Lorillard, Inc. and subsidiaries ("Lorillard"). Funds from operations continue to exceed operating requirements. Lorillard generated net cash flow from operations of approximately $364 million for the year ended December 31, 1994, compared to $538 million for the prior year. No material capital expenditures are anticipated during 1995. For a number of years through 1992 leading cigarette marketers, including Lorillard, had increased the price of their premium brands. For the period 1982 to 1992 the annual price increase for Lorillard's premium brands averaged approximately 10%. Lorillard's cash flows from operations during this period benefited significantly from these price increases since virtually all of Lorillard's sales are in the premium priced segment, with Newport accounting for more than two-thirds of Lorillard's total unit sales. Effective August 9, 1993 in response to new lower pricing policies and promotions by its competitors, Lorillard reduced its premium brand wholesale cigarette unit prices by approximately 25% to maintain its competitive position. These price moves have established two price tiers for the industry, eliminating much of the price confusion in the market place, and substantially narrowing the price gap between premium and discount cigarettes. These developments appear to have slowed the rapid growth of discount cigarettes. While promotional spending can be reduced, the new lower pricing has resulted in a reduction of Lorillard's revenues, income contribution and cash flow. A number of lawsuits have been filed against Lorillard and other manufacturers of tobacco products seeking damages for cancer and other health effects claimed to have resulted from the use of cigarettes or exposure to tobacco smoke. In several of these cases the Company is named as a defendant. Pending litigation includes actions commenced by individuals, purported class actions and actions brought by state governments, most of which claim very substantial damages. These actions are described in Note 18 of the Notes to Consolidated Financial Statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement, as amended, addresses the accounting by creditors for impairment of certain loans. The Statement requires that applicable loans be treated as impaired when it is probable that a creditor will be unable to collect all amounts (both principal and interest) contractually due. This Statement applies to financial statements for fiscal years beginning after December 15, 1994 and will not have a significant impact on the Company.
Reclassification-Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 1994.
The Company's investment in associated companies primarily consists of its investment in CBS Inc. ("CBS"). At December 31, 1994, the Company held approximately 18% of the outstanding common shares of CBS and accounts for it on the equity method. The Company's carrying value for its investment in CBS is $294,346,000 and $473,483,000 (market value of $607,047,000 and $873,975,000) at December 31, 1994 and 1993, respectively. The Company's equity in the earnings of CBS after giving effect to purchase value adjustments amounted to $45,837,000, $58,990,000 and $27,012,000 before taxes and $30,801,000, $52,641,000 and $24,717,000 after taxes for the years ended December 31, 1994, 1993 and 1992, respectively. Dividends received amounted to $5,227,000, $3,787,000 and $3,029,000 for the respective periods. On September 1, 1994, CBS completed a cash tender offer at an amount exceeding its net book value per share for repurchase of its common stock aggregating approximately $1,137,500,000, or 22% of its common shares. The Company tendered its shares and received cash amounting to $270,373,000, comprised of $86,382,000 realization of previously undistributed earnings and $183,991,000 representing a return of the Company's investment. As a result of the tender, the Company's ownership in CBS decreased from approximately 20% to 18% and the Company's additional paid-in capital increased by $11,531,000. In May 1993, $389.6 million of CBS 5% convertible debentures were converted for 1,947,975 shares of common stock. The difference between the amount of debt converted and the average cost of the treasury shares issued, net of unamortized issue costs related to this debt, was credited to additional paid-in capital. As a result, the Company's ownership in CBS decreased from approximately 23% to 20% and the Company's additional paid-in capital increased by $58,942,000. In 1992, CBS adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," SFAS No. 109, "Accounting for Income Taxes" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1992. The cumulative effect of these accounting changes resulted in recognition by Loews of a charge of $17.4 million, or $.27 per share, in relation to its investment in CBS. Summarized financial information for CBS is as follows:
In January 1992 Diamond Offshore Drilling, Inc., a wholly owned subsidiary, acquired all of the outstanding common stock of Odeco Drilling, Inc. ("Odeco") at a purchase price of $372,242,000 in cash. Odeco owned and operated 40 offshore drilling rigs that were used in drilling oil and gas wells. The acquisition has been accounted for by the purchase method.
The aggregate of long-term debt maturing in each of the next five years is approximately as follows: $4,390,000 in 1995, $254,010,000 in 1996, $19,645,000 in 1997, $270,639,000 in 1998 and $29,536,000 in 1999. The Company paid interest expenses of approximately $168,901,000, $219,099,000 and $127,689,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Payment of dividends by insurance subsidiaries of CNA without prior regulatory agency approval is limited to certain formula-derived amounts. At December 31, 1994, $2,073,474,000 of retained earnings of subsidiaries was not available for dividends to the Company.
At December 31, 1994 and 1993, the Company's minimum pension liability exceeded its unrecognized prior service cost and net transition obligation by $30,712,000 and $43,095,000, respectively. This excess is recorded as a reduction to shareholders' equity of $19,962,000 and $28,012,000, net of tax benefits of $10,750,000 and $15,083,000, respectively. The rates used in the actuarial assumptions were:
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 million in compensatory damages and $100 million in punitive damages. Four of these cases are currently set for trial in 1995. 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. In addition to the defenses based on preemption under the Supreme Court decision referred to above, Lorillard believes that it has a number of other valid defenses to pending cases. 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, and has been so advised by counsel, that some or all of these defenses may, in any of the pending or anticipated cases, be found by a jury or court to bar recovery by a plaintiff. Application of valid defenses, including those of preemption, are likely to be the subject of further legal proceedings in the class action cases and in the actions brought by states or state agencies. 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. An unfavorable outcome of a pending smoking and health case could encourage the commencement of additional similar litigation. 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 ultimate unfavorable outcome of certain pending litigation. Management believes, however, that the ultimate outcome of pending litigation should not have a material adverse effect on the Company's financial position.