitalizations and Lorillard currently estimates that its
Page 26
share of the initial Industry Payment would be approximately $750.
Thereafter, the companies would be required to make specified annual
Industry Payments determined and allocated among the companies based on
volume of domestic sales as long as the companies continue to sell tobacco
products in the United States. These Industry Payments, which would begin
on December 31 of the first full year after implementing federal legislation
is signed, would be in the following amounts (at 1996 volume levels): year
1: $8,500; year 2: $9,500; year 3: $11,500; year 4: $14,000; and each year
thereafter; $15,000. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate determined with
reference to the Consumer Price Index. The Industry Payments would increase
or decrease in proportion to changes from 1996 domestic sales volume levels.
Volume declines would be measured based on adult sales volume figures;
volume increases would be measured by total sales volume. If sales volume
declines but the industry's domestic net operating profit exceeds base year
inflation-adjusted levels, the reduction in the annual Industry Payment due
to volume decline, if any, would be offset to the extent of 25% of the
increased profit. At current levels of sales and prior to any adjustment for
inflation, the Resolution would require total Industry Payments of $368,500
over the first 25 years (subject to credits described below in connection
with potential civil tort liability).
The Industry Payments would be separate from any surcharges required under
the "look back" provision discussed below under the heading "Surcharge for
Failure to Achieve Underage Smoking Reduction Goals." The Industry Payments
would receive priority and would not be dischargeable in any bankruptcy or
reorganization proceeding and would be the obligation only of entities
manufacturing and selling tobacco products in the United States (and not
their affiliated companies). The Resolution provides that all payments by
the industry would be ordinary and necessary business expenses in the year
of payment, and no part thereof would be either in settlement of an actual
or potential liability for a fine or penalty (civil or criminal) or the cost
of a tangible or intangible asset. The Resolution would provide for the
pass-through to consumers of the annual Industry Payments in order to
promote the maximum reduction in underage use.
Surcharge for Failure to Achieve
Underage Smoking Reduction Goals
--------------------------------
The Resolution would impose surcharges on the industry if required
reductions in underage smoking are not achieved. A "look back" provision
would require the following reductions in the incidence of underage smoking
from estimated levels over the past decade:, 30% in the fifth and sixth
years after enactment of implementing federal legislation, 50% in the
seventh, eighth and ninth years, and 60% in the tenth year, with incidence
remaining at such reduced levels thereafter. For any year in which these
required reductions are not met, the FDA must impose a mandatory surcharge
on the participating members of the cigarette industry based upon an
approximation of the present value of the profit the companies would earn
over the lives of the number of underage consumers in excess of the required
reduction. The annual surcharge would be $80 (as adjusted for changes in
population and cigarette profitability) for each percentage point by which
the reduction in underage smoking falls short of the required reductions (as
adjusted to prevent double counting of persons whose smoking has already
resulted in the imposition of a surcharge in previous years). The annual
surcharge would be subject to a $2,000 annual cap (as adjusted for
inflation). The surcharge would be the joint and several obligation of
participating manufacturers allocated among participating manufacturers
based on their market share of the United States cigarette industry and
would be payable on or before July 1 of the year in which it is assessed.
Page 27
Manufacturers could receive a partial refund of this surcharge (up to 75%)
only after paying the assessed amount and only if they could thereafter
prove to the FDA that they had fully complied with the Resolution, had taken
all reasonably available measures to reduce youth tobacco usage and had not
acted to undermine the achievement of the reduction goals.
Effects on Litigation
---------------------
If enacted, the federal legislation provided for in the Resolution would
settle present attorney general health care cost recovery actions (or
similar actions brought by or on behalf of any governmental entity), parens
patriae and smoking and health class actions and all "addiction"/dependence
claims and would bar similar actions from being maintained in the future.
However, the Resolution provides that no stay applications will be made in
pending governmental actions without the mutual consent of the parties. On
July 2, 1997, together with other companies in the United States tobacco
industry, Lorillard entered into a Memorandum of Understanding with the
State of Mississippi with respect to that state's health care cost recovery
action. See Mississippi Settlement discussed below. Lorillard may enter into
discussions with certain other states with health care cost recovery actions
scheduled to be tried this year with regard to the postponement or
settlement of such actions pending the enactment of the legislation
contemplated by the Resolution. No assurance can be given whether a
postponement or settlement will be achieved, or, if achieved, as to the
terms thereof. The Resolution would not affect any smoking and health class
action or any health care cost recovery action that is reduced to final
judgment before implementing federal legislation is effective.
Under the Resolution, the rights of individuals to sue the tobacco industry
would be preserved, as would existing legal doctrine regarding the types of
tort claims that can be brought under applicable statutory and case law
except as expressly changed by implementing federal legislation. Claims,
however, could not be maintained on a class or other aggregated basis and
could be maintained only against tobacco manufacturing companies (and not
their retailers, distributors or affiliated companies). In addition, all
punitive damage claims based on past conduct would be resolved as part of
the Resolution and future claimants could seek punitive damages only with
respect to claims predicated upon conduct taking place after the effective
date of implementing federal legislation. Finally, except with respect to
actions pending as of June 9, 1997, third-party payor (and similar) claims
could be maintained only based on subrogation of individual claims. Under
subrogation principles, a payor of medical costs can seek recovery from a
third party only by "standing in the shoes" of the injured party and being
subject to all defenses available against the injured party.
The Resolution contemplates that participating tobacco manufacturers would
enter into a joint sharing agreement for civil liabilities relating to past
conduct. Judgments and settlements arising from tort actions would be paid
as follows: (i) The Resolution would set an annual aggregate cap equal to
33% of the annual base Industry Payment (including any reductions for volume
declines). (ii) Any judgments or settlements exceeding the cap in a year
would roll over into the next year. (iii) While judgments and settlements
would run against the defendant, they would give rise to an 80-cents-on-
the-dollar credit against the annual Industry Payment. (iv) Finally, any
individual judgments in excess of $1 would be paid at the rate of $1 per
year unless every other judgment and settlement could first be satisfied
within the annual aggregate cap. In all circumstances, however, the
companies would remain fully responsible for costs of defense and certain
costs associated with the fees of attorneys representing certain plaintiffs
in the litigation that would be settled by the Resolution.
Page 28
Mississippi Settlement
On July 2, 1997, together with other companies in the United States tobacco
industry, Lorillard entered into a memorandum of understanding with the
State of Mississippi (the "Mississippi Settlement") setting forth the
principal terms and conditions of an agreement in principle to settle and
resolve with finality all present and future claims relating to the subject
matter of Mississippi's health care cost recovery action pending against
Lorillard and others.
Under the Mississippi Settlement, the parties agree to petition the Chancery
Court of Jackson County, Mississippi to adjourn all further proceedings in
contemplation of their final resolution and termination pursuant to the
Mississippi Settlement and the settlement agreement contemplated thereby.
Under the Mississippi Settlement the parties agree that the settlement
agreement will include the terms summarized below.
The settling defendants have deposited $170, representing the State's
estimate of its share of the $10,000 initial payment under the Resolution,
in an escrow account ("the Escrow"). This amount was allocated among the
settling defendants in accordance with their relative market capitalization,
which resulted in a payment by Lorillard of approximately $13 on July 15,
1997. In addition, a payment was made in July 1997 to private lawyers and
the State for litigation expenses pursuant to the Mississippi Settlement.
Beginning December 31, 1998, the settling defendants will pay into the
Escrow 1.7% of that portion of the annual Industry Payments under the
Resolution which is contemplated to be paid to the states. These payments,
which are not offset by potential credits for civil tort liability and which
would be adjusted, among other things, for changes in volume as provided in
the Resolution discussed above, could result in payments by the industry to
the State of Mississippi of $68 with respect to 1998 and $76.6 with respect
to 1999. These amounts could increase to $136 with respect to 2003 and could
continue at that level thereafter. The settling defendants will also
reimburse the State's expenses and those of its attorneys, currently
estimated to be $15 and will be responsible for the attorneys' fees of
counsel for Mississippi (which will be set by a panel of arbitrators). Each
of these payments would be allocated among the settling defendants in
accordance with their relative volume of domestic cigarette sales.
If legislation implementing the Resolution or its substantial equivalent is
enacted, the settlement agreement will remain in place, but the terms of the
federal legislation will supersede the settlement agreement and the
foregoing payment amounts will be adjusted so that the State would receive
the same payment as it would receive under the Resolution. Similar provision
is made in the event of multiple settlements of non-federal governmental
health care cost recovery actions, provided that Mississippi is entitled to
treatment at least as relatively favorable as such other non-federal
governmental entities. If the Resolution is not implemented, then the
Mississippi Settlement will remain in place as negotiated with the State.
* * * *
Smoking and health related litigation has been brought by plaintiffs against
Lorillard and other manufacturers of tobacco products for many years. While
Lorillard intends to defend vigorously all such actions 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
Page 29
above have received wide-spread media attention. 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 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
June 30, 1997 and December 31, 1996 and the results of operations for the
three and six months and changes in cash flows for the six months ended June
30, 1997 and 1996, respectively.
Results of operations for the second quarter and the first six months of
each of the years is not necessarily indicative of results of operations for
that entire year.
Page 30
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 wholly owned
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 84% owned
subsidiary of the Company--
For the first six months of 1997, statutory surplus of the property and
casualty insurance subsidiaries remained at approximately $6.4 billion. 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 operations. 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 six months of 1997, CNA's operating activities reflect net
negative cash flows of approximately $669.7 million, compared to negative cash
flows of $113.0 million in 1996. Negative cash flows in 1997 are primarily the
result of substantial claim payments resulting from the settlement of the
Fibreboard litigation. CNA believes that future liquidity needs will be met
primarily by cash generated from operations.
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.
Cigarettes
- ----------
Lorillard, Inc. and subsidiaries ("Lorillard")--
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
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 in 1997. 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
Page 31
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.
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 become effective in stages, as follows:
(i) Regulations regarding underage youth smoking, effective February 28,
1997. These regulations make 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 regarding advertising and billboards, effective August 28,
1997. These regulations limit all cigarette advertising to a black and
white, text only format in most publications and outdoor advertising such
as billboards. The regulations also prohibit billboards advertising
cigarettes within 1,000 feet of a school or playground, require that the
established name for the product ("Cigarettes") and an intended use
statement ("A Nicotine-Delivery Device For Persons 18 or Older") be
included on all cigarette packaging and advertising, ban the use of
cigarette brand names, logos and trademarks on premium items and prohibit
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, effective August 28, 1998.
The FDA has announced that it will contract with states to jointly enforce the
FDA Regulations. State regulations narrower in scope and not inconsistent with
the FDA Regulations may be exempt from the pre-emptive effect of the federal
rules and be enforced concurrently.
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 and seeking both preliminary and
permanent injunctive relief. On April 25, 1997, the Court granted, in part, and
denied, in part, plaintiffs' motion for summary judgment. The Court partially
ruled in favor of the defendants, holding 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, partially ruled in favor of the plaintiffs, holding 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 which
were to take effect on August 28, 1997 pending appeal. 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 argument before this Court was heard on
August 11, 1997.
Page 32
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
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.
The Memorandum of Understanding, and the proposed resolution (together, the
"Resolution") resulted from negotiations with state attorneys general,
representatives of the public health community and attorneys representing
plaintiffs in certain smoking and health litigation. The Resolution contains
certain regulatory and legislative provisions with which the industry does not
necessarily agree, but which the industry has agreed to accept in the interest
of achieving the Resolution. The Resolution can be implemented only by federal
legislation and is subject to approval of the boards of directors of the
participating companies. (Lorillard's Board of Directors approved the Resolution
on June 25, 1997.) 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.
The Resolution is currently under review by the White House, Congress, the
public health community and other interested parties. The White House and
certain members of the public health community have expressed concern with
certain aspects of the Resolution and certain members of Congress have indicated
that they may offer alternative legislation. There can be no assurance that
federal legislation in the form of the Resolution will be enacted or that it
will be enacted without modification that is materially adverse to Lorillard or
that any modification would be acceptable to Lorillard or that, if enacted, the
legislation would not face legal challenges. In any event, the Company believes
implementation of the Resolution would materially adversely affect its
consolidated results of operations and financial position. The degree of the
adverse impact would depend, among other things, on the final form of
implementing federal legislation, the rates of decline in United States
cigarette sales in the premium and discount segments and Lorillard's share of
the domestic premium and discount cigarette segments. Moreover, the negotiation
and signing of the Resolution could affect other federal, state and local
regulation of the United States tobacco industry.
The following summary of the Resolution is qualified by reference to the
complete text, which has been filed with the Securities and Exchange Commission
as Exhibit 10 to the Company's Current Report on Form 8-K filed June 24, 1997,
and which is incorporated herein by reference. Certain terms of the Resolution
would apply to all tobacco products sold in the United States; certain terms
would apply only to tobacco manufacturers that consent to participate in the
Resolution; other terms would apply only to non-consenting manufacturers.
Advertising and Marketing Restrictions
The Resolution would incorporate certain regulations previously promulgated by
the Food and Drug Administration (the "FDA") and add additional restrictions to
curtail tobacco product advertising and marketing.
Among other things, it would:
(i) Prohibit the use of human images and cartoon characters, such as Joe
Camel and the Marlboro man, in all tobacco-product advertising.
(ii) Ban all outdoor tobacco-product advertising, including advertising in
enclosed stadia and advertising inside a retail establishment that is
directed outside.
Page 33
(iii) Except for advertising in adult-only facilities or adult publications,
limit tobacco-product advertising to black text on a white
background.
(iv) Ban sponsorships (including concerts and sporting events) in the name,
logo or selling message of a tobacco brand.
(v) Ban all non-tobacco merchandise (such as caps, jackets and bags)
bearing the name, logo or selling message of a tobacco brand.
(vi) Ban offers of non-tobacco items or gifts based on proof of purchase of
tobacco products.
(vii) Ban direct or indirect payments for tobacco product placement in
movies, television programs and video games.
(viii) Prohibit direct and indirect payments to "glamorize" tobacco use in
media appealing to minors, including live and recorded music
performances.
(ix) Prohibit tobacco-product advertising on the Internet unless designed
to be inaccessible in or from the United States.
In addition, the Resolution would require that use of currently employed
product descriptors such as "low tar" and "light" be accompanied by a mandatory
health disclaimer in advertisements, and would prohibit the use of any new
descriptors embodying express or implied health claims unless approved by the
FDA. The FDA would also have the corresponding power, but not the obligation, to
modify advertising restrictions with respect to tobacco products that it
concludes present sufficiently reduced health risks. Exemplars of all new
advertising and tobacco product labeling would be submitted to the FDA for its
ongoing review.
Warnings and Labeling
The Resolution would mandate a new set of rotating warnings to be placed on
packages of tobacco products with greater prominence than previous warnings (25%
of the front of cigarette packs at the top of the pack). The new rotating
warnings would also appear in all advertisements and would occupy 20% of press
advertisements. Cigarette packs would also carry the FDA mandated statement of
intended use ("Nicotine Delivery Device").
Access Restrictions
The Resolution would restrict access to tobacco products by minors. Without
preventing state and local governments from imposing stricter measures, the
Resolution would incorporate regulations previously promulgated by the FDA that
restrict access to tobacco products and would also add additional restrictions.
Taken together, these access restrictions would include the following:
(i) Setting a minimum age of 18 to purchase tobacco products.
(ii) Requiring retailers to check photo identification of anyone under 27
years of age.
(iii) Establishing a requirement of face-to-face transactions for all sales
of tobacco products.
(iv) Banning the sale of tobacco products from opened packages, requiring a
minimum package size of 20 cigarettes, and banning the sampling of
tobacco products.
Page 34
(v) Banning the distribution of tobacco products through the mail except
for sales subject to proof of age (with subsequent FDA review to
determine if minors are obtaining tobacco products through the mail).
(vi) Imposing retailer compliance obligations to ensure that all displays,
advertising, labeling, and other items conform with all applicable
requirements.
(vii) Banning all sales of tobacco products through vending machines.
(viii) Banning self-service displays of tobacco products except in adult-only
facilities.
Licensing of Tobacco Retailers
The Resolution would require that any entity that sells tobacco products
directly to consumers obtain a license. Sellers would be subject to monetary
penalties and suspension or loss of their licenses if they do not comply with
the access restrictions. The federal government and state and local authorities
would enforce these access and licensing provisions through funding provided by
Industry Payments, as defined below under the heading "Industry Payments".
State Enforcement
The Resolution would require states to adopt "no sales to minors" laws and
would contain economic incentives for the states to enforce such laws. If a
state does not meet "no sales to minors" performance targets, the FDA may refuse
to pay that state certain funds otherwise payable under the Resolution. To
comply with the "no sales to minors" law, the state must achieve compliance rate
results of 75% by the fifth year after enactment of federal legislation, 85% by
the seventh year and 90% by the tenth year and each year thereafter. Compliance
would be measured as a percentage of random, unannounced compliance checks in
which the retailer refused to sell tobacco products to minors. Funds withheld
from states for failure to achieve the performance targets would, in turn, be
reallocated to those states that demonstrated superior "no sales to minors"
enforcement records.
Surcharge for Failure to Achieve Underage Smoking Reduction Goals
The Resolution would impose surcharges on the industry if required reductions
in underage smoking are not achieved. A "look back" provision would require the
following reductions in the incidence of underage smoking from estimated levels
over the past decade: 30% in the fifth and sixth years after enactment of
implementing federal legislation, 50% in the seventh, eighth and ninth years,
and 60% in the tenth year, with incidence remaining at such reduced levels
thereafter.
For any year in which these required reductions are not met, the FDA must
impose a mandatory surcharge on the participating members of the cigarette
industry based upon an approximation of the present value of the profit the
companies would earn over the lives of the number of underage consumers in
excess of the required reduction. The annual surcharge would be $80 million (as
adjusted for changes in population and cigarette profitability) for each
percentage point by which the reduction in underage smoking falls short of the
required reductions (as adjusted to prevent double counting of persons whose
smoking has already resulted in the imposition of a surcharge in previous
years). The annual surcharge would be subject to a $2 billion annual cap (as
adjusted for inflation). The surcharge would be the joint and several obligation
of participating manufacturers allocated among participating manufacturers based
on their market share of the United States cigarette industry and would be
payable on or before July 1 of the year in which it is assessed. Manufacturers
Page 35
could receive a partial refund of this surcharge (up to 75%) only after paying
the assessed amount and only if they could thereafter prove to the FDA that they
had fully complied with the Resolution, had taken all reasonably available
measures to reduce youth tobacco usage and had not acted to undermine the
achievement of the reduction goals. The FDA would use the surcharges to fund its
administrative costs and to fund grants to states for additional efforts to
reduce underage smoking.
Regulation
Under the Resolution, the FDA would oversee the development, manufacturing,
marketing and sale of tobacco products in the United States, including FDA
approval of ingredients and imposition of standards for reducing or eliminating
the level of certain constituents, including nicotine.
Under the Resolution, tobacco would continue to be categorized as a "drug" and
a "device" under the Food, Drug and Cosmetic Act. The FDA's authority to
regulate tobacco products as "restricted medical devices" would be explicitly
recognized and tobacco products would be classified as a new subcategory of
Class II devices.
For a period of at least twelve years after implementing legislation is
effective, the FDA would be permitted, subject to certain procedures and
judicial review, to adopt performance standards that require the modification of
existing tobacco products, including the gradual reduction, but not the
elimination, of nicotine yields, and the possible elimination of other
constituents or components of the tobacco product, based upon a finding that the
modification: (i) will result in a significant reduction of the health risks
associated with such products to consumers thereof; (ii) is technologically
feasible; and (iii) will not result in the creation of a significant demand for
contraband or other tobacco products that do not meet the performance standards.
The Resolution would also require, effective three years after implementing
legislation is effective, that no cigarette sold in the United States can exceed
a 12 mg. "tar" yield, using the Federal Trade Commission's presently existing
methodology to determine "tar" yields.
Beginning twelve years after implementing legislation becomes effective, the
FDA would be permitted to set performance standards that exceed those discussed
above, including the elimination of nicotine and the elimination of other
constituents or other demonstrated harmful components of tobacco products, based
upon a finding that: (i) the safety standard will result in a significant
overall reduction of the health risks to tobacco consumers as a group; (ii) the
modification is technologically feasible; and (iii) the modification will not
result in the creation of a significant demand for contraband or other tobacco
products that do not meet the performance standards. An FDA determination to
eliminate nicotine would have to be based upon a preponderance of the evidence
and be subject to judicial review and a two-year phase-in to permit
Congressional review.
The Resolution would require disclosure of non-tobacco ingredients to the FDA,
require manufacturers to submit within five years a safety assessment for
non-tobacco ingredients currently used, and require manufacturers to obtain the
FDA's preapproval for any new non-tobacco ingredients. The FDA would have
authority to disapprove an ingredient's safety. The Resolution also outlines
legislation that would require companies to notify the FDA of technology they
develop or acquire that reduces the risk from tobacco products and that would
mandate cross-licensing of technology that the FDA determines reduces the risk
from tobacco products and that would authorize the FDA to mandate the
introduction of "less hazardous tobacco products" that are technologically
feasible.
Page 36
The Resolution would subject the tobacco industry to "good manufacturing
practice" standards, including requirements regarding quality control systems,
FDA inspections and record-keeping and reporting.
Public Disclosure
The Resolution would require the tobacco industry to disclose to the public
previously confidential internal laboratory research as well as certain other
documents relating to smoking and health, "addiction" or nicotine dependency,
"safer or less hazardous" cigarettes and underage tobacco use and marketing. The
Resolution would also require the industry to disclose all such internal
laboratory research generated in the future. The Resolution would provide
protection for proprietary information and applicable privileges, and would
establish a streamlined process by which interested persons could contest claims
of privilege.
Cessation Programs
The Resolution would authorize the Secretary of Health and Human Services to
accredit smoking cessation programs and techniques that the agency determines to
be potentially effective.
Compliance Programs
Participating tobacco manufacturers would be required to create, and to update
each year, plans to ensure compliance with all applicable laws and regulations,
to identify ways to reduce underage use of tobacco products, and to provide
internal incentives for reducing underage use and for developing products with
"reduced risk".
Participating manufacturers would also be required to implement compliance
programs setting compliance standards and procedures for employees and agents
that are reasonably capable of reducing violations. These programs must assign
to specific high-level personnel the overall responsibility for overseeing
compliance, forbid delegation of substantial discretionary authority to
individuals who have shown a propensity to disregard corporate policies,
establish training or equivalent means of educating employees and agents, and
institute appropriate disciplinary measures and steps to respond to violations
and prevent similar ones from recurring.
Participating manufacturers would be required to promulgate corporate
principles that express and explain the company's commitment to compliance,
reduction of underage tobacco use, and development of "reduced risk" tobacco
products. They would be required to work with retail organizations on
compliance, including retailer compliance checks and financial incentives for
compliance, and disband certain industry associations and only form new ones
subject to regulatory oversight.
Participating manufacturers would be subject to fines and penalties for
breaching any of these obligations. Companies would be required to direct their
employees to report known or alleged violations to the company compliance
officer, who in turn would be required to provide reports to the FDA. Finally,
companies would be prohibited from taking adverse action against "whistle
blowers" who report violations to the government.
Page 37
Public Smoking
The Resolution would mandate minimum federal standards governing smoking in
public places or at work (with states and localities retaining power to impose
stricter requirements). These restrictions, which would be enforced by the
Occupational Safety and Health Administration, would:
(i) Restrict indoor smoking in "public facilities" to ventilated areas
with systems that exhaust the air directly to the outside, maintain
the smoking area at "negative pressure" compared with adjoining areas
and do not recirculate the air inside the public facility.
(ii) Ensure that no employee may be required to enter a designated smoking
area while smoking is occurring.
(iii) Exempt restaurants (other than fast food restaurants) and bars,
private clubs, hotel guest rooms, casinos, bingo parlors, tobacco
merchants and prisons.
Enforcement
Violations of the Resolution's terms would carry civil and criminal penalties
based upon the penalty provisions of the Food, Drug and Cosmetic Act and, where
applicable, the provisions of the United States criminal code. Special enhanced
civil penalties of up to ten times the penalties applicable to similar
violations by drug companies would attach to violations of the obligations to
disclose research about health effects and information about the toxicity of
non-tobacco ingredients.
Terms of the Resolution would be embodied in state consent decrees, giving the
states concurrent enforcement powers. State enforcement could not impose
obligations or requirements beyond those imposed by the Resolution (except where
the Resolution specifically does not preempt additional state-law obligations)
and would be limited to the penalties specified in the Resolution and by
prohibition of duplicative penalties.
Industry Payments
The Resolution would require participating manufacturers to make substantial
payments in the year of implementation and thereafter ("Industry Payments").
Participating manufacturers would be required to make an aggregate $10 billion
initial Industry Payment on the date federal legislation implementing the terms
of the Resolution is signed. This Industry Payment would be based on relative
market capitalizations and Lorillard currently estimates that its share of the
initial Industry Payment would be approximately $750 million which would be
funded from a combination of available cash and borrowings. Thereafter, the
companies would be required to make specified annual Industry Payments
determined and allocated among the companies based on volume of domestic sales
as long as the companies continue to sell tobacco products in the United States.
These Industry Payments, which would begin on December 31 of the first full year
after implementing federal legislation is signed, would be in the following
amounts (at 1996 volume levels): year 1: $8.5 billion; year 2: $9.5 billion;
year 3: $11.5 billion; year 4: $14 billion; and each year thereafter: $15
billion. These Industry Payments would be increased by the greater of 3% or the
previous year's inflation rate determined with reference to the Consumer Price
Index. The Industry Payments would increase or decrease in proportion to changes
from 1996 domestic sales volume levels. Volume declines would be measured based
on adult sales volume figures; volume increases would be measured by total sales
volume. If sales volume declines but the industry's domestic net operating
profit exceeds base year inflation-adjusted levels, the reduction in the annual
Industry Payment due to volume decline, if any, would be offset to the extent of
Page 38
25% of the increased profit. At current levels of sales and prior to any
adjustment for inflation, the Resolution would require total Industry Payments
of $368.5 billion over the first 25 years (subject to credits described below in
connection with potential civil tort liability).
The Industry Payments would be separate from any surcharges required under the
"look back" provision discussed above under the heading "Surcharge for Failure
to Achieve Underage Smoking Goals". The Industry Payments would receive priority
and would not be dischargeable in any bankruptcy or reorganization proceeding
and would be the obligation only of entities selling tobacco products in the
United States (and not their affiliated companies). The Resolution provides that
all payments by the industry would be ordinary and necessary business expenses
in the year of payment, and no part thereof would be either in settlement of an
actual or potential liability for a fine or penalty (civil or criminal) or the
cost of a tangible or intangible asset. The Resolution would provide for the
pass-through to consumers of the annual Industry Payments in order to promote
the maximum reduction in underage use.
The Industry Payments would be made to a central federal authority and then
allocated among various programs and entities to provide funds for federal and
state enforcement efforts; federal, state and local governments' health benefit
programs; public benefits to resolve past punitive damages claims that might be
asserted in private litigation; the expenses related to the administration of
federal legislation enacted pursuant to the Resolution; and a variety of public
and private non-profit efforts to discourage minors from beginning to use
tobacco products and to assist current tobacco consumers to quit, including
research, public education campaigns, individual cessation programs, and impact
grants.
Effects on Litigation
If enacted, the federal legislation provided for in the Resolution would
settle present state-wide Reimbursement Cases (or similar actions brought by or
on behalf of any governmental entity), parens patriae and smoking and health
class actions and all "addiction"/dependence claims and would bar similar
actions from being maintained in the future. However, the Resolution provides
that no stay applications will be made in pending governmental actions without
the mutual consent of the parties. On July 2, 1997, together with other
companies in the United States tobacco industry, Lorillard entered into a
Memorandum of Understanding with the State of Mississippi with respect to that
state's health care cost recovery action. Lorillard may enter into discussions
with certain other states with Reimbursement Cases scheduled to be tried this
year with regard to the postponement or settlement of such actions pending the
enactment of the legislation contemplated by the Resolution. No assurance can be
given whether a postponement or settlement will be achieved, or, if achieved, as
to the terms thereof. The Resolution would not affect any smoking and health
class action or any Reimbursement Case that is reduced to final judgment before
implementing federal legislation is effective.
Under the Resolution, the rights of individuals to sue the tobacco industry
would be preserved, as would existing legal doctrine regarding the types of tort
claims that can be brought under applicable statutory and case law except as
expressly changed by implementing federal legislation. Claims, however, could
not be maintained on a class or other aggregated basis and could be maintained
only against tobacco manufacturing companies (and not their retailers,
distributors or affiliated companies). In addition, all punitive damage claims
based on past conduct would be resolved as part of the Resolution and future
claimants could seek punitive damages only with respect to claims predicated
upon conduct taking place after the effective date of implementing federal
legislation. Finally, except with respect to actions pending as of June 9, 1997,
third-party payor (and similar) claims could be maintained only based on
Page 39
subrogation of individual claims. Under subrogation principles, a payor of
medical costs can seek recovery from a third party only by "standing in the
shoes" of the injured party and being subject to all defenses available against
the injured party.
The Resolution contemplates that participating tobacco manufacturers would
enter into a joint sharing agreement for civil liabilities relating to past
conduct. Judgments and settlements arising from tort actions would be paid as
follows: (i) The Resolution would set an annual aggregate cap equal to 33% of
the annual base Industry Payment (including any reductions for volume declines).
(ii) Any judgments or settlements exceeding the cap in a year would roll over
into the next year. (iii) While judgments and settlements would run against the
defendant, they would give rise to an 80-cents-on-the-dollar credit against the
annual Industry Payment. (iv) Finally, any individual judgments in excess of $1
million would be paid at the rate of $1 million per year unless every other
judgment and settlement could first be satisfied within the annual aggregate
cap. In all circumstances, however, the companies would remain fully responsible
for costs of defense and certain costs associated with the fees of attorneys
representing certain plaintiffs in the litigation that would be settled by the
Resolution.
Non-participating Manufacturers
The Resolution would contain certain measures to ensure that non-participating
manufacturers are not free to undercut the Resolution by selling tobacco
products at lower prices because they were not making the Industry Payments.
See Note 5 of the Notes to Consolidated Condensed Financial Statements for
information with respect to tobacco related litigation.
PROPOSED FEDERAL EXCISE TAX INCREASE
The United States federal excise tax on cigarettes was $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. Such action may adversely affect Lorillard's volume, operating
revenues and operating income.
Offshore Drilling
- -----------------
Diamond Offshore expects to spend approximately $189.2 million during 1997 for
rig upgrades, including approximately $162.5 million for expenditures in
conjunction with the upgrades of three rigs for deep water drilling in the Gulf
of Mexico. Diamond Offshore expended $121.3 million on these projects during the
six months ended June 30, 1997. In addition, Diamond Offshore expects to spend
approximately $25.0 million for a cantilever conversion project on a jack-up
rig, of which $.5 million has been expended through June 30, 1997. Diamond
Offshore has also budgeted $70.7 million for 1997 capital expenditures
associated with its continuing rig enhancement program, spare equipment and
other corporate requirements. During the first six months of 1997, $30.9 million
was expended on this program.
In April 1997, Diamond Offshore completed a public offering of 1.25 million
shares of its common stock for net proceeds of approximately $82.3 million.
Diamond Offshore used these funds to acquire the Polyconfidence, a
semisubmersible accommodation vessel currently working in the U.K. sector of the
North Sea for approximately $81.0 million. As a result of the public offering,
Page 40
the Company's ownership interest in Diamond Offshore declined to 50.3% and the
Company recorded a pre-tax gain of approximately $29.1 million in the second
quarter of 1997. Diamond Offshore is in discussions with several oil companies
regarding conversion of the Polyconfidence to a semisubmersible drilling unit
with advanced capabilities. Such a conversion would be dependent upon the
receipt of a term contract commitment at favorable dayrates. Although the extent
of the conversion would be dependent upon the particular demands of the
customer, the preliminary estimate of conversion cost is approximately $160.0 to
$175.0 million. 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.
In July 1997, Diamond Offshore declared a two-for-one stock split in the form
of a stock dividend to stockholders of record on July 24, 1997. Approximately
139.3 million shares will be outstanding after the split. Diamond Offshore
declared a cash dividend of $0.14 per common share, on the pre-split shares,
payable August 7, 1997 to stockholders of record on July 24, 1997.
Page 41
Investments:
- -----------
Insurance
- ---------
A summary of CNA's general account fixed maturity securities portfolio and
short-term investments are as follows:
<TABLE>
<CAPTION>
Change in
Unrealized
June 30, December 31, Gains
1997 1996 (Losses)
------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities and
obligations of government agencies . $10,460.1 $ 9,835.3 $ (71.9)
Asset-backed securities ............. 4,634.3 6,292.3 15.6
Tax exempt securities ............... 4,424.5 4,951.2 19.6
Taxable ............................. 6,421.1 6,641.8 (52.9)
---------------------------------
Total fixed maturity securities. 25,940.0 27,720.6 (89.6)
Stocks ................................ 657.6 859.1 (40.9)
Short-term and other investments....... 9,943.4 6,830.7 (12.1)
Derivative security investments ....... .9 2.0
---------------------------------
Total .......................... $36,541.9 $35,412.4 $(142.6)
=================================
Short-term investments:
Commercial paper .................... $ 3,707.0 $ 3,207.3
Security repurchase collateral ...... 1,635.3 100.5
Escrow .............................. 1,092.2 1,062.2
Others .............................. 2,578.0 1,483.7
Other investments ..................... 930.9 977.0
-----------------------
Total short-term and other
investments ................... $ 9,943.4 $ 6,830.7
=======================
</TABLE>
CNA's general account investment portfolio is managed to maximize after tax
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,
fixed maturity securities are classified as available for sale.
CNA has a securities lending program where securities are loaned to third
parties, primarily major brokerage firms. Borrowers of these securities must
deposit cash or securities in excess of 100% of the fair value of the securities
borrowed. Cash deposits from these transactions are invested in short-term
investments (primarily commercial paper). CNA continues to receive the interest
on loaned debt securities as beneficial owner and accordingly, loaned debt
Page 42
securities are included within fixed maturity securities. The liabilities for
securities sold subject to repurchase agreements are recorded at their
contractual repurchase amounts.
In addition to interest rate swaps used to convert CNA's acquisition debt from
variable rate to a fixed rate, CNA holds derivative financial instruments for
purposes of enhancing income and total return. These other derivative securities
are marked-to-market with valuation changes reported as investment gains and
losses. CNA's investment in, and risk in relation to, derivative securities is
not significant.
The general account portfolio consists primarily of high quality (BBB or
higher) marketable fixed maturity securities, approximately 94% of which are
rated as investment grade. At June 30, 1997, tax exempt securities and short-
term investments excluding collateral for securities sold under repurchase
agreements, comprised approximately 12% and 20%, respectively, of the general
account's total investment portfolio compared to 14% and 16%, respectively, at
December 31, 1996. 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. At June 30,
1997, the major components of the short-term investment portfolio consist
primarily of high grade commercial paper and U.S. Treasury bills. Collateral for
securities sold under repurchase agreements increased $1,525.1 million to
$1,625.6 million at June 30, 1997.
As of June 30, 1997, the market value of CNA's general account investments in
fixed maturities was $25.9 billion and was greater than amortized cost by
approximately $91.3 million. This compares to a market value of $27.7 billion
and $181.0 million of net unrealized investment gains at December 31, 1996. The
gross unrealized investment gains and losses for the fixed maturity securities
portfolio at June 30, 1997, were $323.6 and $232.3 million, respectively,
compared to $443.8 and $262.8 million, respectively, at December 31, 1996. The
decline in unrealized investment gains is attributable, in large part, to
increases in interest rates which have an adverse effect on bond values.
Net unrealized investment losses on general account fixed maturities at June
30, 1997 include net unrealized investment losses on high yield securities of
$10.0 million, compared to net unrealized investment gains of $41.0 million at
December 31, 1996. 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 were
$1.5 billion at June 30, 1997 as compared to $2.0 billion at December 31, 1996.
At June 30, 1997, total Separate Account business cash and investments
amounted to approximately $5.8 billion with taxable fixed maturity securities
representing approximately 83% of the Separate Accounts' portfolio.
Approximately 77% of 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 guaranteed investment
contracts. The fair value of all fixed maturity securities in the guaranteed
investment portfolio was $4.0 billion at June 30, 1997 compared to $3.8 billion
at December 31, 1996. At June 30, 1997, fair value was greater than amortized
cost by approximately $9.2 million. This compares to an unrealized loss of
approximately $0.7 million at December 31, 1996. The gross unrealized investment
gains and losses for the guaranteed investment fixed maturity securities
portfolio at June 30, 1997 were $45.1 and $35.9 million, respectively.
Carrying values of high yield securities in the guaranteed investment
Page 43
portfolio were $443.5 and $472.0 million at June 30, 1997 and December 31, 1996,
respectively. Net unrealized investment losses on high yield securities held in
such Separate Accounts were $6.5 million at June 30, 1997, compared to $6.0
million at December 31, 1996.
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 June 30, 1997, CNA's investment in high
yield bonds, including Separate Accounts, was approximately 3.3% 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 June 30, 1997 (general and
guaranteed investment portfolios) are $7.1 billion of asset-backed securities,
consisting of approximately 52.0% in collateralized mortgage obligations
("CMO's"), 9.0% in corporate asset-backed obligations, and 39.0% in U.S.
government issued pass-through certificates. The majority of CMO's held are U.S.
government agency issues, which are actively traded in liquid markets and are
priced monthly by broker-dealers. At June 30, 1997, the fair value of asset-
backed securities was more than amortized cost by approximately $22.2 million
compared to net unrealized investment losses of $5.0 million at December 31,
1996. 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.
Over the last few years, much concern has been raised regarding the quality of
insurance company invested assets. At June 30, 1997, 46.0% of the general
account's fixed maturity securities portfolio was invested in U.S. government
securities, 30.0% 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 4.0% U.S. government securities, 62.0% in other AAA rated
securities and 13.0% in AA and A rated securities. These ratings are primarily
from Standard and Poor's.
Other
- -----
Investment activities of non-insurance companies include investments in fixed
maturities securities, equity securities, derivative instruments and short-term
investments. Equity securities which are considered part of the Company's
trading portfolio, 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 net unrealized losses of $21.7 and $22.4 million
at June 30, 1997 and December 31, 1996, respectively.
The Company invests in certain derivative instruments for income enhancements
as part of its portfolio management strategy. These instruments include various
swaps, forwards and futures contracts as well as both purchased and written
options. These investments subject the Company to market risk for positions
where the Company does not hold an offsetting security. The Company controls
this risk through monitoring procedures which include daily detailed reports of
existing positions and valuation fluctuations. These reports are reviewed by
members of senior management 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.
Page 44
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 -- Other," below, for information with respect
to the impact of derivative instruments on results of operations. See Note 4 of
the Notes to Consolidated Financial Statements in the 1996 Annual Report on Form
10-K for additional information with respect to derivative instruments.
Results of Operations:
- ----------------------
Revenues decreased by $295.5 and $400.9 million, or 5.9% and 4.0%, and net
income decreased by $314.9 and $444.4 million, or 83.2% and 59.5%, respectively,
for the quarter and six months ended June 30, 1997 as compared to the prior
year. The following table sets forth the major sources of the Company's
consolidated revenues and net income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
1997 1996 1997 1996
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues (a):
Property and casualty insurance ....... $3,256.7 $3,126.3 $6,332.0 $ 6,447.0
Life insurance ........................ 988.2 985.4 2,029.6 1,980.6
Cigarettes ............................ 604.3 571.7 1,120.8 1,077.1
Hotels ................................ 61.1 54.2 107.0 95.7
Offshore drilling ..................... 234.0 150.3 441.6 257.8
Watches and clocks .................... 27.9 24.0 57.9 49.5
Investment income-net (non-insurance
companies) ........................... (420.7) 144.2 (394.2) 194.3
Other and eliminations-net ............ (2.4) (11.5) (6.5) (12.9)
----------------------------------------------------
$4,749.1 $5,044.6 $9,688.2 $10,089.1
====================================================
Net income (a):
Property and casualty insurance ....... $ 163.7 $ 151.5 $ 284.4 $ 381.7
Life insurance ........................ 42.4 29.0 77.1 94.9
Cigarettes ............................ 123.5 114.1 203.0 191.1
Hotels ................................ 8.9 4.5 9.1 1.7
Offshore drilling ..................... 30.6 12.0 57.4 20.5
Watches and clocks .................... 1.2 .6 2.7 1.3
Investment income-net (non-insurance
companies) ........................... (275.1) 93.6 (260.6) 125.1
Corporate interest expense ............ (16.6) (15.4) (32.4) (34.8)
Unallocated corporate expense and
other-net ............................ (14.8) (11.2) (37.6) (34.0)
----------------------------------------------------
$ 63.8 $ 378.7 $ 303.1 $ 747.5
====================================================
Page 45
(a) Includes investment (losses) gains as follows:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance ....... $ 127.7 $ 63.2 $ 146.0 $279.8
Life insurance ........................ 43.4 14.4 72.5 102.0
Investment income-net ................. (466.5) 100.8 (485.1) 108.4
----------------------------------------------------
$(295.4) $178.4 $(266.6) $490.2
====================================================
Net income:
Property and casualty insurance ....... $ 69.4 $ 38.5 $ 79.5 $151.7
Life insurance ........................ 22.0 6.8 36.9 47.9
Investment income-net ................. (303.4) 66.2 (317.3) 70.9
----------------------------------------------------
$(212.0) $111.5 $(200.9) $270.5
====================================================
</TABLE>
Insurance
- ---------
Property and casualty revenues, excluding investment gains, increased by $65.9
and $18.8 million, or 2.2% and .3%, for the quarter and six months ended June
30, 1997, as compared to the same period a year ago.
Property and casualty premium revenues increased by $50.8 and $13.5 million,
or 2.0% and .3%, for the quarter and six months ended June 30, 1997, from the
prior year's comparable period. The increase is a result of an increase in
commercial operations particularly in professional and specialty, accident and
health and reinsurance business, partially offset by a decrease in involuntary
risk business. Revenues also benefited from increases in other insurance
operations. Net investment income decreased by $8.0 and $29.0 million, or 1.7%
and 3.1%, for the quarter and six months ended June 30, 1997, compared with the
same period in the prior year. The decrease reflects reduced operating cash flow
and a movement to shorter duration investments. The fixed maturities segment of
the investment portfolio yielded 6.4% in the first half of 1997 compared with
6.9% for the same period a year ago.
Life insurance revenues, excluding investment gains, decreased by $26.2
million, or 2.7%, and increased $78.5 million, or 4.2%, as compared to the same
period a year ago. Life premium revenues decreased by $23.3 million or 2.8% and
increased $67.5 million, or 4.2%, for the quarter and six months ended June 30,
1997. The decrease in life revenues for the quarter ended June 30, 1997 is due
to a decline in annuity and group reinsurance business, partially offset by an
increase in Viaterm life product sales and disability and accident premium. The
increase for the six months ended June 30, 1997 is due to continued growth in
sales in the Viaterm life product, continued growth in disability and accident
premium and an increase in premiums in the Federal Employees Health Benefits
Program, due to strong enrollment through the fist six months of 1997, partially
offset by a decline in group reinsurance premium. Life net investment income was
essentially unchanged for the quarter and increased $7.0 million, or 3.6%, for
the six months ended June 30, 1997, compared to the same periods a year ago, due
to a larger asset base generated from increased operating cash flows. The fixed
maturities segment of the life investment portfolio yielded 6.4% in the first
half of 1997 compared with 6.8% for the same period a year ago.
Page 46
Property and casualty underwriting losses for the quarter and six months ended
June 30, 1997 were $277.2 and $570.4 million, compared to $243.0 and $534.0
million for the same period in 1996. The GAAP combined ratio for the six months
ended June 30, 1997 was 109.3% as compared to 108.6% for the comparable period
in 1996. GAAP expense ratios were 29.8% and 30.0% for the six months ended June
30, 1997 and 1996, respectively. Deterioration in the loss ratios reflect
continued competitive pressures on virtually all segments of the insurance
market, particularly commercial insurance. Pre-tax catastrophe losses were
approximately $45.0 and $76.0 million for the quarter and six months ended June
30, 1997 as compared to $114.5 and $208.0 million in 1996.
The components of CNA's investment gains are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Bonds:
U.S. Government ....................... $ 43.1 $(21.9) $ 49.0 $112.4
Tax exempt ............................ 1.7 (10.5) 2.2 9.5
Asset-backed .......................... 2.4 3.9 9.2 21.3
Taxable ............................... 73.6 17.0 84.0 44.8
--------------------------------------------------
Total bonds ........................ 120.8 (11.5) 144.4 188.0
Stocks .................................. 9.6 74.3 39.3 129.2
Derivative instruments .................. (4.0) 2.9 (.7) 12.0
Separate Accounts and other ............. 45.6 6.8 55.0 48.6
--------------------------------------------------
Total investment gains ............. $172.0 $ 72.5 $238.0 $377.8
==================================================
</TABLE>
CNA's primary property and casualty subsidiary, Continental Casualty Company,
is party to litigation with Fibreboard Corporation 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 $32.6 and $43.7 million, or 5.7% and 4.1%, and net
income increased by $9.4 and $11.9 million, or 8.2% and 6.2%, respectively, for
the quarter and six months ended June 30, 1997 as compared to the corresponding
periods of the prior year.
The increase in revenues is primarily composed of an increase of approximately
$11.8 and $17.9 million, or 2.1% and 1.7%, due to higher unit sales volume and
an increase of approximately $21.3 and $31.2 million, or 3.8% and 2.9%,
reflecting higher average unit prices for the quarter and six months ended June
30, 1997, as compared to the prior year. These increases were partially offset
by lower investment income. Net income increased as a result of the improved
revenues, partially offset by higher legal expenses.
Virtually all of Lorillard's sales are in the full price brand category.
Discount brand sales have decreased from an average of 37% of industry sales
during 1993 to an average of 28% during 1996. At June 30, 1997, they represented
27.5% of industry sales.
Page 47
Hotels
- ------
Revenues increased by $6.9 and $11.3 million, or 12.7% and 11.8%, and net
income increased by $4.4 and $7.4 million for the quarter and six months ended
June 30, 1997, as compared to the prior year, due primarily to improved results
at the Loews Monte Carlo hotel, as well as higher overall average room and
occupancy rates.
Offshore drilling
- -----------------
Revenues increased by $83.7 and $183.8 million and net income increased by
$18.6 and $36.9 million, respectively, for the quarter and six months ended June
30, 1997, as compared to the prior year.
Revenues from semisubmersible rigs increased by $68.8 and $153.8 million, or
45.8% and 59.7%, for the quarter and six months ended June 30, 1997. These
increases reflect additional revenues ($17.5 and $56.1 million) from eight
semisubmersible rigs acquired through Arethusa, higher dayrates ($30.1 and $45.6
million) recognized by semisubmersible rigs located in the North Sea and the
Gulf of Mexico, and increased utilization ($5.7 and $27.4 million) resulting
from shipyard repairs in the prior year which reduced the days worked during the
comparable period. Revenues from jackup rigs increased by $18.7 and $42.1
million, or 12.5% and 16.3%, due to additional rigs acquired through Arethusa
($3.2 and $13.3 million) and improvements in dayrates in the Gulf of Mexico
($14.8 and $27.6 million).
Net income for the quarter and six months ended June 30, 1997 increased due
primarily to the higher revenues discussed above, partially offset by increased
operating costs and depreciation expense related to the drilling rigs acquired
from Arethusa, and an increased provision for minority interest as a result of
the dilutive effect to the Company of Diamond Offshore's acquisition of Arethusa
in April 1996.
Watches and Clocks
- ------------------
Revenues increased by $3.9 and $8.4 million and net income increased by $.6
and $1.4 million, respectively, for the quarter and six months ended June 30,
1997 as compared to the prior year.
Revenues increased for the quarter and six months ended June 30, 1997 due
primarily to increased watch unit prices and sales volume.
Net income increased for the quarter and six months ended June 30, 1997 due
primarily to the increased revenues discussed above and lower postretirement
benefit costs, partially offset by higher administrative, advertising and
selling expenses.
Other
- -----
Revenues decreased by $555.8 and $582.1 million and net income decreased by
$373.5 and $386.9 million, respectively, for the quarter and six months ended
June 30, 1997 as compared to the prior year.
Page 48
The components of investment (losses) gains included in Investment income-net
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Derivative instruments (1) ............ $(357.4) $(67.9) $(380.7) $(102.9)
Gain on issuance of subsidiary's stock 29.1 186.6 29.1 186.6
Equity securities, including short
positions ............................ (135.3) (28.0) (149.3) 15.5
Other ................................. (2.9) 10.1 15.8 9.2
------------------------------------
(466.5) 100.8 (485.1) 108.4
Income tax benefit (expense) ............ 163.2 (35.1) 169.7 (37.9)
Minority interest ....................... (.1) .5 (1.9) .4
------------------------------------
Net income ......................... $(303.4) $ 66.2 $(317.3) $ 70.9
====================================
</TABLE>
(1) Includes losses on equity index futures and options aggregating $350.2,
$61.9, $386.2 and $110.1 for the quarter and six months ended June 30,
1997 and 1996, respectively. Since June 30, 1997, the Company has
experienced significant losses from its open contracts on these equity
index positions.
Exclusive of securities transactions, revenues increased $11.5 and $11.4
million, or 36.1% and 15.6%, for the quarter and six months ended June 30, 1997
due primarily to increased investment interest income. Net loss increased by
$3.9 million for the quarter ended June 30, 1997 due primarily to a lower
allocation of parent company charges, partially offset by increased investment
income. Net loss declined by $1.3 million for the six months ended June 30, 1997
due to the increased investment income and lower interest expenses, partially
offset by reduced parent company charges.
Accounting Standards
- --------------------
In January 1997, the Securities and Exchange Commission expanded existing
disclosure requirements with respect to certain derivative instruments. The new
rules require enhanced descriptions in the accounting policies footnote to the
financial statements and also require qualitative and quantitative disclosure
outside the financial statements regarding market risk related to the derivative
instruments. The rules are effective for fiscal years ended after June 15, 1997
and will not have a significant impact on the Company.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share ("EPS"), which simplifies the
Page 49
computations originally established in APB Opinion No. 15, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with basic EPS, which excludes the concept of common stock
equivalents. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation between the two computations. This Statement is
effective for financial statements issued for periods ending after December 15,
1997 and will not have an impact on the Company.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which codifies standards for disclosing information
about an entity's capital structure. This Statement has no impact on the
Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement will not have a significant impact on the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997 and will affect the Company's segment
disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
1. CNA is involved in various lawsuits in the ordinary course of business.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Set forth below is information relating to the 1997 Annual Meeting of
Shareholders of the Registrant:
The annual meeting was called to order at 11:00 A.M., May 13, 1997.
Represented at the meeting, in person or by proxy, were 104,041,634 shares,
approximately 90.5% of the issued and outstanding shares entitled to vote.
Page 50
The following business was transacted:
Election of Directors
- --------------------------------------------------------------------------------
Over 88% of the votes cast for directors were voted for the election of the
following directors. The number of votes for and withheld with respect to each
director was as follows:
Votes For Votes Withheld
--------- --------------
Charles B. Benenson 102,526,642 1,514,992
John Brademas 92,344,461 11,697,173
Dennis H. Chookaszian 102,509,535 1,532,099
Bernard Myerson 102,486,652 1,554,982
Edward J. Noha 102,488,585 1,553,049
Gloria R. Scott 101,674,859 2,366,775
Andrew H. Tisch 102,502,839 1,538,795
James S. Tisch 102,534,775 1,506,859
Jonathan M. Tisch 102,529,189 1,512,445
Laurence A. Tisch 102,474,661 1,566,973
Preston R. Tisch 102,471,392 1,570,242
Ratification of the appointment of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
Approved-- 103,801,787 shares, approximately 99.7% of the shares voting, voted
to ratify the appointment of Deloitte & Touche, LLP as independent certified
public accountants for the Company. 67,790 shares, approximately .1% of the
shares voting, voted against, and 172,057 shares, approximately .2% of the
shares voting, abstained.
Shareholder proposal relating to cumulative voting
- --------------------------------------------------------------------------------
Rejected-- 67,991,929 shares, approximately 69.8% of the shares voting, voted
against this shareholder proposal. 25,787,340 shares, approximately 26.4% of the
shares voting, were cast for, and 3,716,823 shares, approximately 3.8% of the
shares voting, abstained. In addition, there were 6,545,542 shares as to which
brokers indicated that they did not have authority to vote ("broker non-votes").
Shareholder proposal relating to director stock ownership
- --------------------------------------------------------------------------------
Rejected-- 91,480,624 shares, approximately 94.0% of the shares voting, voted
against this shareholder proposal. 3,352,195 shares, approximately 3.4% of the
shares voting, were cast for, and 2,481,673 shares, approximately 2.6% of the
shares voting, abstained. In addition, there were 6,727,142 broker non-votes.
Shareholder proposal relating to smoking by youth
- --------------------------------------------------------------------------------
Rejected-- 81,550,971 shares, approximately 83.6% of the shares voting, voted
against this shareholder proposal. 6,331,756 shares, approximately 6.5% of the
shares voting, were cast for, and 9,625,064 shares, approximately 9.9% of the
shares voting, abstained. In addition, there were 6,533,843 broker non-votes.
Shareholder proposal relating to eliminating benzo(a)pyrene from tobacco
products
- --------------------------------------------------------------------------------
Rejected-- 82,576,756 shares, approximately 84.7% of the shares voting, voted
against this shareholder proposal. 3,164,081 shares, approximately 3.2% of the
shares voting, were cast for, and 11,766,983 shares, approximately 12.1% of the
shares voting, abstained. In addition, there were 6,533,814 broker non-votes.
Page 51
Shareholder proposal relating to independent directors
- --------------------------------------------------------------------------------
Rejected-- 73,147,028 shares, approximately 75.1% of the shares voting, voted
against this shareholder proposal. 21,296,102 shares, approximately 21.8% of the
shares voting, were cast for; and 3,005,493 shares, approximately 3.1% of the
shares voting, abstained. In addition, there were 6,593,011 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits--
(3.01) By-Laws
(27) Financial Data Schedule for the six months ended June 30, 1997.
(b) Current reports on Form 8-K--
The Company filed a report on Form 8-K on June 24, 1997 stating that together
with other companies in the United States tobacco industry, the Company's
subsidiary, Lorillard Tobacco Company, signed a Memorandum of Understanding
("MOU") to resolve certain regulatory and litigation issues. A copy of the MOU
was filed as an exhibit.
The Company also filed a report on Form 8-K on June 26, 1997 stating that the
Boards of Directors of its Lorillard, Inc. and Lorillard Tobacco Company
subsidiaries had approved the proposal reflected in the MOU. The Company also
reported that its Board of Directors had voted to support this proposal.
Page 52
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: August 14, 1997 By /s/ Peter W. Keegan
-------------------------
PETER W. KEEGAN
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 53
Exhibit 3.01
AS AMENDED THROUGH
May 13, 1997
=====================================
================================================================================
LOEWS CORPORATION
=======
By-Laws
=======
================================================================================
BY-LAWS
OF
LOEWS CORPORATION
(A Delaware Corporation)
------------------------
------------------------------------
ARTICLE 1
Definitions
As used in these By-laws, unless the context otherwise requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as amended from
time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Corporation" means Loews Corporation.
1.7 "Directors" means directors of the Corporation.
1.8 "General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended from time to time.
1.9 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.10 "Chairman of the Board" means the Chairman of the Board of Directors
of the Corporation.
1.11 "President" means the President of the Corporation.
2
1.12 "Secretary" means the Secretary of the Corporation.
1.13 "Stockholders" means stockholders of the Corporation.
1.14 "Treasurer" means the Treasurer of the Corporation.
1.15 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of the stockholders shall be held at
-----------------
the office of the Corporation or at such other place within or without the State
of Delaware as shall be specified or fixed in the notice of such meeting or in
the waiver of notice thereof.
2.2 Annual Meeting. A meeting of stockholders shall be held annually for
--------------
the election of directors and the transaction of other business at such hour as
may be designated in the notice of meeting, on the second Tuesday in May in each
year (or, if such date falls on a legal holiday, on the first business day
thereafter which is not a Saturday, Sunday or legal holiday), or on such other
date not later than six months after the end of the fiscal year of the
Corporation, as may be fixed by the Board.
2.3 Special Meetings. A special meeting of stockholders, unless otherwise
----------------
prescribed by statute, may be called at any time by the Board or by the Chairman
of the Board and Chief Executive Officer, the President or by the Secretary and
shall be called by the Chairman of the Board and Chief Executive Officer, the
President or by the Secretary on the written request of holders of a majority or
more of the shares of capital stock of the Corporation entitled to vote in an
election of directors, which written request shall state the purpose or purposes
of such meeting. At any special meeting of stockholders only such business may
be transacted which is related to the purpose or purposes of such meeting set
forth in the notice thereof given pursuant to Section 2.5 of the By-laws or in
any waiver of notice thereof given pursuant to Section 2.4 of the By-laws.
2.4 Fixing Record Date. For the purpose of determining the stockholders
------------------
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful
3
action, the Board may fix, in advance, a date as the record date for any such
determination of stockholders. Such date shall not be more than sixty nor less
than ten days before the date of such meeting, nor more than sixty days prior to
any other action. If no such record date is fixed:
2.4.1 The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held;
2.4.2 The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board is necessary, shall be the day on which the first written consent
is expressed;
2.4.3 The record date for determining stockholders for any purpose other
than specified in Sections 2.4.1 and 2.4.2 shall be at the close of business on
the day on which the Board adopts the resolution relating thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.4 such
determination shall apply to any adjournment thereof, unless the Board fixes a
new record date for the adjourned meeting.
2.5 Notice of Meetings of Stockholders. Except as otherwise provided in
----------------------------------
Sections 2.3 and 2.4 of the By-laws, whenever under the General Corporation Law
or the Certificate of Incorporation or the By-laws, stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. A copy of the notice of
any meeting shall be given, personally or by mail not less than ten nor more
than fifty days before the date of the meeting, to each stockholder entitled to
notice of or to vote at such meeting. If mailed, such notice shall be deemed to
be given when deposited in the United States mail, with postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation. An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the Corporation that the notice required by this section has
been given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been transacted at the
meeting as originally called. If, however, the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
4
2.6 List of Stockholders. The Secretary shall prepare and make, or cause to
--------------------
be prepared and made, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.7 Quorum of Stockholders; Adjournment. The holders of a majority of the
-----------------------------------
shares of stock entitled to vote at any meeting of stockholders, present in
person or represented by proxy, shall constitute a quorum for the transaction of
any business at such meeting. When a quorum is once present to organize a
meeting of stockholders, it is not broken by the subsequent withdrawal of any
stockholders. The holders of a majority of the shares of stock present in person
or represented by proxy at any meeting of stockholders, including an adjourned
meeting, whether or not a quorum is present, may adjourn such meeting to another
time and place.
2.8 Voting; Proxies. Unless otherwise provided in the Certificate of
---------------
Incorporation every stockholder of record shall be entitled at every meeting of
stockholders to one vote for each share of capital stock standing in his name on
the record of stockholders determined in accordance with Section 2.4 of the By-
laws. If the Certificate of Incorporation provides for more or less than one
vote for any share, on any matter, every, reference in the By-laws or the
General Corporation Law to a majority or other proportion of stock shall refer
to such majority or other proportion of the votes of such stock. The provisions
of Sections 212 and 217 of the General Corporation Law shall apply in
determining whether any shares of capital stock may be voted and the persons, if
any, entitled to vote such shares; but the Corporation shall be protected in
treating the persons in whose names shares of capital stock stand on the record
of stockholders as owners thereof for all purposes. At any meeting of
stockholders, a quorum being present, all matters, except as otherwise provided
by law or by the Certificate of Incorporation or by the By-laws, shall be
decided by a majority of the votes cast at such meeting by the holders of shares
present in person or represented by proxy and entitled to vote thereon. All
elections of directors shall be by written ballot unless otherwise provided in
the Certificate of Incorporation. In voting on any other question on which a
vote by ballot is required by law or is demanded by any stockholder entitled to
vote, the voting shall be by ballot. Each ballot shall be signed by the
stockholder voting or by his proxy, and shall state the number of shares voted.
On all other questions, the voting may be viva voce. Every stockholder entitled
to vote at a meeting of stockholders or to express consent or dissent without a
meeting may authorize another person or persons to act for him by proxy. The
validity and enforceability of any proxy shall be determined in accordance with
Section 212 of the General Corporation Law.
5
2.9 Selection and Duties of Inspectors at Meetings of Stockholders. The
--------------------------------------------------------------
Board, in advance of any meeting of stockholders, may appoint one or more
inspectors to act at the meeting or any adjournment thereof. If inspectors are
not so appointed, the person presiding at such meeting may, and on the request
of any stockholder entitled to vote thereat shall, appoint one or more
inspectors. In case any person appointed fails to appear or act, the vacancy may
be filled by appointment made by the Board in advance of the meeting or at the
meeting by the person presiding thereat. Each inspector, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector at such meeting with strict impartiality and according
to the best of his ability. The inspector or inspectors shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the person presiding at the meeting or any stockholder entitled to
vote thereat, the inspector or inspectors shall make a report in writing of any
challenge, question or matter determined by him or them and execute a
certificate of any fact found by him or them. Any report or certificate made by
the inspector or inspectors shall be prima facie evidence of the facts stated
and of the vote as certified by him or them.
2.10 Organization. At every meeting of stockholders, the Chairman of the
------------
Board and Chief Executive Officer, or in his absence the President, or in the
absence of both of them the Senior Vice President, or in the absence of all of
them the Executive Vice President or in the absence of all of them the most
senior Vice President (based on term of service as Vice President) present,
shall act as chairman of the meeting. The Secretary, or in his absence one of
the Assistant Secretaries, shall act as secretary of the meeting. In case none
of the officers above designated to act as chairman or secretary of the meeting,
respectively, shall be present a chairman or a secretary of the meeting, as the
case may be, shall be chosen by a majority of the votes cast at such meeting by
the holders of shares of capital stock present in person or represented by proxy
and entitled to vote at the meeting.
2.11 Order of Business. The order of business at all meetings of
-----------------
stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
6
ARTICLE 3
Directors
3.1 General Powers. Except as otherwise provided in the Certificate of
--------------
Incorporation, the business and affairs of the Corporation shall be managed by
the Board. The Board may adopt such rules and regulations, not inconsistent with
the Certificate of Incorporation or the By-laws or applicable laws, as it may
deem proper for the conduct of its meetings and the management of the
Corporation. In addition to the powers expressly conferred by the By-laws, the
Board may exercise all powers and perform all acts which are not required, by
the By-laws or the Certificate of Incorporation or by law, to be exercised and
performed by the stockholders.
3.2 Number; Qualification; Term of Office. The Board shall consist of one
-------------------------------------
or more members. The number of directors shall be fixed initially by the Board
and may thereafter be changed from time to time by action of the stockholders or
of the Board. Directors need not be stockholders. Each director shall hold
office until his successor is elected and qualified or until his earlier death,
resignation or removal.
3.3 Election. Directors shall except as otherwise required by law or by the
--------
Certificate of Incorporation, be elected by a plurality of the votes cast at a
meeting of stockholders by the holders of shares entitled to vote in the
election.
3.4 Newly Created Directorships and Vacancies. Unless otherwise provided in
-----------------------------------------
the Certificate of Incorporation, newly created directorships resulting from an
increase in the number of directors and vacancies occurring in the Board for any
reason, including the removal of directors without cause, may be filled by vote
of a majority of the directors then in office, although less than a quorum, at
any meeting of the Board or may be elected by a plurality of the votes cast by
the holders of shares of capital stock entitled to vote in the election at a
special meeting of stockholders called for that purpose. A director elected to
fill a vacancy shall be elected to hold office until his successor is elected
and qualified, or until his earlier death, resignation or removal.
3.5 Resignations. Any director may resign at any time by written notice to
------------
the Corporation. Such resignation shall take effect at the time therein
specified, and, unless otherwise specified, the acceptance of such resignation
shall not be necessary to make it effective.
3.6 Removal of Directors. Any or all of the directors may be removed (i)
--------------------
for cause, by vote of the stockholders or by action of the Board, and (ii)
without cause, by vote of the stockholders.
7
3.7 Remuneration. Unless otherwise expressly provided by resolution adopted
------------
by the Board, none of the directors or of the members of any committee of the
Corporation contemplated by these By-laws or otherwise provided for by
resolution of the Board shall as such receive any stated remuneration for his
services; but the Board may at any time or from time to time by resolution
provide that remuneration shall be paid to, or on behalf of, any director of the
Corporation or to any member of any such committee who shall not be in the
employ of the Corporation or of any of its subsidiary companies, either as his
annual remuneration as such director or member or as remuneration for his
attendance at each meeting of the Board or of such committee. The Board may also
likewise provide that the Corporation shall reimburse each such director or
member of such committee for any expenses paid by him on account of his
attendance at any such meeting. Nothing in this Section contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving remuneration therefor.
3.8 Place and Time of Meetings of the Board. Meetings of the Board, regular
---------------------------------------
or special, may be held at any place within or without the State of Delaware.
The times and places for holding meetings of the Board may be fixed from time to
time by resolution of the Board or (unless contrary to resolution of the Board)
in the notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where the annual
---------------
meeting of stockholders for the election of directors is held, and as soon as
practicable thereafter, the Board may hold its annual meeting, without notice of
such meeting, for the purposes of organization the election of officers and the
transaction of other business. The annual meeting of the Board may be held at
any other time and place specified in a notice given as provided in Section 3.11
of the By-laws for special meetings of the Board or in a waiver of notice
thereof.
3.10 Regular Meetings. Regular meetings of the Board may be held at such
----------------
times and places as may be fixed from time to time by the Board. Unless
otherwise required by the Board, regular meetings of the Board may be held
without notice. If any day fixed for a regular meeting of the Board shall be a
Saturday or Sunday or a legal holiday at the place where such meeting is to be
held, then such meeting shall be held at the same hour at the same place on the
first business day thereafter which is not a Saturday, Sunday or legal holiday.
3.11 Special Meetings. Special meetings of the Board shall be held whenever
----------------
called by the Chairman of the Board, the President, or the Secretary or by any
two or more directors. Notice of each special meeting of the Board shall, if
mailed, be addressed to each director at the address designated by him for that
purpose or, if none is designated, at his last known address at least two days
before the date on which the meeting is to be held; or such notice shall be sent
to each director at such address by telegraph, cable or wireless, or be
delivered to him personally, not later than the day before the date on which
such meeting is to be held. Every such notice shall state the time and place of
the meeting but need not state the purposes of the meeting, except to the extent
required by law.
8
If mailed, each notice shall be deemed given when deposited, with postage
thereon prepaid, in a post office or official depository under the exclusive
care and custody of the United States Post Office Department. Such mailing shall
be by first-class mail.
3.12 Adjourned Meetings. A majority of the directors present at any meeting
------------------
of the Board, including an adjourned meeting, whether or not a quorum is present
may adjourn such meeting to another time and place. Notice of any adjourned
meeting of the Board need not be given to any director whether or not present at
the time of the adjournment. Any business may be transacted at any adjourned
meeting that might have been transacted at the meeting as originally called.
3.13 Waiver of Notice. Whenever notice is required to be given to any
----------------
director or member of a committee of directors under any provision of the
General Corporation Law or of the Certificate of Incorporation or By-laws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice.
3.14 Organization. At each meeting of the Board, the Chairman of the Board,
------------
or in the absence of the Chairman of the Board, the President of the
Corporation, or in the absence of all of them a chairman chosen by the majority
of the directors present, shall preside. The Secretary shall act as secretary at
each meeting of the Board. In case the Secretary shall be absent from any
meeting of the Board, an Assistant Secretary shall perform the duties of secre-
tary at such meeting; and in the absence from any such meeting of the Secretary
and Assistant Secretaries, the person presiding at the meeting may appoint any
person to act as secretary of the meeting.
3.15 Quorum of Directors. A majority of the directors then in office shall
-------------------
constitute a quorum for the transaction of business or of any specified item of
business at any meeting of the Board.
3.16 Action by the Board. All corporate action taken by the Board or any
-------------------
committee thereof shall be taken at a meeting of the Board, or of such
committee, as the case may be, except that any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee. Members of the Board, or any
committee designated by the Board, may participate in a meeting of the Board, or
of such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each others and participation in a meeting pursuant to this
9
Section 3.16 shall constitute presence in person at such meeting. Except as
otherwise provided by the Certificate of Incorporation or by law, the vote of a
majority of the directors present (including those who participate by means of
conference telephone or similar communications equipment) at the time of the
vote, if a quorum is present at such time, shall be the act of the Board.
ARTICLE 4
COMMITTEES OF THE BOARD
4.1 Executive Committee; Number, Appointment, Term of Office, etc. (a) The
-------------------------------------------------------------
Board, by resolution adopted by a majority of the whole Board, may designate an
Executive Committee consisting of the Chairman of the Board and Chief Executive
Officer and such other directors as it may designate. Each member of the
Executive Committee shall continue to be a member thereof only so long as he
remains a director and at the pleasure of a majority of the whole Board. Any
vacancies on the Executive Committee may be filled by the majority of the whole
Board.
(b) The Executive Committee, between meetings of the Board, shall have and
may exercise the powers of the Board in the management of the property, business
and affairs of the Corporation and may authorize the seal of the Corporation to
be affixed to all papers which may require it. Without limiting the foregoing,
the Executive Committee shall have the express power and authority to declare a
dividend, to authorize the issuance of stock, and to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware.
The Secretary, or if he shall be absent from such meeting, the person (who shall
be an Assistant Secretary, if an Assistant Secretary shall be present thereat)
whom the chairman of such meeting shall appoint, shall act as secretary of such
meeting and keep the minutes thereof.
(c) Regular meetings of the Executive Committee, of which no notice shall
be necessary, shall be held on such days and at such places, within or without
the State of Delaware, as shall be fixed by resolution adopted by a majority of
the Executive Committee. Special meetings of the Executive Committee shall be
held whenever called by the Chairman of the Board, if Chief Executive Officer,
the President, the Chairman of the Executive Committee and shall be called by
the Secretary of the Corporation on the request of a majority of the Executive
Committee. Notice of each special meeting of the Executive Committee shall be
given to each member thereof by depositing such notice in the United States
mail, in a postage prepaid envelope, directed to him at his residence or usual
place of business at least two days before the day on which such meeting is to
be held or shall be sent addressed to him at such place by telegraph, cable,
wireless or other form of recorded communication or be delivered personally or
by telephone a reasonable time in advance of the time at which such meeting is
to be held. Notice of any such meeting need not, however, be given to any member
of the Executive Committee if he shall be present at such meeting. Any
10
meeting of the Executive Committee shall be a legal meeting without any Notice
thereof having been given if all the members of the Executive Committee shall be
present thereat. Such notice shall specify the time and place of the meeting,
but except as otherwise expressly provided by law, the purposes thereof need not
be stated in such notice. Subject to the provisions of these By-laws, the
Executive Committee may fix its own rules of procedure, and it shall keep a
record of its proceedings and report them to the Board at the next regular or
special meeting thereof after such proceedings shall have been taken. All such
proceedings shall be subject to revision or alteration by the Board; provided,
however, that third parties shall not be prejudiced by any such revision or
alteration.
(d) Except as otherwise provided by law, a majority of the Executive
Committee then in office shall constitute a quorum for the transaction of
business, and the act of a majority of those present at a meeting thereof shall
be the act of the Executive Committee. In the absence of a quorum, a majority of
the members of the Executive Committee present thereat may adjourn such meeting
from time to time until a quorum shall be present thereat. Notice of any
adjourned meeting need not be given. The Executive Committee shall act only as a
committee, and the individual members shall have no power as such.
(e) Any member of the Executive Committee may resign therefrom at any time
by giving written notice of his resignation to the Chairman of the Board, the
President or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, it shall take effect immediately upon its receipt; and,
except as specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
(f) In addition to the foregoing, in the absence or disqualification of a
member of the Executive Committee, the members present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
4.2 Other Committees of the Board. The Board, by resolution adopted by a
-----------------------------
majority of the whole Board, may designate one or more other committees, which
shall in each case consist of such number of directors, but not less than two,
and shall have and may exercise such powers for such periods, as the Board may
determine in the resolution designating such committee. A majority of the
members of any such committee may fix its rules of procedure, determine its
action, fix the time and place, whether within or without the State of Delaware,
of its meetings and specify what notice thereof, if any, shall be given, unless
the Board shall by resolution adopted by a majority of the whole Board otherwise
provide. Each member of any such committee shall continue to be a member thereof
only so long as he remains a director and at the pleasure of a majority of the
whole Board. Any vacancies on any such committee may be filled by a majority of
the whole Board.
11
4.3 Other Committees. Nothing hereinbefore contained in this Article 4
----------------
shall be deemed to preclude the designation by the Chairman of the Board, if
Chief Executive Officer, or the President, of committees, other than committees
of the Board, which may include officers and employees who are not directors.
ARTICLE 5
OFFICERS
5.1 Officers. The Board shall elect a Chairman of the Board and Chief
--------
Executive Officer, a President, a Chairman of the Executive Committee, a
Chairman of the Management Committee, a Secretary and a Treasurer, and as many
Assistant Secretaries and Assistant Treasurers as the Board may deem necessary,
and may elect or appoint one or more Vice Presidents and such other officers as
it may determine. The Board may designate one or more Vice Presidents as Senior
Vice President, Executive Vice President, and may use descriptive words or
phrases to designate the standing, seniority or area of special competence of
the Vice Presidents elected or appointed by it. Each officer shall hold his
office until his successor is elected and qualified or until his earlier death,
resignation or removal in the manner provided in Section 5.2 of the By-laws. Any
two or more offices may be held by the same person. The Board may require any
officer to give a bond or other security for the faithful performance of his
duties, in such amount and with such sureties as the Board may determine. All
officers as between themselves and the Corporation shall have such authority and
perform such duties in the management of the Corporation as may be provided in
the By-laws or as the Board may from time to time determine.
5.2 Removal of Officers. Any officer elected or appointed by the Board may
-------------------
be removed by the Board with or without cause. The removal of an officer without
cause shall be without prejudice to his contract rights, if any. The election or
appointment of an officer shall not of itself create contract rights.
5.3 Resignations. Any officer may resign at any time in writing by
------------
notifying the Board, The Chairman of the Board and Chief Executive Officer, the
President or the Secretary. Such resignation shall take effect at the date of
receipt of such notice or at such later time as is therein specified, and,
unless otherwise specified, the acceptance of such resignation shall not be
necessary to make it effective. The resignation of an officer shall be without
prejudice to the contract rights of the Corporation, if any.
5.4 Vacancies. A vacancy in any office because of death, resignation,
---------
removal, disqualification or any other cause shall be filled for the unexpired
portion of the term in the manner prescribed in the By-laws for the regular
election or appointment to such office.
12
5.5 Compensation. Salaries or other compensation of the officers may be
------------
fixed from time to time by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that he is also a
director.
5.6 Chairman of the Board and Chief Executive Officer. The Chairman of the
-------------------------------------------------
Board and Chief Executive Officer of the Corporation shall have general
supervision over the business of the Corporation, subject, however, to the
control of the Board and of any duly authorized committee of directors. The
Chairman of the Board and Chief Executive Officer shall, if present, preside at
all meetings of the stockholders and at all meetings of the Board. He may, with
the Secretary or the Treasurer or an Assistant Secretary or an Assistant
Treasurer, sign certificates for shares of capital stock of the Corporation. He
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts and other instruments, except in cases where the signing and execution
thereof shall be expressly delegated by the Board or by the By-laws to some
other officer or agent of the Corporation, or shall be required by law otherwise
to be signed or executed and, in general, he shall perform all duties incident
to the office of Chairman of the Board and Chief Executive Officer and such
other duties as from time to time may be assigned to him by the Board. The Board
may designate two persons to serve as Co-Chairman of the Board and Co-Chief
Executive Officer of the Corporation in which case each reference in these By-
Laws to the "Chairman of the Board and Chief Executive Officer" shall mean the
"Co-Chairmen of the Board and Co-Chief Executive Officers". Where both
individuals holding such office are present, the individual with greater
seniority shall exercise the powers of the office, unless otherwise directed by
the Board.
5.7 President. At the request of the Chairman of the Board and Chief
---------
Executive Officer, or in his absence, at the request of the Board, the President
shall perform all of the duties of the Chairman of the Board and Chief Executive
Officer and so acting shall have all the powers of, and be subject to all
restrictions upon the Chairman of the Board and Chief Executive Officer. The
President may also, with the Secretary or the Treasurer or an Assistant
Secretary or an Assistant Treasurer, sign certificates for shares of capital
stock of the Corporation; may sign and execute in the name of the Corporation
deeds, mortgages, bonds, contracts or other instruments authorized by the Board,
except in cases where the signing and execution thereof shall be expressly
delegated by the Board or by the By-laws to some other officer or agent of the
Corporation, or shall be required by law otherwise to be signed or executed; and
shall perform such other duties as from time to time may be assigned to him by
the Board or by the Chairman of the Board.
5.8 Chairman of the Executive Committee. The Chairman of the Executive
-----------------------------------
Committee shall have the powers and duties incident to that office and shall
have other powers and duties as may be prescribed from time to time by the Board
of Directors. He shall be a member of the Executive Committee and shall preside
at all meetings of the Executive Committee. In the event of the absence or
disability of the Chairman of the Board and Chief Executive Officer and of the
President, he shall perform the duties of the Chairman of the Board and Chief
Executive Officer and
13
of the President, unless the Board of Directors shall have designated another
person to perform such duties.
5.9 Chairman of the Management Committee. The Chairman of the Management
------------------------------------
Committee shall have the powers and duties incident to that office. As such he
shall consider matters relating to strategic planning, including potential for
acquisitions and dispositions of businesses, the management of the Corporation
and such other matters as the Board of Directors may from time to time
determine. He shall be a member of the Management Committee and shall preside at
all meetings of the Management Committee.
5.10 Vice Presidents. At the request of the Chairman of the Board and Chief
---------------
Executive Officer, or in his absence, at the request of the President, or in the
absence of both of them, at the request of the Board, the Vice Presidents shall
(in such order as may be designated by the Board or in the absence of any such
designation in order of seniority based on age) perform all of the duties of the
Chairman of the Board and Chief Executive Officer and so acting shall have all
the powers of and be subject to all restrictions upon the Chairman of the Board
and Chief Executive Officer. Any Vice President may also, with the Secretary or
the Treasurer or an Assistant Secretary or an Assistant Treasurer, sign
certificates for shares of capital stock of the Corporation; may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments authorized by the Board, except in cases where the signing and
execution thereof than be expressly delegated by the Board or by the By-laws to
some other officer or agent of the Corporation, or shall be required by law
otherwise to be signed or executed; and shall perform such other duties as from
time to time may be assigned to him by the Board or by the Chairman of the Board
and Chief Executive Officer or the President.
5.11 Secretary. The Secretary, if present, shall act as secretary of all
---------
meetings of the stockholders and of the Board, and shall keep the minutes
thereof in the proper book or books to be provided for that purpose; he shall
see that all notices required to be given by the Corporation are duly given and
served; he may, with the Chairman of the Board and Chief Executive Officer, the
President or a Vice President, sign certificates for shares of capital stock of
the Corporation; he shall be custodian of the seal of the Corporation and may
seal with the seal of the Corporation, or a facsimile thereof, all certificates
for shares of capital stock, of the Corporation and all documents the execution
of which on behalf of the Corporation under its corporate seal is authorized in
accordance with the provisions of the By-laws; he shall have charge of the stock
ledger and also of the other books, records and papers of the Corporation
relating to its organization and management as a Corporation, and shall see that
the reports, statements and other documents required by law are properly kept
and filed; and shall, in general, perform all the duties incident to the office
of Secretary and such other duties as from time to time may be assigned to him
by the Board or by the Chairman of the Board and Chief Executive Officer or by
the President.
14
5.12 Treasurer. The Treasurer shall have charge and custody of, and be
---------
responsible for, all funds, securities and notes of the Corporation; receive and
give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these By-laws; against proper vouchers, cause such funds to be disbursed by
checks or drafts on the authorized depositaries of the Corporation signed in
such manner as shall be determined in accordance with any provisions of the By-
laws, and be responsible for the accuracy of the amounts of all moneys so
disbursed; regularly enter or cause to be entered in books to be kept by him or
under his direction full and adequate amount of all moneys received or paid by
him for the amount of the Corporation; have the right to require, from time to
time reports or statements giving such information as he may desire with respect
to any and all financial transactions of the Corporation from the officers or
agents transacting the same; render to the Chairman of the Board and Chief
Executive Officer, the President or the Board, whenever the Chairman of the
Board and Chief Executive Officer, the President or the Board, respectively, all
require him so to do, an account of the financial condition of the Corporation
and of all his transactions as Treasurer; exhibit at all reasonable times his
books of account and other records to any of the directors upon application at
the office of the Corporation where such books and records are kept; and in
general, perform all the duties incident to the office of Treasurer and such
other duties as from time to time may be assigned to him by the Board, the
Chairman of the Board and Chief Executive Officer or by the President; and he
may sign, with the Chairman of the Board and Chief Executive Officer, the
President or a Vice President, certificates for shares of capital stock of the
Corporation.
5.13 Assistant Secretaries and Assistant Treasurers. Assistant Secretaries
----------------------------------------------
and Assistant Treasurers shall perform such duties as shall be assigned to them
by the Secretary or by the Treasurer, respectively, or by the Board, the
Chairman of the Board and Chief Executive Officer, or the President. Assistant
Secretaries and Assistant Treasurers may, with the Chairman of the Board and
Chief Executive Officer, the President or a Vice President, sign certificates
for shares of capital stock of the Corporation.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board may authorize any officer, employee
----------------------
or agent, in the name and on behalf of the Corporation, to enter into any
contracts or execute and satisfy any instrument, and any such authority may be
general or confined to specific instances, or otherwise limited.
15
6.2 Loans. The Chairman of the Board and Chief Executive Officer, the
-----
President or any other officer, employee or agent authorized by the By-laws or
by the Board may effect loans and advances at any time for the Corporation from
any bank, trust company or other institutions or from any firm, corporation or
individual and for such loan and advances may make, execute and deliver
promissory notes, bonds or other certificates or evidences of indebtedness of
the Corporation, and when authorized so to do may pledge and hypothecate or
transfer any securities or other property of the Corporation as security for any
such loans or advances. Such authority conferred by the Board may be general or
confined to specific instances or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
-------------------
payment of money out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed shall be
--------
deposited from time to time to the order of the Corporation in such banks, trust
companies or other depositories as the Board may select or as may be selected by
an officer, employee or agent of the Corporation to whom such power may from
time to time be delegated by the Board.
ARTICLE 7
STOCKS AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of the
--------------------------------
Corporation shall be represented by certificates in such form (consistent with
the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman of the
Board and Chief Executive Officer, the President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer,
and may be sealed with the seal of the Corporation or a facsimile thereof. The
signatures of the officers upon a certificate may be facsimiles, if the cer-
tificate is countersigned by a transfer agent or registrar other than the
Corporation itself or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may, unless otherwise
ordered by the Board, be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
------------------
Corporation shall be made only on the books of the Corporation by the holder
thereof or by his duly authorized attorney appointed by a power of attorney duly
executed and filed with the Secretary or a transfer agent of the Corporation,
and on surrender of the certificate or certificates representing such shares of
capital
16
stock properly endorsed for transfer and upon payment of all necessary transfer
taxes. Every certificate exchanged, returned or surrendered to the Corporation
shall be marked "Canceled," with the date of cancellation, by the Secretary or
an Assistant Secretary or the transfer agent of the Corporation. A person in
whose name shares of capital stock shall stand on the books of the Corporation
shall be deemed the owner thereof to receive dividends, to vote as such owner
and for all other purposes as respects the Corporation. No transfer of shares of
capital stock shall be valid as against the Corporation, its stockholders and
creditors for any purpose, except to render the transferee liable for the debts
of the Corporation to the extent provided by law, until such transfer shall have
been entered on the books of the Corporation by an entry showing from and to
whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
----------------------------
maintain one or more transfer offices or agents and registry offices or agents
at such place or places as may be determined from time to time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any
--------------------------------------------------
shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as, a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his legal representatives, to make proof satisfactory
to the Board of such loss, destruction, theft or mutilation and to advertise
such fact in such manner as the Board may require, and to give the Corporation
and its transfer agents and registrars, or such of them as the Board may
require, a bond in such form, in such sum and with such surety or sureties as
the Board may direct, to indemnify the Corporation and its transfer agents and
registrars against any claim that may be made against any of them on account of
the continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 Regulations. The Board may make such rules and regulations as it may
-----------
deem expedient, not inconsistent with the By-laws or with the Certificate of
Incorporation, concerning the issue, transfer and registration of certificates
representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the transfer
--------------------------------
or registration of transfer of capital stock of the Corporation, if permitted by
Section 202 of the General Corporation Law and noted conspicuously on the
certificate representing such capital stock, may be enforced against the holder
of the restricted capital stock or any successor or transferee of the holder
including an executor, administrator, trustee, guardian or other fiduciary
entrusted with like responsibility for the person or estate of the holder.
Unless noted conspicuously on the certificate representing such capital stock, a
restriction, even though permitted by Section 202 of the General Corporation
Law, shall be ineffective except against a person with actual knowledge of the
restriction. A restriction
17
on the transfer or registration of transfer of capital stock of the Corporation
may be imposed either by the Certificate of Incorporation or by an agreement
among any number of stockholders or among such stockholders and the Corporation.
No restriction so imposed shall be binding with respect to capital stock issued
prior to the adoption of the restriction unless the holders of such capital
stock are parties to an agreement or voted in favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate
-----------------------
of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other distributions on the
outstanding shares of capital stock in such amounts and at such time or
times as, in its discretion, the condition of the affairs of the
Corporation shall render advisable;
7.7.2 May use and apply, in its discretion, any of the surplus of the
Corporation in purchasing or acquiring any shares of capital stock of the
Corporation, or purchase warrants therefor, in accordance with law, or any
of its bonds, debentures, notes, scrip or other securities or evidences of
indebtedness;
7.7.3 May set aside from time to time out of such surplus or net profits
such sum or sums as, in its discretion, it may think proper, as a reserve
fund to meet contingencies, or for equalizing dividends or for the purpose
of maintaining or increasing the property or business of the Corporation,
or for any purpose it may think conducive to the best interest of the
Corporation.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnification of Officers and Directors. The Corporation shall
-----------------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or an officer of the Corporation against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding to the fullest extent and in the manner set forth in and permitted by
the General Corporation Law, and any other applicable law, as from time to time
in effect. Such right of indemnification shall not be deemed exclusive of any
other rights to which such director or officer may be entitled apart from the
foregoing provisions. The foregoing provisions of this Section 8.1 shall be
deemed to be a contract between the Corporation and each director and officer
who serves in such capacity at any time while this Article 8 and the relevant
provisions, of the General Corporation law and other applicable law, if any, are
in effect, and any
18
repeal or modification thereof shall not affect any rights or obligations then
existing, with respect to any state of facts then or theretofore existing, or
any action, suit or proceeding theretofore, or thereafter brought or threatened
based in whole or in part upon any such state of facts.
8.2 Indemnification of Other Persons. The Corporation may indemnify any
--------------------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was an employee or agent of the Corporation, or is or was, serving at the
request of the Corporation, as a director, officer, employee or agent of another
Corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding to the extent and in the manner set forth in and
permitted by the General Corporation Law, and any other applicable law, as from
time to time in effect. Such right of indemnification shall not be deemed
exclusive of any other rights to which any such person may be entitled apart
from the foregoing provisions.
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. The Corporation shall keep correct and complete
-----------------
books and records of account and shall keep minutes of the proceedings of the
stockholders, the Board and any committee of the Board. The Corporation shall
keep at the office designated in the Certificate of Incorporation or at the
office of the transfer agent or registrar of the Corporation in Delaware, a
record containing the names and addresses of all stockholders, the number and
class of shares held by each and the dates when they respectively became the
owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in the
---------------
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device
provided that the records so kept can be converted into clearly legible written
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by law,
-------------------------------
the Board shall determine from time to time whether, and, if allowed, when and
under what conditions and regulations, the accounts, books, minutes and other
records of the Corporation, or any of them, shall be open to the inspection of
the stockholders.
19
ARTICLE 10
SEAL
The Board may adopt a corporate seal which shall be in the form of a circle
and shall bear the full name of the Corporation, the year of its incorporation
and the word "Delaware".
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall begin on the 1st day of January
and shall terminate on the 31st day of December in each year, or such other
period as may be fixed by resolution of the Board.
ARTICLE 12
VOTING OF SHARES HELD
Unless otherwise provided by resolution of the Board, the Chairman of the
Board and Chief Executive Officer, or the President, or any Vice President, may,
from time to time, appoint one or more attorneys or agents of the Corporation,
in the name and on behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as a stockholder or otherwise in any other
corporation, any of whose shares or securities may be held by the Corporation,
at meetings of the holders of stock or other securities of such other
corporation, or to consent, in writing to any action by any such other
corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed on behalf of the Corporation and under its corporate or seal, or
otherwise, such written proxies, consents, waivers or other instruments as he
may deem necessary or proper in the premises; or the Chairman of the Board and
Chief Executive Officer, or the President, or any Vice President may himself
attend any meeting of the holders of the stock or other securities of any such
other corporation and thereat vote or exercise any or all other powers of the
Corporation as the holder of such stock or other securities of such other
corporation.
20
ARTICLE 13
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
Pursuant to the provisions of Section 203 (a) (2) of the General
Corporation Law, the Corporation, by action of the Board, expressly elects not
to be governed by Section 203 of the General Corporation Law, dealing with
business combinations with interested stockholders. Notwithstanding anything to
the contrary in these By-laws, the provisions of this Article 13 may not be
further amended by the Board, except as may be specifically authorized by the
General Corporation Law.
ARTICLE 14
AMENDMENTS
The By-laws may be altered, amended, supplemented or repealed, or new By-
laws may be adopted, by vote of the holders of the shares entitled to vote in
the election of directors. The By-laws may be altered, amended, supplemented or
repealed, or new By-laws may be adopted, by the Board, provided that the vote of
a majority of the entire Board shall be required to change the number of
authorized directors. Any By-laws adopted, altered, amended, or supplemented by
the Board may be altered, amended, supplemented or repealed by the stockholders
entitled to vote thereon.
ARTICLE 15
OFFICES
The Corporation may have an office or offices at such place or places,
within or without the State of Delaware, as the Board of Directors may from time
to time designate or the business of the Corporation require.
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