-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SW9484z0qdw00BlVc/T4OGwDhoV+0R60eKavbpiAUWAGo9zt4Fcxk+f1VtG2TRTh X+DDhpy2BTQM78QLAoExBQ== 0000950152-00-002514.txt : 20000331 0000950152-00-002514.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950152-00-002514 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESSIVE CORP/OH/ CENTRAL INDEX KEY: 0000080661 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 340963169 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09518 FILM NUMBER: 586081 BUSINESS ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 BUSINESS PHONE: 4404615000 MAIL ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 10-K 1 THE PROGRESSIVE CORPORATION FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999 ----------------------------------------------- 1999 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 1-9518 ----------------------- THE PROGRESSIVE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-0963169 - -------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (440) 461-5000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered COMMON SHARES, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE - --------------------------------------- ----------------------------------- Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (Title of class) 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. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant at January 31, 2000: $3,945,195,528.75 The number of the registrant's Common Shares, $1.00 par value, outstanding as of February 29, 2000: 72,993,722 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1999 are incorporated by reference in Parts I, II and IV hereof. Portions of the registrant's Proxy Statement dated March 16, 2000, for the Annual Meeting of Shareholders to be held on April 21, 2000, are incorporated by reference in Part III hereof. 2 INTRODUCTION The Progressive Corporation and subsidiaries' (collectively, the "Company") 1999 Annual Report to Shareholders (the "Annual Report") contains portions of the information required to be included in this Form 10-K, which are incorporated herein by reference. Cross references to relevant sections of the Annual Report are included under the appropriate items of this Form 10-K. Portions of the information included in The Progressive Corporation's Proxy Statement dated March 16, 2000, for the Annual Meeting of Shareholders to be held on April 21, 2000 (the "Proxy Statement") have also been incorporated by reference herein and are identified under the appropriate items in this Form 10-K. PART I ITEM 1. BUSINESS (a) General Development of Business The Progressive insurance organization began business in 1937. The Progressive Corporation, an insurance holding company formed in 1965, has 82 subsidiaries and 1 mutual insurance company affiliate. The Progressive Corporation's insurance subsidiaries and affiliate provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. The Company's property-casualty insurance products protect its customers against collision and physical damage to their motor vehicles and liability to others for personal injury or property damage arising out of the use of those vehicles. (b) Financial Information About Industry Segments Incorporated by reference from Note 11, SEGMENT INFORMATION, on page 46 of the Company's Annual Report. (c) Narrative Description of Business The Company offers a number of personal and commercial property-casualty insurance products related to motor vehicles. Net premiums written were $6,124.7 million in 1999, compared to $5,299.7 million in 1998 and $4,665.1 million in 1997. The underwriting profit margin was 1.7% in 1999, compared to 8.4% in 1998 and 6.6% in 1997. PERSONAL LINES Of the approximately 230 United States insurance company groups writing private passenger auto insurance, the Company estimates that it ranks fourth in size for 1999. For 1999, the estimated industry premiums written, which include personal auto insurance in the United States and Ontario, Canada, were $123.8 billion, and Progressive's share of this market was approximately 4.6%, compared to $120.7 billion and 4.1%, respectively, in 1998, and $117.5 billion and 3.7% in 1997. Except as otherwise noted, all industry data and Progressive's market share or ranking in the industry were derived either directly from data reported by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data as the primary source. The Company's Personal Lines segment writes insurance for private passenger automobiles and recreation vehicles. This business frequently offers more than one program in a single state, with each targeted to a specific market segment. Personal Lines accounted for 93% of the Company's 1999 and 1998 total net premiums written, compared to 92% in 1997. The Company's strategy is to build towards becoming a low-cost provider of a full line of auto insurance products and related services, distributed through whichever channel the customer prefers. Private passenger automobile insurance is comprised of preferred, standard and non-standard automobile risks. Standard and preferred automobile risks accounted for between 45% and 50% of the Company's total Personal Lines premiums in 1999. The Company's goal is to compete successfully in the standard and preferred market, which comprises about 80% of the United States' personal automobile insurance market. 2 3 Nonstandard automobile insurance accounts for the remaining private passenger automobile insurance written by the Company. The size of the nonstandard automobile insurance market changes with the insurance environment and is estimated to be about 20% of the United States' personal automobile insurance market. Volume potential is influenced by the actions of direct competitors, writers of standard and preferred automobile insurance and state-mandated involuntary plans. Approximately 376 nonstandard insurance companies, many of which are part of an affiliated group, compete for this business. The Company is a leading writer in the nonstandard auto market. The Company's specialty Personal Lines products include motorcycle, recreation vehicle, mobile home, watercraft and snowmobile insurance. The Company's competitors are specialty companies and large multi-line insurance carriers. Although industry figures are not available, based on the Company's analysis of this market, the Company believes that it is one of the largest participants in the specialty personal lines market. In 1998, Progressive became the market share leader in the motorcycle product. The Company launched a homeowners product in Arizona in March 2000 and plans to expand to a few additional states during the year. Initially, the Company will sell its homeowners insurance through a select number of independent agents. The Company recognizes that many consumers and agents prefer the convenience of placing their home and auto insurance with the same company. The new product line will also include condominium owners' and renters' insurance policies. To minimize the overall exposure, the Company will reinsure this product through a 75% quota share agreement under which the Company has a 25% net retention. The Personal Lines business is generated either by an Agent or written directly by the Company. The Agent channel includes business written by the Company's network of more than 30,000 Independent Insurance Agents, located throughout the United States, and through Strategic Alliance business relationships. The Independent Insurance Agents have the authority to bind the Company to specified insurance coverages within prescribed underwriting guidelines, subject to compliance with certain Company-mandated procedures. These guidelines prescribe the kinds and amounts of coverage that may be written and the premium rates that may be charged for specified categories of risk. The Agents do not have authority on behalf of the Company to settle or adjust claims, establish underwriting guidelines, develop rates or enter into other transactions or commitments. The Strategic Alliances channel includes alliances with other insurance companies, financial institutions, employers and national brokerage agencies. In 1999, the total net premiums written through Independent Agents and Strategic Alliance agency relationships represented 83% of the Personal Lines volume, compared to 89% in 1998. Direct business includes business written through 1-800-AUTO-PRO(R), the Internet (progressive.com) and the Strategic Alliance business unit on behalf of affinity groups. Net premiums written on the Direct business were 17% and 11% of the Personal Lines volume in 1999 and 1998, respectively. The Company introduced its local advertising campaign, which includes direct mail, radio and television advertising, to 3 more states in 1999 , bringing the total number of states in which the Company advertises to 35 plus Washington, D.C. (107 markets). The Company expanded its television advertising campaign on a national level in 1998. Auto insurance differs greatly by community because regulations and legal decisions vary by state and because traffic, law enforcement, cultural attitudes, insurance agents, medical services and auto repair facilities vary by community. The Company's matrix organization enables it to meet varied local conditions under a cohesive set of policies and procedures designed to provide consistency and control. The Company's 39 State and Community Managers run the business in the markets they serve. They manage claims, distribution, advertising budgets, price levels, agent development, regulation and community relations for their territory. State Managers determine their state(s) organization, and may appoint Community Managers with responsibilities similar to their own for a large part of the state. Processing (such as customer service calls, direct sales calls and claims processing) is performed at ten regional sites in Albany, New York; Austin, Texas; Cleveland, Ohio; Colorado Springs, Colorado; Richmond, Virginia; Sacramento, California; Tampa, Florida; Tempe, Arizona; Tigard, Oregon and Toronto, Ontario. State Managers report directly to the Company's senior officers and Distribution Leaders, who are the Company's senior policy and decision makers. In 2000, the senior officers include a Chief Executive Officer (CEO), a CEO-Insurance Operations (who also serves as the Company's Chief Information Officer), a CEO-Investments and Capital Management, a Chief Pricing/Product Officer, a Chief Claim Officer, a Chief Financial Officer, a Chief Human Resources Officer and a Chief Communications Officer. The Company also has three Distribution Leaders (Independent Agent, 1-800-AUTO-PRO(R) and progressive.com). The Distribution Leaders are challenged to develop and manage product offerings and customer 3 4 service processes tailored to the unique requirements of customers who discover and select Progressive through different distribution modes. OTHER BUSINESSES The Company's other lines of business include the commercial vehicle business unit, United Financial Casualty Company (UFCC), Professional Liability Group (PLG) and Motor Carrier business unit, which are organized by customer group and headquartered in Cleveland, Ohio. These businesses accounted for 7% of total revenue in 1999. The choice of distribution channel is driven by each customer group's buying preference and service needs. Distribution channels include independent agents, financial institutions, vehicle dealers and company-employed sales forces. Distribution arrangements are individually negotiated between such intermediaries and the Company and are tailored to the specific needs of the customer group and the nature of the related financial or purchase transactions. Most of these businesses operate in markets that are declining in size. Monoline commercial vehicle insurance covers commercial vehicle risks for primary liability, physical damage and other supplementary insurance coverages. Based on the Company's analysis of this market, the Company competes for this business on a nationwide basis with approximately 150 other companies. The Company estimates itself to be one of the largest monoline commercial auto carriers. UFCC primarily provides physical damage insurance and related tracking services to protect the commercial or retail lender's interest in collateral which is not otherwise insured against these risks. The principal product offered is collateral protection for automobile lenders, which is sold to financial institutions and/or their customers. Commercial banks are UFCC's largest customer group for these services. This business also serves savings and loan institutions, finance companies and credit unions. According to the Company's analysis of this market, numerous companies offer these products and none of them has a dominant market share. PLG's principal customers are community banks. Its principal products are liability insurance for directors and officers and employee dishonesty insurance. Progressive shares the risk and premium on these coverages with a small mutual reinsurer controlled by its bank customers and various other reinsurance entities. The program is sponsored by the American Bankers Association. Additionally, the Company provides similar coverages for credit unions and savings and loan institutions. The risk and premium on these coverages are also reinsured by various reinsurance entities. PLG represented less than one-half percent of the Company's total 1999 net premiums written. The service operations of the other lines of business consist primarily of processing business for Commercial Auto Insurance Procedures (CAIP), which are state supervised plans serving the involuntary markets. The Motor Carrier business unit processes CAIP in 26 states. As a CAIP servicing carrier, this business unit processes over 50% of the premiums in the CAIP market and assumes no indemnity risk. It competes with 2 other providers nationwide. Prior to November 1999, service operations also provided claim services to fleet owners and other insurance companies. COMPETITIVE FACTORS The automobile insurance and other property-casualty markets in which the Company operates are highly competitive. Property-casualty insurers generally compete on the basis of price, consumer recognition, coverages offered, claim handling, financial stability, customer service and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies, some of which have broad distribution networks of employed or captive agents, and by smaller regional insurers. While the Company relies heavily on technology and extensive data gathering and analysis to segment and price markets according to risk potential, some competitors merely price their coverage at rates set lower than the Company's published rates. By avoiding extensive data gathering and analysis, these competitors incur lower underwriting expenses. The Company has remained competitive by closely managing expenses and achieving operating efficiencies, and by refining its risk measurement and price segmentation skills. In addition, the Company offers prices for a wide spectrum of risks and seeks to offer a wider array of payment plans, limits of liability and deductibles than its competitors. Superior customer service, claim adjusting and strong brand recognition are also important factors in the Company's competitive strategy. 4 5 LICENSES The Company operates under licenses issued by various state or provincial insurance authorities. These licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. The licenses govern the kind of insurance coverages which may be written in the issuing state. Such licenses are normally issued only after the filing of an appropriate application and the satisfaction of prescribed criteria. All licenses which are material to the Company's business are in good standing. INSURANCE REGULATION The insurance subsidiaries are generally subject to regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to transact business. At least one of the subsidiaries is licensed and subject to regulation in each of the 50 states and certain U.S. possessions, in three Canadian provinces and by Canadian federal authorities. The nature and extent of such regulation and supervision varies from jurisdiction to jurisdiction. Generally, an insurance company is subject to a higher degree of regulation and supervision in its state of domicile. The Company's insurance subsidiaries and affiliate are domiciled in the states of Arizona, California, Colorado, Hawaii, Illinois, Florida, Louisiana, Michigan, Mississippi, Missouri, New York, Ohio, Pennsylvania, Tennessee, Texas, Washington and Wisconsin. State insurance departments have broad administrative power relating to licensing insurers and agents, regulating premium rates and policy forms, establishing reserve requirements, prescribing statutory accounting methods and the form and content of statutory financial reports, and regulating the type and amount of investments permitted. Rate regulation varies from "file and use" to prior approval to mandated rates. Most jurisdictions prohibit rates that are "excessive, inadequate or unfairly discriminatory." Insurance departments are charged with the responsibility of ensuring that insurance companies maintain adequate capital and surplus and comply with a variety of operational standards. Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. Insurance departments are authorized to make periodic and other examinations of regulated insurers' financial condition, to ensure adherence to statutory accounting principles and compliance with state insurance laws and regulations. Insurance holding company laws enacted in many jurisdictions grant to insurance authorities the power to regulate acquisitions of insurers and certain other transactions involving insurers and to require periodic disclosure of certain information. These laws impose prior approval requirements for certain transactions between regulated insurers and their affiliates and generally regulate dividend and other distributions, including loans and cash advances, between regulated insurers and their affiliates. See the "Dividends" discussion in Item 5(c) for further information on these dividend limitations. Under state insolvency and guaranty laws, regulated insurers can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Insurers are also required by many states, as a condition of doing business in the state, to provide coverage to certain risks which are not insurable in the voluntary market. These so-called "assigned risk" plans generally specify the types of insurance and the level of coverage which must be offered to such involuntary risks, as well as the allowable premium. Many states also have involuntary market plans which hire a limited number of servicing carriers to provide insurance to involuntary risks. These plans, through assessments, pass underwriting and administrative expenses on to insurers that write voluntary coverages in those states. Insurance companies are generally required by insurance regulators to maintain sufficient surplus to support their writings. Although the ratio of writings to surplus that the regulators will allow is a function of a number of factors, including the type of business being written, the adequacy of the insurer's reserves, the quality of the insurer's assets, and the identity of the regulator, as a general rule, the regulators prefer that annual net written premiums be not more than three times the insurer's total policyholders' surplus. Thus, the amount of an insurer's surplus may, in certain cases, limit its ability to grow its business. Many states have laws and regulations that limit an insurer's ability to exit a market. For example, certain states limit an automobile insurer's ability to cancel and non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance 5 6 department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict an insurer's ability to exit unprofitable markets. Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to technical factors, such as changes in investment laws made to recognize new investment vehicles; other changes result from such general pressures as consumer resistance to price increases and concerns relating to insurer solvency. In recent years, legislation and voter initiatives have been introduced which deal with use of non-public consumer information, insurance rate development, rate determination and the ability of insurers to cancel or renew insurance policies, reflecting concerns about consumer privacy, coverage, availability, prices and alleged discriminatory pricing. In some states, the automobile insurance industry has been under pressure in past years from regulators, legislators or special interest groups to reduce, freeze or set rates to or at levels that are not necessarily related to underlying costs, including initiatives to roll back automobile and other personal lines rates. This kind of activity has adversely affected, and may in the future adversely affect, the profitability and growth of the subsidiaries' automobile insurance business in those jurisdictions, and may limit the subsidiaries' ability to increase rates to compensate for increases in costs. Adverse legislative and regulatory activity limiting the subsidiaries' ability to adequately price automobile insurance may occur in the future. The impact of these regulatory changes on the subsidiaries' businesses cannot be predicted. The state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, expand state authority to regulate insurance companies and insurance holding company systems. Further, the National Association of Insurance Commissioners (NAIC) and state insurance regulators are re-examining existing laws and regulations, specifically focusing on insurance company investments, issues relating to the solvency of insurance companies and further limitations on the ability of regulated insurers to pay dividends. The NAIC also developed a risk-based capital (RBC) program to enable regulators to take appropriate and timely regulatory actions relating to insurers that show signs of weak or deteriorating financial conditions. RBC is a series of dynamic surplus-related formulas which contain a variety of factors that are applied to financial balances based on a degree of certain risks, such as asset, credit and underwriting risks. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance which will replace the current NAIC Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The implementation date established by the NAIC is January 1, 2001; however, the effective date will be specified by each insurance company's state of domicile. The Company is currently evaluating the potential effect of the Codification guidance, but does not expect it to have a material impact on the Company's statutory surplus. STATUTORY ACCOUNTING PRINCIPLES The Company's results are reported in accordance with generally accepted accounting principles (GAAP), which differ from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Specifically, under GAAP: 1. Commissions, premium taxes and other costs incurred in connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP. 2. Certain assets are included in the consolidated balance sheets, which for SAP are charged directly against statutory surplus. These assets consist primarily of premium receivables that are outstanding over 90 days, furniture and equipment and prepaid expenses. 3. Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP. 6 7 4. Fixed maturities securities, which are classified as available-for-sale, are reported at market values, rather than at amortized cost, or the lower of amortized cost or market depending on the specific type of security, as required by SAP. Equity securities are reported at quoted market values which may differ from the NAIC market values as required by SAP. 5. Costs for computer software developed or obtained for internal use are capitalized and amortized over their useful life, rather then expensed as incurred, as required by SAP. The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. INVESTMENTS The Company employs a conservative approach to investment and capital management intended to ensure that there is sufficient capital to support all the insurance premium that can be profitably written. The Company's portfolio is invested primarily in short-term and intermediate-term, investment-grade fixed-income securities. The Company's investment portfolio, at market value, was $6,427.7 million at December 31, 1999, compared to $5,674.3 million at December 31, 1998. Investment income is affected by shifts in the types of investments in the portfolio, changes in interest rates and other factors. Investment income, including net realized gains on security sales, before expenses and taxes, was $387.9 million in 1999, compared to $306.2 million in 1998 and $373.4 million in 1997. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, beginning on page 14 herein for additional discussion. EMPLOYEES The number of employees, excluding temporary employees, at December 31, 1999, was 18,753. LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of the Company's insurance subsidiaries. Total loss reserves are established at a level that is intended to represent the midpoint of the reasonable range of loss reserve estimates. The liabilities for losses and LAE are determined using actuarial and statistical procedures and represent undiscounted estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of future trends on claim settlement. These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Such adjustments, if any, are reflected in the current results of operations. The accompanying tables present an analysis of property-casualty losses and LAE. The following table provides a reconciliation of beginning and ending estimated liability balances for 1999, 1998 and 1997 on a GAAP basis. 7 8 RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1999 1998 1997 ------------------------------------------------------------------ Balance at January 1 $2,188.6 $2,146.6 $1,800.6 Less reinsurance recoverables on unpaid losses 242.8 279.1 267.7 ------------------------------------------------------------------ Net balance at January 1 1,945.8 1,867.5 1,532.9 ------------------------------------------------------------------ Net reserves of subsidiary purchased -- -- 82.2 ------------------------------------------------------------------ Incurred related to: Current year 4,286.2 3,560.5 3,070.8 Prior years (29.8) (184.2) (103.3) ------------------------------------------------------------------ Total incurred 4,256.4 3,376.3 2,967.5 ------------------------------------------------------------------ Paid related to: Current year 2,919.2 2,376.0 1,971.5 Prior years 1,082.8 922.0 743.6 ------------------------------------------------------------------ Total paid 4,002.0 3,298.0 2,715.1 ------------------------------------------------------------------ Net balance at December 31 2,200.2 1,945.8 1,867.5 Plus reinsurance recoverable on unpaid losses 216.0 242.8 279.1 ------------------------------------------------------------------ Balance at December 31 $2,416.2 $2,188.6 $2,146.6 ==================================================================
The reconciliation above shows $29.8 million of positive development, which emerged during 1999, in the 1999 liability and a positive emergence of $184.2 million shown in the 1998 liability, based on information known as of December 31, 1999 and December 31, 1998, respectively. The Company's reserves have historically developed conservatively. In 1999, the Company experienced an increase in severity trends which led to less favorable development on prior accident years as compared to 1998 and 1997. The anticipated effect of inflation is explicitly considered when estimating liabilities for losses and LAE. While anticipated increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, inflation, policy provisions and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary. The Company has not entered into any loss reserve transfers or similar transactions having a material effect on earnings or reserves. 8 9 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT (millions)
YEAR ENDED 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998 1999 LIABILITY FOR UNPAID LOSSES AND LAE(1) $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9 $1,867.5$1,945.8 $2,200.2 - -------------- PAID (CUMULATIVE) AS OF: - ----------------------- One year later 293.1 322.4 353.4 366.8 417.0 525.3 593.0 743.6 922.0 1,082.8 Two years later 446.8 490.8 518.8 520.0 589.8 706.4 838.9 1,034.5 1,289.6 -- Three years later 539.8 570.4 583.2 598.2 664.1 810.6 960.1 1,266.1 -- -- Four years later 588.2 600.0 617.6 632.8 709.9 857.1 1,057.1 -- -- -- Five years later 603.1 613.6 635.8 658.6 729.8 892.7 -- -- -- -- Six years later 608.1 624.7 651.2 669.7 742.2 -- -- -- -- -- Seven years later 614.7 631.1 656.2 676.0 -- -- -- -- -- -- Eight years later 619.2 634.7 659.7 -- -- -- -- -- -- -- Nine years later 620.9 638.6 -- -- -- -- -- -- -- -- Ten years later 623.9 -- -- -- -- -- -- -- -- -- LIABILITY RE-ESTIMATED - ---------------------- AS OF: - ----- One year later 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6 1,683.3 1,916.0 Two years later 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5 1,364.5 1,668.5 -- Three years later 668.6 712.7 718.7 737.4 811.3 961.2 1,118.6 1,432.3 -- -- Four years later 667.1 683.7 700.1 725.2 794.6 940.6 1,137.7 -- -- -- Five years later 654.7 666.3 695.1 717.3 782.9 945.5 -- -- -- -- Six years later 647.1 664.8 692.6 711.1 780.1 -- -- -- -- -- Seven years later 645.7 664.5 688.2 709.2 -- -- -- -- -- -- Eight years later 645.4 661.4 687.9 -- -- -- -- -- -- -- Nine years later 641.9 660.4 -- -- -- -- -- -- -- -- Ten years later 641.5 -- -- -- -- -- -- -- -- -- CUMULATIVE REDUNDANCY $107.1 $131.2 $173.6 $247.2 $232.3 $153.2 $176.7 $100.6 $199.0 $29.8 - --------------------- PERCENTAGE(2) 14.3 16.6 20.2 25.8 22.9 13.9 13.4 6.6 10.7 1.5
(1) Represents loss and LAE reserves net of reinsurance recoverables on unpaid losses at the balance sheet date. (2) Cumulative redundancy / liability for unpaid losses and LAE. (3) In 1994, based on a review of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." The above table presents the development of balance sheet liabilities for 1989 through 1998. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years for the property-casualty insurance subsidiaries only. This liability represents the estimated amount of losses and LAE for claims that are unpaid at the balance sheet date, including losses that had been incurred but not reported. The upper section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information about the claims becomes known for individual years. For example, as of December 31, 1999 the companies had 9 10 paid $638.6 million of the currently estimated $660.4 million of losses and LAE that had been incurred through the end of 1990; thus an estimated $21.8 million of losses incurred through 1990 remain unpaid as of the current financial statement date. The "Cumulative Redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1989 liability has developed conservatively by $107.1 million over ten years. That amount has been reflected in income over the ten years and did not have a significant effect on the income of any one year. The effects on income during the past three years due to changes in estimates of the liabilities for losses and LAE is shown in the reconciliation table on page 8 as the "prior years" contribution to incurred losses and LAE. In evaluating this information, note that each cumulative redundancy amount includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the development related to losses settled in 1992, but incurred in 1989, will be included in the cumulative redundancy amount for years 1989, 1990 and 1991. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it generally is not appropriate to extrapolate future development based on this table. The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is constructed from Schedule P, Part-1, from the 1991 through 1999 Consolidated Annual Statements, as filed with the state insurance departments, and Schedules O and P filed for years prior to 1991. This development table differs from the development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2 excludes Canadian operations and unallocated loss adjustment expenses and reflects the change in the method of accounting for salvage and subrogation for 1994 and prior. (d) Financial Information about Foreign and Domestic Operations The Company operates throughout the United States. The Company ceased writing new business in Canada in 1999. For 1999, the amount of Canadian revenues and assets were less than 2% of the Company's consolidated revenues and assets. The amount of operating income (loss) generated by its Canadian operations was immaterial with respect to the Company's consolidated operating income. 10 11 ITEM 2. PROPERTIES The Company's 517,800 square foot corporate office complex is located on a 42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The Company's central data processing facility occupies a building containing an additional 107,000 square feet of office space, on this same parcel. The Company also owns six other buildings in suburbs adjoining the corporate office complex (excluding the buildings in the following paragraph), four buildings in Tampa, Florida, and a building in each of the following cities: Tempe, Arizona; Albany, New York; Tigard, Oregon; Plymouth Meeting, Pennsylvania; and Austin, Texas. In total, these buildings contain 1,497,000 square feet of office, warehouse and training facility space and are owned by subsidiaries of the Company. These locations are occupied by the Company's business units or other operations and are not segregated by industry segment. In addition, the Company owns two buildings in Tampa, Florida that are currently for sale, which are partially leased to non-affiliates. The building in Plymouth Meeting, Pennsylvania is also partially leased to non-affiliates. In November 1997, the Company purchased 91 acres in Mayfield Village, Ohio to construct an office complex near the site of its corporate headquarters. This office complex is part of a five-year cooperative effort with Mayfield Village to develop over 300 acres. Progressive will serve as the anchor corporate user with additional business users and recreational facilities on the site. The Company is constructing five buildings, containing a total of approximately 770,000 square feet, on the site, and a parking garage, at an estimated cost of $132.5 million. As of December 31, 1999, $65.8 million has been paid. The first building was completed in May 1999. The next two buildings were completed in the first quarter of 2000. The parking garage and fourth building are scheduled to be completed in October 2000. The fifth building is scheduled to be completed in the first quarter of 2001. The construction projects are being funded through operating cash flows. The Company leases 703,000 square feet of office and warehouse space at various locations throughout the United States for its other business units and staff functions. In addition, the Company leases 347 claim offices, consisting of 1,431,000 square feet, at various locations throughout the United States. These leases are generally short-term to medium-term leases of standard commercial office space. Two offices totaling 16,000 square feet are leased in Canada. As the Company continues to grow, it expects that it will need additional space and is actively engaged in seeking out additional locations to meet its current and anticipated needs. ITEM 3. LEGAL PROCEEDINGS Incorporated by reference from Note 2, LITIGATION, on page 39 of the Company's Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from information with respect to executive officers of The Progressive Corporation and its subsidiaries set forth in Item 10 in Part III of this Annual Report on Form 10-K. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's Common Shares are traded on the New York Stock Exchange under the symbol PGR. The high and low prices set forth below are as reported on the consolidated transaction reporting system.
Dividends Year Quarter High Low Close Per Share - -------------------------------------------------------------------------------------------------------------------------- 1999 1 $174 1/4 $115 7/16 $143 1/2 $.065 2 152 1/8 127 3/8 145 .065 3 144 15/16 81 1/2 81 11/16 .065 4 97 5/8 68 1/2 73 1/8 .065 ------------------------------------------------------------------------------------------- $174 1/4 $68 1/2 $ 73 1/8 $.260 =========================================================================================== 1998 1 $135 1/2 $106 11/16 $134 11/16 $.060 2 150 126 1/2 141 .060 3 156 3/4 95 112 3/4 .065 4 172 94 169 3/8 .065 ------------------------------------------------------------------------------------------- $172 $94 $169 3/8 $.250 ===========================================================================================
The closing price of the Company's Common Shares on February 29, 2000 was $59 1/2. (b) Holders There were 3,858 shareholders of record on February 29, 2000. (c) Dividends Statutory policyholders' surplus was $2,258.9 million and $2,029.9 million at December 31, 1999 and 1998, respectively. Generally, under state insurance laws, the net admitted assets of insurance subsidiaries available for transfer to a corporate parent are limited to those net admitted assets, as determined in accordance with SAP, which exceed minimum statutory capital requirements. At December 31, 1999, $278.5 million of consolidated statutory policyholders' surplus represents net admitted assets of the insurance subsidiaries that are required to meet minimum statutory surplus requirements in the subsidiaries' states of domicile. Furthermore, state insurance laws limit the amount that can be paid as a dividend or other distribution in any given year without prior regulatory approval and adequate policyholders' surplus must be maintained to support premiums written. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends to the corporate parent of $200.3 million in 2000 out of statutory policyholders' surplus, without prior approval by regulatory authorities. 12 13 ITEM 6. SELECTED FINANCIAL DATA (millions - except per share amounts)
For the years ended December 31, 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------------------------- Total revenues $6,124.2 $5,292.4 $4,608.2 $3,478.4 $3,011.9 Operating income 266.7 449.3 336.0 309.1 220.1 Net income 295.2 456.7 400.0 313.7 250.5 Per share: Operating income(1) 3.58 6.01 4.46 4.12 2.85 Net income(1) 3.96 6.11 5.31 4.14 3.26 Dividends .260 .250 .240 .230 .220 Total assets 9,704.7 8,463.1 7,559.6 6,183.9 5,352.5 Debt outstanding 1,048.6 776.6 775.9 775.7 675.9
(1) Presented on a diluted basis. In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) 128 "Earnings Per Share," and, as a result, restated prior periods per share amounts, if applicable. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The Progressive Corporation is a holding company and does not have any revenue producing operations of its own. It receives cash through borrowings, equity sales, subsidiary dividends and other transactions, and may use the proceeds to contribute to the capital of its insurance subsidiaries in order to support premium growth, to repurchase its Common Shares, to retire its outstanding indebtedness, to pay dividends and for other business purposes. During 1999, the Company repurchased 6,044 of its Common Shares at a total cost of $.6 million (average $93.25 per share) to satisfy obligations under the Company's benefit plans. During the three-year period ended December 31, 1999, the Company repurchased 440,316 of its Common Shares at a total cost of $46.0 million (average $104.57 per share). During the same period, The Progressive Corporation made $82.5 million of capital contributions to its subsidiaries, net of dividends received from these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Item 5(c) herein. The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. In March 1999, the Company issued $300 million of 6 5/8% Senior Notes due 2029 under an outstanding shelf registration, which became effective in 1998. The net proceeds of $293.7 million will be used to repay current outstanding debt upon its maturity. The Company also has available a $10.0 million revolving credit agreement. The Company's debt to total capital ratio is 28%; management believes the Company has substantial capital resources and sufficient borrowing capacity to support current and anticipated growth. The Company's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the three years ended December 31, 1999, operations generated positive cash flows of $2,127.8 million, and cash flows are expected to be positive in both the short-term and reasonably foreseeable future. The Company's investment portfolio is highly liquid and consists substantially of readily marketable securities. Total capital expenditures for the three years ended December 31, 1999, aggregated $443.6 million. In December 1997, the Company purchased approximately 72 acres in Tampa, Florida to construct a three-building, 307,000 square foot, regional call center. The final cost of the project was $45.5 million. The first two buildings were completed during 1998. The third building was completed in February 1999. In addition, in November 1997, the Company purchased 91 acres in Mayfield Village, Ohio to construct an office complex, near the site of its corporate headquarters. This office complex is part of a five-year cooperative effort with Mayfield Village to develop over 300 acres. Progressive will serve as the anchor corporate user, with additional business users and recreational facilities on the site. The Company is constructing five buildings, containing a total of approximately 770,000 square feet, on the site, and a parking garage, at an estimated cost of $132.5 million. As of December 31, 1999, $65.8 million has been paid. The first building was completed in May 1999. The next two buildings were completed in the first quarter of 2000. The parking garage and fourth building are scheduled to be completed in October 2000. The fifth building is scheduled to be completed in the first quarter of 2001. The construction projects are being funded through operating cash flows. INVESTMENTS The Company invests in fixed-maturity, equity and short-term securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations. The Company evaluates the risk/reward tradeoffs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. At December 31, 1999, the Company's portfolio was $6,427.7 million, compared to $5,674.3 million in 1998. As of December 31, 1999, the Company's portfolio had $5.4 million in unrealized losses, compared to $174.3 million in unrealized gains in 1998. This decrease in value was the result of widening credit spreads on non-treasury related products and the portfolio's underperformance relative to the S&P 500, due to underweighting in the technology sector. The weighted average fully taxable equivalent book yield of the portfolio was 6.3% for the years ended December 31, 1999 and 1998 and 6.6% for 1997. 14 15 The majority of the portfolio is invested in high-grade, fixed-maturity securities, of which short- and intermediate-term securities represented $4,417.7 million, or 68.7% of the portfolio, at the end of 1999, compared to $4,439.4 million, or 78.3%, at the end of 1998. Long-term investment-grade securities, including those principal paydowns from asset-backed securities that are greater than 10-years, were $96.0 million, or 1.5% of the portfolio, at the end of 1999, compared to $93.5 million, or 1.6%, at the end of 1998. Non-investment-grade fixed-maturity securities were $248.0 million, or 3.9% of the portfolio, at the end of 1999, compared to $128.0 million, or 2.3%, at the end of 1998, and offer the Company higher returns and added diversification without a significant adverse effect on the stability and quality of the investment portfolio as a whole. Non-investment-grade securities may involve greater risks often related to creditworthiness, solvency and relative liquidity of the secondary trading market. The duration of the fixed-income portfolio was 3.0 years at December 31, 1999, compared to 2.8 years at December 31, 1998. The quality distribution of the fixed-income portfolio is as follows: Percentage at Percentage at Rating December 31, 1999 December 31, 1998 -------------------------- --------------------- --------------------- AAA 54.7% 57.7% AA 14.2 14.3 A 20.0 20.4 BBB 5.1 4.1 Non Rated/Other 6.0 3.5 --------------------- --------------------- 100.0% 100.0% ===================== ===================== As of December 31, 1999, the Company held $1,831.1 million of asset-backed securities, which represented 28.5% of the total investment portfolio. The asset-backed portfolio included collateralized mortgage obligations (CMO) and commercial mortgage-backed obligations (CMB) totaling $612.0 million and $649.7 million, respectively. The remainder of the asset-backed portfolio was invested primarily in auto loan and other asset-backed securities. As of December 31, 1999, the CMO portfolio included sequential bonds, representing 68.3% of the CMO portfolio ($417.7 million), and planned amortization class bonds, representing 31.7% of the CMO Portfolio ($194.3 million). At December 31, 1999, the CMO portfolio had an average life of 3.88 years and a weighted average Moody's or Standard & Poor's rating of AAA. The CMB portfolio had an average life of 5.75 years and a weighted average Moody's or Standard & Poor's rating of AA. At December 31, 1999, the CMO and CMB portfolios had unrealized losses of $13.0 million and $45.1 million, respectively. The single largest unrealized loss in any individual CMO security was $1.3 million and in any CMB security was $6.9 million, at December 31, 1999. The CMB portfolio includes $106.6 million of CMB interest-only certificates, which had an average life of 6.45 years and a weighted average Moody's or Standard & Poor's rating of AAA at December 31, 1999. Both the CMO and CMB portfolios are liquid with available market quotes and contain no residual interests. During 1997, the Company sold $178.4 million (proceeds of $200.8 million) of non-investment-grade CMB securities to a third-party purchaser. The purchaser subsequently transferred the securities to a trust as collateral in a resecuritized debt offering. The transaction was accounted for as a sale under Statement of Financial Accounting Standards (SFAS) 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," resulting in a net gain of $22.4 million. A bankruptcy remote subsidiary of the Company acquired $22.8 million of the resecuritized debt, which was subsequently sold in 1998 for a net gain of $3.5 million. This portion of the transaction was not accounted for as a sale in 1998 in accordance with SFAS 125. A portion of the investment portfolio is invested in marketable equity securities. Common stocks represented $1,243.6 million, or 19.3% of the portfolio, at the end of 1999, compared to $636.9 million, or 11.2%, a year earlier. The majority of the common stock portfolio is invested in domestic equities traded on nationally recognized securities exchanges. The common stock portfolio also includes term trust certificates, the common shares of closed-end bond funds, which have the risk and reward characteristics of the underlying bonds and comprised $230.2 million of the common stock portfolio at the end of 1999; no term trust securities were held at the end of 1998. Foreign equities, which may include stock index futures and foreign currency forwards, comprised $84.2 million of the common stock portfolio at the end of 1999, 15 16 compared to $130.7 million last year, and partnership investments comprised $104.0 million of the common stock portfolio at the end of 1999, compared to $63.7 million last year. Preferred stocks represented $422.4 million, or 6.6% of the portfolio, at the end of 1999, compared to $376.5 million, or 6.6%, a year earlier, and was comprised of over 89% of fixed-rate preferred stocks with mechanisms that are expected to provide an opportunity to liquidate at par. Investments in the Company's portfolio have varying degrees of risk. The primary market risk exposure to the fixed-income portfolio is interest rate risk, which is limited by managing duration to a defined range of 1.8 to 5 years. The distribution of maturities and convexity are monitored on a regular basis. Common stocks, excluding term trust certificates, and other risk assets, which generally have greater risk and volatility of market value, may range from 0 to 25% of the total portfolio; at December 31, 1999, the Company held 16.5% of these securities. Market values, along with industry and sector concentrations of common stocks and similar investments, are monitored daily. Exposure to foreign currency exchange risk is limited by Company restrictions and is monitored quarterly for compliance. Exposures are evaluated individually and as a whole, considering the effects of cross correlation. For the quantitative market risk disclosures, see page 56 of the Company's Annual Report. The Company quarterly examines its portfolio for evidence of impairment. In such cases, changes in market value are evaluated to determine the extent to which such changes are attributable to: (i) interest rates, (ii) market-related factors other than interest rates and (iii) financial conditions, business prospects and other fundamental factors specific to the issuer. Declines attributable to issuer fundamentals are reviewed in further detail. Available evidence is considered to estimate the realizable value of the investment. When a security in the Company's investment portfolio has a decline in market value which is other than temporary, the Company is required by GAAP to reduce the carrying value of such security to its net realizable value. Included in the Company's fixed-maturity and equity portfolios are $195.8 million, or 3.0%, of other risk assets. These include high yield and distressed debt, private equities and warrants, and mezzanine investments. No individual security in this category comprised more than 1% of the Company's total investment portfolio. The total return on this asset class in 1999 was 7.1% with a total net unrealized gain of $20.5 million. Trading securities and derivative instruments held or issued for trading are entered into for the purpose of near-term profit taking. During 1999, net activity in the trading portfolio was not material to the Company's financial position, cash flows or results of operations. At December 31, 1999, trading positions had a net market value of $50.2 million, compared to $(.4) million at December 31, 1998. Net gains and losses for the year ended December 31, 1999 and 1998, were $.8 million and $(1.2) million, respectively. Derivative instruments are primarily used to manage the risks and enhance the returns of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio, hedged securities or hedged cash flows. During 1998, the Company entered into two transactions, an interest rate swap hedge and a short futures position, to hedge against possible rises in interest rates prior to the issuance of debt under the $300 million shelf registration. During 1999, the $300 million of debt was issued and the hedges were closed. The interest rate swap performed as expected and was recorded as a deferred asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge. The deferred asset of $4.8 million is recognized as an adjustment to interest expense over the life of the debt. During 1998, the short futures position, driven by changing economic conditions, did not meet the established criteria for hedging correlation and was discontinued as a hedge, but the Company continued to hold it for risk management of the anticipated debt offering. The Company recognized a net realized gain of $8.1 million in 1999 and a net realized loss of $9.2 million in 1998, on the short futures position. Derivative instruments may also be used for trading purposes. For all derivative positions, net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; collateral is not required to support the credit risk. RESULTS OF OPERATIONS Operating income, which excludes net realized gains and losses from security sales and one-time items, was $266.7 million, or $3.58 per share, in 1999, $449.3 million, or $6.01 per share, in 1998 and $336.0 million, or $4.46 per share, in 1997. The GAAP combined ratio was 98.3 in 1999, 91.6 in 1998 and 93.4 in 1997. Direct premiums written increased 16% to $6,305.3 million in 1999, compared to $5,451.3 million in 1998 and $4,825.2 million in 1997. Net premiums written increased 16% to $6,124.7 million in 1999, compared to $5,299.7 million in 1998 16 17 and $4,665.1 million in 1997. The difference between direct and net premiums written is attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Procedures, for which the Company retains no indemnity risk, of $49.7 million in 1999, $60.7 million in 1998 and $78.4 million in 1997, and reinsurance the Company maintains in its auto and non-auto programs and its strategic alliance relationships. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 15% in 1999, compared to 18% in 1998 and 31% in 1997. Net premiums written in the Company's Personal Lines business units, which write insurance for private passenger automobiles and recreation vehicles and represented 93% of the Company's 1999 total premiums written, grew 16%, 15% and 36% in 1999, 1998 and 1997, respectively, primarily reflecting an increase in unit sales. The Company decreased rates an average of 1.3% during the first six months of 1999, and increased rates 4.4% in the second half of the year, for an annual rate increase of 3.1% in 1999, compared to rate decreases of 5.3% and .9% in 1998 and 1997, respectively. The Company expects that these rate increases will likely slow volume growth in 2000 and, since nearly two-thirds of the Company's new auto policies are on an annual term, the Company does not expect to see the full impact of these rate changes until the fourth quarter of 2000. The Personal Lines business is generated either by an Agent or written directly by the Company. The Agent channel includes business written by the Company's network of 30,000 Independent Insurance Agents and through Strategic Alliance business relationships (other insurance companies, financial institutions, employers and national brokerage agencies). Total net premiums written through Independent Agents and Strategic Alliance agency relationships were $4,746.5 million in 1999, compared to $4,390.4 million in 1998 and $4,033.8 million in 1997. The combined ratios for the Agency channel were 96.5, 90.6 and 93.2 for 1999, 1998 and 1997, respectively. Direct business includes business written through 1-800-AUTO-PRO(R), the Internet (progressive.com) and the Strategic Alliance business unit on behalf of affinity groups. Net premiums written and combined ratio on the Direct business were $955.9 million and 113.1, respectively, in 1999, compared to $531.9 million and 107.5 in 1998 and $255.0 million and 103.8 in 1997. The sales generated via the Internet represented approximately 7% and 2% of the Direct business net premiums written for 1999 and 1998, respectively; the Company started selling insurance directly over the Internet in August 1997. Through these multiple distribution channels, the Company continues to write standard and preferred risks, which represented between 45% and 50% of total 1999 Personal Lines volume, compared to between 30% and 35% in 1998 and between 20% and 25% in 1997, as well as its traditional nonstandard auto products. Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claim costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are established. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss reserves. Claim costs, expressed as a percentage of premiums earned, were 75% in 1999, compared to 68% in 1998 and 71% in 1997. The increase in the loss ratios was driven by the factors discussed below. Four factors contributed to the Company's underwriting losses during the second half of 1999 and its inability to meet its traditional goals in 1999. The first factor was that, during 1999, the Company reduced loss reserves relating to prior accident years $29.8 million, or .5 points, compared to $184.2 million, or 3.7 points, and $103.3 million, or 2.5 points, for 1998 and 1997, respectively. The second factor was continued strong growth in the Direct business in 1999. In periods of rapid growth in the Direct business, the Company's earnings may be lower as a result of higher up-front costs and higher loss costs traditionally associated with new business. In response, the Company decided to return to profit targets based on a calendar year measure rather than over the entire retention period of a policyholder, with the intent to bring the combined ratio back to the historic goal of 96 over the next few years. The Company's profit and growth opportunities change from year to year; however, over every consecutive 5-year period, the Company strives to produce a four percent underwriting profit and to grow at 15 percentage points greater than the rate of inflation. The third factor was that the Company lowered rates in 1998 and during the first half of 1999, in an attempt to raise its combined ratio to 96 while achieving its growth target. Lastly, during 1999, loss trend accelerated at an unanticipated pace; consequently, loss costs rose faster than expected. The Company expects these loss costs trends to continue. In 1999, actual trend for 17 18 pricing exceeded estimates. Similarly, the emerging loss development is greater than anticipated primarily for the 1999 losses, which led to the Company experiencing approximately 6 points of adverse development during the first two months of 2000. During March 2000, the Company undertook a comprehensive review of those reserve segments that have shown the most development and intends to adjust the reserves accordingly. The Company's other lines of business include writing insurance for small fleets of commercial vehicles, collateral protection and loan tracking for auto lenders and financial institutions, directors' and officers' liability and fidelity coverage for American Bankers Association member community banks and independent credit unions, and providing related claim, underwriting and system services. Revenues in these businesses were $437.0 million in 1999, compared to $405.5 million in 1998 and $402.1 million in 1997. Pretax operating profit was $41.8 million in 1999, compared to $61.9 million in 1998 and $36.6 million in 1997. The Company writes directors and officers and other professional liability coverage for community banks and credit unions and, therefore, could potentially be exposed to liability for errors made by these institutions relating to the year 2000 conversion. The Company has reinsurance to limit its potential exposure to approximately 7% of the average policy limits in the event any of the insured directors or officers are held liable for year 2000 noncompliance by their financial institutions. It is currently unknown whether these financial institutions have been able to completely avoid errors relating to year 2000 compliance and the Company is unable to predict to what extent such financial institutions will incur losses as a result of noncompliance and whether their directors and officers will be subject to individual liability for such noncompliance. In the event of a claim, applicable factual and coverage issues would have to be resolved. Based on information currently available and management's best estimate, the Company does not believe that any losses resulting from this exposure will have a material impact on the Company's liquidity, financial condition, cash flows or results of operations. Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. Management does not believe that these claims will have a material impact on the Company's liquidity, financial condition, cash flows or results of operations. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 23% in 1999, 1998 and 1997. The Company advertises locally in 35 states, plus Washington D.C. (107 markets), as compared to 32 states (83 markets) in 1998 and 19 states (40 markets) in 1997. The Company expanded its television advertising campaign on a national level during 1998. During 1999, the Company incurred advertising expenses of $124 million, compared to $70 million in 1998 and $23 million in 1997. Recurring investment income (interest and dividends) increased 16% to $340.7 million in 1999, compared to $294.8 million in 1998 and $274.9 million in 1997, primarily due to an increase in the size of the investment portfolio. Net realized gains on security sales were $47.2 million in 1999, $11.4 million in 1998 and $98.5 million in 1997. Investment expenses were $9.5 million in 1999, compared to $7.4 million in 1998 and $9.9 million in 1997. YEAR 2000 COMPLIANCE The Company's five-year effort to achieve year 2000 compliance was successful. The Company successfully operated through the rollover to year 2000 with only minor issues and has not experienced any significant business outage or incurred any significant cost due to the year 2000 failure or errors of business partners to date. The total cost to modify existing production systems, which includes both internal and external costs of programming, coding and testing, was $9.3 million, of which $9.2 million had been expensed through December 31, 1999. The Company also replaced some of its systems. In addition to being year 2000 compliant, these new systems added increased functionality to the Company. The majority of the projects were completed in 1998, with remaining parallel testing completed during the first half of 1999. As of December 31, 1999, $5.5 million, which include both internal and external costs, had been paid for these systems. All costs were funded through operating cash flows. The Company continually evaluates computer hardware and software upgrades for enhancements and, therefore, many of the costs to replace these items to be year 2000 compliant were not incremental costs to the Company. 18 19 In preparing for the rollover to the 21st century, the Company's process teams and business groups identified potential year 2000 scenarios. For those scenarios deemed to be both probable and with a potentially significant business impact, the Company developed contingency plans. These plans were reviewed by the Company's chief financial and technology officers throughout 1999. It has not been necessary to execute any of the contingency plans to date. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: CERTAIN MATTERS IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS AND RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, UNCERTAINTIES RELATED TO ESTIMATES, ASSUMPTIONS AND PROJECTIONS GENERALLY; CHANGES IN ECONOMIC CONDITIONS (INCLUDING CHANGES IN INTEREST RATES AND FINANCIAL MARKETS); PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS; LEGISLATIVE AND REGULATORY DEVELOPMENTS; WEATHER CONDITIONS (INCLUDING THE SEVERITY AND FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER CONDITIONS); CHANGES IN DRIVING PATTERNS AND LOSS TRENDS; COURT DECISIONS AND TRENDS IN LITIGATION AND HEALTH CARE COSTS; UNFORESEEN TECHNOLOGICAL ISSUES ASSOCIATED WITH THE YEAR 2000 COMPLIANCE EFFORTS AND THE EXTENT TO WHICH VENDORS, PUBLIC UTILITIES, GOVERNMENTAL ENTITIES AND OTHER THIRD PARTIES THAT INTERFACE WITH THE COMPANY MAY FAIL TO ACHIEVE YEAR 2000 COMPLIANCE; AND OTHER MATTERS DESCRIBED FROM TIME TO TIME BY THE COMPANY IN OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS ANNUAL REPORT. 19 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are incorporated by reference from the "Investments" section of MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and pages 56 and 57 of the Company's 1999 Annual Report to Shareholders, which is included as Exhibit 13 to such Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company, along with the related notes, supplementary data and report of independent accountants, are incorporated by reference from the Company's 1999 Annual Report, pages 33 through 47 and pages 51 through 58. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to all of the directors and the individuals who have been nominated for election as directors at the 2000 Annual Meeting of Shareholders of the Registrant, is incorporated herein by reference from the section entitled "Election of Directors" in the Proxy Statement, pages 2 through 4. Information relating to executive officers of the Registrant and its subsidiaries follows. Unless otherwise indicated, the executive officer has held the position(s) indicated for at least the last five years.
Offices Held and Name Age Last Five Years' Business Experience ---- --- ------------------------------------ Peter B. Lewis 66 President and Chairman of the Board; Chief Executive Officer since January 2000 and prior to January 1999; Chief Executive Officer - Insurance Operations during 1999; President, Chairman of the Board and Chief Executive Officer of Progressive Casualty Insurance Company, the principal subsidiary of the Registrant Alan R. Bauer 47 Internet Distribution Leader since January 1999; International/Internet Officer from December 1996 to December 1998; Independent Agent Marketing Process Leader from March 1996 to December 1996; West Division President prior to March 1996 Jeffrey W. Basch 41 Vice President since December 1999; Chief Accounting Officer Charles B. Chokel 46 Chief Executive Officer - Investments and Capital Management since January 1999; Chief Financial Officer and Treasurer prior to January 1999 Janet A. Dolohanty 46 Vice President since December 1999; Tax Director W. Thomas Forrester 51 Chief Financial Officer and Treasurer since January 1999; Ownership Process Leader from March 1996 to December 1998; Central States Division President prior to April 1996 R. Steven Kestner 45 Chief Legal Officer and Secretary of the Registrant since January 2000; Partner at Baker & Hostetler LLP, which is the principal outside law firm of the Registrant Thomas A. King 40 Vice President since December 1999; Corporate Controller since March 1998; General Manager of Minnesota and Wisconsin from October 1995 to February 1998; Pennsylvania Auto Product Manager prior to October 1995 Moira A. Lardakis 48 Chief Communications Officer since January 1999; Community Manager Support Process Leader during 1998; General Manager of Ohio Business Unit from March 1996 to December 1997; Ohio Division President prior to March 1996 Daniel R. Lewis 53 Independent Agent Distribution Leader since January 1999; Independent Agent Marketing Process Leader from December 1996 to December 1998; General Manager of South Florida Community prior to January 1997 Brian J. Passell 43 Chief Claim Officer since January 1999; General Manager of Pennsylvania from March 1996 to December 1998; New York Division Claim Manager prior to March 1996
21 22 Glenn M. Renwick 44 Chief Executive Officer - Insurance Operations since January 2000; Chief Information Officer from January 1998; Consumer Marketing Process Leader from March 1996 to December 1997; Director of Consumer Marketing prior to March 1996 Tiona M. Thompson 49 Chief Human Resources Officer Richard H. Watts 45 Direct Business Leader since January 2000; General Manager of Northeast Ohio from January 1996 to December 1999; Direct Product Manager of Ohio during 1995 Robert T. Williams 43 Chief Pricing/Product Officer since January 1999; Product Process Leader during 1998; General Manager of New York Business Unit from March 1996 to December 1997; New York Division President prior to April 1996; Manager of Special Lines prior to March 1997
Section 16(a) Beneficial Ownership Reporting Compliance. The February 16, 1999 purchase of 1,400 shares by a partnership organized for the benefit of B. Charles Ames and members of his immediate family was reported in a Form 4 filed on May 27, 1999. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation," pages 9 through 21. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the section of the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management," pages 6 through 8. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the section of the Proxy statement entitled "Election of Directors - Certain Relationships and Related Transactions," page 5. 22 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Listing of Financial Statements The following consolidated financial statements of the Registrant and its subsidiaries, included in the Registrant's Annual Report, are incorporated by reference in Item 8: Report of Independent Accountants Consolidated Statements of Income - For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Supplemental Information* *Not covered by Report of Independent Accountants. (a)(2) Listing of Financial Statement Schedules The following financial statement schedules of the Registrant and its subsidiaries, Report of Independent Accountants and Consent of Independent Accountants are included in Item 14(d): SCHEDULES Report of Independent Accountants Consent of Independent Accountants Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant Schedule III - Supplementary Insurance Information 23 24 Schedule IV - Reinsurance Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations No other schedules are required to be filed herewith pursuant to Article 7 of Regulation S-X. (a)(3) Listing of Exhibits See exhibit index contained herein at pages 39 through 43. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. (10)(D) through (10)(V). (b) Reports on Form 8-K On November 22, 1999, the Registrant filed a Current Report on Form 8-K, dated November 18, 1999, discussing certain changes in the senior management of the Registrant. (c) Exhibits The exhibits in response to this portion of Item 14 are submitted concurrently with this report. (d) Financial Statement Schedules The response to this portion of Item 14 is located at pages 30 through 38. 24 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. THE PROGRESSIVE CORPORATION March 30, 2000 BY: /S/ PETER B. LEWIS -------------------------------- Peter B. Lewis Director, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. /S/ PETER B. LEWIS Director, Chairman, President and March 30, 2000 - ----------------------------------------- Peter B. Lewis Chief Executive Officer /S/ CHARLES B. CHOKEL Director and Chief Executive Officer- March 30, 2000 - ----------------------------------------- Charles B. Chokel Investments and Capital Management /S/ GLENN M. RENWICK Director and Chief Executive Officer- March 30, 2000 - ----------------------------------------- Glenn M. Renwick Insurance Operations /S/ W. THOMAS FORRESTER Treasurer and Chief Financial Officer March 30, 2000 - ----------------------------------------- W. Thomas Forrester /S/ JEFFREY W. BASCH Vice President and Chief Accounting Officer March 30, 2000 - ----------------------------------------- Jeffrey W. Basch * Director March 30, 2000 - ----------------------------------------- Milton N. Allen * Director March 30, 2000 - ----------------------------------------- B. Charles Ames * Director March 30, 2000 - ----------------------------------------- James E. Bennett III * Director March 30, 2000 - ----------------------------------------- Charles A. Davis
25 26 * Director March 30, 2000 - ----------------------------------------- Stephen R. Hardis * Director March 30, 2000 - ----------------------------------------- Janet Hill * Director March 30, 2000 - ----------------------------------------- Norman S. Matthews * Director March 30, 2000 - ----------------------------------------- Donald B. Shackelford * R. STEVEN KESTNER, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by such persons. By /S/ R. STEVEN KESTNER March 30, 2000 ------------------------------------------------------------------------------------------ R. Steven Kestner Attorney-in-fact
26 27 ANNUAL REPORT ON FORM 10-K ITEM 14(d) FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1999 THE PROGRESSIVE CORPORATION MAYFIELD VILLAGE, OHIO 27 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders, The Progressive Corporation: Our report on the consolidated financial statements of The Progressive Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 33 of the 1999 Annual Report to Shareholders of The Progressive Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on pages 23 and 24 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio January 25, 2000 28 29 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders, The Progressive Corporation: We consent to the incorporation by reference in the Registration Statement of The Progressive Corporation on Form S-8 (File No. 333-51613) filed May 1, 1998, the Registration Statement on Form S-8 (File No. 333-25197) filed April 15, 1997, the Registration Statement on Form S-8 (File No. 33-57121) filed December 29, 1994, the Registration Statement on Form S-8 (File No. 33-64210) filed June 10, 1993, the Registration Statement on Form S-8 (File No. 33-51034) filed August 20, 1992, the Registration Statement on Form S-8 (File No. 33-46944) filed April 3, 1992, the Registration Statement on Form S-8 (File No. 33-38793) filed February 4, 1991, the Registration Statement on Form S-8 (File No. 33-38107) filed December 6, 1990, the Registration Statement on Form S-8 (File No. 33-37707) filed November 9, 1990, the Registration Statement on Form S-8 (File No. 33-33240) filed January 31, 1990, and the Registration Statement on Form S-8 (File No. 33-16509) filed August 14, 1987, of our reports dated January 25, 2000, on our audits of the consolidated financial statements and financial statement schedules of The Progressive Corporation and subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which reports are included in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio March 27, 2000 29 30 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES THE PROGRESSIVE CORPORATION AND SUBSIDIARIES - -------------------------------------------- (millions)
December 31, 1999 ----------------------------------------------------------------- Amount At Which Shown In The Type of Investment Cost Market Value Balance Sheet ----------------------------------------------------------------- Fixed Maturities: Available-for-sale: United States Government and government agencies and authorities $ 352.4 $ 345.6 $ 345.6 States, municipalities and political subdivisions 1,352.9 1,332.2 1,332.2 Asset-backed securities 1,897.3 1,831.1 1,831.1 Foreign government obligations 60.4 59.0 59.0 Corporate and other debt securities 950.2 927.0 927.0 Redeemable preferred stock 37.7 37.8 37.8 ----------------------------------------------------------------- Total fixed maturities 4,650.9 4,532.7 4,532.7 ----------------------------------------------------------------- Equity securities: Common stocks: Public utilities 17.3 15.2 15.2 Banks, trust and insurance companies 405.9 397.1 397.1 Industrial, miscellaneous and all other 704.6 831.3 831.3 Nonredeemable preferred stocks 425.4 422.4 422.4 ----------------------------------------------------------------- Total equity securities 1,553.2 1,666.0 1,666.0 ----------------------------------------------------------------- Short-term investments 229.0 229.0 229.0 ----------------------------------------------------------------- Total investments $6,433.1 $6,427.7 $6,427.7 =================================================================
The Company did not have any securities of one issuer with an aggregate cost or market value exceeding 10% of total shareholders' equity at December 31, 1999. 30 31 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME THE PROGRESSIVE CORPORATION (PARENT COMPANY) - -------------------------------------------- (millions)
Years Ended December 31, 1999 1998 1997 ---------------------------------------------------- Revenues Dividends from subsidiaries* $95.4 $151.0 $108.1 Intercompany investment income* 41.2 25.9 35.3 ---------------------------------------------------- 136.6 176.9 143.4 ---------------------------------------------------- Expenses Interest expense 79.5 64.5 64.5 Other operating costs and expenses .6 5.2 6.2 ---------------------------------------------------- 80.1 69.7 70.7 ---------------------------------------------------- Operating income and income before income taxes and other items below 56.5 107.2 72.7 Income tax benefit (14.2) (16.2) (12.7) ---------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 70.7 123.4 85.4 Equity in undistributed net income of consolidated subsidiaries* 224.5 333.3 314.6 ---------------------------------------------------- Net income $295.2 $456.7 $400.0 ====================================================
*Eliminated in consolidation. See notes to condensed financial statements. 31 32 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED BALANCE SHEETS THE PROGRESSIVE CORPORATION (PARENT COMPANY) - -------------------------------------------- (millions)
December 31, 1999 1998 ----------------------------------------------- ASSETS Investment in non-consolidated affiliates $ .4 $ .4 Investment in subsidiaries* 3,076.0 2,882.9 Receivable from subsidiary* 745.7 441.1 Intercompany receivable* -- 9.9 Income taxes 12.9 19.7 Other assets 18.5 12.6 ----------------------------------------------- TOTAL ASSETS $3,853.5 $3,366.6 =============================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 39.3 $ 32.9 Intercompany payable* 20.5 -- Debt 1,040.9 776.6 ----------------------------------------------- Total liabilities 1,100.7 809.5 ----------------------------------------------- Shareholders' equity: Common Shares, $1.00 par value, authorized 300.0 shares, issued 83.1, including treasury shares of 10.0 and 10.6 73.1 72.5 Paid-in capital 481.6 448.3 Accumulated other comprehensive income: Net unrealized appreciation (depreciation) of investment in equity securities of consolidated subsidiaries (3.4) 113.3 Other (9.0) (9.6) Retained earnings 2,210.5 1,932.6 ----------------------------------------------- Total shareholders' equity 2,752.8 2,557.1 ----------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,853.5 $3,366.6 ===============================================
*Eliminated in consolidation. See notes to condensed financial statements. 32 33 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS THE PROGRESSIVE CORPORATION (PARENT COMPANY) - -------------------------------------------- (millions)
Years Ended December 31, 1999 1998 1997 -------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $295.2 $456.7 $400.0 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in income of consolidated subsidiaries (319.9) (484.3) (422.7) Changes in: Intercompany receivable or payable 30.4 (37.8) 34.5 Accounts payable and accrued expenses 6.4 9.3 1.4 Income taxes 6.8 9.2 (15.9) Other, net 3.4 (4.7) (3.5) -------------------------------------------------- Net cash provided by (used in) operating 22.3 (51.6) (6.2) activities CASH FLOWS FROM INVESTING ACTIVITIES: Additional investments in equity securities of consolidated subsidiaries (90.2) (124.1) (219.3) Purchase of consolidated subsidiaries -- -- (100.5) Dividends received from consolidated subsidiaries 95.4 151.0 108.1 -------------------------------------------------- Net cash provided by (used in) investing 5.2 26.9 (211.7) activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 12.6 11.5 14.1 Proceeds from exercise of stock options Tax benefits from exercise of stock options 20.4 25.6 17.6 Proceeds from Debt 293.7 -- -- Payments of Debt (30.0) -- -- Receivable from subsidiary (304.6) 48.3 206.4 Dividends paid to shareholders (19.0) (18.1) (17.3) Acquisition of treasury shares (.6) (42.6) (2.9) -------------------------------------------------- Net cash provided by (used in) financing activities (27.5) 24.7 217.9 -------------------------------------------------- Change in cash -- -- -- Cash, beginning of year -- -- -- -------------------------------------------------- Cash, end of year $ -- $ -- $ -- ==================================================
See notes to condensed financial statements. 33 34 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements of The Progressive Corporation (the "Registrant") should be read in conjunction with the consolidated financial statements and notes thereto of The Progressive Corporation and subsidiaries included in the Registrant's 1999 Annual Report. STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Registrant paid income taxes of $116.5 million in 1999, and $235.9 million, and $166.9 million in 1998 and 1997, respectively. Total interest paid was $72.4 million for 1999 and $63.8 million for 1998 and 1997. DEBT -- Debt at December 31 consisted of:
1999 1998 --------------------------- --------------------------- (millions) Market Market Cost Value Cost Value ------------------------------------------------------------ 6 5/8% Senior Notes due 2029 (issued: $300.0, March 1999) $293.7 $254.1 $ -- $ -- 7.30% Notes due 2006 (issued: $100.0, May 1996) 99.7 98.0 99.7 109.5 6.60% Notes due 2004 (issued: $200.0, January 1994) 199.3 193.7 199.1 199.4 7% Notes due 2013 (issued: $150.0, October 1993) 148.5 138.8 148.4 157.2 8 3/4% Notes due 1999 (issued: $30.0, May 1989) -- -- 29.9 30.4 10% Notes due 2000 (issued: $150.0, December 1988) 149.9 154.3 149.8 162.7 10 1/8% Subordinated Notes due 2000 (issued: 149.8 154.5 149.7 162.4 $150.0, December 1988) ------------------------------------------------------------ $1,040.9 $ 993.4 $776.6 $821.6 ============================================================
Debt includes amounts the Registrant has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. During 1999, there were no bank borrowings outstanding. Market values are obtained from publicly quoted sources. All debt is noncallable, except for the 6 5/8% Senior Notes which may be redeemed all or in part at any time, subject to a "make whole" provision; interest is payable semiannually. In May 1990, the Registrant entered into a revolving credit arrangement with National City Bank, which is reviewed by the bank annually. Under this agreement, the Registrant has the right to borrow up to $10.0 million. By selecting from available credit options, the Registrant may elect to pay interest at rates related to the London interbank offered rate, the bank's base rate or at a money market rate. A commitment fee is payable on any unused portion of the committed amount at the rate of .125% per annum. The Registrant had no borrowings under this arrangement at December 31, 1999 and 1998. Aggregate principal payments on debt outstanding at December 31, 1999 are $300.0 for 2000, $0 million for 2001, 2002 and 2003, $200.0 for 2004 and $550.0 million thereafter. 34 35 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS INCOME TAXES -- The Registrant files a consolidated Federal income tax return with all eligible subsidiaries. The Federal income taxes in the accompanying Condensed Balance Sheets represent amounts recoverable from the Internal Revenue Service by the Registrant as agent for the consolidated tax group. The Registrant and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated Federal income taxes. Amounts allocated to the subsidiaries under the written agreement are included in Intercompany Receivable from Subsidiaries in the accompanying Condensed Balance Sheets. INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its investment in consolidated subsidiaries, recognizes the changes in unrealized gains (losses) on available-for-sale securities of the subsidiaries. These amounts were:
(millions) 1999 1998 1997 ----------------------------------------------------------------- Unrealized gains (losses): Available-for-sale: fixed maturities $ (165.6) $ (7.2) $ 29.5 equity securities (14.1) (6.9) 44.8 Deferred income taxes 63.0 5.1 (26.0) ----------------------------------------------------------------- $ (116.7) $ (9.0) $ 48.3 =================================================================
OTHER MATTERS -- The information relating to incentive compensation plans is incorporated by reference from Note 9, EMPLOYEE BENEFIT PLANS, "Incentive Compensation Plans" on pages 44 and 45 of the Registrant's 1999 Annual Report. 35 36 SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION THE PROGRESSIVE CORPORATION AND SUBSIDIARIES - -------------------------------------------- (millions)
Future policy Other benefits, policy Benefits, Deferred losses, claims claims, policy claims and and losses and acquisition loss Unearned benefits Premium Investment settlement Segment costs(1) expenses(1) premiums(1) payable(1) revenue income(1)(2) expenses ------------------------------------------------------------------------------------ Year ended December 31, 1999: Personal Lines $5,294.1 $4,002.7 Other 389.5 253.7 ------------------------------------------------------------------------------------ Total $343.4 $2,416.2 $2,781.4 $ -- $5,683.6 $340.7 $4,256.4 ==================================================================================== Year ended December 31, 1998: Personal Lines $4,580.7 $3,164.4 Other 367.3 211.9 ------------------------------------------------------------------------------------ Total $299.1 $2,188.6 $2,329.7 $ -- $4,948.0 $294.8 $3,376.3 ==================================================================================== Year ended December 31, 1997: Personal Lines $3,832.7 $2,743.3 Other 356.8 224.2 ------------------------------------------------------------------------------------ Total $259.6 $2,146.6 $1,980.1 $ -- $4,189.5 $274.9 $2,967.5 ====================================================================================
Amortization of deferred policy Other Net acquisition operating premiums Segment costs(3) expenses written -------------------------------------- Year ended December 31, 1999: Personal Lines $693.9 $534.3 $5,702.4 Other 51.1 49.5 422.3 -------------------------------------- Total $745.0 $583.8 $6,124.7 ====================================== Year ended December 31, 1998: Personal Lines $610.9 $443.9 $4,922.3 Other 49.0 51.9 377.4 -------------------------------------- Total $659.9 $495.8 $5,299.7 ====================================== Year ended December 31, 1997: Personal Lines $556.0 $290.4 $4,288.8 Other 51.8 45.6 376.3 -------------------------------------- Total $607.8 $336.0 $4,665.1 ======================================
(1) The Company does not allocate assets or investment income to operating segments. (2) Excluding investment expenses of $9.5 million in 1999, $7.4 million in 1998 and $9.9 million in 1997. (3) Since the Company does not allocate deferred policy acquisition costs to operating segments, amounts were allocated based on premium revenue. 36 37 SCHEDULE IV -- REINSURANCE THE PROGRESSIVE CORPORATION AND SUBSIDIARIES - -------------------------------------------- (millions)
YEAR ENDED Assumed Percentage - ---------- Ceded to From of Amount Gross Amount Other Other Assumed Companies Companies Net Amount to Net ----------------------------------------------------------------------------------- DECEMBER 31, 1999 - ---------------- Premiums earned: Property and liability $5,853.5 $169.9 $-- $5,683.6 -- =================================================================================== DECEMBER 31, 1998 - ----------------- Premiums earned: Property and liability $5,100.5 $152.5 $-- $4,948.0 -- =================================================================================== DECEMBER 31, 1997 - ----------------- Premiums earned: Property and liability $4,382.9 $193.4 $-- $4,189.5 -- ===================================================================================
37 38 SCHEDULE VI -SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS THE PROGRESSIVE CORPORATION AND SUBSIDIARIES - -------------------------------------------- (millions)
Paid Losses and Losses and Loss Adjustment Expenses Loss Adjustment Incurred Related to Expenses --------------------------------------------------- ------------------- Current Prior YEAR ENDED Year Years - ---------- -------------------------- ---------------------- December 31, 1999 $4,286.2 $(29.8) $4,002.0 ========================== ====================== =================== December 31, 1998 $3,560.5 $(184.2) $3,298.0 ========================== ====================== =================== December 31, 1997 $3,070.8 $(103.3) $2,715.1 ========================== ====================== ===================
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 36, for the additional information required in Schedule VI. 38 39 EXHIBIT INDEX
Exhibit No. Under Reg. Form 10-K S-K, Item 601 Exhibit No. Description of Exhibit (3)(i) 3(A) Amended Articles of Incorporation, as amended, of The Progressive Corporation (3)(ii) 3(B) Code of Regulations of Progressive (4) 4(A) Indenture dated as of November 15, 1988 between Progressive and State Street Bank and Trust Company (successor in interest to Rhode Island Hospital Trust National Bank), as Trustee ("Subordinated Indenture") (including Table of Contents and cross-reference sheet) (4) 4(B) Form of 10 1/8% Subordinated Notes due 2000 issued in the aggregate principal amount of $150,000,000 under the Subordinated Indenture (4) 4(C) Indenture dated as of November 15, 1988 between Progressive and State Street Bank and Trust Company (successor in interest to The First National Bank of Boston), as Trustee ("1988 Senior Indenture") (including Table of Contents and cross-reference sheet) (4) 4(D) Form of 10% Notes due 2000 issued in the aggregate principal amount of $150,000,000 under the 1988 Senior Indenture (4) 4(E) $10,000,000 Unsecured Line of Credit with National City Bank (dated May 23, 1990; renewed May 20, 1992; amended February 1, 1994 and May 1, 1997)
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with Which S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC (3)(i) 3(A) Registration Statement No. 333-51613 (Filed with SEC on May 1, 1998; see Exhibit 4(C) therein) (3)(ii) 3(B) Quarterly Report on Form 10-Q (filed with SEC on May 15, 1997; see Exhibit 3 therein) (4) 4(A) Contained in Exhibit Binder (4) 4(B) Contained in Exhibit Binder (4) 4(C) Contained in Exhibit Binder (4) 4(D) Contained in Exhibit Binder (4) 4(E) Annual Report on Form 10-K (Filed with SEC on March 27, 1998; see Exhibit 4(F) therein)
39 40
Exhibit No. Under Reg. Form 10-K S-K, Item 601 Exhibit No. Description of Exhibit (4) 4(F) Indenture dated as of September 15, 1993 between Progressive and State Street Bank and Trust Company (successor in interest to The First National Bank of Boston), as Trustee ("1993 Senior Indenture") (including Table of Contents and cross-reference sheet) (4) 4(G) Form of 7% Notes due 2013 issued in the aggregate principal amount of $150,000,000 under the 1993 Senior Indenture (4) 4(H) Form of 6.60% Notes due 2004 issued in the aggregate principal amount of $200,000,000 under the 1993 Senior Indenture (4) 4(I) First Supplemental Indenture dated March 15, 1996 between Progressive and State Street Bank and Trust Company, evidencing the designation of State Street Bank and Trust Company as successor Trustee under the 1993 Senior Indenture (4) 4(J) Form of 7.30% Notes due 2006, issued in the aggregate principal amount of $100,000,000 under the 1993 Senior Indenture, as amended and supplemented (4) 4(K) Second Supplemental Indenture dated February 26, 1999 between Progressive and State Street Bank and Trust Company, as Trustee, supplementing and amending the 1993 Senior Indenture (4) 4(L) Form of 6 5/8% Senior Notes due 2029, issued in the aggregate principal amount of $300,000,000 under the 1993 Senior Indenture, as amended and supplemented
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with Which S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC (4) 4(F) Registration Statement No. 333-48935 (Filed with SEC on March 31, 1998; see Exhibit 4.1 therein) (4) 4(G) Annual Report on Form 10-K (Filed with SEC on March 27, 1999; see Exhibit 4(H) therein) (4) 4(H) Contained in Exhibit Binder (4) 4(I) Registration Statement No. 333-0175 (Filed with SEC on March 15, 1996; see Exhibit 4.2 therein) (4) 4(J) Quarterly Report on Form 10-Q (Filed with SEC on July 31, 1996; see Exhibit 4 therein) (4) 4(K) Current Report on Form 8-K (Filed with SEC on February 26, 1999; see Exhibit 4.4 therein) (4) 4(L) Current Report on Form 8-K (Filed with SEC on February 26, 1999; see Exhibit 4.5 therein)
40 41
Exhibit No. Under Reg. Form 10-K S-K, Item 601 Exhibit No. Description of Exhibit (10)(i) 10(A) Construction Agreements dated November 3, 1997 between Progressive Casualty Insurance Company and HCB Contractors (10)(i) 10(B) Construction Agreement dated April 6, 1998 between Progressive Casualty Insurance Company and the Whiting-Turner Construction Company for the Corporate Office Complex in Mayfield Village, Ohio (10)(i) 10(C) Development Agreement by and between G.P. Ohio, L.L.C. (as "Developer") and Progressive Casualty Insurance Company (as "Progressive") (10)(ii) 10(D) Aircraft Purchase Agreement (10)(ii) 10(E) Aircraft Management Agreement (10)(iii) 10(F) The Progressive Corporation 1997 Gainsharing Plan (10)(iii) 10(G) The Progressive Corporation 1999 Gainsharing Plan (10)(iii) 10(H) The Progressive Corporation 2000 Gainsharing Plan (10)(iii) 10(I) The Progressive Corporation 1997 Executive Bonus Plan (10)(iii) 10(J) The Progressive Corporation 1999 Executive Bonus Plan
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with Which S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC (10)(i) 10(A) Annual Report on Form 10-K (Filed with SEC on March 27, 1998; see Exhibit 10(A) therein) (10)(i) 10(B) Quarterly Report on Form 10-Q (Filed with SEC on August 14, 1998; see Exhibit 10 therein) (10)(i) 10(C) Contained in Exhibit Binder (10)(ii) 10(D) Contained in Exhibit Binder (10)(ii) 10(E) Contained in Exhibit Binder (10)(iii) 10(F) Annual Report on Form 10-K (Filed with SEC on March 31, 1997; see Exhibit 10(B) therein) (10)(iii) 10(G) Annual Report on Form 10-K (filed with SEC on March 27, 1999; see Exhibit 10(D) therein) (10)(iii) 10(H) Contained in Exhibit Binder (10)(iii) 10(I) Annual Report on Form 10-K (Filed with SEC on March 31, 1997; see Exhibit 10(D) therein) (10)(iii) 10(J) Annual Report on Form 10-K (filed with SEC on March 27, 1999; see Exhibit 10(F) therein)
41 42
Exhibit No. Under Reg. Form 10-K S-K, Item 601 Exhibit No. Description of Exhibit (10)(iii) 10(K) The Progressive Corporation Directors Deferral Plan (Amendment and Restatement), as further amended on October 25, 1996 (10)(iii) 10(L) The Progressive Corporation 1989 Incentive Plan (amended and restated as of April 24, 1992, as further amended on July 1, 1992 and February 5, 1993) (10)(iii) 10(M) The Progressive Corporation 1998 Directors' Stock Option Plan (10)(iii) 10(N) The Progressive Corporation 1990 Directors' Stock Option Plan (Amended and Restated as of April 24, 1992 and as further amended on July 1, 1992) (10)(iii) 10(O) Agreement dated March 11, 1996 with Bruce W. Marlow (10)(iii) 10(P) The Progressive Corporation 1995 Incentive Plan (10)(iii) 10(Q) The Progressive Corporation Executive Deferred Compensation Plan (Amended and Restated as of January 1, 1997), as further amended December 1, 1997 (10)(iii) 10(R) Third Amendment to The Progressive Corporation Executive Deferred Compensation Plan dated December 1, 1998 (10)(iii) 10(S) The Progressive Corporation Executive Deferred Compensation Trust (December 1, 1998 Amendment and Restatement)
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with Which S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC (10)(iii) 10(K) Quarterly Report on Form 10-Q (Filed with SEC on November 13, 1996; see Exhibit 10 therein) (10)(iii) 10(L) Annual Report on Form 10-K (Filed with SEC on March 27, 1999; see Exhibit 10(H) therein) (10)(iii) 10(M) Annual Report on Form 10-K/A-No. 1 (Filed with SEC on March 30, 1998; see Exhibit 10(H) therein) (10)(iii) 10(N) Annual Report on Form 10-K (Filed with SEC on March 27, 1998; see Exhibit 10(I) therein) (10)(iii) 10(O) Annual Report on Form 10-K (Filed with SEC on March 15, 1996; see Exhibit 10(H) therein) (10)(iii) 10(P) Contained in Exhibit binder (10)(iii) 10(Q) Annual Report on Form 10-K (Filed with SEC on March 27, 1998; see Exhibit 10(M) therein) (10)(iii) 10(R) Annual Report on Form 10-K (Filed with SEC on March 27, 1999; see Exhibit 10(O) therein) (10)(iii) 10(S) Annual Report on Form 10-K (Filed with SEC on March 27, 1999; see Exhibit 10(P) therein)
42 43
Exhibit No. Under Reg. Form 10-K S-K, Item 601 Exhibit No. Description of Exhibit (10)(iii) 10(T) Form of Non-Qualified Stock Option Agreement under The Progressive Corporation 1989 Incentive Plan (single award) (10)(iii) 10(U) Form of Non-Qualified Stock Option Agreement under The Progressive Corporation 1989 Incentive Plan (multiple awards) (10)(iii) 10(V) The Progressive Corporation 1999 Information Services Incentive Plan (11) 11 Computation of Earnings Per Share (13) 13 The Progressive Corporation 1999 Annual Report (21) 21 Subsidiaries of The Progressive Corporation (23) 23 Consent of Independent Accountants (24) 24 Powers of Attorney (27) 27 Financial Data Schedule
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with Which S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC (10)(iii) 10(T) Quarterly Report on Form 10-Q (Filed with SEC on May 1, 1996; see Exhibit 10(B) therein) (10)(iii) 10(U) Quarterly Report on Form 10-Q (Filed with SEC on May 1, 1996; see Exhibit 10(C) therein) (10)(iii) 10(V) Annual Report on Form 10-K (filed with SEC on March 27, 1999; see Exhibit 10(S) therein) (11) 11 Contained in Exhibit Binder (13) 13 Contained in Exhibit Binder (21) 21 Contained in Exhibit Binder (23) 23 Incorporated herein by reference to page 29 of this Annual Report on Form 10-K (24) 24 Contained in Exhibit Binder (27) 27 These exhibits are contained in the EDGAR filing of the Annual Report on Form 10-K for the year ended December 31, 1999 only
No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K. 43 EX-4.A 2 EXHIBIT 4(A) 1 EXHIBIT NO. 4(A) ================================================================================ THE PROGRESSIVE CORPORATION AND RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Trustee -------------- INDENTURE -------------- Dated as of November 15, 1988 ================================================================================ 2 CROSS REFERENCE SHEET* ------- Between Provisions of Trust Indenture Act of 1939 and Indenture to be dated as of November 15, 1988 between THE PROGRESSIVE CORPORATION and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Trustee: Section of the Act Section of Indenture - - - - ------------------- -------------------- 310(a)(1) and (2) . . . . . . . . . . . . . . . . . . 6.9 310(a)(3) and (4) . . . . . . . . . . . . . . . . . . Inapplicable 310(b) . . . . . . . . . . . . . . . . . . . . . . . 6.8 and 6.10(a), (b) and (d) 310(c) . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 311(a) . . . . . . . . . . . . . . . . . . . . . . . 6.13(a) and (c)(1) and (2) 311(b) . . . . . . . . . . . . . . . . . . . . . . . 6.13(b) 311(c) . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 312(a) . . . . . . . . . . . . . . . . . . . . . . . 4.1 and 4.2(a) 312(b) . . . . . . . . . . . . . . . . . . . . . . . 4.2(a) and (b)(i) and (ii) 312(c) . . . . . . . . . . . . . . . . . . . . . . . 4.2(c) 313(a) . . . . . . . . . . . . . . . . . . . . . . . 4.4(a)(i), (ii), (iii), (iv), (v) and (vi) 313(b)(1) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 313(b)(2) . . . . . . . . . . . . . . . . . . . . . . 4.4 313(c) . . . . . . . . . . . . . . . . . . . . . . . 4.4 313(d) . . . . . . . . . . . . . . . . . . . . . . . 4.4 314(a) . . . . . . . . . . . . . . . . . . . . . . . 4.3 314(b) . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(c)(1) and (2) . . . . . . . . . . . . . . . . . . 11.5 314(c)(3) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(d) . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(e) . . . . . . . . . . . . . . . . . . . . . . . 11.5 314(f) . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 315(a), (c) and (d) . . . . . . . . . . . . . . . . . 6.1 315(b) . . . . . . . . . . . . . . . . . . . . . . . 5.11 315(e) . . . . . . . . . . . . . . . . . . . . . . . 5.12 316(a)(1) . . . . . . . . . . . . . . . . . . . . . . 5.9 316(a)(2) . . . . . . . . . . . . . . . . . . . . . . Not required 316(a) (last sentence) . . . . . . . . . . . . . . . 7.4 316(b) . . . . . . . . . . . . . . . . . . . . . . . 5.7 317(a) . . . . . . . . . . . . . . . . . . . . . . . 5.2 317(b) . . . . . . . . . . . . . . . . . . . . . . . 3.4(a) and (b) 318(a) . . . . . . . . . . . . . . . . . . . . . . . 11.7 * This Cross Reference Sheet is not part of the Indenture. 3 TABLE OF CONTENTS ----------------- PAGE ---- PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RECITALS: Authorization of Indenture . . . . . . . . . . . . . . . . . . . . . . 1 Compliance with Legal Requirements 1 Purpose of and Consideration for Indenture . . . . . . . . . . . . . . 1 ARTICLE ONE DEFINITIONS SECTION 1.1. Certain Terms Defined . . . . . . . . . . . . . . . . 1 Authorized Newspaper . . . . . . . . . . . . . . . . 2 Board of Directors . . . . . . . . . . . . . . . . . 2 Business Day . . . . . . . . . . . . . . . . . . . . 2 Commission . . . . . . . . . . . . . . . . . . . . . 2 Corporate Trust Office . . . . . . . . . . . . . . . 2 Coupon . . . . . . . . . . . . . . . . . . . . . . . 2 ECU . . . . . . . . . . . . . . . . . . . . . . . . . 3 European Communities . . . . . . . . . . . . . . . . 3 Event of Default . . . . . . . . . . . . . . . . . . 3 Foreign Currency . . . . . . . . . . . . . . . . . . 3 Holder, holder of Securities, Securityholder . . . . 3 Indebtedness . . . . . . . . . . . . . . . . . . . . 3 Indenture . . . . . . . . . . . . . . . . . . . . . . 4 Interest . . . . . . . . . . . . . . . . . . . . . . 4 Issuer . . . . . . . . . . . . . . . . . . . . . . . 4 Officers' Certificate . . . . . . . . . . . . . . . . 4 Opinion of Counsel . . . . . . . . . . . . . . . . . 4 Original issue date . . . . . . . . . . . . . . . . . 4 Original Issue Discount Security . . . . . . . . . . 4 Outstanding . . . . . . . . . . . . . . . . . . . . . 4 Person . . . . . . . . . . . . . . . . . . . . . . 5 principal . . . . . . . . . . . . . . . . . . . . . . 5 Registered Security . . . . . . . . . . . . . . . . . 5 Responsible Officer . . . . . . . . . . . . . . . . . 5 Security or Securities . . . . . . . . . . . . . . . 6 Senior Indebtedness . . . . . . . . . . . . . . . . . 6 Subordinated Indebtedness . . . . . . . . . . . . . . 6 Subsidiary . . . . . . . . . . . . . . . . . . . . . 6 Trustee . . . . . . . . . . . . . . . . . . . . . . . 6 Trust Indenture Act of 1939 . . . . . . . . . . . . . 6 Unregistered Security . . . . . . . . . . . . . . . . 6 4 ii PAGE ---- U.S. Government Obligations . . . . . . . . . . . . . . . 6 vice president . . . . . . . . . . . . . . . . . . . . . 6 Yield to Maturity . . . . . . . . . . . . . . . . . . . . 7 ARTICLE TWO SECURITIES SECTION 2.1. Forms Generally . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.2. Form of Trustee's Certificate of Authentication . . . . . 7 SECTION 2.3. Amount Unlimited; Issuable in Series . . . . . . . . . . 8 SECTION 2.4. Authentication and Delivery of Securities . . . . . . . . 10 SECTION 2.5. Execution of Securities . . . . . . . . . . . . . . . . . 11 SECTION 2.6. Certificate of Authentication . . . . . . . . . . . . . . 12 SECTION 2.7. Denomination and Date of Securities; Payments of Interest . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.8. Registration, Transfer and Exchange . . . . . . . . . . . 14 SECTION 2.9. Mutilated, Defaced, Destroyed Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 2.10. Cancellation of Securities; Destruction Thereof . . . . . 18 SECTION 2.11. Temporary Securities . . . . . . . . . . . . . . . . . . 18 ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1. Payment of Principal and Interest . . . . . . . . . . . . 19 SECTION 3.2. Offices for Payments, etc . . . . . . . . . . . . . . . . 20 SECTION 3.3. Appointment to Fill a vacancy in Office of Trustee . . . 21 SECTION 3.4. Paying Agents . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 3.5. Written Statement to Trustee . . . . . . . . . . . . . . 22 SECTION 3.6. Luxembourg Publications . . . . . . . . . . . . . . . . . 22 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1. Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders . . . . . . . . . . . . . 23 SECTION 4.2. Preservation and Disclosure of Securityholders' Lists . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.3. Reports by the Issuer . . . . . . . . . . . . . . . . . . 25 SECTION 4.4. Reports by the Trustee . . . . . . . . . . . . . . . . . 26 5 iii PAGE ---- ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1. Event of Default Defined; Acceleration of Maturity; Waiver of Default . . . . . . . . . . . . . . . . . . . . . 28 SECTION 5.2. Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . . . . . . . . . . .. 31 SECTION 5.3. Application of Proceeds . . . . . . . . . . . . . . . . . . . 34 SECTION 5.4. Suits for Enforcement . . . . . . . . . . . . . . . . . . . . 35 SECTION 5.5. Restoration of Rights on Abandonment of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 5.6. Limitations on Suits by Securityholders . . . . . . . . . . . 36 SECTION 5.7. Unconditional Right of Securityholders to Institute Certain Suits . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.8. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default . . . . . . . . . . . . . . . . . . . 37 SECTION 5.9. Control by Securityholders . . . . . . . . . . . . . . . . . 37 SECTION 5.10. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . 38 SECTION 5.11. Trustee to Give Notice of Default, But May Withhold in Certain Circumstances . . . . . . . . . . . . . . . . . 39 SECTION 5.12. Right of Court to Require Filing of Undertaking to Pay Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1. Duties and Responsibilities of the Trustee; During Default; Prior to Default . . . . . . . . . . . . . . . . . 40 SECTION 6.2. Certain Rights of the Trustee . . . . . . . . . . . . . . . . 41 SECTION 6.3. Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof . . . . . . . 43 SECTION 6.4. Trustee and Agents May Hold Securities or Coupons; Collections, etc . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.5. Moneys Held by Trustee . . . . . . . . . . . . . . . . . . . 43 SECTION 6.6. Compensation and Indemnification of Trustee and Its Prior Claim . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 6.7. Right of Trustee to Rely on Officers' Certificate, etc. . . . 44 SECTION 6.8. Qualification of Trustee; Conflicting Interests . . . . . . . 45 SECTION 6.9. Persons Eligible for Appointment as Trustee . . . . . . . . . 51 6 iv PAGE ---- SECTION 6.10. Resignation and Removal; Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 6.11. Acceptance of Appointment by Successor Trustee . . . . . . 53 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . . . . . . . . . . . . 55 SECTION 6.13. Preferential Collection of Claims Against the Issuer . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1. Evidence of Action Taken by Securityholders . . . . . . . . 60 SECTION 7.2. Proof of Execution of Instruments and of Holding of Securities . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 7.3. Holders to be Treated as Owners . . . . . . . . . . . . . . 61 SECTION 7.4. Securities Owned by Issuer Deemed Not Outstanding . . . . . 62 SECTION 7.5. Right of Revocation of Action Taken . . . . . . . . . . . . 63 ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1. Supplemental Indentures Without Consent of Security- holders . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 8.2. Supplemental Indentures With Consent of Securityholders . . . . . . . . . . . . . . . . . . . . . 65 SECTION 8.3. Effect of Supplemental Indenture . . . . . . . . . . . . . 66 SECTION 8.4. Documents to Be Given to Trustee . . . . . . . . . . . . . 67 SECTION 8.5. Notation on Securities in Respect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1. Issuer May Consolidate, etc., on Certain Terms . . . . . . 67 SECTION 9.2. Successor Corporation Substituted . . . . . . . . . . . . . 68 SECTION 9.3. Opinion of Counsel to Trustee . . . . . . . . . . . . . . . 69 7 v
PAGE ---- ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 10.1. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . 69 SECTION 10.2. Application by Trustee of Funds Deposited for Payment of Securities . 72 SECTION 10.3. Repayment of Moneys Held by Paying Agent . . . . . . . . . . . . . . 72 SECTION 10.4. Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 10.5. Indemnity for U.S. Government Obligations . . . . . . . . . . . . . . 73 ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1. Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability . . . . . . . . . . . . . . 73 SECTION 11.2. Provisions of Indenture for the Sole Benefit of Parties and Securityholders . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.3. Successors and Assigns of Issuer Bound by Indenture . . . . . . . . . 74 SECTION 11.4. Notices and Demands on Issuer, Trustee and Securityholders . . . . . 74 SECTION 11.5. Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein . . . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 11.6. Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . 76 SECTION 11.7. Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.8. New York Law to Govern . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 11.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 11.10. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 11.11. Securities in Foreign Currencies or in ECU . . . . . . . . . . . . . 77 ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1. Applicability of Article . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 12.2. Notice of Redemption; Partial Redemptions . . . . . . . . . . . . . . 78 SECTION 12.3. Payment of Securities Called for Redemption . . . . . . . . . . . . . 79 SECTION 12.4. Exclusion of Certain Securities from Eligibility for Selection for Redemption . . . . . . . . . . . . . . . . . . . . . 80 SECTION 12.5. Mandatory and Optional Sinking Funds . . . . . . . . . . . . . . . . 81
8 vi PAGE ---- ARTICLE THIRTEEN SUBORDINATION; SENIORITY SECTION 13.1. Securities Subordinated to Senior Indebtedness . . . . . . 84 SECTION 13.2. Issuer Not to Make Payments with Respect to Securities in Certain Circumstances . . . . . . . . . . . . . . . . 84 SECTION 13.3. Subrogation of Securities . . . . . . . . . . . . . . . . . 87 SECTION 13.4. Authorization by Holders of Securities . . . . . . . . . . 88 SECTION 13.5. Notices to Trustee . . . . . . . . . . . . . . . . . . . . 88 SECTION 13.6. Trustee's Relation to Senior Indebtedness . . . . . . . . . 89 SECTION 13.7. No Impairment of Subordination . . . . . . . . . . . . . . 89 SECTION 13.8. Article 13 Not to Prevent Events of Default . . . . . . . . 90 SECTION 13.9. Paying Agents other than the Trustee . . . . . . . . . . . 90 SECTION 13.10. Securities Senior to Subordinated Indebtedness . . . . . . 90 TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 9 THIS INDENTURE, dated as of November 15, 1988, between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), and RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, a national banking association (the "Trustee"), WITNESSETH: WHEREAS, the Issuer has duly authorized the issue from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and to provide, among other things, for the authentication, delivery and administration thereof, the Issuer has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make this Indenture a valid indenture and agreement according to its terms have been done; Now, THEREFORE: In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities and of the Coupons, if any, appertaining thereto as follows: ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined. The following terms (except as otherwise expressly provided or unless the context otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939, including terms defined therein by reference to the Securities Act of 1933 (except as herein otherwise expressly provided or unless the context otherwise clearly requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" means such accounting principles as 10 2 are generally accepted at the time of any computation. The words "herein", "hereto" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. "Authorized Newspaper" means a newspaper (which, in the case of the United Kingdom, will, if practicable, be the Financial Times (London Edition) and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort) published in English or an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in the United Kingdom or in Luxembourg, as applicable. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof which is made or given with the approval of the Trustee shall constitute a sufficient publication of such notice. "Board of Directors" means either the Board of Directors of the Issuer or any committee of such Board duly authorized to act hereunder. "Business Day" means, with respect to any Security, a day that in the city (or in any of the cities, if more than one) in which amounts are payable, as specified in the form of such Security, is not a day on which banking institutions are authorized by law or regulation to close or a day on which transactions in the currency in which the Securities are payable are not conducted. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution and delivery of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located at 15 Westminster Street, Room 737W, Providence, Rhode Island 02903, Attn: Corporate Trust Administration. "Coupon" means any interest coupon appertaining to a Security. 11 3 "ECU" means the European Currency Unit as defined and revised from time to time by the council of European Communities. "European Communities" means the European Economic Community (the "EEC"), the European Coal and Steel Community and Euratom. "Event of Default" means any event or condition specified as such in Section 5.1. "Foreign Currency" means a currency issued by the government of a country other than the United States. "Holder," "Holder of Securities," "Securityholder" or other similar terms mean (a) in the case of any Registered Security, the Person in whose name such Security is registered in the security register kept by the Issuer for that purpose in accordance with the terms hereof, and (b) in the case of any Unregistered Security, the bearer of such Security, or any Coupon appertaining thereto, as the case may be. "Indebtedness" with respect to any Person means: (1) any debt (i) for borrowed money, or (ii) evidenced by a bond, note, debenture, or similar instrument (including purchase money obligations) given in connection with the acquisition of any business, property or assets, whether by purchase, merger, consolidation or otherwise, but shall not include any account payable or other obligation created or assumed by a Person in the ordinary course of business in connection with the obtaining of materials or services, or (iii) which is a direct or indirect obligation which arises as a result of banker's acceptances or drawings under bank letters of credit issued to secure obligations of such person, whether contingent or otherwise; (2) any debt of others described in the preceding clause (1) which such Person has guaranteed or for which it is otherwise liable; (3) the obligation of such Person as lessee under any lease of property which is reflected on such Person's balance sheet as a capitalized lease; and (4) any deferral, amendment, renewal, extension, supplement or refunding of any liability of the kind described in any of the preceding clauses (1), (2) and (3) provided, however, that, in computing the "Indebtedness" of any Person, there shall be excluded any particular 12 4 indebtedness if, upon or prior to the maturity thereof, there shall have been deposited with the depository in trust money (or evidences of indebtedness if permitted by the instrument creating such indebtedness) in the necessary amount to pay, redeem or satisfy such indebtedness as it becomes due, and the amount so deposited shall not be included in any computation of the assets of such Person. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented or both, and shall include the forms and terms of particular series of Securities established as contemplated hereunder. "Interest" means, when used with respect to non-interest bearing Securities, interest payable after maturity. "lssuer" means (except as otherwise provided in Article Six) THE PROGRESSIVE CORPORATION, an Ohio corporation, and, subject to Article Nine, its successors and assigns. "Officers' Certificate" means a certificate signed by the chairman of the Board of Directors or the president or any vice president or by the treasurer and by the secretary or any assistant secretary of the Issuer and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 11.5. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer or other counsel who shall be satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 11.5, if and to the extent required hereby. "Original Issue Date" of any Security (or portion thereof) means the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Original Issue Discount Security" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "Outstanding" (except as otherwise provided in Section 6.8), when used with reference to Securities, shall, subject to the provisions of Section 7.4, means, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except 13 5 (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Issuer) or shall have been set aside, segregated and held in trust by the Issuer for the holders of such Securities (if the Issuer shall act as its own paying agent), provided that if such Securities, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in substitution for which other Securities shall have been authenticated and delivered, or which shall have been paid, pursuant to the terms of Section 2.9 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuer). In determining whether the holders of the requisite principal amount of Outstanding Securities of any or all series have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of all Original Issue Discount Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "principal" whenever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any." "Registered Security" means any Security registered on the Security Register of the Issuer. "Responsible Officer" when used with respect to the Trustee means any officer or assistant officer assigned by the Trustee to administer its corporate trust matters. 14 6 "Security" or "Securities" (except as otherwise provided in Section 6.8) has the meaning stated in the first recital of this Indenture, or, as the case may be, Securities that have been authenticated and delivered under this Indenture. "Senior Indebtedness" means the principal and unpaid interest on Indebtedness of the Company outstanding at any time, other than (1) the Securities, (2) Indebtedness of the Issuer to a Subsidiary for money borrowed or advanced from any Subsidiary, except for such Indebtedness which the Subsidiary has borrowed from a third party other than a Subsidiary and advanced to the Company, (3) the Company's Floating Rate Convertible Subordinated Debentures due 2008 issued in the aggregate principal amount of $75,000,000 ("Floating Rate Convertible Subordinated Debentures"), and (4) any other Indebtedness which by its terms expressly provides that it is not superior in right of payment to the Securities. "Subordinated Indebtedness" means the principal and interest on any Indebtedness of the Company which by its terms is expressly subordinated in right of payment to the Securities (including without limitation the Floating Rate Convertible Subordinated Debentures). "Subsidiary" means a corporation the majority of whose voting stock is owned by the Company or a Subsidiary. Voting stock is capital stock having voting power under the ordinary circumstances to elect directors. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Six, shall also include any successor trustee. "Trust Indenture Act of 1939" (except as otherwise provided in Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was originally executed. "Unregistered Security" means any Security other than a Registered Security. "U.S. Government Obligations" means direct obligations of the United States of America, backed by its full faith and credit. "vice president" when used with respect to the Issuer, means any vice president, whether or not designated by a number or a word or words added before or after the title of "vice president". 15 7 "Yield to Maturity" means the yield to maturity on a series of securities, calculated at the time of issuance of such series, or, if applicable, at the most recent redetermination of interest on such series, and calculated in accordance with accepted financial practice. ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally. The Securities of each series and the Coupons, if any, to be attached thereto shall be substantially in such form (not inconsistent with this Indenture) as shall be established by or pursuant to a resolution of the Board of Directors or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have imprinted or otherwise reproduced thereon such legend or legends, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto, or with any rules of any securities exchange or to conform to general usage, all as may be determined by the officers executing such Securities and Coupons, as evidenced by their execution of the Securities and Coupons. The definitive Securities and Coupons shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, as evidenced by their execution of such Securities and Coupons. SECTION 2.2 Form of Trustees Certificate of Authentication. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. TRUSTEE, as Trustee By ____________________________________________________ Authorized Signatory 16 8 SECTION 2.3 Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a resolution of the Board of Directors and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.8, 2.9, 2.11 or 12.3); (3) the date or dates on which the principal of the Securities of the series is payable or the method by which such date or dates shall be determined; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate shall be determined, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the record dates for the determination of Holders to whom interest is payable; (5) the place or places where the principal and any interest on Securities of the series shall be payable; (6) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Issuer, pursuant to any sinking fund or otherwise; (7) the obligation, if any, of the Issuer to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; 17 9 (8) if other than denominations of U.S. $1,000 and any integral multiple thereof, in the case of Registered Securities, or U.S. $1,000 in the case of Unregistered Securities, the denominations in which Securities of the series shall be issuable; (9) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.1 or provable in bankruptcy pursuant to Section 5.2; (10) any authenticating or paying agents, transfer agents or registrars or any other agents with respect to the Securities of such series; (11) if other than such coin or currency of the United States of America as at the time of payment is legal tender for payment of public or private debts, the coin or currency or units based on or relating to currencies (including ECU) in which payment of the principal of and interest, if any, on the Securities of that series shall be payable; (12) if the principal of or interest, if any, on the Securities of that series are to be payable, at the election of the Issuer or a holder thereof, in a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the period or periods within which, and the terms and conditions upon which, such election may be made; (13) if the amount of payments of principal of or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method based on a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the manner in which such amounts shall be determined; (14) whether the Securities of the series will be issuable as Registered Securities or Unregistered Securities (with or without Coupons), or both, any restrictions applicable to the offer, sale or delivery of Unregistered Securities and, if other than as provided in Section 2.8, the terms upon which Unregistered Securities of any series may be exchanged for Registered Securities of such series and vice versa; 18 10 (15) whether and under what circumstances the Issuer will pay additional amounts on the Securities of the series held by a Person who is not a U.S. person in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such additional amounts; (16) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions not otherwise set forth herein, then the form and terms of such certificates, documents or conditions; (17) the degree to which such Securities shall be subordinated to any other securities of the Issuer; and (18) any other terms of the series, including provisions for payment by wire transfers, if any, or modifications of the definition of Business Day (which terms shall not adversely affect the interests of the Holders of the Securities). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such resolution of the Board of Directors or in any such indenture supplemental hereto. SECTION 2.4 Authentication and Delivery of Securities. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Securities of any series (having attached thereto appropriate Coupons, if any), executed by the Issuer to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Securities and Coupons, if any, to or upon the written order of the Issuer, signed by both (a) the chairman of its Board of Directors, or any vice chairman of its Board of Directors, or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any assistant secretary, without any further action by the Issuer. In authenticating such Securities and Coupons, if any, and accepting the additional responsibilities under this Indenture in relation to such Securities and Coupons, if any, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: 19 11 (1) a copy of any resolution or resolutions of the Board of Directors by or pursuant to which the form and term of such series were established in each case certified by the Secretary or an Assistant Secretary of the Issuer; (2) an executed supplemental indenture, if any; (3) an Officers' Certificate setting forth the form and terms of the Securities and Coupons, if any, as required pursuant to Section 2.3, and prepared in accordance with Section 11.5; (4) an Opinion of Counsel, prepared in accordance with Section 11.5, which shall state (a) that the form or forms and terms of such Securities and Coupons, if any, have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.1 and 2.3 in conformity with the provisions of this Indenture; (b) that such Securities and Coupons, if any, when authenticated and delivered by the Trustee and issued by the issuer in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and binding obligations of the Issuer; (c) that all laws and requirements in respect of the execution and delivery by the Issuer of the Securities and Coupons, if any, have been complied with; and (d) such other matters as the Trustee may reasonably request. The Trustee shall have the right to decline to authenticate and deliver any Securities and Coupons, if any, under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken by the Issuer or if the Trustee in good faith by its board of directors or board of trustees, executive committee, or a trust committee of directors, trustees or Responsible Officers shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 2.5 Execution of Securities. The Securities and, if applicable, each Coupon appertaining thereto, shall be signed on behalf of the Issuer by both (a) the chairman of its Board of Directors or any vice chairman of its Board of Directors or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any 20 12 assistant secretary, under its corporate seal which may, but need not, be attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security or Coupon that has been duly authenticated and delivered by the Trustee. In case any officer of the Issuer who shall have signed any of the Securities or Coupons shall cease to be such officer before the Security or Coupon so signed (or the Security to which the Coupon so signed appertains) shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Security or Coupon nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security or Coupon had not ceased to be such officer of the Issuer; and any Security or Coupon may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Security or Coupon, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such person was not such an officer. SECTION 2.6 Certificate of Authentication. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by the manual signature of one of its authorized signatories, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Security executed by the Issuer shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. No Coupon shall be entitled to the benefits of this Indenture or shall be valid or obligatory for any purpose until such certificate by the Trustee shall have become duly executed on the Security to which such Coupon appertains. SECTION 2.7 Denomination and Date of Securities; Payments of Interest. The Securities shall be issuable as Registered Securities or Unregistered Securities in such denominations as shall be specified as contemplated by Section 2.3. In the absence of any such specification with respect to the Registered Securities of any series, the Registered Securities of such series shall be issuable in denominations of U.S. $1,000 and any integral multiple thereof. In the absence of any such specification 21 13 with respect to the Unregistered Securities, Unregistered Securities shall be issued in the denomination of U.S. $1,000. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plan as the officers of the Issuer executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Each Registered Security shall be dated the date of its authentication. Each Unregistered Security shall be dated as provided in the resolution or resolutions of the Board of Directors of the Issuer or the supplemental indenture referred to in Section 2.3. The Securities of each series shall bear interest, if any, from the date, and such interest shall be payable on the dates, established as contemplated by Section 2.3. The person in whose name any Registered Security of any series is registered at the close of business on any record date applicable to a particular series with respect to any interest payment date for such series shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Registered Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date for such series, in which case such defaulted interest shall be paid to the persons in whose names Outstanding Registered Securities for such series are registered at the close of business on a subsequent record date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the holders of Registered Securities not less than 15 days preceding such subsequent record date. The term "record date" as used with respect to any interest payment date (except a date for payment of defaulted interest) shall mean the date specified as such in the terms of the Registered Securities of any particular series, or, if no such date is so specified, if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month or, if such interest payment date is the fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a Business Day. Any defaulted interest payable in respect of any Unregistered Security shall be payable pursuant to such procedures as are satisfactory to the Trustee and in such manner so that there is no discrimination as between the holders of Registered Securities and Unregistered Securities 22 14 of the same series and notice of the payment date therefore shall be given by the Trustee in the name and at the expense of the Company by publication at least once in an Authorized Newspaper. In case an Unregistered Security is surrendered in exchange for a Registered Security after the close of business on any record date for the payment of defaulted interest and before the opening of business on the proposed date of payment of such defaulted interest, the Coupon appertaining to such surrendered Unregistered Security and due for payment on such proposed date of payment will not be surrendered with such surrendered Unregistered Security and interest payable on such proposed date of payment will be made only to the holder of such Coupon on such proposed date. SECTION 2.8. Registration, Transfer and Exchange. The Issuer will keep or cause to be kept at each office or agency to be maintained for the purpose as provided in Section 3.2 a register or registers for each series of Registered Securities issued hereunder (collectively, the "Security Register") in which, subject to such reasonable regulations as it may prescribe, it will register, and will register the transfer of, or cause the registration of transfer of, Registered Securities as in this Article provided. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Registered Security of any series at any such office or agency to be maintained for the purpose as provided in Section 3.2, the Issuer shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Registered Security or Registered Securities of the same series in authorized denominations for a like aggregate principal amount. Unregistered Securities (except for any temporary Unregistered Securities) and Coupons (except for Coupons attached to any temporary Unregistered Securities) shall be transferable by delivery. Any Registered Security or Registered Securities of any series may be exchanged for a Registered Security or Registered Securities of the same series in other authorized denominations, in an equal aggregate principal amount. Registered Securities of any series to be exchanged shall be surrendered at any office or agency to be maintained by the Issuer 23 15 for the purpose as provided in Section 3.2, and the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefore the Registered Security or Registered Securities of the same series which the Securityholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. If the Securities of any series are issued in both registered and unregistered form, except as otherwise specified pursuant to Section 2.3, at the option of the Holder thereof, Unregistered Securities of any series may be exchanged for Registered Securities of such series, maturity date, and interest rate of any authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. At the option of the Holder thereof, if Unregistered Securities of any series, maturity date, interest rate and original issue date are issued in more than one authorized denomination, except as otherwise specified pursuant to Section 2.3, such Unregistered Securities may be exchanged for Unregistered Securities of such series, maturity date, interest rate and original issue date of other authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 or as specified pursuant to Section 2.3, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. Unless otherwise specified pursuant to Section 2.3, Registered Securities of any series may not be exchanged for Unregistered Securities of such series. Whenever any Securities, and the Coupons appertaining thereto, if any, are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities, and the Coupons appertaining thereto, if any, which the Holder making the exchange is entitled to receive. Notwithstanding the foregoing, if an Unregistered Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series after the close of business at such office or agency on any record date and before the opening of business at such office or agency on the applicable interest payment date, such Unregis- 24 16 tered Security shall be surrendered without the Coupon, if any, relating to such interest payment date. All Securities and Coupons surrendered upon any exchange or transfer provided for in this Indenture shall be promptly cancelled and disposed of by the Trustee and the Trustee will deliver a certificate of disposition thereof to the Issuer. All Registered Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the holder or his attorney duly authorized in writing. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of Securities and shall not be required to exchange or register a transfer of any Securities until such payment is made. No service charge shall be made for any such transaction. The Issuer shall not be required to exchange or register a transfer of (a) any Securities of any series for a period of 15 days next preceding the first mailing of notice of redemption of Securities of such series to be redeemed, or (b) any Securities selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not so to be redeemed and except that an Unregistered Security may be exchanged for a Registered Security of the same series being called for redemption. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Notwithstanding anything herein or in the terms of any series of Securities to the contrary, neither the Issuer nor the Trustee (which shall rely on an Officers' Certificate and an Opinion of Counsel) shall be required to exchange any Unregistered Security for a Registered Security if such exchange would result in adverse Federal income tax consequences to the Issuer (including, without limitation the inability of the Issuer to deduct from its income, as computed for Federal income tax purposes, the interest payable on the Unregistered Securities) under then applicable United States Federal income tax laws. 25 17 SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In case any temporary or definitive Security or any Coupon appertaining to any Security shall become mutilated, defaced or be destroyed, lost or stolen, the Issuer in its discretion may execute, and upon the written request of any officer of the Issuer, the Trustee shall authenticate and deliver, a new Security of the same series, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and substitution for the Security so destroyed, lost or stolen with Coupons corresponding to the Coupons appertaining to the Security so mutilated, defaced, destroyed, lost or stolen, or in exchange or substitution for the Security to which such mutilated, defaced, destroyed, lost or stolen Coupons appertained, with Coupons appertaining thereto corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen. In every case the applicant for a substitute Security or Coupon shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as may be required by them to indemnify and defend and to save each of them harmless and, in every case of destruction, loss or theft, evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. Upon the issuance of any substitute Security or Coupon, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Security or Coupon which has matured or is about to mature or has been called for redemption in full shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, at its sole discretion, instead of issuing a substitute Security or Coupon, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated or defaced Security or Coupon), if the applicant for such payment shall furnish to the Issuer and to the Trustee and any agent of the issuer or the Trustee such security or indemnity as any of them may require to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof. Every substitute Security or Coupon of any series issued pursuant to the provisions of this Section by virtue of the fact that any such 26 18 Security or Coupon is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Security or Coupon shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities or Coupons of such series duly authenticated and delivered hereunder. All Securities or Coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced or destroyed, lost or stolen Securities or Coupons and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.10 Cancellation of Securities; Destruction Thereof. All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange, or for credit against any payment in respect of a sinking or analogous fund, if surrendered to the Issuer or any agent of the Issuer or the Trustee, shall be delivered to the Trustee for cancellation or, if surrendered to the Trustee, shall be cancelled by it; and no Securities or Coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Securities and Coupons held by it and deliver a certificate of destruction to the Issuer. If the Issuer shall acquire any of the Securities or Coupons, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or Coupons unless and until the same are delivered to the Trustee for cancellation. SECTION 2.11 Temporary Securities. Pending the preparation of definitive Securities for any series, the Issuer may execute and the Trustee shall authenticate and deliver temporary Securities for such series (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities of any series shall be issuable as Registered Securities without Coupons, or as Unregistered Securities with or without Coupons attached thereto, of any authorized denomination, and substantially in the form of the definitive Securities of such series but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be 27 19 determined by the Issuer with the concurrence of the Trustee. Temporary Securities may contain such reference to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Securities. Without unreasonable delay the Issuer shall execute and shall furnish definitive Securities of such series and thereupon temporary Securities of such series may be surrendered in exchange therefore without charge at each office or agency to be maintained by the Issuer for that purpose pursuant to Section 3.2, and in the case of Unregistered Securities, together with any unmatured Coupons and any matured Coupons in default appertaining thereto, at any agency maintained by the Issuer for such purpose as specified pursuant to Section 2.3, and the Trustee shall authenticate and deliver in exchange for such temporary Securities of such series a like aggregate principal amount of definitive Securities of the same series of authorized denominations. Until so exchanged, the temporary Securities and any unmatured Coupons appertaining thereto of any series shall be entitled to the same benefits under this Indenture as definitive Securities and any unmatured Coupons appertaining thereto of such series. The provisions of this Section are subject to any restrictions or limitations on the issue and delivery of temporary Unregistered Securities of any series that may be established pursuant to Section 2.3 (including any provision that Unregistered Securities of such series initially be issued in the form of a single global Unregistered Security to be delivered to a depositary or agency of the Issuer located outside the United States and the procedures pursuant to which definitive Unregistered Securities of such series would be issued in exchange for such temporary global Unregistered Security). ARTICLE THREE COVENANTS OR THE ISSUER SECTION 3.1 Payment of Principal and Interest. The Issuer covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and interest on, each of the Securities of such series at the place or places, at the respective times and in the manner provided in such Securities. Except as specified in Section 2.3, the interest on Securities with Coupons attached (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only upon presentation and 28 20 surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. Except as specified in Section 2.3, the interest on any temporary Unregistered Securities (together with any additional amounts payable pursuant to the terms of such Securities) shall be paid, as to the installments of interest evidenced by Coupons attached thereto, if any, only upon presentation and surrender thereof, and, as to the other installments of interest, if any, only upon presentation of such Securities for notation thereon of the payment of such interest. Each installment of interest on the Registered Securities of any series may be paid by mailing checks for such interest payable to or upon the written order of the holders of Registered Securities entitled thereto as they shall appear on the registry books of the Issuer. SECTION 3.2 Offices for Payments, etc. So long as any of the Securities remain outstanding, the Issuer will maintain the following for each series: an office or agency (a) where the Registered Securities may be presented for payment, (b) where the Registered Securities may be presented for registration of transfer and for exchange as in this Indenture provided and (c) where notices and demands to or upon the Issuer in respect of the Registered Securities or of this Indenture may be served. The Issuer will maintain one or more agencies in a city or cities located outside the United States (including any city in which such an agency is required to be maintained under the rules of any stock exchange on which the Securities of such series are listed) where the Unregistered Securities, if any, of each series and Coupons, if any, appertaining thereto may be presented for payment. No payment on any Unregistered Security or Coupon will be made upon presentation of such Unregistered Security or Coupon at an agency of the Issuer within the United States nor will any payment be made by transfer to an account in, or by mail to an address in, the United States unless pursuant to applicable United States laws and regulations then in effect such payment can be made without adverse tax consequences to the Issuer. Notwithstanding the foregoing, payments in U.S. dollars on Unregistered Securities of any series and Coupons appertaining thereto which are denominated in U.S. dollars may be made at an agency of the Issuer maintained in the Borough of Manhattan, The City of New York if such payment in U.S. dollars at each agency maintained by the Issuer outside the United States for payment on such Unregistered Securities is illegal or effectively precluded by exchange controls or other similar restrictions. 29 21 The Issuer will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. With respect to each series of Securities and Coupons whose terms are established pursuant to Section 2.3, the Issuer hereby designates the Corporate Trust Office as the initial office to be maintained by it for each such purpose. In case the Issuer shall fail to so designate or maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Corporate Trust Office. SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 3.4 Paying Agents. Whenever the Issuer shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities of such series (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities of such series or the Coupons appertaining thereto or of the Trustee, and (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable. The Issuer will, on or prior to each due date of the principal of or interest on the Securities of such series, deposit with the paying agent a sum sufficient to pay such principal or interest so becoming due, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own paying agent with respect to the Securities or the Coupons appertaining thereto of any series, it will, on 30 22 or before each due date of the principal of or interest on the Securities or the Coupons appertaining thereto of such series, set aside, segregate and hold in trust for the benefit of the holders of the Securities or the Coupons appertaining thereto of such series a sum sufficient to pay such principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Issuer or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 10.3 and 10.4. SECTION 3.5 Written Statement to Trustee. The Issuer will deliver to the Trustee on or before April 30 in each year (beginning with April 30, 1989) a written statement, signed by two of its officers (which need not comply with Section 11.5), stating that in the course of the performance of their duties as officers of the Issuer they would normally have knowledge of any default by the Issuer in the performance or fulfillment of any covenant, agreement or condition contained in this Indenture, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.6 Luxembourg Publications. In the event of the publication of any notice pursuant to Section 5.11, 6.10(a), 6.11, 8.2, 10.4 or 12.2, the party making such publication in London shall also, to the extent that notice is required to be given to Holders of Securities of any series by applicable Luxembourg law or stock exchange regulation, as evidenced by an Officers' Certificate delivered to such party, make a similar publication in Luxembourg. 31 23 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1 Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders. The Issuer covenants and agrees that it will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the holders of the Securities of each series: (a) semiannually and not more that 15 days after each record date for the payment of interest on such Securities, as hereinabove specified, as of such record date and on dates to be determined pursuant to Section 2.3 for not-interest bearing securities in each year, and (b) at such other times as the Trustee may request in writing, within 30 days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished, provided that if and so long as the Trustee shall be the Security registrar for such series and all of the Securities of such series are Registered Securities, such list shall not be required to be furnished. The Trustee shall, at the request of the Issuer, provide such list to the Issuer for so long as the Trustee shall be the Security registrar. SECTION 4.2 Preservation and Disclosure of Securityholders' Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Securities (i) contained in the most recent list furnished to it as provided in Section 4.1, (ii) received by it in the capacity of Security registrar for such series, if so acting and (iii) filed with it within the preceding two years pursuant to Section 4.4(c)(ii). The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities of a particular series (in which case the applicants must all hold Securities of such series) or with Holders of all 32 24 Securities with respect to their rights under this Indenture or under such Securities and such application is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (i) afford to such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section, or (ii) inform such applicants as to the approximate number of holders of Securities of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee, in accordance with the provisions of subsection (a) of this Section, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford to such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Securities, as the case may be, whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met, and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall 33 25 be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities and Coupons, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under such subsection (b). SECTION 4.3 Reports by the Issuer. The Issuer covenants: (a) to file with the Trustee, within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and of the information, documents, any other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, if the Issuer is not required to file information, documents, or reports pursuant to either of such Sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents, and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, or in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents, and reports with respect to compliance by the Issuer with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations; and (c) to transmit by mail to the holders of Securities. within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Issuer pursuant to subsections (a) and (b) of this Section as may be required 34 26 to be transmitted to such Holders by rules and regulations prescribed from time to time by the Commission. SECTION 4.4 Reports by the Trustee. (a) On or before July 15 in each year following the date hereof, so long as any Securities are Outstanding hereunder, the Trustee shall transmit by mail as provided below to the Securityholders of each series, as hereinafter in this Section provided, a brief report dated as of the preceding May 15 with respect to: (i) its eligibility under Section 6.9 and its qualification under Section 6.8, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under such Sections, a written statement to such effect; (ii) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities of any series, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the securities of any series Outstanding on the date of such report; (iii) the amount, interest rate, and maturity date of all other indebtedness owing by the Issuer (or by any other obligor on the Securities) to the Trustee in its individual capacity on the date of such report, with a brief description of any property held as collateral security therefore, except any indebtedness based upon a creditor relationship arising in any manner described in Section 6.13(b)(2), (3), (4) or (6); (iv) the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report; (v) any additional issue of Securities which the Trustee has not previously reported; and (vi) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 5.11. 35 27 (b) The Trustee shall transmit to the Securityholders of each series, as provided in subsection (c) of this Section, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee, as such, since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of this Indenture) for the reimbursement of which it claims or may claim a lien or charge prior to that of the Securities of such series on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this subsection (b), except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Securities of such series outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section shall be transmitted by mail: (i) to all registered Holders of Securities, as the names and addresses of such Holders appear upon the registry books of the Issuer; (ii) to such other Holders of Securities as have, within two years preceding such transmission, filed their names and addresses with the Trustee for that purpose; and (iii) except in the case of reports pursuant to subsection (b), to each Holder of a Security whose name and address are preserved at the time by the Trustee as provided in Section 4.2(a). (d) A copy of each such report shall, at the time of such transmission to Securityholders, be furnished to the Issuer and be filed by the Trustee with each stock exchange upon which the Securities of any applicable series are listed and also with the Commission. The Issuer agrees to notify the Trustee with respect to any series when and as the Securities of such series become admitted to trading on any national securities exchange. 36 28 ARTICLE FIVE REMEDIES OR THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default. "Event of Default with respect to Securities of any series wherever used herein, means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any installment of interest upon any of the Securities of such series as and when the same shall become due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal on any of the Securities of such series as and when the same shall become due and payable either at maturity, upon redemption, by declaration or otherwise; or (c) default in the payment of any sinking fund installment as and when the same shall become due and payable by the terms of the Securities of such series; or (d) default in the performance, or breach, of any covenant or warranty of the Issuer in respect of the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of all series affected thereby, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer in all involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the 37 29 Issuer or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (f) the Issuer shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Issuer or for any substantial part of its property, or make any general assignment for the benefit of creditors; or (g) any other Event of Default provided in the supplemental indenture or resolution of the Board of Directors under which such series of Securities is issued or in the form of Security for such series. If an Event of Default described in clauses (a), (b), (c) or (d) above (if the Event of Default under clause (d) is with respect to less than all series of Securities then Outstanding) occurs and is continuing, then, and in each and every such case, unless the principal of all of the Securities of such series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding hereunder (each such series voting as a separate class) by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) of all Securities of such series and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default described in clause (d) (if the Event of Default under clause (d) is with respect to all series of Securities then Outstanding), (e) or (f) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in 38 30 aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities then Outstanding and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of any and all Securities of such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein---then and in every such case the holders of a majority in aggregate principal amount of all the Securities of such series, each series voting as a separate class (or of all the Securities, as the case may be, voting as a single class) then outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults with respect to such series (or with respect to all the 39 31 Securities, as the case may be) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. For all purposes under this Indenture, if a portion of the principal of any Original Issue Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof, then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any, thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount Securities. SECTION 5.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt. The Issuer covenants that (a) in case default shall be made in the payment of any installment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise--then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable on all Securities of such series, and Coupons appertaining thereto, for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. 40 32 Until such demand is made by the Trustee, the Issuer may pay the principal of and interest on the Securities of any series to the holders, whether or not the principal of and interest on the Securities of such series be overdue. In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon such Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or Coupons appertaining thereto, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the principal of any Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of any series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) owing and unpaid in respect of the Securities of any series, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and 41 33 each predecessor Trustee, except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or to the creditors or property of the Issuer or such other obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities of any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan or reorganization, arrangement, adjustment or composition affecting the Securities or Coupons appertaining thereto of any series or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities, or Coupons appertaining thereto may be enforced by the Trustee without the possession of any of the Securities, or Coupons appertaining thereto, or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings 42 34 instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements, compensation and all other amounts due pursuant to Section 6.6 to the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the holders of the Securities, or Coupons appertaining thereto, in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities in respect to which such action was taken, and it shall not be necessary to make any holders of such Securities parties to any such proceedings. SECTION 5.3 Application of Proceeds. Any moneys collected by the Trustee pursuant to this Article in respect of any series shall be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the several Securities, and Coupons appertaining thereto, in respect of which monies have been collected and stamping (or otherwise noting) thereon the payment, or issuing Securities of such series in reduced principal amounts in exchange for the presented Securities of like series if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses applicable to such series in respect of which monies have been collected, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6; SECOND: To the Holders of Senior Indebtedness to the extent required by Article 13; THIRD: In case the principal of the Securities of such series in respect of which moneys have been collected shall not have become and be then due and payable, to the payment of interest on the Securities of such series in default in the order of the maturity of the installments of such interest, with interest (to the extent that such 43 35 interest has been collected by the Trustee) upon the overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in such Securities, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; FOURTH: In case the principal of the Securities of such series in respect of which moneys have been collected shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities of such series for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and interest or yield to maturity, without preference or priority of principal over interest or yield to maturity, or of interest or yield to maturity over principal, or of any installment of interest over any other installment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and accrued and unpaid interest or yield to maturity; and FIFTH: To the payment of the remainder, if any, to the Issuer or any other person lawfully entitled thereto. SECTION 5.4 Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.5 Restoration of Rights on Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued 44 36 or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 5.6 Limitations on Suits by Securityholders. No holder of any Security of any series or of any Coupon appertaining thereto shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities of such series then outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 5.9; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security or Coupon with every other taker and Holder and the Trustee, that no one or more Holders of Securities of any series or of any Coupon appertaining thereto shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other such Holder of Securities or Coupons, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities of the applicable series or of any Coupon appertaining thereto. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 45 37 SECTION 5.7 Unconditional Rights of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any holder of any Security or Coupon to receive payment of the principal of an interest on such Security or Coupon on or after the respective due dates expressed in such Security or Coupon, or in any Coupon appertaining thereto, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 5.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. Except as provided in Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any Securityholder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 5.6, every power and remedy given by this Indenture or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.9 Control by Securityholders. The Holders of a majority in aggregate principal amount of the Securities of each series affected (with each series voting as a separate class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities of such series by this Indenture; provided that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and provided further that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel shall determine that the action or proceeding so directed may not lawfully be 46 38 taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all series so affected not joining in the giving of said direction, it being understood that (subject to Section 6.1) the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Securityholders. SECTION 5.10 Waiver of Past Defaults. Prior to the declaration of the acceleration of the maturity of the Securities of any series as provided in Section 5.1, the Holders of a majority in aggregate principal amount of the Securities of such series at the time Outstanding may on behalf of the Holders of all the Securities of such series waive any past default or Event of Default described in clause (d) of Section 5.1 (or, in the case of an event specified in clause (d) of Section 5.1 which relates to less than all series of Securities then Outstanding, the Holders of a majority in aggregate principal amount of the Securities then Outstanding affected thereby (each series voting as a separate class)) may waive any such default or Event of Default, or, in the case of an event specified in clause (d) (if the Event of Default under clause (d) relates to all series of Securities then Outstanding), (e) or (f) of Section 5.1 the Holders of Securities of a majority in principal amount of all the Securities then Outstanding (voting as one class) may waive any such default or Event of Default), and its consequences except a default in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the Holders of the Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of 47 39 Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 5.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances. The Trustee shall, within 90 days after the occurrence of a default with respect to the Securities of any series known to a Responsible Officer of the Trustee, provide notice to the Holders of Securities of such series and Coupons appertaining thereto, if any, (i) if any Unregistered Securities of that series are then Outstanding, to the Holders thereof, by publication at least once in an Authorized Newspaper in London (and, if required by Section 3.6, at least once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered Securities of that series are then Outstanding, to all Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such Holders at such addresses and (iii) to all Holders of then Outstanding Registered Securities of that series, by mailing such notice to such Holders at their addresses as they shall appear in the registry books, unless such defaults shall have been cured before the giving of such notice (the term "default" or "defaults" for the purposes of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default); provided that, except in the case of default in the payment of the principal of or interest on any of the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series. SECTION 5.12 Right of Court to Require Filing of Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Security or Coupon by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any 48 40 party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders of any series holding in the aggregate more than 10% in aggregate principal amount of the Securities of such series, or, in the case of any suit relating to or arising under clause (d) of Section 5.1 (if the suit relates to Securities of more than one but less than all series), 10% in aggregate principal amount of Securities Outstanding affected thereby, or in the case of any suit relating to or arising under clause (d) (if the suit under clause (d) relates to all the Securities then Outstanding), (e) or (f) of Section 5.1, 10% in aggregate principal amount of all Securities Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security or Coupon on or after the due date expressed in such Security or Coupon. ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Securities of a particular series and after the curing or waiving of all Events of Default which may have occurred with respect to such series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Securities of any series and after the curing or waiving of all such Events of Default with respect to such series which may have occurred: (i) the duties and obligations of the Trustee with respect to the Securities of any series shall be determined solely by the 49 41 express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders pursuant to Section 5.9 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. SECTION 6.2 Certain Rights of the Trustee. Subject to Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or 50 42 other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuer mentioned herein shall be sufficiently evidenced by an Officers' Certificate or order of the Issuer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts, rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Securities of all series affected then outstanding; provided that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a 51 43 condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Issuer upon demand; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be deemed to have knowledge or notice of any default or Event of Default unless a Responsible Officer has actual knowledge thereof or unless the holders of not less than 25% of the aggregate principal amount of the then outstanding Securities of any affected series have notified the Trustee thereof. SECTION 6.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or Coupons. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. SECTION 6.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons with the same rights it would have if it were not the Trustee or such agent and, subject to Sections 6.8 and 6.13, if operative, may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. SECTION 6.5 Moneys Held by Trustee. Subject to the provisions of Section 10.4 hereof, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except 52 44 to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 6.6 Compensation and Indemnification of Trustee and Its Prior Claim. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities and Coupons upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities or Coupons, and the Securities and Coupons are hereby subordinated to such senior claim, but such senior claim shall not be subordinate to any Senior Indebtedness. SECTION 6.7 Right of Trustee to Rely on Officers' Certificate, etc. Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may in the absence of negligence or bad faith on the part of the Trustee, be deemed 53 45 to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.8 Qualification of Trustee; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect specified in this Indenture. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section, the Trustee shall, within 10 days after the expiration of such 90 day period, provide notice of such failure to the Securityholders in the manner and to the extent required by Section 4.4(c). (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to Securities of any series if (i) the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any other series or is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Issuer are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture and this Indenture with respect to the Securities of any other series and there shall also be so excluded any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer are outstanding if (i) this Indenture is and, if applicable, this Indenture and any series issued pursuant to this Indenture and such other indenture or indentures are wholly unsecured, and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section 307(c) of such Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture with respect to Securities of such series and one or more other series, or the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary 54 46 in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture or such other indenture or indentures, or (ii) the Issuer shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indentures; (ii) the Trustee or any of its directors or executive officers is an obligor upon the Securities of any series issued under this Indenture or an underwriter for the Issuer; (iii) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Issuer or an underwriter for the Issuer; (iv) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Issuer, or of an underwriter (other than the Trustee itself) for the Issuer who is currently engaged in the business of underwriting, except that (x) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Issuer, but may not be at the same time an executive officer of both the Trustee and the Issuer; (y) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Issuer; and (z) the Trustee may be designated by the Issuer or by any underwriter for the Issuer to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of subsection (c)(i) of this Section, to act as trustee, whether under an indenture or otherwise; (v) 10% or more of the voting securities of the Trustee is beneficially owned either by the Issuer or by any director, partner or executive officer thereof, or 20% or more of such voting securities 55 47 is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Issuer or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (vi) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (x) 5% or more of the voting securities or 10% or more of any other class of security of the Issuer, not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (y) 10% or more of any class of security of an underwriter for the Issuer; (vii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Issuer; (viii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Issuer; or (ix) the Trustee owns on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under Section 6.8(c)(vi), (vii) or (viii). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator, or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Issuer 56 48 fails to make payment in full of principal of or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of subsections (c)(vi), (vii) and (viii) of this Section. The specification of percentages in subsections (c)(v) to (ix) inclusive of this Section shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of subsections (c)(iii) or (vii) of this Section. For the purposes of subsections (c)(vi), (vii), (viii) and (ix), of this Section, only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies, or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (x) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (y) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (z) any security which it holds as agent for collection, or as custodian, escrow agent, or depositary, or in any similar representative capacity. Except as provided above, the word "security" or "securities" as used in this Section shall mean any note, stock, treasury stock, bond, 57 49 debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For purposes of this Section: (i) the term "underwriter" when used with reference to the issuer shall mean every person who, within three years prior to the time as of which the determination is made, has purchased from the Issuer with a view to, or has offered or sold for the Issuer in connection with, the distribution of any security of the Issuer outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission; (ii) the term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated; (iii) the term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof; as used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security; (iv) the term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person; 58 50 (v) the term "Issuer" shall mean any obligor upon the Securities; and (vi) the term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (i) a specified percentage of the voting securities of the Trustee, the Issuer or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person; (ii) a specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding; (iii) the term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security; (iv) the term "outstanding" means issued and not held by or for the account of the issuer; the following securities shall not be deemed outstanding within the meaning of this definition: (A) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (B) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; 59 51 (C) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (D) securities held in escrow if placed in escrow by the issuer thereof; provided, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof; and (v) a security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 6.9 Persons Eligible for Appointment as Trustee. The Trustee for each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State or the District of Columbia having a combined capital and surplus of at least $50,000,000, and which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. 60 52 SECTION 6.10 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities by giving written notice of resignation to the Issuer. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed with respect to any series and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 5.12, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 6.8 with respect to any series of Securities after written request therefor by the Issuer or by any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.9 and shall fail to resign after written request therefor by the Issuer or by any Securityholder; or (iii) the Trustee shall become incapable of acting with respect to any series of Securities, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property of affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Issuer may remove the Trustee with respect to the applicable series of Securities and appoint a successor trustee for such series by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be 61 53 delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.12, any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to such series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Securities of each series at the time Outstanding may at any time remove the Trustee with respect to securities of such series and appoint a successor trustee with respect to the Securities of such series by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 7.1 of the action in that regard taken by the Securityholders. (d) any resignation or removal of the Trustee with respect to any series and any appointment of a successor trustee with respect to such series pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee for such series hereunder; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 10.4, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and 62 54 confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Issuer, the predecessor Trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor Trustee with respect to the Securities of any series as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees or co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts under separate indentures. No successor trustee with respect to any series of Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9. Upon acceptance of appointment by any successor trustee as provided in this Section 6.11, the Issuer shall mail notice thereof (a) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof, by publication of such notice at least once in an Authorized Newspaper in London (and, if required by Section 3.6. at least once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such holders at such addresses as were so furnished to the Trustee (and the Trustee shall make such information available to the Issuer for such purpose) and (c) to the Holders of Registered Securities of each series affected, by first-class mail to such Holders of Securities of any series for which such successor trustee is acting as trustee at their last addresses as they shall appear in the Security register. If the Issuer fails to mail such notice within ten days after acceptance of appointment by the successor trustee, 63 55 the successor trustee shall cause such notice to be mailed at the expense of the Issuer. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided, that such corporation shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9 without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; provided, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13 Preferential Collection of Claims Against the Issuer. (a) Subject to the provisions of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Issuer within four months prior to a default, as defined in subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the Holders of other indenture securities (as defined in this Section): (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or 64 56 interest, effected after the beginning of such four months period and valid as against the Issuer and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in subsection (a)(2) of this Section, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Issuer upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefore, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' period or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Issuer and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Issuer) who is liable thereon, (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable state law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default as defined in subsection (c) of this Section would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C) as the case may be, to the extent of the fair value of such property. 65 57 For the purpose of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released and to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of Trustee as such creditor, such claim shall have the same status as such pre- existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Securityholders and the holders of other indenture securities in such manner that the Trustee, such Securityholders and the holders of other indenture securities realize, as a result of payment from such special account and payments of dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Issuer of the funds and property in such special account and before crediting to the respective claims of the Trustee, such Securityholders and the holders of other indenture securities dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include and such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, such Securityholders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the 66 58 provisions of this paragraph, due consideration in determining the fairness of the distributions to be made to the Trustee, such Securityholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as trustee, occurred after the beginning of such four months' period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of this Section a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Securityholders at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; 67 59 (4) an indebtedness created as a result of services rendered or premises rented or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c)(3) below: (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Issuer, or (6) the acquisition, ownership, acceptance or negotiation of any draft, bills of exchange, acceptance or obligations which fall within the classification of self-liquidating paper as defined in subsection (c)(4) of this Section. (c) As used in this Section: (1) the term "default" shall mean any failure to make payment in full of the principal of or interest upon any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" shall mean securities upon which the Issuer is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of subsection (a) of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in said special account; (3) the term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (4) the term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Issuer for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the secu- 68 60 rity, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Issuer arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; and (5) the term "Issuer" shall mean any obligor upon the Securities. ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1 Evidence of Action Taken by Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage in principal amount of the Securityholders of any or all series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Securityholders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 7.2 Proof of Execution of Instruments and of Holding of Securities. Subject to Sections 6.1 and 6.2, the execution of any instrument by a Securityholder or his agent or proxy may be proved in the following manner: The fact and date of the execution by any Holder of any instrument may be proved by the certificate of any notary public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the person executing such instruments acknowledged to him the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute sufficient proof of the authority of the person executing the same. The fact of the holding by any Holder 69 61 of an Unregistered Security of any series, and the identifying number of such Security and the date of his holding the same, may be proved by the production of such Security or by a certificate executed by any trust company, bank, banker or recognized securities dealer wherever situated satisfactory to the Trustee, if such certificate shall be deemed by the Trustee to be satisfactory. Each such certificate shall be dated and shall state that on the date thereof a Security of such series bearing a specified identifying number was deposited with or exhibited to such trust company, bank, banker or recognized securities dealer by the person named in such certificate. Any such certificate may be issued in respect of one or more Unregistered Securities of one or more series specified therein. The holding by the person named in any such certificate of any Unregistered Securities of any series specified therein shall be presumed to continue for a period of one year from the date of such certificate unless at the time of any determination of such holding (1) another certificate bearing a later date issued in respect of the same Securities shall be produced, or (2) the Security of such series specified in such certificate shall be produced by some other person, or (3) the Security of such series specified in such certificate shall have ceased to be Outstanding. Subject to Sections 6.1 and 6.2, the fact and date of the execution of any such instrument and the amount and numbers of Securities of any series held by the person so executing such instrument and the amount and numbers of any Security or Securities for such series may also be proven in accordance with such reasonable rules and regulations as may be prescribed by the Trustee for such series or in any other manner which the Trustee for such series may deem sufficient. SECTION 7.3 Holders to be Treated as Owners. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register for such series as the absolute owner of such Security (whether or not such Security shall be overdue and not withstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. The 70 62 Issuer, the Trustee and any agent of the lssuer or the Trustee may treat the Holder of any Unregistered Security and the Holder of any Coupon as the absolute owner of such Unregistered Security or Coupon (whether or not such Unregistered Security or Coupon shall be overdue) for the purpose of receiving payment thereof or on account thereof and for all other purposes and neither the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security or Coupon. SECTION 7.4 Securities Owned by Issuer Deemed Not Outstanding. In determining whether the Holders of the requisite aggregate principal amount of Outstanding Securities of any or all series have concurred in any direction, consent or waiver under this Indenture. Securities which are owned by the Issuer or any other obligor on the Securities with respect to which such determination is being made or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities with respect to which such determination is being made shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly a written statement by two of its officers (which need not comply with Section 11.5) listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the fact therein set 71 63 forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 7.5 Right of Revocation of Action Taken. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the serial number of which is shown by the evidence to be included among the serial number of the Securities the Holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security and of any Securities issued in exchange or substitution therefore, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the Holders of all the Securities affected by such action. ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1 Supplemental Indentures Without Consent of Securityholders. The Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of the execution thereof) for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of one or more series any property or assets: (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article Nine; 72 64 (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as its Board of Directors and the Trustee shall consider to be for the protection of the Holders of Securities or Coupons, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Outstanding Securities of such series to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as the Board of Directors may deem necessary or desirable and which shall not adversely affect the interests of the Holders of the Securities; (e) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with Securities issued hereunder in fully registered form, and to make all appropriate changes for such purpose; and (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series, or of the Coupons appertaining to such Securities, and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11. The Trustee is hereby authorized to join with the Issuer in the execution of any such supplemental indenture, to make any further 73 65 appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the Holders of any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 8.2. SECTION 8.2 Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Article Seven of the Holders not less than 66 2/3% in aggregate principal amount of the Securities at the time Outstanding of all series affected by such supplemental indenture (voting as one class), the Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of execution thereof) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities of each such series or the coupons appertaining to such Securities; provided, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof or the method in which amounts of payments of principal or interest thereon are determined, or reduce the rate or extend the time of payment of interest thereon, or change the coin or currency or units based on or related to currencies (including ECU) of payment thereof, or reduce any amount payable on redemption thereof or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.1 or the amount thereof provable in bankruptcy pursuant to Section 5.2, or impair or affect the right of any Securityholder to institute suit for the payment thereof or, if the Securities provide therefore, any right of repayment at the option of the Securityholder or make any change in Article Thirteen hereof that adversely affects the rights of any Holder, in each case, without the consent of the Holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holder of each Security so affected. 74 66 Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors certified by the secretary or an assistant secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid and other documents, if any, required by Section 7.1, the Trustee shall join with the Issuer in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Issuer shall mail a notice thereof (i) by first class mail to the Holders of then Outstanding Registered Securities of each series affected thereby at their addresses as they shall appear on the registry books of the Issuer, (ii) if any Unregistered Securities of a series affected thereby are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing a notice thereof by first class mail to such Holders at such addresses as were so furnished to the Trustee and (iii) if any Unregistered Securities of a series affected thereby are then Outstanding, to all holders thereof by publication of a notice thereof at least once in an Authorized Newspaper in London (and, if required by Section 3.6, at least once in an authorized Newspaper in Luxembourg), and in each case such notice shall set forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to mail such notice, or any defect therein, shall not however, in any way impair or affect the validity of any such supplemental indenture. SECTION 8.3 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, 75 67 the Issuer and the Holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture of any and all purposes. SECTION 8.4 Documents to Be Given to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate and an Opinion Of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article Eight complies with the applicable provisions of this Indenture. SECTION 8.5 Notation on Securities in Respect of Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee for such series as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Issuer or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities of such series then Outstanding. ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1 Issuer May Consolidate, etc., on Certain Terms. The issuer covenants that it will not merge or consolidate with any other corporation or sell or convey all or substantially all of its assets to any Person, unless (i) either the Issuer shall be the continuing corporation, or the successor corporation or the Person which acquires by sale or conveyance substantially all the assets of the Issuer (if other than the Issuer) shall be a corporation organized under the laws of the United States of America or any State thereof and shall expressly assume the due and punctual payment of the principal of and interest on all the Securities and Coupons, according to their tenor, and the due and 76 68 punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Issuer by supplemental indenture satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, and (ii) the Issuer or such successor corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale or conveyance, be in default in the performance of any such covenant or condition. SECTION 9.2 Successor Corporation Substituted. In case of any such consolidation, merger, sale or conveyance and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein. Such successor corporation may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder, together with any Coupons appertaining thereto, which theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor corporation instead of the Issuer and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee authenticate and shall deliver any Securities, together with any Coupons appertaining thereto, which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities, together with any Coupons appertaining thereto, which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities, together with any Coupons appertaining thereto, so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities, together with any Coupons appertaining thereto, theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities and Coupons had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. 77 69 SECTION 9.3 Opinion of Counsel to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel, prepared in accordance with Section 11.5, as conclusive evidence that any such consolidation, merger, sale, lease or conveyance and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture. ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE: UNCLAIMED MONEYS SECTION 10.1 Satisfaction and Discharge of Indenture. (A) If at any time (a) the Issuer shall have paid or caused to be paid the principal of and interest on all the Securities of any series Outstanding hereunder and all unmatured Coupons appertaining thereto (other than Securities or Coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9) as and when the same shall have become due and payable, or (b) the Issuer shall have delivered to the Trustee for cancellation all Securities of any series theretofore authenticated and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.9) or (c) (i) all the Securities of such series not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Issuer in accordance with Section 10.4) or U.S. Government Obligations, maturing as to principal and interest in such amounts and at such times as will insure the availability of cash (without consideration of any reinvestment of such principal or interest), or a combination of U.S. Government Obligations and cash sufficient to pay at maturity or upon redemption all Securities of such series and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been 78 70 replaced or paid as provided in Section 2.9) not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity as the case may be, and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer with respect to Securities of such series and Coupons appertaining thereto, then this Indenture shall cease to be of further effect with respect to Securities of such series and Coupons appertaining thereto (except as to (i) rights of registration of transfer and exchange, and the Issuer's right of optional redemption, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon upon the original stated due dates therefore (but not upon acceleration) and remaining rights of the holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, including those under Section 6.6. (v) the rights of the Securityholders of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture with respect to such series; provided, that the rights of Holders of the Securities and Coupons to receive amounts in respect of principal of and interest on the Securities and Coupons held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities and Coupons of such series. (B) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In addition to discharge of the Indenture pursuant to the next preceding paragraph, the Issuer shall be deemed to have paid and discharged the entire indebtedness on all the Securities of a series and Coupons appertaining thereto on the 121st day after the date of the 79 71 deposit referred to in subparagraph (a) below, and the provisions of this Indenture with respect to the Securities of such series and Coupons appertaining thereto shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities of such series, and of Coupons appertaining thereto, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive, from the trust fund described in subparagraph (a) below, payments of principal thereof and interest thereon, upon the original stated due dates therefore (but not upon acceleration) and remaining rights of the holders to receive sinking fund payments if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, including those under section 6.6, (v) the rights of the holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, at the expense of the Issuer, shall at the Issuer's request execute proper instruments acknowledging the same, if (a) with reference to this provision the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series and Coupons appertaining thereto (i) cash, or (ii) U.S. Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the Principal and interest on all Securities of such series and Coupons appertaining thereto on the date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the day on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Issuer is a party or by which it is bound; (c) the Issuer has delivered to the Trustee an opinion of independent legal counsel satisfactory to the Trustee to the effect 80 72 that Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; and (d) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with, and the Opinion of Counsel shall also state that such deposit does not violate applicable law. SECTION 10.2 Application by Trustee of Funds Deposited for Payment of Securities. Subject to Section 10.4, all moneys deposited with the Trustee pursuant to Section 10.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the Holders of the particular Securities of such series and of Coupons appertaining thereto for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. Money or U.S. Government Obligations so held in trust are not subject to the provisions of Article 13. SECTION 10.3 Repayment of Moneys Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to Securities of any series, all moneys then held by any paying agent under the provisions of this Indenture with respect to such series of Securities shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security of any series and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee for such series or such paying agent, and the Holder of the Security of such series shall, unless 81 73 otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; provided the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment (a) in respect of Registered Securities of any series, may at the expense of the Issuer, mail by first class mail to Holders of such Securities at their addresses as they shall appear on the Security register, and (b) in respect of Unregistered Securities of any series, may at the expense of the Issuer cause to be published once, in an Authorized Newspaper in London (and if required by Section 3.8, once in an Authorized Newspaper in Luxembourg), notice, that such moneys remain and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 10.5 Indemnity for U.S. Government Obligations. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 10.1 or the principal or interest received in respect of such obligations. ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1 Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security or Coupon appertaining thereto, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future shareholder, officer or director, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities and any Coupons appertaining thereto by the holders thereof and as part of the consideration for the issue of the Securities and any Coupons appertaining thereto. 82 74 SECTION 11.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders. Nothing in this Indenture or in the Securities and any Coupons appertaining thereto, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the Holders of the Securities or Coupons, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the Holders of the Securities. SECTION 11.3 Successors and Assigns of lssuer Bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 11.4 Notices and Demands on Issuer, Trustee and Securityholders. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities or Coupons to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to The Progressive Corporation, 6000 Parkland Boulevard, Mayfield Heights, Ohio 44124, Attn: Treasurer. Any notice, direction, request or demand by the Issuer or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office. Where this Indenture provides for notice to Holders, such notice shall be sufficiently given (unless otherwise herein expressly provided) (i) in the case of Holders of Registered Securities and Holders of Unregistered Securities who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), if in writing and mailed, first-class postage prepaid, to each holder entitled thereto, at his last address as it appears in the registry books; and (ii) in the case of holders of Unregistered Securities who have not filed their names and addresses with the Trustee, by publication in accordance with the requirements of the provision hereof requiring such notice. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given when mailed, whether or not the Holder receives the notice. In any case 83 75 where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer and Securityholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 11.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. 84 76 Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities of any series or any Coupons appertaining thereto or the date fixed for redemption or repayment of any such Security or Coupon shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 11.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in 85 77 this Indenture which is required to be included herein by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 11.8 New York Law to Govern. This Indenture and each Security and Coupon shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law. SECTION 11.9 Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 11.10 Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.11 Securities in Foreign Currencies or in ECU. Whenever this Indenture provides for any action by, or the determination of any of the rights of, or any distribution to, Holders of Securities denominated in United States dollars and in any other currency or currency unit (including ECU), in the absence of any provision to the contrary in the form of Security of any particular series, any amount in respect of any Security denominated in a currency or currency unit (including ECU) other than United States dollars shall be treated for any such action or distribution as that amount of United States dollars that could be obtained for such amount on such reasonable basis of exchange and as of such date as the Issuer may specify in a written notice to the Trustee or in the absence of such written notice, as the Trustee shall so determine. ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1 Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.3 for Securities of such series. 86 78 SECTION 12.2 Notice of Redemption; Partial Redemptions. Notice of redemption to the Holders of Registered Securities of any series to be redeemed as a whole or in part at the option of the Issuer shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities of such series at their last addresses as they shall appear upon the registry books. Notice of redemption to the Holders of Unregistered Securities to be redeemed as a whole or in part, who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), shall be given by mailing notice of such redemption, by first class mail, postage prepaid, at least thirty and not more than sixty days prior to the date fixed for redemption, to such Holders at such addresses as were so furnished to the Trustee (and in the case of any such notice given by the Issuer, the Trustee shall make such information available to the Issuer for such purpose). Notice of redemption to all other holders of Unregistered Securities shall be published in an Authorized Newspaper in London (and, if required by Section 3.6, in an Authorized Newspaper in Luxembourg), in each case, once in each of two successive calendar weeks, the first publication to be not less than thirty nor more than sixty days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. The notice of redemption to each such Holder shall specify the principal amount of each Security of such series held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, and, in the case of Securities with Coupons attached thereto, of all Coupons appertaining thereto maturing after the date fixed for redemption, that such redemption is pursuant to the mandatory or optional sinking fund, or both, if such be the case, that interest accrued to the date fixed for redemption will be paid as specified in such notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security of a series is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of 87 79 such Security, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities of any series to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. On the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more paying agents (or, if the Issuer is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities of such series so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If any or all of the outstanding Securities of a series are to be redeemed, the Issuer will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officers' Certificate stating the date of redemption and the aggregate principal amount of Securities to be redeemed. If less than all the Securities of a series are to be redeemed, the Trustee shall select, in such manner as it shall deem appropriate and fair, Securities of such series to be redeemed in whole or in part. Securities may be redeemed in part in multiples equal to the minimum authorized denomination for Securities of such series or any integral multiple thereof. The Trustee shall promptly notify the Issuer in writing of the Securities of such series selected for redemption and, in the case of any Securities of such series selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities of any series shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 12.3 Payment of Securities Called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and the 88 80 unmatured Coupons, if any, appertaining thereto shall be void and, except as provided in Sections 6.5 and 10.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities, together with all Coupons appertaining thereto maturing after the date fixed for redemption, at a place of payment specified in said notice, said Securities and Coupons or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that any semiannual payment of interest becoming due on the date fixed for redemption shall be payable in the case of Securities with Coupons attached thereto, to the bearers of the Coupons for such interest upon surrender thereof, and in the case of Registered Securities, to the Holders of such Securities registered as such on the relevant record date subject to the terms and provisions of Section 2.4 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate of interest or Yield to Maturity (in the case of an Original Issue Discount Security) borne by the Security. If any Security with Coupons attached thereto is surrendered for redemption and is not accompanied by all such Coupons maturing after the date fixed for redemption, the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee, if there be furnished to each of them such security or indemnity as they may require to save each of them harmless. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new Security or Securities of such series, together with all Coupons, if any, appertaining thereto, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 12.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registra- 89 81 tion and certificate number in a written statement signed by an authorized officer of the Issuer and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such written statement directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. SECTION 12.5 Mandatory and Optional Sinking Funds. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment". The date on which a sinking fund payment is to be made is herein referred to as the "sinking fund payment date". In lieu of making all or any part of any mandatory sinking fund payment with respect to any series of Securities in cash, the Issuer may at its option (a) deliver to the Trustee Securities of such series theretofore purchased or otherwise acquired (except upon redemption pursuant to the mandatory sinking fund) by the Issuer or receive credit for Securities of such series (not previously so credited) theretofore purchased or otherwise acquired (except as aforesaid) by the Issuer and delivered to the Trustee for cancellation pursuant to Section 2.7, (b) receive credit for optional sinking fund payments (not previously so credited) made pursuant to this Section, or (c) receive credit for Securities of such series (not previously so credited) redeemed by the Issuer through any optional redemption provision contained in the terms of such series. Securities so delivered or credited shall be received or credited by the Trustee at the sinking fund redemption price specified in such Securities. On or before the sixtieth day next preceding each sinking fund payment date for any series, the Issuer will deliver to the Trustee a written statement (which need not contain the statements required by Section 11.5) signed by an authorized officer of the Issuer (a) specifying the portion of the mandatory sinking fund payment to be satisfied by payment of cash and the portion to be satisfied by credit of Securities of such series, (b) stating that none of the Securities of such series has theretofore been so credited, (c) stating that no defaults in the payment of interest or Events of Default with respect to such series have occurred 90 82 (which have not been waived or cured) and are continuing and (d) stating whether or not the Issuer intends to exercise its right to make an optional sinking fund payment with respect to such series and, if so, specifying the amount of such optional sinking fund payment which the Issuer intends to pay on or before the next succeeding sinking fund payment date. Any Securities of such series to be credited and required to be delivered to the Trustee in order for the Issuer to be entitled to credit therefore as aforesaid which have not theretofore been delivered to the Trustee shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with such written statement (or reasonably promptly thereafter if acceptable to the Trustee). Such written statement shall be irrevocable and upon its receipt by the Trustee the Issuer shall become unconditionally obligated to make all the cash payments or payments therein referred to, if any, on or before the next succeeding sinking fund payment date. Failure of the Issuer, on or before any such sixtieth day, to deliver such written statement and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute, on and as of such date, the irrevocable election of the Issuer (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuer will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or a lesser sum if the Issuer shall so request) with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $50,000 or less and the Issuer makes no such request, then it shall be carried over until a sum in excess of $50,000 is available. The Trustee shall select, in the manner provided in Section 12.2, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and shall (if requested in writing by the Issuer) inform the Issuer of the serial numbers of the Securities of such series (or potions thereof) so selected. Securities of any series which are (a) owned by the Issuer 91 83 or an entity known by the Trustee to be directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer, as shown by the Security register, and not know to the Trustee to have been pledged or hypothecated by the Issuer or any such entity or (b) identified in an Officers' Certificate at least 60 days prior to the sinking fund payment date as being beneficially owned by, and not pledged or hypothecated by, the Issuer or an entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer shall be excluded from Securities of such series eligible for selection for redemption. The Trustee, in the name and at the expense of the Issuer (or the Issuer, if it shall so request the Trustee in writing) shall cause notice of redemption of the Securities of such series to be given in substantially the manner provided in Section 12.2 (and with the effect provided in Section 12.3) for the redemption of Securities of such series in part at the option of the Issuer. The amount of any sinking fund payments not so applied or allocated to the redemption of Securities of such series shall be added to the next cash sinking fund payment for such series and, together with such payment, shall be applied in accordance with the provisions of this Section. Any and all sinking fund moneys held on the stated maturity date of the Securities of any particular series (or earlier, if such maturity is accelerated), which are not held for the payment or redemption of particular Securities of such series shall be applied, together with other moneys, if necessary, sufficient for the purpose, to the payment of the principal of, and interest on, the Securities of such series at maturity. On each sinking fund payment date, the Issuer shall pay to the Trustee in cash or shall otherwise provide for the payment of all interest accrued to the date fixed for redemption on Securities to be redeemed on the next following sinking fund payment date. The Trustee shall not redeem or cause to be redeemed any Securities of a series with sinking fund moneys or provide any notice of redemption of Securities for such series by operation of the sinking fund during the continuance of a default in payment of interest on such Securities or of any Event of Default except that, where the mailing or publication of notice of redemption of any Securities shall theretofore have been made, the Trustee shall redeem or cause to be redeemed such Securities, provided that it shall have received from the Issuer a sum sufficient for such redemption. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default 92 84 shall occur, and any moneys thereafter paid into the sinking fund, shall, during the continuance of such default or Event of Default, be deemed to have been collected under Article Five and held for the payment of all such Securities. In case such Event of Default shall have been waived as provided in Section 5.10 or the default cured on or before the sixtieth day preceding the sinking fund payment date in any year, such moneys shall thereafter be applied on the next succeeding sinking fund payment date in accordance with this Section to the redemption of such Securities. ARTICLE THIRTEEN SUBORDINATION; SENIORITY SECTION 13.1 Securities Subordinated to Senior Indebtedness. The Issuer agrees, and each Holder of the Securities by his acceptance thereof likewise agrees, that the payment of the principal of and interest on Securities of any series issued under this Indenture shall be subordinated and junior in right of payment, to the extent and in the manner provided in this Article 13 to the prior payment in full of all Senior Indebtedness whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed. The Senior Indebtedness of the Issuer shall continue to be Senior Indebtedness and entitled to the benefits of these subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to the Senior Indebtedness or the extension or renewal of the Senior Indebtedness. All the provisions of this Indenture and the Securities shall be subject to the provisions of this Article 13 so far as they may be applicable thereto, except that nothing in this Article 13 shall apply to claims for, or payments to, the Trustee under or pursuant to Section 6.6. SECTION 13.2 Issuer Not to Make Payments with Respect to Securities in Certain Circumstances. No payment shall be made by the Issuer on account of principal of or interest on Securities of any series or on account of the purchase or other acquisition of Securities of any series, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness permitting the acceleration thereof or with respect to the payment of any Senior Indebtedness and (a) such default is the subject of a judicial proceeding or (b) notice of such default 93 85 in writing or by telegram has been given to the Issuer by any holder or holders of any Senior Indebtedness (provided, however, that in the case of Senior Indebtedness issued pursuant to an indenture such notice may be validly given only by the trustee under such indenture), unless and until such default or event of default shall have been cured or waived or shall have ceased to exist. Upon any acceleration of the principal of Securities of any series or any payment by the Issuer, or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Issuer, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in money or money's worth, or payment thereof provided for, before any payment is made on account of the principal of or interest on Securities of any series; and (subject to the power of a court of competent jurisdiction to make other equitable provision, which shall have been determined by such court to give effect to the rights conferred in this Article upon the Senior Indebtedness and the holders thereof with respect to Securities of any series or the Holders thereof or the Trustee, by a lawful plan of reorganization or readjustment under applicable law) upon any such dissolution or winding up or liquidation or reorganization, any payment by the Issuer, or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to which the Holders of the Securities of any series or the Trustee would be entitled except for the provisions of this Article, shall be paid by the Issuer or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution directly to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the Holders of the Securities of any series or to the Trustee. In the event that, notwithstanding the foregoing, any payment by or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be 94 86 received by the Trustee or the Holders of the Securities of any series before all Senior Indebtedness is paid in full in money or money's worth, or provision is made for such payment, and if such fact shall then have been or thereafter be made known to the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, and, until so delivered, the same shall be held in trust by any Holder of a Security as the property of the holders of Senior Indebtedness. The consolidation of the Issuer with, or the merger of the Issuer into, another corporation or the liquidation or dissolution of the Issuer following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Article Nine shall not be deemed a dissolution, winding up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Nine. Nothing in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6. The holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holders of the Securities of any series, without incurring responsibility to the Holders of the Securities of any series and without impairing or releasing the obligations of the Holders of the Securities of any series to the holders of Senior Indebtedness: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Issuer and any other Person. 95 87 SECTION 13.3 Subrogation of Securities. Subject to the payment in full of all amounts then due (whether by acceleration of the maturity thereof or otherwise) on account of the principal and interest on all Senior Indebtedness at the time outstanding, the Holders of the Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Issuer applicable to the Senior Indebtedness until the principal and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Securities of any series or the Trustee would be entitled except for the provisions of this Article shall, as between the Issuer, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities of any series, be deemed to be a payment by the Issuer to or on account of the Senior Indebtedness. It is understood that the provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of Senior Indebtedness, on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities of any series is intended to or shall impair, as among the Issuer, its creditors other than the holders of Senior Indebtedness, and the Holders of the Securities, the obligation of the Issuer, which is absolute and unconditional, to pay to the Holders of the Securities the principal of and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities of any series and creditors of the Issuer other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness in respect of cash, property or securities of the Issuer received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Issuer referred to in this Article, the Trustee, subject to the provisions of Section 6.1, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such 96 88 dissolution, winding up, liquidation or reorganization proceedings are pending, or certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Issuer, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 13.4 Authorization by Holders of Securities. Each Holder of a Security of any series by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate, as between the Holder of the Security and the holders of Senior Indebtedness, the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 13.5 Notices to Trustee. The Issuer shall give prompt written notice to the Trustee of any fact known to the Issuer which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities of any series pursuant to the provisions of this Article. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities of any series pursuant to the provisions of this Article, unless and until the Trustee shall have received at its Corporate Trust Office written notice thereof from the Issuer or a holder or holders of Senior Indebtedness or from any trustee therefore; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 6.1, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received at least three Business Days prior to the date upon which by the terms hereof any such moneys may become payable for any purpose (including, without limitation, the payment of the principal or interest on any Security of any series) with respect to such moneys the notice provided for in this Section, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received and shall 97 89 not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 13.6 Trustee's Relation to Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 6.13 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe any such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to the holders of Senior Indebtedness but shall have only such obligations to such holders as are expressly set forth in this Article. SECTION 13.7 No Impairment of Subordination. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Issuer or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Issuer with the terms, provisions and 98 90 covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. SECTION 13.8 Article 13 Not To Prevent Events of Default. The failure to make a payment on account of principal or interest on the Securities by reason of any provision in this Article 13 shall not be construed as preventing the occurrence of an Event of Default under Section 5.1. SECTION 13.9 Paying Agents other than the Trustee. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Issuer and be then acting hereunder, the term "Trustee" as used in this Article 13 shall in such case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article 13 in addition to or in place of the Trustee; provided, however, that Sections 13.5 and 13.6 hereof shall not apply to the Issuer or any Subsidiary if it acts as Paying Agent. SECTION 13.10 Securities Senior to Subordinated Indebtedness. The indebtedness represented by the Securities will be senior and prior in right of payment to the principal and interest on all Subordinated Indebtedness, to the extent and in the manner provided in such Subordinated Indebtedness. 99 91 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of November 15, 1988. THE PROGRESSIVE CORPORATION [CORPORATE SEAL] By ------------------------------------- Treasurer Attest: By -------------------------------------- RHODE ISLAND HOSPITAL TRUST NATIONAL BANK [CORPORATE SEAL] By ------------------------------------- Attest: By -------------------------------------- 100 92 STATE OF NEW YORK COUNTY OF NEW YORK ss.: On this ____ day of ______ before me personally came Howard M. Zelikow, to me personally known, who, being by me duly sworn, did depose and say that he resides at Cleveland, Ohio ; that he is an officer of THE PROGRESSIVE CORPORATION, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ------------------------------------- Notary Public [NOTARIAL SEAL] STATE OF NEW YORK COUNTY OF NEW YORK ss.: On this day of , before me personally came , to me personally known, who, being by me duly sworn, did depose and say that he resides at New York, New York; that he is an of RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ------------------------------------- Notary Public [NOTARIAL SEAL] EX-4.B 3 EXHIBIT 4(B) 1 EXHIBIT N0. 4(B) (FACE OF SECURITY) REGISTERED REGISTERED NO. R _________ $____________ CUSIP 743315 AD 5 SEE REVERSE FOR CERTAIN DEFINITIONS THE PROGRESSIVE CORPORATION 10-1/8% SUBORDINATED NOTE DUE DECEMBER 15, 2000 THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value received, hereby promises to pay to ___________________________________ or registered assigns, at the office or agency of the Issuer at the office of the Trustee in Providence, Rhode Island, the principal sum of __________________ Dollars on December 15, 2000, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest semiannually on June 15 and December 15 of each year, commencing June 15, 1989, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Note, from the June 15 or the December 15, as the case may be, next preceding the date of this Note to which interest has been paid, unless the date hereof is a date to which interest has been paid, in which case from the date of this Note, or unless no interest has been paid on these Notes, in which case from December 15, 1988, until payment of said principal sum has been made or duly provided for; PROVIDED, that payment of interest may be made at the option of the Issuer by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Notwithstanding the foregoing, if the date hereof is after the first day of June or December, as the case may be, and before the following June 15 or December 15, this Note shall bear interest from such June 15 or December 15; PROVIDED, that if the Issuer shall default in the payment of interest due on such June 15 or December 15, then this Note shall bear interest from the next preceding June 15 or December 15 to which interest has been paid or, if no interest has been paid on these Notes, from December 15, 1988. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the June 1 or December 1, as the case may be, next preceding such June 15 or December 15. Reference is made to the further provisions of this Note set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to be signed by facsimile by its duly authorized officers and has caused a facsimile of its corporate seal to be affixed hereunto or imprinted hereon. (CORPORATE SEAL) THE PROGRESSIVE CORPORATION Attest: /s/ David M. Schneider By /s/ Peter B. Lewis ---------------------- ------------------------------------- Secretary President and Chief Executive Officer Dated:____________ 2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. Rhode Island Hospital Trust National Bank, as Trustee By................................. Authorized Signatory (BACK OF SECURITY) THE PROGRESSIVE CORPORATION 10-1/8% SUBORDINATED NOTE DUE DECEMBER 15, 2000 This Note is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of November 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Issuer to Rhode Island Hospital Trust National Bank, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as in the Indenture provided. This Note is one of a series designated as the 10-1/8% Subordinated Note Due December 15, 2000 of the Issuer, limited in aggregate principal amount to $150,000,000. In case an Event of Default with respect to the 10-1/8% Subordinated Notes Due December 15, 2000, as defined in the Indenture, shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. This Note is subordinated to all existing and future Senior Indebtedness (as defined in the Indenture) of the Issuer. To the extent and in the manner provided in the Indenture, Senior Indebtedness must be paid before any payment may be made to any Holders of Securities of any series. Any Securityholder by accepting this Note agrees to the subordination and authorizes the Trustee to give it effect. In addition to all other rights of Senior Indebtedness described in the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of any instrument relating to the Senior Indebtedness or extension or renewal of the Senior Indebtedness. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the time Outstanding (as defined in the Indenture) of all series to be affected (voting as one class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; PROVIDED HOWEVER, that no such supplemental indenture shall (i) extend the final maturity of any Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of any interest thereon, or 3 impair or affect the rights of any Holder to institute suit for the payment thereof, or make any change in the subordination provisions that adversely affects the rights of any Holder, in each case, without the consent of the Holder of each Security so affected or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holder of each Security affected. It is also provided in the Indenture that, with respect to certain defaults or Events of Default regarding the Securities of any series, prior to any declaration accelerating the maturity of such Securities, the Holders of a majority in aggregate principal amount Outstanding of the Securities of such series (or, in the case of certain defaults or Events of Default, all or certain series of the Securities) may on behalf of the Holders of all the Securities of such series (or all or certain series of the Securities, as the case may be) waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and any Note which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiples of $1,000 at the office or agency of the Issuer at the office of the Trustee in Providence, Rhode Island, and in the manner and subject to the limitations provided in the Indenture, but without the payment of any service charge, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not subject to redemption at the option of the Issuer or through the operation of a sinking fund. Upon due presentment for registration of transfer of this Note at the office or agency of the Issuer or at the office of the Trustee in Providence, Rhode Island, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for all other purposes, and neither the Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee shall be affected by any notice to the contrary. No recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, of the Issuer or of any successor corporation, either directly or through the Issuer or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. 4 ------------------------ ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties CUST - Custodian JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - __(Cust)___Custodian __(Minor) under Uniform Gifts to Minors Act --------------------------------- (State) Additional abbreviations may also be used though not in the above list. --------------------------------------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Please print or typewrite name and address including postal zip code of assignee - -------------------------------------------------------------------------------- the within Note and all rights thereunder, hereby irrevocably constituting and appointing - -------------------------------------------------------------------------------- attorney to transfer said Note on the books of the Issuer, with full power of substitution in the premises. Date: ------------------- ------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-4.C 4 EXHIBIT 4(C) 1 EXHIBIT NO. 4(C) ================================================================================ THE PROGRESSIVE CORPORATION AND THE FIRST NATIONAL BANK OF BOSTON, Trustee -------------- INDENTURE -------------- Dated as of November 15, 1988 ================================================================================ 2 CROSS REFERENCE SHEET* Between Provisions of Trust Indenture Act of 1939 and Indenture to be dated as of November 15, 1988 between THE PROGRESSIVE CORPORATION and THE FIRST NATIONAL BANK OF BOSTON, Trustee: Section of the Act Section of Indenture - - - - ------------------ -------------------- 310(a)(1) and (2) . . . . . . . . . . . . . . . . . 6.9 310(a)(3) and (4) . . . . . . . . . . . . . . . . . Inapplicable 310(b) . . . . . . . . . . . . . . . . . . . . . . 6.8 and 6.10(a), (b) and (d) 310(c) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 311(a) . . . . . . . . . . . . . . . . . . . . . . 6.13(a) and (c)(1) and (2) 311(b) . . . . . . . . . . . . . . . . . . . . . . 6.13(b) 311(c) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 312(a) . . . . . . . . . . . . . . . . . . . . . . 4.1 and 4.2(a) 312(b) . . . . . . . . . . . . . . . . . . . . . . 4.2(a) and (b)(i) and (ii) 312(c) . . . . . . . . . . . . . . . . . . . . . . 4.2(c) 313(a) . . . . . . . . . . . . . . . . . . . . . . 4.4(a)(i), (ii), (iii), (iv), (v) and (vi) 313(b)(1) . . . . . . . . . . . . . . . . . . . . . Inapplicable 313(b)(2) . . . . . . . . . . . . . . . . . . . . . 4.4 313(c) . . . . . . . . . . . . . . . . . . . . . . 4.4 313(d) . . . . . . . . . . . . . . . . . . . . . . 4.4 314(a) . . . . . . . . . . . . . . . . . . . . . . 4.3 314(b) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(c)(1) and (2) . . . . . . . . . . . . . . . . . 11.5 314(c)(3) . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(d) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(e) . . . . . . . . . . . . . . . . . . . . . . 11.5 314(f) . . . . . . . . . . . . . . . . . . . . . . Inapplicable 315(a), (c) and (d) . . . . . . . . . . . . . . . . 6.1 315(b) . . . . . . . . . . . . . . . . . . . . . . 5.11 315(e) . . . . . . . . . . . . . . . . . . . . . . 5.12 316(a)(1) . . . . . . . . . . . . . . . . . . . . . 5.9 316(a)(2) . . . . . . . . . . . . . . . . . . . . . Not Required 316(a) (last sentence) . . . . . . . . . . . . . . 7.4 316(b) . . . . . . . . . . . . . . . . . . . . . . 5.7 317(a) . . . . . . . . . . . . . . . . . . . . . . 5.2 317(b) . . . . . . . . . . . . . . . . . . . . . . 3.4(a) and (b) 318(a) . . . . . . . . . . . . . . . . . . . . . . 11.7 * This Cross Reference Sheet is not part of the Indenture. 3 TABLE OF CONTENTS PAGE ---- PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RECITALS: Authorization of Indenture . . . . . . . . . . . . . . . . . . . . 1 Compliance with Legal Requirements . . . . . . . . . . . . . . . . 1 Purpose of and Consideration for Indenture . . . . . . . . . . . . 1 ARTICLE ONE DEFINITIONS SECTION 1.1. Certain Terms Defined . . . . . . . . . . . . . . 1 Authorized Newspaper . . . . . . . . . . . . . . 2 Board of Directors . . . . . . . . . . . . . . . 2 Business Day . . . . . . . . . . . . . . . . . . 2 Commission . . . . . . . . . . . . . . . . . . . 2 Corporate Trust Office . . . . . . . . . . . . . 2 Coupon . . . . . . . . . . . . . . . . . . . . . 2 ECU . . . . . . . . . . . . . . . . . . . . . . . 3 European Communities . . . . . . . . . . . . . . 3 Event of Default . . . . . . . . . . . . . . . . 3 Foreign Currency . . . . . . . . . . . . . . . . 3 Holder, holder of Securities, Securityholder . . 3 Indenture . . . . . . . . . . . . . . . . . . . . 3 Interest . . . . . . . . . . . . . . . . . . . . 3 Issuer . . . . . . . . . . . . . . . . . . . . . 3 Officers' Certificate . . . . . . . . . . . . . . 3 Opinion of Counsel . . . . . . . . . . . . . . . 3 Original Issue date . . . . . . . . . . . . . . . 4 Original Issue Discount Securities . . . . . . . 4 Outstanding . . . . . . . . . . . . . . . . . . . 4 Person . . . . . . . . . . . . . . . . . . . . . 5 principal . . . . . . . . . . . . . . . . . . . . 5 Registered Security . . . . . . . . . . . . . . . 5 Responsible Officer . . . . . . . . . . . . . . . 5 Security or Securities . . . . . . . . . . . . . 5 Trustee . . . . . . . . . . . . . . . . . . . . . 5 Trust Indenture Act of 1939 . . . . . . . . . . . 5 Unregistered Security . . . . . . . . . . . . . . 5 4 ii PAGE ---- U.S. Government Obligations . . . . . . . . . . . . . . . . . 5 Vice President . . . . . . . . . . . . . . . . . . . . . . . 5 Yield to Maturity . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE TWO SECURITIES SECTION 2.1. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.2. Form of Trustee's Certificate of Authentication . . . . . . . 6 SECTION 2.3. Amount Unlimited; Issuable in Series . . . . . . . . . . . . 7 SECTION 2.4. Authentication and Delivery of Securities . . . . . . . . . . 9 SECTION 2.5. Execution of Securities . . . . . . . . . . . . . . . . . . . 10 SECTION 2.6. Certificate of Authentication . . . . . . . . . . . . . . . . 11 SECTION 2.7. Denomination and Date of Securities; Payments of Interest . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.8. Registration, Transfer and Exchange . . . . . . . . . . . . . 13 SECTION 2.9. Mutilated, Defaced, Destroyed, Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 2.10. Cancellation of Securities; Destruction Thereof . . . . . . . 17 SECTION 2.11. Temporary Securities . . . . . . . . . . . . . . . . . . . . 17 ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1. Payment of Principal and Interest . . . . . . . . . . . . . . 18 SECTION 3.2. Offices for Payments, etc. . . . . . . . . . . . . . . . . . 19 SECTION 3.3. Appointment to Fill a Vacancy in the Office of Trustee . . . 20 SECTION 3.4. Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.5. Written Statement to Trustee . . . . . . . . . . . . . . . . 21 SECTION 3.6. Luxembourg Publications . . . . . . . . . . . . . . . . . . . 21 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1. Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders . . . . . . . . . . . . . . . 22 SECTION 4.2. Preservation and Disclosure of Securityholders' Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 4.3. Reports by the Issuer . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.4. Reports by the Trustee . . . . . . . . . . . . . . . . . . . 25 5 iii ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT PAGE ---- SECTION 5.1. Event of Default Defined; Acceleration of Maturity; Waiver of Default . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.2. Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 5.3. Application of Proceeds . . . . . . . . . . . . . . . . . . . 33 SECTION 5.4. Suits for Enforcement . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.5. Restoration of Rights on Abandonment of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 5.6. Limitations on Suits by Securityholders . . . . . . . . . . . 35 SECTION 5.7. Unconditional Right of Securityholders to Institute Certain Suits . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 5.8. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default . . . . . . . . . . . . . . . . . . . 36 SECTION 5.9. Control by Securityholders . . . . . . . . . . . . . . . . . 36 SECTION 5.10. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . 37 SECTION 5.11. Trustee to Give Notice of Default, But May Withhold in Certain Circumstances . . . . . . . . . . . . . . . . . 38 SECTION 5.12. Right of Court to Require Filing of Undertaking to Pay Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1. Duties and Responsibilities of the Trustee; During Default; Prior to Default . . . . . . . . . . . . . . . . . 39 SECTION 6.2. Certain Rights of the Trustee . . . . . . . . . . . . . . . . 40 SECTION 6.3. Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof . . . . . . . 42 SECTION 6.4. Trustee and Agents May Hold Securities or Coupons; Collections, etc. . . . . . . . . . . . . . . . . . . . . . 42 SECTION 6.5. Moneys Held by Trustee . . . . . . . . . . . . . . . . . . . 42 SECTION 6.6. Compensation and Indemnification of Trustee and Its Prior Claim . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.7. Right of Trustee to Rely on Officers' Certificate, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.8. Qualification of Trustee; Conflicting Interests . . . . . . . 44 SECTION 6.9. Persons Eligible for Appointment as Trustee . . . . . . . . . 50 6 iv PAGE ---- SECTION 6.10. Resignation and Removal; Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.11. Acceptance of Appointment by Successor Trustee . . . . . . 52 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . . . . . . . . . . . . 54 SECTION 6.13. Preferential Collection of Claims Against the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1. Evidence of Action Taken by Securityholders . . . . . . . . 59 SECTION 7.2. Proof of Execution of Instruments and of Holding of Securities . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 7.3. Holders to be Treated as Owners . . . . . . . . . . . . . . 60 SECTION 7.4. Securities Owned by Issuer Deemed Not Outstanding . . . . . 61 SECTION 7.5. Right of Revocation of Action Taken . . . . . . . . . . . . 62 ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1. Supplemental Indentures Without Consent of Security- holders . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 8.2. Supplemental Indentures With Consent of Securityholders . . 64 SECTION 8.3. Effect of Supplemental Indenture . . . . . . . . . . . . . 65 SECTION 8.4. Documents to Be Given to Trustee . . . . . . . . . . . . . 66 SECTION 8.5. Notation on Securities in Respect of Supplemental Indentures 66 ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1. Issuer May Consolidate, etc., on Certain Terms . . . . . . 66 SECTION 9.2. Successor Corporation Substituted . . . . . . . . . . . . . 67 SECTION 9.3. Opinion of Counsel to Trustee . . . . . . . . . . . . . . . 68 7 v ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS
PAGE ---- SECTION 10.1. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . 68 SECTION 10.2. Application by Trustee of Funds Deposited for Payment of Securities 71 SECTION 10.3. Repayment of Moneys Held by Paying Agent . . . . . . . . . . . . . 71 SECTION 10.4. Return of Moneys Held By Trustee and Paying Agent Unclaimed for Two Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 10.5. Indemnity for U.S. Government Obligations . . . . . . . . . . . . . 72 ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1. Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability . . . . . . . . . . . . . 72 SECTION 11.2. Provisions of Indenture for the Sole Benefit of Parties and Securityholders . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.3. Successors and Assigns of Issuer Bound by Indenture . . . . . . . . 73 SECTION 11.4. Notices and Demands on Issuer, Trustee and Securityholders . . . . 73 SECTION 11.5. Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein . . . . . . . . . . . . . . . . . . . . . 74 SECTION 11.6. Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . 75 SECTION 11.7. Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 11.8. New York Law to Govern . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.10. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 11.11. Securities in Foreign Currencies or in ECU . . . . . . . . . . . . 76 ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1. Applicability of Article . . . . . . . . . . . . . . . . . . . . . 76 SECTION 12.2. Notice of Redemption; Partial Redemptions . . . . . . . . . . . . . 77 SECTION 12.3. Payment of Securities Called for Redemption . . . . . . . . . . . . 78 SECTION 12.4. Exclusion of Certain Securities from Eligibility for Selection for Redemption . . . . . . . . . . . . . . . . . . . . 79 SECTION 12.5. Mandatory and Optional Sinking Funds . . . . . . . . . . . . . . . 80
8 vi TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 9 THIS INDENTURE, dated as of November 15, 1988, between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association (the "Trustee"), WITNESSETH: WHEREAS, the Issuer has duly authorized the issue from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and to provide, among other things, for the authentication, delivery and administration thereof, the Issuer has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make this Indenture a valid indenture and agreement according to its terms have been done; NOW, THEREFORE: In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities and of the Coupons, if any, appertaining thereto as follows: ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined. The following terms (except as otherwise expressly provided or unless the content otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939, including terms defined therein by reference to the Securities Act of 1933 (except as herein otherwise expressly provided or unless the content otherwise clearly requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means such accounting principles as 10 2 are generally accepted at the time of any computation. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. "Authorized Newspaper" means a newspaper (which, in the case of the United Kingdom, will, if practicable, be the Financial Times (London Edition) and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort) published in English or an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in the United Kingdom or in Luxembourg, as applicable. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof which is made or given with the approval of the Trustee shall constitute a sufficient publication of such notice. "Board of Directors" means either the Board of Directors of the Issuer or any committee of such Board duly authorized to act hereunder. "Business Day" means, with respect to any Security, a day that in the city (or in any of the cities, if more than one) in which amounts are payable, as specified in the form of such Security, is not a day on which banking institutions are authorized by law or regulation to close or a day on which transactions in the currency in which the Securities are payable are not conducted. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution and delivery of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located at 100 Federal Street, Boston, Massachusetts 02110, Attn: Corporate Trust Administration. "Coupon" means any interest coupon appertaining to a Security. 11 3 "ECU" means the European Currency Unit as defined and revised from time to time by the council of European Communities. "European Communities" means the European Economic Community (the "EEC"), the European Coal and Steel Community and Euratom. "Event of Default" means any event or condition specified as such in Section 5.1. "Foreign Currency" means a currency issued by the government of a country other than the United States. "Holder," "holder of Securities," "Securityholder" or other similar terms mean (a) in the case of any Registered Security, the Person in whose name such Security is registered in the security register kept by the Issuer for that purpose in accordance with the terms hereof, and (b) in the case of any Unregistered Security, the bearer of such Security, or any Coupon appertaining thereto, as the case may be. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented or both, and shall include the forms and terms of particular series of Securities established as contemplated hereunder. "Interest" means, when used with respect to non-interest bearing Securities, interest payable after maturity. "Issuer" means (except as otherwise provided in Article Six) THE PROGRESSIVE CORPORATION, an Ohio corporation, and, subject to Article Nine, its successors and assigns. "Officers' Certificate" means a certificate signed by the chairman of the Board of Directors or the president or any vice president or by the treasurer and by the secretary or any assistant secretary of the Issuer and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 11.5. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer or other counsel who shall be satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 11.5, if and to the extent required hereby. 12 4 "Original issue date" of any Security (or portion thereof) means the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Original Issue Discount Security" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "Outstanding" (except as otherwise provided in Section 6.8), when used with reference to Securities, subject to the provisions of Section 7.4, means, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Issuer) or shall have been set aside, segregated and held in trust by the Issuer for the holders of such Securities (if the Issuer shall act as its own paying agent), provided that if such Securities, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in substitution for which other Securities shall have been authenticated and delivered, or which shall have been paid, pursuant to the terms of Section 2.9 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuer). In determining whether the holders of the requisite principal amount of Outstanding Securities of any or all series have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. 13 5 "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal" whenever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any." "Registered Security" means any Security registered on the Security Register of the Issuer. "Responsible Officer" when used with respect to the Trustee means any officer or assistant officer assigned by the Trustee to administer its corporate trust matters. "Security" or "Securities" (except as otherwise provided in Section 6.8) has the meaning stated in the first recital of this Indenture, or, as the case may be, Securities that have been authenticated and delivered under this Indenture. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Six, shall also include any successor trustee. "Trust Indenture Act of 1939" (except as otherwise provided in Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was originally executed. "Unregistered Security" means any Security other than a Registered Security. "U.S. Government Obligations" means direct obligations of the United States of America, backed by its full faith and credit. "Vice President," when used with respect to the Issuer, means any vice president, whether or not designated by a number or a word or words added before or after the title of "vice president". "Yield to Maturity" means the yield to maturity on a series of securities, calculated at the time of issuance of such series, or, if applicable, at the most recent redetermination of interest on such series, and calculated in accordance with accepted financial practice. 14 6 ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally. The Securities of each series and the Coupons, if any, to be attached thereto shall be substantially in such form (not inconsistent with this Indenture) as shall be established by or pursuant to a resolution of the Board of Directors or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have imprinted or otherwise reproduced thereon such legend or legends, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto, or with any rules of any securities exchange or to conform to general usage, all as may be determined by the officers executing such Securities and Coupons, as evidenced by their execution of the Securities and Coupons. The definitive Securities and Coupons shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, as evidenced by their execution of such Securities and Coupons. SECTION 2.2 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. TRUSTEE, as Trustee By ------------------------------------ Authorized Signatory 15 7 SECTION 2.3 Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a resolution of the Board of Directors and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.8, 2.9, 2.11 or 12.3); (3) the date or dates on which the principal of the Securities of the series is payable or the method by which such date or dates shall be determined; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate shall be determined, the date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the record dates for the determination of Holders to whom interest is payable; (5) the place or places where the principal and any interest on Securities of the series shall be payable; (6) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Issuer, pursuant to any sinking fund or otherwise; (7) the obligation, if any, of the Issuer to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; 16 8 (8) if other than denominations of U.S. $1,000 and any integral multiple thereof, in the case of Registered Securities, or U.S. $1,000 in the case of Unregistered Securities, the denominations in which Securities of the series shall be issuable; (9) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.1 or provable in bankruptcy pursuant to Section 5.2; (10) any authenticating or paying agents, transfer agents or registrars or any other agents with respect to the Securities of such series; (11) if other than such coin or currency of the United States of America as at the time of payment is legal tender for payment of public or private debts, the coin or currency or units based on or relating to currencies (including ECU) in which payment of the principal of and interest, if any, on the Securities of that series shall be payable; (12) if the principal of or interest, if any, on the Securities of that series are to be payable, at the election of the Issuer or a holder thereof, in a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the period or periods within which, and the terms and conditions upon which, such election may be made; (13) if the amount of payments of principal of or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method based on a coin or currency or units based on or relating to currencies (including ECU) other than that in which the Securities are stated to be payable, the manner in which such amounts shall be determined; (14) whether the Securities of the series will be issuable as Registered Securities or Unregistered Securities (with or without Coupons), or both, any restrictions applicable to the offer, sale or delivery of Unregistered Securities and, if other than as provided in Section 2.8, the terms upon which Unregistered Securities and, of any series may be exchanged for Registered Securities of such series and vice versa; 17 9 (15) whether and under what circumstances the Issuer will pay additional amounts on the Securities of the series held by a Person who is not a U.S. person in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such additional amounts; (16) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions not otherwise set forth herein, then the form and terms of such certificates, documents or conditions; and (17) any other terms of the series, including provisions for payment by wire transfers, if any, or modifications of the definition of Business Day (which terms shall not adversely affect the interests of the Holders of the Securities). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such resolution of the Board of Directors or in any such indenture supplemental hereto. SECTION 2.4 Authentication and Delivery of Securities. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Securities of any series (having attached thereto appropriate Coupons, if any), executed by the Issuer to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Securities and Coupons, if any, to or upon the written order of the Issuer, signed by both (a) the chairman of its Board of Directors, or any vice chairman of its Board of Directors, or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any assistant secretary, without any further action by the Issuer. In authenticating such Securities and Coupons, if any, and accepting the additional responsibilities under this Indenture in relation to such Securities and Coupons, if any, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: (1) a copy of any resolution or resolutions of the Board of Directors by or pursuant to which the form and term of such series 18 10 were established in each case certified by the secretary or an assistant secretary of the Issuer; (2) an executed supplemental indenture, if any; (3) an Officers' Certificate setting forth the form and terms of the Securities and Coupons, if any, as required pursuant to Section 2.3, and prepared in accordance with Section 11.5; (4) an Opinion of Counsel, prepared in accordance with Section 11.5, which shall state (a) that the form or forms and terms of such Securities and Coupons, if any, have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.1 and 2.3 in conformity with the provisions of this Indenture; (b) that such Securities and Coupons, if any, when authenticated and delivered by the Trustee and issued by the issuer in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and binding obligations of the Issuer; (c) that all laws and requirements in respect of the execution and delivery by the Issuer of the Securities and Coupons, if any, have been complied with; and (d) such other matters as the Trustee may reasonably request. The Trustee shall have the right to decline to authenticate and deliver any Securities and Coupons, if any, under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken by the Issuer or if the Trustee in good faith by its board of directors or board of trustees, executive committee, or a trust committee of directors, trustees or Responsible Officers shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 2.5 Execution of Securities. The Securities and, if applicable, each Coupon appertaining thereto, shall be signed on behalf of the Issuer by both (a) the chairman of its Board of Directors or any vice chairman of its Board of Directors or its president or any vice president or its treasurer or any assistant treasurer and (b) by its secretary or any assistant secretary, under its corporate seal which may, but need not, be 19 11 attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security or Coupon that has been duly authenticated and delivered by the Trustee. In case any officer of the Issuer who shall have signed any of the Securities or Coupons shall cease to be such officer before the Security or Coupon so signed (or the Security to which the Coupon so signed appertains) shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Security or Coupon nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security or Coupon had not ceased to be such officer of the Issuer; and any Security or Coupon may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Security or Coupon, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such person was not such an officer. SECTION 2.6 Certificate of Authentication. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by the manual signature of one of its authorized signatories, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Security executed by the Issuer shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. No Coupon shall be entitled to the benefits of this Indenture or shall be valid or obligatory for any purpose until such certificate by the Trustee shall have become duly executed on the Security to which such Coupon appertains. SECTION 2.7 Denomination and Date of Securities; Payments of Interest. The Securities shall be issuable as Registered Securities or Unregistered Securities in such denominations as shall be specified as contemplated by Section 2.3. In the absence of any such specification with respect to the Registered Securities of any series, the Registered Securities of such series shall be issuable in denominations of U.S. $1,000 and any integral multiple thereof. In the absence of any such specification 20 12 with respect to the Unregistered Securities, Unregistered Securities shall be issued in the denomination of U.S. $1,000. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plan as the officers of the Issuer executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Each Registered Security shall be dated the date of its authentication. Each Unregistered Security shall be dated as provided in the resolution or resolutions of the Board of Directors of the Issuer or the supplemental indenture referred to in Section 2.3. The Securities of each series shall bear interest, if any, from the date, and such interest shall be payable on the dates, established as contemplated by Section 2.3. The person in whose name any Registered Security of any series is registered at the close of business on any record date applicable to a particular series with respect to any interest payment date for such series shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Registered Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date for such series, in which case such defaulted interest shall be paid to the persons in whose names Outstanding Registered Securities for such series are registered at the close of business on a subsequent record date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the holders of Registered Securities not less than 15 days preceding such subsequent record date. The term "record date" as used with respect to any interest payment date (except a date for payment of defaulted interest) shall mean the date specified as such in the terms of the Registered Securities of any particular series, or, if no such date is so specified, if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month or, if such interest payment date is the fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a Business Day. Any defaulted interest payable in respect of any Unregistered Security shall be payable pursuant to such procedures as are satisfactory to the Trustee and in such manner so that there is no discrimination as between the holders of Registered Securities and Unregistered Securities 21 13 of the same series and notice of the payment date therefor shall be given by the Trustee in the name and at the expense of the Company by publication at least once in an Authorized Newspaper. In case an Unregistered Security is surrendered in exchange for a Registered Security after the close of business on any record date for the payment of defaulted interest and before the opening of business on the proposed date of payment of such defaulted interest, the Coupon appertaining to such surrendered Unregistered Security and due for payment on such proposed date of payment will not be surrendered with such surrendered Unregistered Security and interest payable on such proposed date of payment will be made only to the holder of such Coupon on such proposed date. SECTION 2.8. Registration, Transfer and Exchange. The Issuer will keep or cause to be kept at each office or agency to be maintained for the purpose as provided in Section 3.2 a register or registers for each series of Registered Securities issued hereunder (collectively, the "Security Register") in which, subject to such reasonable regulations as it may prescribe, it will register, and will register the transfer of, or cause the registration of transfer of, Registered Securities as in this Article provided. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Registered Security of any series at any such office or agency to be maintained for the purpose as provided in Section 3.2, the Issuer shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Registered Security or Registered Securities of the same series in authorized denominations for a like aggregate principal amount. Unregistered Securities (except for any temporary Unregistered Securities) and Coupons (except for Coupons attached to any temporary Unregistered Securities) shall be transferable by delivery. Any Registered Security or Registered Securities of any series may be exchanged for a Registered Security or Registered Securities of the same series in other authorized denominations, in all equal aggregate principal amount. Registered Securities of any series to be exchanged shall be surrendered at any office or agency to be maintained by the Issuer 22 14 for the purpose as provided in Section 3.2, and the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefor the Registered Security or Registered Securities of the same series which the Securityholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. If the Securities of any series are issued in both registered and unregistered form, except as otherwise specified pursuant to Section 2.3, at the option of the Holder thereof, Unregistered Securities of any series may be exchanged for Registered Securities of such series, maturity date, and interest rate of any authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. At the Option of the Holder thereof, if Unregistered Securities of any series, maturity date, interest rate and original issue date are issued in more than one authorized denomination, except as otherwise specified pursuant to Section 2.3, such Unregistered Securities may be exchanged for Unregistered Securities of such series, maturity date, interest rate and original issue date of other authorized denominations and of a like aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 or as specified pursuant to Section 2.3, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. Unless otherwise specified pursuant to Section 2.3, Registered Securities of any series may not be exchanged for Unregistered Securities of such series. Whenever any Securities, and the Coupons appertaining thereto, if any, are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities, and the Coupons appertaining thereto, if any, which the Holder making the exchange is entitled to receive. Notwithstanding the foregoing, if an Unregistered Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series after the close of business at such office or agency on any record date and before the opening of business at such office or agency on the applicable interest payment date, such Unregis- 23 15 tered Security shall be surrendered without the Coupon, if any, relating to such interest payment date. All Securities and Coupons surrendered upon any exchange or transfer provided for in this Indenture shall be promptly cancelled and disposed of by the Trustee and the Trustee will deliver a certificate of disposition thereof to the Issuer. All Registered Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the holder or his attorney duly authorized in writing. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of Securities and shall not be required to exchange or register a transfer of any Securities until such payment is made. No service charge shall be made for any such transaction. The Issuer shall not be required to exchange or register a transfer of (a) any Securities of any series for a period of 15 days next preceding the first mailing of notice of redemption of Securities of such series to be redeemed, or (b) any Securities selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not so to be redeemed and except that all Unregistered Security may be exchanged for a Registered Security of the same series being called for redemption. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Notwithstanding anything herein or in the terms of any series of Securities to the contrary, neither the Issuer nor the Trustee (which shall rely on an Officers' Certificate and an Opinion of Counsel) shall be required to exchange any Unregistered Security for a Registered Security if such exchange would result in adverse Federal income tax consequences to the Issuer (including, without limitation the inability of the Issuer to deduct from its income, as computed for Federal income tax purposes, the interest payable on the Unregistered Securities) under then applicable United States Federal income tax laws. 24 16 SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In case any temporary or definitive Security or any Coupon appertaining to any Security shall become mutilated, defaced or be destroyed, lost or stolen, the Issuer in its discretion may execute, and upon the written request of any officer of the Issuer, the Trustee shall authenticate and deliver, a new Security of the same series, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and substitution for the Security so destroyed, lost or stolen with Coupons corresponding to the Coupons appertaining to the Security so mutilated, defaced, destroyed, lost or stolen, or in exchange or substitution for the Security to which such mutilated, defaced, destroyed, lost or stolen Coupons appertained, with Coupons appertaining thereto corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen. In every case the applicant for a substitute Security or Coupon shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as may be required by them to indemnify and defend and to save each of them harmless and, in every case of destruction, loss or theft, evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. Upon the issuance of any substitute Security or Coupon, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Security or Coupon which has matured or is about to mature or has been called for redemption in full shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may, at its sole discretion, instead of issuing a substitute Security or Coupon, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated or defaced Security or Coupon), if the applicant for such payment shall furnish to the Issuer and to the Trustee and any agent of the issuer or the Trustee such security or indemnity as any of them may require to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof. Every substitute Security or Coupon of any series issued pursuant to the provisions of this Section by virtue of the fact that any such 25 17 Security or Coupon is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Security or Coupon shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities or Coupons of such series duly authenticated and delivered hereunder. All Securities or Coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced or destroyed, lost or stolen Securities or Coupons and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.10 Cancellation of Securities; Destruction Thereof. All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange, or for credit against any payment in respect of a sinking or analogous fund, if surrendered to the Issuer or any agent of the Issuer or the Trustee, shall be delivered to the Trustee for cancellation or, if surrendered to the Trustee, shall be cancelled by it; and no Securities or Coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Securities and Coupons held by it and deliver a certificate of destruction to the Issuer. If the Issuer shall acquire any of the Securities or Coupons, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or Coupons unless and until the same are delivered to the Trustee for cancellation. SECTION 2.11 Temporary Securities. Pending the preparation of definitive Securities for any series, the Issuer may execute and the Trustee shall authenticate and deliver temporary Securities for such series (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities of any series shall be issuable as Registered Securities without Coupons, or as Unregistered Securities with or without Coupons attached thereto, of any authorized denomination, and substantially in the form of the definitive Securities of such series but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be 26 18 determined by the Issuer with the concurrence of the Trustee. Temporary Securities may contain such reference to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Securities. Without unreasonable delay the Issuer shall execute and shall furnish definitive Securities of such series and thereupon temporary Securities of such series may be surrendered in exchange therefor without charge at each office or agency to be maintained by the Issuer for that purpose pursuant to Section 3.2, and in the case of Unregistered Securities, together with any unmatured Coupons and any matured Coupons in default appertaining thereto, at any agency maintained by the Issuer for such purpose as specified pursuant to Section 2.3, and the Trustee shall authenticate and deliver in exchange for such temporary Securities of such series a like aggregate principal amount of definitive Securities of the same series of authorized denominations. Until so exchanged, the temporary Securities and any unmatured Coupons appertaining thereto of any series shall be entitled to the same benefits under this Indenture as definitive Securities and any unmatured Coupons appertaining thereto of such series. The provisions of this Section are subject to any restrictions or limitations on the issue and delivery of temporary Unregistered Securities of any series that may be established pursuant to Section 2.3 (including any provision that Unregistered Securities of such series initially be issued in the form of a single global Unregistered Security to be delivered to a depositary or agency of the Issuer located outside the United States and the procedures pursuant to which definitive Unregistered Securities of such series would be issued in exchange for such temporary global Unregistered Security). ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1 Payment of Principal and Interest. The Issuer covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and interest on, each of the Securities of such series at the place or places, at the respective times and in the manner provided in such Securities. Except as specified in Section 2.3, the interest on Securities with Coupons attached (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only upon presentation and 27 19 surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. Except as specified in Section 2.3, the interest on any temporary Unregistered Securities (together with any additional amounts payable pursuant to the terms of such Securities) shall be paid, as to the installments of interest evidenced by Coupons attached thereto, if any, only upon presentation and surrender thereof and, as to the other installments of interest, if any, only upon presentation of such Securities for notation thereon of the payment of such interest. Each installment of interest on the Registered Securities of any series may be paid by mailing checks for such interest payable to or upon the written order of the holders of Registered Securities entitled thereto as they shall appear on the registry books of the Issuer. SECTION 3.2 Offices for Payments, etc. So long as any of the Securities remain outstanding, the Issuer will maintain the following for each series: an office or agency (a) where the Registered Securities may be presented for payment, (b) where the Registered Securities may be presented for registration of transfer and for exchange as in this Indenture provided and (c) where notices and demands to or upon the Issuer in respect of the Registered Securities or of this Indenture may be served. The Issuer will maintain one or more agencies in a city or cities located outside the United States (including any city in which such an agency is required to be maintained under the rules of any stock exchange on which the Securities of such series are listed) where the Unregistered Securities, if any, of each series and Coupons, if any, appertaining thereto may be presented for payment. No payment on any Unregistered Security or Coupon will be made upon presentation of such Unregistered Security or Coupon at an agency of the Issuer within the United States nor will any payment be made by transfer to an account in, or by mail to an address in, the United States unless pursuant to applicable United States laws and regulations then in effect such payment can be made without adverse tax consequences to the Issuer. Notwithstanding the foregoing, payments in U.S. dollars on Unregistered Securities of any series and Coupons appertaining thereto which are denominated in U.S. dollars may be made at an agency of the Issuer maintained in the Borough of Manhattan, The City of New York if such payment in U.S. dollars at each agency maintained by the Issuer outside the United States for payment on such Unregistered Securities is illegal or effectively precluded by exchange controls or other similar restrictions. 28 20 The Issuer will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. With respect to each series of Securities and Coupons whose terms are established pursuant to Section 2.3, the Issuer hereby designates the Corporate Trust Office as the initial office to be maintained by it for each such purpose. In case the Issuer shall fail to so designate or maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Corporate Trust Office. SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 3.4 Paying Agents. Whenever the Issuer shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities of such series (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities of such series or the Coupons appertaining thereto or of the Trustee, and (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable. The Issuer will, on or prior to each due date of the principal of or interest on the Securities of such series, deposit with the paying agent a sum sufficient to pay such principal or interest so becoming due, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own paying agent with respect to the Securities or the Coupons appertaining thereto of any series, it will, on 29 21 or before each due date of the principal of or interest on the Securities or the Coupons appertaining thereto of such series, set aside, segregate and hold in trust for the benefit of the holders of the Securities or the Coupons appertaining thereto of such series a sum sufficient to pay such principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Issuer or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 10.3 and 10.4. SECTION 3.5 Written Statement to Trustee. The Issuer will deliver to the Trustee on or before April 30 in each year (beginning with April 30, 1989) a written statement, signed by two of its officers (which need not comply with Section 11.5), stating that in the course of the performance of their duties as officers of the Issuer they would normally have knowledge of any default by the Issuer in the performance or fulfillment of any covenant, agreement or condition contained in this Indenture, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. SECTION 3.6 Luxembourg Publications. In the event of the publication of any notice pursuant to Section 5.11, 6.10(a), 6.11, 8.2, 10.4 or 12.2, the party making such publication in London shall also, to the extent that notice is required to be given to Holders of Securities of any series by applicable Luxembourg law or stock exchange regulation, as evidenced by an Officers' Certificate delivered to such party, make a similar publication in Luxembourg. 30 22 ARTICLE FOUR SECURITYHOLDERS' LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1 Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders. The Issuer covenants and agrees that it will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the holders of the Securities of each series: (a) semiannually and not more that 15 days after each record date for the payment of interest on such Securities, as hereinabove specified, as of such record date and on dates to be determined pursuant to Section 2.3 for not-interest bearing securities in each year, and (b) at such other times as the Trustee may request in writing, within 30 days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished, PROVIDED that if and so long as the Trustee shall be the Security registrar for such series and all of the Securities of such series are Registered Securities, such list shall not be required to be furnished. The Trustee shall, at the request of the Issuer, provide such list to the Issuer for so long as the Trustee shall be the Security registrar. SECTION 4.2 Preservation and Disclosure of Securityholders' Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Securities (i) contained in the most recent list furnished to it as provided in Section 4.1, (ii) received by it in the capacity of Security registrar for such series, if so acting and (iii) filed with it within the preceding two years pursuant to Section 4.4(c)(ii). The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities of a particular series (in which case the applicants must all hold Securities of such series) or with Holders of all 31 23 Securities with respect to their rights under this Indenture or under such Securities and such application is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (i) afford to such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section, or (ii) inform such applicants as to the approximate number of holders of Securities of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee, in accordance with the provisions of subsection (a) of this Section, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford to such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Securities, as the case may be, whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met, and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall 32 24 be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities and Coupons, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under such subsection (b). SECTION 4.3 Reports by the Issuer. The Issuer covenants: (a) to file with the Trustee, within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and of the information, documents, any other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, of if the Issuer is not required to file information, documents, or reports pursuant to either of such Sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents, and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, or in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents, and reports with respect to compliance by the Issuer with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations; and (c) to transmit by mail to the holders of Securities, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Issuer pursuant to subsections (a) and (b) of this Section as may be required 33 25 to be transmitted to such Holders by rules and regulations prescribed from time to time by the Commission. SECTION 4.4 Reports by the Trustee. (a) On or before July 15 in each year following the date hereof, so long as any Securities are Outstanding hereunder, the Trustee shall transmit by mail as provided below to the Securityholders of each series, as hereinafter in this Section provided, a brief report dated as of the preceding May 15 with respect to: (i) its eligibility under Section 6.9 and its qualification under Section 6.8, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under such Sections, a written statement to such effect; (ii) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities of any series, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the securities of any series Outstanding on the date of such report; (iii) the amount, interest rate, and maturity date of all other indebtedness owing by the Issuer (or by any other obligor on the Securities) to the Trustee in its individual capacity on the date of such report, with a brief description of any property held as collateral security therefor, except any indebtedness based upon a creditor relationship arising in any manner described in Section 6.13(b)(2), (3), (4) or (6); (iv) the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report; (v) any additional issue of Securities which the Trustee has not previously reported; and (vi) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 5.11. 34 26 (b) The Trustee shall transmit to the Securityholders of each series, as provided in subsection (c) of this Section, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee, as such, since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of this Indenture) for the reimbursement of which it claims or may claim a lien or charge prior to that of the Securities of such series on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this subsection (b), except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Securities of such series outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section shall be transmitted by mail: (i) to all registered Holders of Securities, as the names and addresses of such Holders appear upon the registry books of the Issuer; (ii) to such other Holders of Securities as have, within two years preceding such transmission, filed their names and addresses with the Trustee for that purpose; and (iii) except in the case of reports pursuant to subsection (b), to each Holder of a Security whose name and address are preserved at the time by the Trustee as provided in Section 4.2(a). (d) A copy of each such report shall, at the time of such transmission to Securityholders, be furnished to the Issuer and be filed by the Trustee with each stock exchange upon which the Securities of any applicable series are listed and also with the Commission. The Issuer agrees to notify the Trustee with respect to any series when and as the Securities of such series become admitted to trading on any national securities exchange. 35 27 ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default. "Event of Default" with respect to Securities of any series wherever used herein, means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any installment of interest upon any of the Securities of such series as and when the same shall become due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal on any of the Securities of such series as and when the same shall become due and payable either at maturity, upon redemption, by declaration or otherwise; or (c) default in the payment of any sinking fund installment as and when the same shall become due and payable by the terms of the Securities of such series; or (d) default in the performance, or breach, of any covenant or warranty of the Issuer in respect of the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of all series affected thereby, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the 36 28 Issuer or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (f) the Issuer shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Issuer or for any substantial part of its property, or make any general assignment for the benefit of creditors; or (g) any other Event of Default provided in the supplemental indenture or resolution of the Board of Directors under which such series of Securities is issued or in the form of Security for such series. If an Event of Default described in clauses (a), (b), (c) or (d) above (if the Event of Default under clause (d) is with respect to less than all series of Securities then Outstanding) occurs and is continuing, then, and in each and every such case, unless the principal of all of the Securities of such series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding hereunder (each such series voting as a separate class) by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) of all Securities of such series and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default described in clause (d) (if the Event of Default under clause (d) is with respect to all series of Securities then Outstanding), (e) or (f) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in 37 29 aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities then Outstanding and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of any and all Securities of such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of all the Securities of such series, each series voting as a separate class (or of all the Securities, as the case may be, voting as a single class) then outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults with respect to such series (or with respect to all the 38 30 Securities, as the case may be) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. For all purposes under this Indenture, if a portion of the principal of any Original Issue Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof, then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any, thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount Securities. SECTION 5.2 Collection of Indebtedness by Trustee, Trustee May Prove Debt. The Issuer covenants that (a) in case default shall be made in the payment of any installment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise -- then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable on all Securities of such series, and Coupons appertaining thereto, for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. 39 31 Until such demand is made by the Trustee, the Issuer may pay the principal of and interest on the Securities of any series to the holders, whether or not the principal of and interest on the Securities of such series be overdue. In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon such Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or Coupons appertaining thereto, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the principal of any Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of any series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) owing and unpaid in respect of the Securities of any series, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and 40 32 each predecessor Trustee, except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities of any series, or to the creditors or property of the Issuer or such other obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities of any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan or reorganization, arrangement, adjustment or composition affecting the Securities or Coupons appertaining thereto of any series or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities, or Coupons appertaining thereto, may be enforced by the Trustee without the possession of any of the Securities, or Coupons appertaining thereto, or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings 41 33 instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements, compensation and all other amounts due pursuant to Section 6.6 to the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the holders of the Securities, or Coupons appertaining thereto, in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities in respect to which such action was taken, and it shall not be necessary to make any holders of such Securities parties to any such proceedings. SECTION 5.3 Application of Proceeds. Any moneys collected by the Trustee pursuant to this Article in respect of any series shall be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the several Securities, and Coupons appertaining thereto, in respect of which monies have been collected and stamping (or otherwise noting) thereon the payment, or issuing Securities of such series in reduced principal amounts in exchange for the presented Securities of like series if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses applicable to such series in respect of which monies have been collected, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and all other amounts due to the Trustee or any predecessor Trustee pursuant to Section 6.6; SECOND: In case the principal of the Securities of such series in respect of which moneys have been collected shall not have become and be then due and payable, to the payment of interest on the Securities of such series in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the same rate as the rate of interest or Yield 42 34 to Maturity (in the case of Original Issue Discount Securities) specified in such Securities, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; THIRD: In case the principal of the Securities of such series in respect of which moneys have been collected shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities of such series for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and interest or yield to maturity, without preference or priority of principal over interest or yield to maturity, or of interest or yield to maturity over principal, or of any installment of interest over any other installment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and accrued and unpaid interest or yield to maturity; and FOURTH: To the payment of the remainder, if any, to the Issuer or any other person lawfully entitled thereto. SECTION 5.4 Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.5 Restoration of Rights on Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued 43 35 or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 5.6 Limitations on Suits by Securityholders. No holder of any Security of any series or of any Coupon appertaining thereto shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and in of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 5.9; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security or Coupon with every other taker and Holder and the Trustee, that no one or more Holders of Securities of any series or of any Coupon appertaining thereto shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other such Holder of Securities or Coupons, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities of the applicable series or of any Coupon appertaining thereto. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 44 36 SECTION 5.7 Unconditional Right of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any holder of any Security or Coupon to receive payment of the principal of an interest on such Security or Coupon on or after the respective due dates expressed in such Security or Coupon, or in any Coupon appertaining thereto, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 5.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. Except as provided in Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any Securityholder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 5.6, every power and remedy given by this Indenture or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.9 Control by Securityholders. The Holders of a majority in aggregate principal amount of the Securities of each series affected (with each series voting as a separate class) at the time Outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities of such series by this Indenture; PROVIDED that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and PROVIDED FURTHER that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be 45 37 taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all series so affected not joining in the giving of said direction, it being understood that (subject to Section 6.1) the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Securityholders. SECTION 5.10 Waiver of Past Defaults. Prior to the declaration of the acceleration of the maturity of the Securities of any series as provided in Section 5.1, the Holders of a majority in aggregate principal amount of the Securities of such series at the time Outstanding may on behalf of the Holders of all the Securities of such series waive any past default or Event of Default described in clause (d) of Section 5.1 (or, in the case of an event specified in clause (d) of Section 5.1 which relates to less than all series of Securities then Outstanding, the Holders of a majority in aggregate principal amount of the Securities then Outstanding affected thereby (each series voting as a separate class) may waive any such default or Event of Default, or, in the case of all event specified in clause (d) (if the Event of Default under clause (d) relates to all series of Securities then Outstanding), (e) or (f) of Section 5.1 the Holders of Securities of a majority in principal amount of all the Securities then Outstanding (voting as one class) may waive any such default or Event of Default), and its consequences except a default in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the Holders of the Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of 46 38 Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 5.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances. The Trustee shall, within 90 days after the occurrence of a default known to the Trustee with respect to the Securities of any series, provide notice to the Holders of Securities of such series and Coupons appertaining thereto, if any, (i) if any Unregistered Securities of that series are then Outstanding, to the Holders thereof, by publication at least once in an Authorized Newspaper in London (and, if required by Section 3.6, at least once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered Securities of that series are then Outstanding, to all Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such Holders at such addresses and (iii) to all Holders of then Outstanding Registered Securities of that series, by mailing such notice to such Holders at their addresses as they shall appear in the registry books, unless such defaults shall have been cured before the giving of such notice (the term "default" or "defaults" for the purposes of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default); PROVIDED that, except in the case of default in the payment of the principal of or interest on any of the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series. SECTION 5.12 Right of Court to Require Filing of Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Security or Coupon by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any 47 39 party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders of any series holding in the aggregate more than 10% in aggregate principal amount of the Securities of such series, or, in the case of any suit relating to or arising under clause (d) of Section 5.1 (if the suit relates to Securities of more than one but less than all series), 10% in aggregate principal amount of Securities Outstanding affected thereby, or in the case of any suit relating to or arising under clause (d) (if the suit under clause (d) relates to all the Securities then Outstanding), (e) or (f) of Section 5.1, 10% in aggregate principal amount of all Securities Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security or Coupon on or after the due date expressed in such Security or Coupon. ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Securities of a particular series and after the curing or waiving of all Events of Default which may have occurred with respect to such series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Securities of any series and after the curing or waiving of all such Events of Default with respect to such series which may have occurred: (i) the duties and obligations of the Trustee with respect to the Securities of any series shall be determined solely by the 48 40 express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders pursuant to Section 5.9 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. SECTION 6.2 Certain Rights of the Trustee. Subject to Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or 49 41 other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuer mentioned herein shall be sufficiently evidenced by an Officers' Certificate or order of the Issuer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts, rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Securities of all series affected then Outstanding; provided that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a 50 42 condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Issuer upon demand; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be deemed to have knowledge or notice of any default or Event of Default unless a Responsible Officer has actual knowledge thereof or unless the holders of not less than 25% of the aggregate principal amount of the then Outstanding Securities of any affected series have notified the Trustee thereof. SECTION 6.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or Coupons. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. SECTION 6.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons with the same rights it would have if it were not the Trustee or such agent and, subject to Sections 6.8 and 6.13, if operative, may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. SECTION 6.5 Moneys Held by Trustee. Subject to the provisions of Section 10.4 hereof, all moneys received by the Trustee shall until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except 51 43 to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 6.6 Compensation and Indemnification of Trustee and Its Prior Claim. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities and Coupons upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities or Coupons, and the Securities and Coupons are hereby subordinated to such senior claim. SECTION 6.7 Right of Trustee to Rely on Officers' Certificate, etc. Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed 52 44 to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.8 Qualification of Trustee; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect specified in this Indenture. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section, the Trustee shall, within 10 days after the expiration of such 90 day period, provide notice of such failure to the Securityholders in the manner and to the extent required by Section 4.4(c). (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to Securities of any series if (i) the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any other series or is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Issuer are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture and this Indenture with respect to the Securities of any other series and there shall also be so excluded any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer are outstanding and this Indenture with respect to the Securities of any other series (i) this Indenture is and, if applicable, this Indenture and any series issued pursuant to this Indenture and such other indenture or indentures are wholly unsecured, and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section, 307(c) of such Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture with respect to Securities of such series and one or more other series, or the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary 53 45 in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture or such other indenture or indentures, or (ii) the Issuer shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of such series and such other series, or under this Indenture and such other indentures; (ii) the Trustee or any of its directors or executive officers is an obligor upon the Securities of any series issued under this Indenture or an underwriter for the Issuer; (iii) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Issuer or an underwriter for the Issuer; (iv) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Issuer, or of an underwriter (other than the Trustee itself) for the Issuer who is currently engaged in the business of underwriting, except that (x) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Issuer, but may not be at the same time an executive officer of both the Trustee and the Issuer; (y) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Issuer; and (z) the Trustee may be designated by the Issuer or by any underwriter for the Issuer to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of subsection (c)(i) of this Section, to act as trustee, whether under all indenture or otherwise; (v) 10% or more of the voting securities of the Trustee is beneficially owned either by the Issuer or by any director, partner or executive officer thereof, or 20% or more of such voting securities 54 46 is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Issuer or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (vi) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (x) 5% or more of the voting securities or 10% or more of any other class of security of the Issuer, not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (y) 10% or more of any class of security of an underwriter for the Issuer; (vii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 5%. or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Issuer; (viii) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Issuer; or (ix) the Trustee owns on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or INTER VIVOS trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under Section 6.8(c)(vi), (vii) or (viii). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator, or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Issuer 55 47 fails to make payment in full of principal of or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of subsections (c)(vi), (vii) and (viii) of this Section. The specification of percentages in subsections (c)(v) to (ix) inclusive of this Section shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of subsections (c)(iii) or (vii) of this Section. For the purposes of subsections (c)(vi), (vii), (viii) and (ix), of this Section, only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies, or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (x) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (y) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (z) any security which it holds as agent for collection, or as custodian, escrow agent, or depositary, or in any similar representative capacity. Except as provided above, the word "security" or 'securities' as used in this Section shall mean any note, stock, treasury stock, bond, 56 48 debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For purposes of this Section: (i) the term "underwriter" when used with reference to the issuer shall mean every person who, within three years prior to the time as of which the determination is made, has purchased from the Issuer with a view to, or has offered or sold for the Issuer in connection with, the distribution of any security of the Issuer outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission; (ii) the term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated; (iii) the term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof; as used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security; (iv) the term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person; 57 49 (v) the term "Issuer" shall mean any obligor upon the Securities; and (vi) the term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (i) a specified percentage of the voting securities of the Trustee, the Issuer or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person; (ii) a specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding; (iii) the term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security; (iv) the term "outstanding" means issued and not held by or for the account of the issuer; the following securities shall not be deemed outstanding within the meaning of this definition: (A) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (B) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; 58 50 (C) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (D) securities held in escrow if placed in escrow by the issuer thereof; PROVIDED, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof; and (v) a security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; PROVIDED, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and PROVIDED, FURTHER, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 6.9 Persons Eligible for Appointment as Trustee. The Trustee for each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State or the District of Columbia having a combined capital and surplus of at least $50,000,000, and which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition, so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. 59 51 SECTION 6.10 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities bygiving written notice of resignation to the Issuer. Upon receiving such notice of resignation, the Issuershall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed with respect to any series and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 5.12, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 6.8 with respect to any series of Securities after written request therefor by the Issuer or by any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.9 and shall fail to resign after written request therefor by the Issuer or by any Securityholder; or (iii) the Trustee shall become incapable of acting with respect to any series of Securities, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property of affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Issuer may remove the Trustee with respect to the applicable series of Securities and appoint a successor trustee for such series by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be 60 52 delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.12, any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to such series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Securities of each series at the time Outstanding may at any time remove the Trustee with respect to securities of such series and appoint a successor trustee with respect to the Securities of such series by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 7.1 of the action in that regard taken by the Securityholders. (d) Any resignation or removal of the Trustee with respect to any series and any appointment of a successor trustee with respect to such series pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee for such series hereunder; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 10.4, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver all instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and 61 53 confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Issuer, the predecessor Trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor Trustee with respect to the Securities of any series as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees or co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts under separate indentures. No successor trustee with respect to any series of Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9. Upon acceptance of appointment by any successor trustee as provided in this Section 6.11, the Issuer shall mail notice thereof (a) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof, by publication of such notice at least once in an Authorized Newspaper in London (and, if required by Section 3.8, at least once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such holders at such addresses as were so furnished to the Trustee (and the Trustee shall make such information available to the Issuer for such purpose) and (c) to the Holders of Registered Securities of each series affected, by first-class mail to such Holders of Securities of any series for which such successor trustee is acting as trustee at their last addresses as they shall appear in the Security register. If the Issuer fails to mail such notice within ten days after acceptance of appointment by the successor trustee, 62 54 the successor trustee shall cause such notice to be mailed at the expense of the Issuer. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be qualified under the provisions of Section 6.8 and eligible under the provisions of Section 6.9, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; PROVIDED, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13 Preferential Collection of Claims Against the Issuer. (a) Subject to the provisions of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Issuer within four months prior to a default, as defined in subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the Holders of other indenture securities (as defined in this Section): (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or 63 55 interest, effected after the beginning of such four months' period and valid as against the Issuer and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in subsection (a)(2) of this Section, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Issuer upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Issuer and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Issuer) who is liable thereon, (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable state law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default as defined in subsection (c) of this Section would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. 64 56 For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Securityholders and the Holders of other indenture securities in such manner that the Trustee, such Securityholders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Issuer of the funds and property in such special account and before crediting to the respective claims of the Trustee, such Securityholders and the holders of other indenture securities dividends on claims filed against the Issuer in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, such Securityholders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the 65 57 provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, such Securityholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as trustee, occurred after the beginning of such four months' period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of this Section a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Securityholders at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; 66 58 (4) an indebtedness created as a result of services rendered or premises rented or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c)(3) below; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Issuer; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in subsection (c)(4) of this Section. (c) As used in this Section: (1) the term "default" shall mean any failure to make payment in full of the principal of or interest upon any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" shall mean securities upon which the Issuer is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of subsection (a) of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in said special account; (3) the term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand (4) the term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Issuer for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the secu- 67 59 rity, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Issuer arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; and (5) the term "Issuer" shall mean any obligor upon the Securities. ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1 Evidence of Action Taken by Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage in principal amount of the Securityholders of any or all series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Securityholders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 7.2 Proof of Execution of lnstruments and of Holding of Securities. Subject to Sections 6.1 and 6.2, the execution of any instrument by a Securityholder or his agent or proxy may be proved in the following manner: The fact and date of the execution by any Holder of any instrument may be proved by the certificate of any notary public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the person executing such instruments acknowledged to him the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute sufficient proof of the authority of the person executing the same. The fact of the holding by any Holder 68 60 of an Unregistered Security of any series, and the identifying number of such Security and the date of his holding the same, may be proved by the production of such Security or by a certificate executed by any trust company, bank, banker or recognized securities dealer wherever situated satisfactory to the Trustee, if such certificate shall be deemed by the Trustee to be satisfactory. Each such certificate shall be dated and shall state that on the date thereof a Security of such series bearing a specified identifying number was deposited with or exhibited to such trust company, bank, banker or recognized securities dealer by the person named in such certificate. Any such certificate may be issued in respect of one or more Unregistered Securities of one or more series specified therein. The holding by the person named in any such certificate of any Unregistered Securities of any series specified therein shall be presumed to continue for a period of one year from the date of such certificate unless at the time of any determination of such holding (1) another certificate bearing a later date issued in respect of the same Securities shall be produced, or (2) the Security of such series specified in such certificate shall be produced by some other person, or (3) the Security of such series specified in such certificate shall have ceased to be Outstanding. Subject to Sections 6.1 and 6.2, the fact and date of the execution of any such instrument and the amount and numbers of Securities of any series held by the person so executing such instrument and the amount and numbers of any Security or Securities for such series may also be proven in accordance with such reasonable rules and regulations as may be prescribed by the Trustee for such series or in any other manner which the Trustee for such series may deem sufficient. SECTION 7.3 Holders to be Treated as Owners. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register for such series as the absolute owner of such Security (whether or not such Security shall be overdue and not withstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. The 69 61 Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Holder of any Unregistered Security and the Holder of any Coupon as the absolute owner of such Unregistered Security or Coupon (whether or not such Unregistered Security or Coupon shall be overdue) for the purpose of receiving payment thereof or on account thereof and for all other purposes and neither the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security or Coupon. SECTION 7.4 Securities Owned by Issuer Deemed Not Outstanding. In determining whether the Holders of the requisite aggregate principal amount of Outstanding Securities of any or all series have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Issuer or any other obligor on the Securities with respect to which such determination is being made or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities with respect to which such determination is being made shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly a written statement by two of its officers (which need not comply with Section 11.5) listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set 70 62 forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 7.5 Right of Revocation of Action Taken. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the serial number of which is shown by the evidence to be included among the serial numbers of the Securities the Holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security and of any Securities issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the Holders of all the Securities affected by such action. ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1 Supplemental Indentures Without Consent of Securityholders. The Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of the execution thereof) for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of one or more series any property or assets; (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article Nine; 71 63 (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as its Board of Directors and the Trustee shall consider to be for the protection of the Holders of Securities or Coupons, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; PROVIDED, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Outstanding Securities of such series to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as the Board of Directors may deem necessary or desirable and which shall not adversely affect the interests of the Holders of the Securities; (e) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with Securities issued hereunder in fully registered form, and to make all appropriate changes for such purpose; and (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series, or of the Coupons appertaining to such Securities, and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11. The Trustee is hereby authorized to join with the Issuer in the execution of any such supplemental indenture, to make any further 72 64 appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the Holders of any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 8.2. SECTION 8.2 Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Article Seven) of the Holders of not less than 66 2/3% in aggregate principal amount of the Securities at the time Outstanding of all series affected by such supplemental indenture (voting as one class), the Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act of 1939 as in force at the date of execution thereof) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities of each such series or the coupons appertaining to such Securities; provided, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof or the method in which amounts of payments of principal or interest thereon are determined, or reduce the rate or extend the time of payment of interest thereon, or change the coin, or currency or units based on or related to currencies (including ECU) of payment thereof, or reduce any amount payable on redemption thereof or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.1 or the amount thereof provable in bankruptcy pursuant to Section 5.2, or impair or affect the right of any Securityholder to institute suit for the payment thereof or, if the Securities provide therefor, any right of repayment at the option of the Securityholder without the consent of the Holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holders of each Security so affected. 73 65 Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors certified by the secretary or an assistant secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid and other documents, if any, required by Section 7.1, the Trustee shall join with the Issuer in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Issuer shall mail a notice thereof (i) by first class mail to the Holders of then Outstanding Registered Securities of each series affected thereby at their addresses as they shall appear on the registry books of the Issuer, (ii) if any Unregistered Securities of a series affected thereby are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to section 4.4(c)(ii), by mailing a notice thereof by first class mail to such Holders at such addresses as were so furnished to the Trustee and (iii) if any Unregistered Securities of a series affected thereby are then Outstanding, to all holders thereof, by publication of a notice thereof at least once in an Authorized ~newspaper in London (and, if required by Section 3.6, at least once in an Authorized Newspaper in Luxembourg), and in each case such notice shall set forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 8.3 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, 74 66 the Issuer and the Holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 8.4 Documents to Be Given to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article 8 complies with the applicable provisions of this Indenture. SECTION 8.5 Notation on Securities in Respect of Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee for such series as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Issuer or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities of such series then Outstanding. ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1 Issuer May Consolidate, etc., on Certain Terms. The Issuer covenants that it will not merge or consolidate with any other corporation or sell or convey all or substantially all of its assets to any Person, unless (i) either the Issuer shall be the continuing corporation, or the successor corporation or the Person which acquires by sale or conveyance substantially all the assets of the Issuer (if other than the Issuer) shall be a corporation organized under the laws of the United States of America or any State thereof and shall expressly assume the due and punctual payment of the principal of and interest on all the Securities and Coupons, according to their tenor, and the due and 75 67 punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Issuer, by supplemental indenture satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, and (ii) the Issuer or such successor corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale or conveyance, be in default in the performance of any such covenant or condition. SECTION 9.2 Successor Corporation Substituted. In case of any such consolidation, merger, sale or conveyance, and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein. Such successor corporation may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder, together with any Coupons appertaining thereto, which theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor corporation instead of the Issuer and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities, together with any Coupons appertaining thereto, which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities, together with any Coupons appertaining thereto, which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities, together with any Coupons appertaining thereto, so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities, together with any Coupons appertaining thereto, theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities and Coupons had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. 76 68 SECTION 9.3 Opinion of Counsel to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel, prepared in accordance with Section 11.5, as conclusive evidence that any such consolidation, merger, sale, lease or conveyance, and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture. ARTICLE TEN SATISFACTION AND DISCHARGE OR INDENTURE; UNCLAIMED MONEYS. SECTION 10.1 Satisfaction and Discharge of Indenture. (A) If at any time (a) the Issuer shall have paid or caused to be paid the principal of and interest on all the Securities of any series Outstanding hereunder and all unmatured Coupons appertaining thereto (other than Securities or Coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9) as and when the same shall have become due and payable, or (b) the Issuer shall have delivered to the Trustee for cancellation all Securities of any series theretofore authenticated and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.9) or (c) (i) all the Securities of such series not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Issuer in accordance with Section 10.4) or U.S. Government Obligations, maturing as to principal and interest in such amounts and at such times as will insure the availability of cash (without consideration of any reinvestment of such principal or interest), or a combination of U.S. Government Obligations and cash sufficient to pay at maturity or upon redemption all Securities of such series and all unmatured Coupons appertaining thereto (other than any Securities or Coupons of such series which shall have been destroyed, lost or stolen and which shall have been 77 69 replaced or paid as provided in Section 2.9) not theretofore delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity as the case may be, and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer with respect to Securities of such series and Coupons appertaining thereto, then this Indenture shall cease to be of further effect with respect to Securities of such series and Coupons appertaining thereto (except as to (i) rights of registration of transfer and exchange, and the Issuer's right of optional redemption, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration) and remaining rights of the holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, including those under Section 6.6, (v) the rights of the Securityholders of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture with respect to such series; PROVIDED, that the rights of Holders of the Securities and Coupons to receive amounts in respect of principal of and interest on the Securities and Coupons held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities and Coupons of such series. (B) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In addition to discharge of the Indenture pursuant to the next preceding paragraph, the Issuer shall be deemed to have paid and discharged the entire indebtedness on all the Securities of a series and Coupons appertaining thereto on the 121st day after the date of the 78 70 deposit referred to in subparagraph (a) below, and the provisions of this Indenture with respect to the Securities of such series and Coupons appertaining thereto shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities of such series, and of Coupons appertaining thereto, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive, from the trust fund described in subparagraph (a) below, payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration) and remaining rights of the holders to receive sinking fund payments, if any, (iv) the rights, obligation, duties and immunities of the Trustee hereunder, including those under Section 6.6, (v) the rights of the holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, at the expense of the Issuer, shall at the Issuer's request, execute proper instruments acknowledging the same, if (a) with reference to this provision the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series and Coupons appertaining thereto (i) cash, or (ii) U.S. Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on the date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the day on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Issuer is a party or by which it is bound; (c) the Issuer has delivered to the Trustee an opinion of independent legal counsel satisfactory to the Trustee to the effect 79 71 that Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; and (d) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with, and the Opinion of Counsel shall also state that such deposit does not violate applicable law. SECTION 10.2 Application by Trustee of Funds Deposited for Payment of Securities. Subject to Section 10.4, all moneys deposited with the Trustee pursuant to Section 10.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the Holders of the particular Securities of such series and of Coupons appertaining thereto for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extend required by law. SECTION 10.3 Repayment of Moneys Held by Paying Agent. In connection with the satisfaction, and discharge of this Indenture with respect to Securities of any series, all moneys then held by any paying agent under the provisions of this Indenture with respect to such series of Securities shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security of any series and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee for such series or such paying agent, and the Holder of the Security of such series shall, unless 80 72 otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; provided, the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment (a) in respect of Registered Securities of any series, may at the expense of the Issuer, mail by first class mail to Holders of such Securities at their addresses as they shall appear on the Security register, and (b) in respect of Unregistered Securities of any series, may at the expense of the Issuer cause to be published once, in an Authorized Newspaper in London (and if required by Section 3.6, once in an Authorized Newspaper in Luxembourg), notice, that such moneys remain and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 10.5 Indemnity for U.S. Government Obligations. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 10.1 or the principal or interest received in respect of such obligations. ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1 Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security or Coupon appertaining thereto, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future shareholder, officer or director, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities and any Coupons appertaining thereto by the holders thereof and as part of the consideration for the issue of the Securities and any Coupons appertaining thereto. 81 73 SECTION 11.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders. Nothing in this Indenture or in the Securities and any Coupons appertaining thereto, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the Holders of the Securities or Coupons, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the Holders of the Securities. SECTION 11.3 Successors and Assigns of Issuer Bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 11.4 Notices and Demands on Issuer, Trustee and Securityholders. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities or Coupons to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to The Progressive Corporation, 6000 Parkland Boulevard, Mayfield Heights, Ohio 44124, Attn: Treasurer. Any notice, direction, request or demand by the Issuer or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office. Where this Indenture provides for notice to Holders. such notice shall be sufficiently given (unless otherwise herein expressly provided) (i) in the case of Holders of Registered Securities and Holders of Unregistered Securities who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), if in writing and mailed, first-class postage prepaid, to each holder entitled thereto, at his last address as it appears in the registry books or as so filed; and (ii) in the case of holders of Unregistered Securities who have not filed their names and addresses with the Trustee, by publication in accordance with the requirements of the provision hereof requiring such notice. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given when mailed, whether or not the Holder receives the notice. In any case 82 74 where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer and Securityholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 11.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. 83 75 Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities of any series or any Coupons appertaining thereto or the date fixed for redemption or repayment of any such Security or Coupon shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 11.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in 84 76 this Indenture which is required to be included herein by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 11.8 New York Law to Govern. This Indenture and each Security and Coupon shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law. SECTION 11.9 Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 11.10 Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.11 Securities in Foreign Currencies or in ECU. Whenever this Indenture provides for any action by, or the determination of any of the rights of, or any distribution to, Holders of Securities denominated in United States dollars and in any other currency or currency unit (including ECU), in the absence of any provision to the contrary in the form of Security of any particular series, any amount in respect of any Security denominated in a currency or currency unit (including ECU) other than United States dollars shall be treated for any such action or distribution as that amount of United States dollars that could be obtained for such amount on such reasonable basis of exchange and as of such date as the Issuer may specify in a written notice to the Trustee or in the absence of such written notice, as the Trustee shall so determine. ARTICLE TWELVE REDEMPTION or SECURITIES AND SINKING FUNDS SECTION 12.1 Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.3 for Securities of such series. 85 77 SECTION 12.2 Notice of Redemption; Partial Redemptions. Notice of redemption to the Holders of Registered Securities of any series to be redeemed as a whole or in part at the option of the Issuer shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities of such series at their last addresses as they shall appear upon the registry books. Notice of redemption to the Holders of Unregistered Securities to be redeemed as a whole or in part, who have filed their names and addresses with the Trustee pursuant to Section 4.4(c)(ii), shall be given by mailing notice of such redemption, by first class mail, postage prepaid, at least thirty and not more than sixty days prior to the date fixed for redemption, to such Holders at such addresses as were so furnished to the Trustee (and, in the case of any such notice given by the Issuer, the Trustee shall make such information available to the Issuer for such purpose). Notice of redemption to all other holders of Unregistered Securities shall be published in an Authorized Newspaper in London (and, if required by Section 3.6, in an Authorized Newspaper in Luxembourg), in each case, once in each of two successive calendar weeks, the first publication to be not less than thirty nor more than sixty days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. The notice of redemption to each such Holder shall specify the principal amount of each Security of such series held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, and, in the case of Securities with Coupons attached thereto, of all Coupons appertaining thereto maturing after the date fixed for redemption, that such redemption is pursuant to the mandatory or optional sinking fund, or both, if such be the case, that interest accrued to the date fixed for redemption will be paid as specified in such notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security of a series is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of 86 78 such Security, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities of any series to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. On the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more paying agents (or, if the Issuer is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities of such series so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If any or all of the outstanding Securities of a series are to be redeemed, the Issuer will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officers' Certificate stating the date of redemption and the aggregate principal amount of Securities to be redeemed. If less than all the Securities of a series are to be redeemed, the Trustee shall select, in such manner as it shall deem appropriate and fair, Securities of such series to be redeemed in whole or in part. Securities may be redeemed in part in multiples equal to the minimum authorized denomination for Securities of such series or any integral multiple thereof. The Trustee shall promptly notify the Issuer in writing of the Securities of such series selected for redemption and, in the case of any Securities of such series selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities of any series shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 12.3 Payment of Securities Called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and the 87 79 unmatured Coupons, if any, appertaining thereto shall be void and, except as provided in Sections 6.5 and 10.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities, together with all Coupons appertaining thereto maturing after the date fixed for redemption, at a place of payment specified in said notice, said Securities and Coupons or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that any semiannual payment of interest becoming due on the date fixed for redemption shall be payable in the case of Securities with Coupons attached thereto, to the bearers of the Coupons for such interest upon surrender thereof, and in the case of Registered Securities, to the Holders of such Securities registered as such on the relevant record date subject to the terms and provisions of Section 2.4 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate of interest or Yield to Maturity (in the case of an Original Issue Discount Security) borne by the Security. If any Security with Coupons attached thereto is surrendered for redemption and is not accompanied by all such Coupons maturing after the date fixed for redemption, the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee, if there be furnished to each of them such security or indemnity as they may require to save each of them harmless. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new Security or Securities of such series, together with all Coupons, if any, appertaining thereto, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 12.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registra- 88 80 tion and certificate number in a written statement signed by an authorized officer of the Issuer and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such written statement directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. SECTION 12.5 Mandatory and Optional Sinking Funds. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment". The date on which a sinking fund payment is to be made is herein referred to as the "sinking fund payment date". In lieu of making all or any part of any mandatory sinking fund payment with respect to any series of Securities in cash, the Issuer may at its option (a) deliver to the Trustee Securities of such series theretofore purchased or otherwise acquired (except upon redemption pursuant to the mandatory sinking fund) by the Issuer or receive credit for Securities of such series (not previously so credited) theretofore purchased or otherwise acquired (except as aforesaid) by the Issuer and delivered to the Trustee for cancellation pursuant to Section 2.7, (b) receive credit for optional sinking fund payments (not previously so credited) made pursuant to this Section, or (c) receive credit for Securities of such series (not previously so credited) redeemed by the Issuer through any optional redemption provision contained in the terms of such series. Securities so delivered or credited shall be received or credited by the Trustee at the sinking fund redemption price specified in such, Securities. On or before the sixtieth day next preceding each sinking fund payment date for any series, the Issuer will deliver to the Trustee a written statement (which need not contain the statements required by Section 11.5) signed by an authorized officer of the Issuer (a) specifying the portion of the mandatory sinking fund payment to be satisfied by payment of cash and the portion to be satisfied by credit of Securities of such series, (b) stating that none of the Securities of such series has theretofore been so credited, (c) stating that no defaults in the payment of interest or Events of Default with respect to such series have occurred 89 81 (which have not been waived or cured) and are continuing and (d) stating whether or not the Issuer intends to exercise its right to make an optional sinking fund payment with respect to such series and, if so, specifying the amount of such optional sinking fund payment which the Issuer intends to pay on or before the next succeeding sinking fund payment date. Any Securities of such series to be credited and required to be delivered to the Trustee in order for the Issuer to be entitled to credit therefore as aforesaid which have not theretofore been delivered to the Trustee shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with such written statement (or reasonably promptly thereafter if acceptable to the Trustee). Such written statement shall be irrevocable and upon its receipt by the Trustee the Issuer shall become unconditionally obligated to make all the cash payments or payments therein referred to, if any, on or before the next succeeding sinking fund payment date. Failure of the Issuer, on or before any such sixtieth day, to deliver such written statement and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute, on and as of such date, the irrevocable election of the Issuer (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuer will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or a lesser sum if the Issuer shall so request) with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $50,000 or less and the Issuer makes no such request then it shall be carried over until a sum in excess of $50,000 is available. The Trustee shall select, in the manner provided in Section 12.2, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and shall (if requested in writing by the Issuer) inform the Issuer of the serial numbers of the Securities of such series (or portions thereof) so selected. Securities of any series which are (a) owned by the Issuer 90 82 or an entity known by the Trustee to be directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer, as shown by the Security register, and not know to the Trustee to have been pledged or hypothecated by the Issuer or any such entity or (b) identified in an Officers' Certificate at least 60 days prior to the sinking fund payment date as being beneficially owned by, and not pledged or hypothecated by, the Issuer or an entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer shall be excluded from Securities of such series eligible for selection for redemption. The Trustee, in the name and at the expense of the Issuer (or the Issuer, if it shall so request the Trustee in writing) shall cause notice of redemption of the Securities of such series to be given in substantially the manner provided in Section 12.2 (and with the effect provided in Section 12.3) for the redemption of Securities of such series in part at the option of the issuer. The amount of any sinking fund payments not so applied or allocated to the redemption of Securities of such series shall be added to the next cash sinking fund payment for such series and, together with such payment, shall be applied in accordance with the provisions of this Section. Any and all sinking fund moneys held on the stated maturity date of the Securities of any particular series (or earlier, if such maturity is accelerated), which are not held for the payment or redemption of particular Securities of such series shall be applied, together with other moneys, if necessary, sufficient for the purpose, to the payment of the principal of, and interest on, the Securities of such series at maturity. On each sinking fund payment date, the Issuer shall pay to the Trustee in cash or shall otherwise provide for the payment of all interest accrued to the date fixed for redemption on Securities to be redeemed on such sinking fund payment date. The Trustee shall not redeem or cause to be redeemed any Securities of a series with sinking fund moneys or provide any notice of redemption of Securities for such series by operation of the sinking fund during the continuance of a default in payment of interest on such Securities or of any Event of Default except that, where the mailing or publication of notice of redemption of any Securities shall theretofore have been made, the Trustee shall redeem or cause to be redeemed such Securities, provided that it shall have received from the Issuer a sum sufficient for such redemption. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default 91 83 shall occur, and any moneys thereafter paid into the sinking fund, shall, during the continuance of such default or Event of Default, be deemed to have been collected under Article Five and held for the payment of all such Securities. In case such Event of Default shall have been waived as provided in Section 5.10 or the default cured on or before the sixtieth day preceding the sinking fund payment date in any year, such moneys shall thereafter be applied on the next succeeding sinking fund payment date in accordance with this Section to the redemption of such Securities. 92 84 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of November 15, 1988. THE PROGRESSIVE CORPORATION [CORPORATE SEAL] By - ----------------------------------------------------------- Attest: By -------------------------------------------------------- THE FIRST NATIONAL BANK OF BOSTON [CORPORATE SEAL] By - ----------------------------------------------------------- Attest: By -------------------------------------------------------- 93 85 STATE OF NEW YORK COUNTY OF NEW YORK SS.: On this _______ day of_______________, before me personally came HOWARD M. ZELIKOW, to me personally known, who, being by me duly sworn, did depose and say that he resides at Cleveland, Ohio that he is an officer of THE PROGRESSIVE CORPORATION, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. - -------------------------------------------------------------- Notary Public [NOTARIAL SEAL] STATE OF NEW YORK COUNTY OF NEW YORK SS.: On this _____ day of_______________, before me personally came to me personally known, who, being by me duly sworn,, did depose and say that he resides at New York, New York; that he is an of THE FIRST NATIONAL BANK OF BOSTON, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. - -------------------------------------------------------------- Notary Public [NOTARIAL SEAL] EX-4.D 5 EXHIBIT 4(D) 1 EXHIBIT NO. 4(D) (FACE OF SECURITY) REGISTERED REGISTERED NO. R_______ $__________ CUSIP 743315 AC 7 SEE REVERSE FOR CERTAIN DEFINITIONS THE PROGRESSIVE CORPORATION 10% NOTE DUE DECEMBER 15, 2000 THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value received, hereby promises to pay to ___________________________________ or registered assigns, at the office or agency of the Issuer at the office of the Trustee in Boston, Massachusetts, the principal sum of __________________ Dollars on December 15, 2000, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest semiannually on June 15 and December 15 of each year, commencing June 15, 1989, on said principal sum at said office or agency, in like coin or currency at the rate per annum specified in the title of this Note, from the June 15 or the December 15, as the case may be, next preceding the date of this Note to which interest has been paid, unless the date hereof is a date to which interest has been paid, in which case from the date of this Note, or unless no interest has been paid on these Notes, in which case from December 15, 1988, until payment of said principal sum has been made or duly provided for; PROVIDED that payment of interest may be made at the option of the Issuer by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Notwithstanding the foregoing, if the date hereof is after the first day of June or December, as the case may be, and before the following June 15 or December 15, this Note shall bear interest from such June 15 or December 15; PROVIDED, that if the Issuer shall default in the payment of interest due on such June 15 or December 15, then this Note shall bear interest from the next preceding June 15 or December 15 to which interest has been paid or, if no interest has been paid on these Notes, from December 15, 1988. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the June 1 or December 1, as the case may be, next preceding such June 15 or December 15. Reference is made to the further provisions of this Note set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to be signed by facsimile by its duly authorized officers, and has caused a facsimile of its corporate seal to be affixed hereunto or imprinted hereon. (CORPORATE SEAL) Attest: THE PROGRESSIVE CORPORATION /s/ David M. Schneider By /s/ Peter B. Lewis - - - - ---------------------- -------------------------------- Secretary President and Chief Executive Officer Dated:_____________ 2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. The First National Bank of Boston, as Trustee By_________________________________ Authorized Signatory (BACK OF SECURITY) THE PROGRESSIVE CORPORATION 10% NOTE DUE DECEMBER 15, 2000 This Note is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of November 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Issuer to The First National Bank of Boston, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as in the Indenture provided. This Note is one of a series designated as the 10% Notes Due December 15, 2000 of the Issuer, limited in aggregate principal amount to $150,000,000. In case an Event of Default with respect to the 10% Notes Due December 15, 2000, as defined in the Indenture, shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the time Outstanding (as defined in the Indenture) of all series to be affected (voting as one class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the final maturity of any Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of any interest thereon, or impair or affect the rights of any Holder to institute suit for the payment thereof, without the consent of the Holder of each Security so affected or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holder of each Security affected. It is also provided in the Indenture that, with respect to certain defaults or Events of Default regarding the Securities of any series, prior to any declaration accelerating the maturity of such Securities, the Holders of a majority in aggregate principal amount Outstanding of the Securities of such 3 series (or, in the case of certain defaults or Events of Default, all or certain series of the Securities) may on behalf of the Holders of all the Securities of such series (or all or certain series of the Securities, as the case may be) waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and any Note which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiples of $1,000 at the office or agency of the Issuer at the office of the Trustee in Boston, Massachusetts, and in the manner and subject to the limitations provided in the Indenture, but without the payment of any service charge, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not subject to redemption at the option of the Issuer or through the operation of a sinking fund. Upon due presentment for registration of transfer of this Note at the office or agency of the Issuer at the office of the Trustee in Boston, Massachusetts, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for all other purposes, and neither the Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee shall be affected by notice to the contrary. No recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, of the Issuer or of any successor corporation, either directly or through the Issuer or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. ------------------------ ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: 4 TEN COM - as tenants in common TEN ENT - as tenants by the entireties CUST - Custodian JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - __(Cust)___Custodian __(Minor) under Uniform Gifts to Minors Act ----------------------------------- (State) Additional abbreviations may also be used though not in the above list. --------------------------------------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Please print or typewrite name and address including postal zip code of assignee ------------------------------------------------------------------------------ the within Note and all rights thereunder, hereby irrevocably constituting and appointing ------------------------------------------------------------------------------ attorney to transfer said Note on the books of the Issuer, with full power of substitution in the premises. Date: ------------------- --------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-4.H 6 EXHIBIT 4(H) 1 EXHIBIT NO. 4(H) (Face of Security) REGISTERED REGISTERED No. R________ $___________ CUSIP 743315 AG 8 SEE REVERSE FOR CERTAIN DEFINITIONS THE PROGRESSIVE CORPORATION 6.60% NOTE DUE 2004 THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value received, hereby promises to pay to ____________________________________ or registered assigns, at the office or agency of the Issuer at the office of the Trustee in Canton, Massachusetts, the principal sum of __________________ dollars on January 15, 2004, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest semiannually on January 15 and July 15 of each year, commencing on July 15, 1994, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Note, from the January 15 or the July 15, as the case may be, next preceding the date of this Note to which interest has been paid, unless the date hereof is a date to which interest has been paid, in which case from the date of this Note, or unless no interest has been paid on the Notes, in which case from January 12, 1994, until payment of said principal sum has been made or duly provided for; PROVIDED, that payment of interest may be made at the option of the Issuer by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Notwithstanding the foregoing, if the date hereof is after the first day of January or July, as the case may be, and before the following January 15 or July 15, this Note shall bear interest from such January 15 or July 15; PROVIDED, that if the Issuer shall default in the payment of interest due on such January 15 or July 15, then this Note shall bear interest from the next preceding January 15 or July 15 to which interest has been paid or, if no interest has been paid on this Note, from January 12, 1994. The interest so payable on any January 15 or July 15 will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Note is registered at the close of business on the January 1 or July 1, as the case may be, next preceding such January 15 or July 15. Reference is made to the further provisions of this Note set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to be signed by facsimile by its duly authorized officers and has caused a facsimile of its corporate seal to be affixed hereto or imprinted hereon. THE PROGRESSIVE CORPORATION (CORPORATE SEAL) Attest: THE PROGRESSIVE CORPORATION /s/ David M. Schneider By /s/ Peter B. Lewis - - - - ---------------------- -------------------------------- Secretary President and Chief Executive Officer Dated:_____________ 2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities, of the series designated herein, referred to in the within-mentioned Indenture. THE FIRST NATIONAL BANK OF BOSTON, as Trustee By:_______________________________ Authorized Signatory (Back of Security) THE PROGRESSIVE CORPORATION 6.60% NOTE DUE 2004 This Note is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Issuer (hereinafter called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture dated as of September 15, 1993 (herein called the "Indenture"), duly executed and delivered by the Issuer to The First National Bank of Boston, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any) and may otherwise vary as in the Indenture provided. This Note is one of a series designated as the 6.60% Notes Due 2004 of the Issuer, limited in aggregate principal amount to $200,000,000. In case an Event of Default, as defined in the Indenture, with respect to the 6.60% Notes Due 2004 shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate principal amount of the Securities at the time Outstanding (as defined in the Indenture) of all series to be affected (voting as one class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the Holders of the Securities of each such series; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the final maturity of any Security, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of any interest thereon, or impair or affect the rights of any Holder to institute suit for the payment thereof, without the consent of the Holder of each Security so affected or (ii) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture, without the consent of the Holder of each Security so affected. It is also provided in the Indenture that, with respect to certain defaults or Events of Default regarding the Securities of any series, prior to any declaration accelerating the maturity of such Securities, the Holders of a majority in aggregate principal amount Outstanding of the Securities of such series may on behalf of the Holders of all the Securities of such series waive any such past default or Event of Default and its consequences. The preceding sentence shall not, however, apply to a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and any Note which may be issued in exchange or substitution herefor, 3 irrespective of whether or not any notation thereof is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note in the manner, at the respective times, at the rate and in the coin or currency herein prescribed. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiple of $1,000 at the office or agency of the Issuer at the office of the Trustee in Canton, Massachusetts, and in the manner and subject to the limitations provided in the Indenture, but without the payment of any service charge. Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes are not subject to redemption at the option of the Issuer or through the operation of a sinking fund. Upon due presentment for registration of transfer of this Note at the office or agency of the Issuer at the office of the Trustee in Canton, Massachusetts, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for all other purposes, and neither the Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee shall be affected by notice to the contrary. No recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, officer or director, as such, of the Issuer or of any successor corporation, either directly or through the Issuer or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as part of the consideration for the issue hereof. Terms used herein which are defined in the Indenture shall have the respective meanings assigned thereto in the Indenture. ------------------------ ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties CUST - Custodian JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - __(Cust)___Custodian __(Minor) under Uniform Gifts to Minors Act ----------------------------------- (State) 4 Additional abbreviations may also be used though not in the above list. --------------------------------------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Please print or typewrite name and address including postal zip code of assignee ------------------------------------------------------------------------------ the within Note and all rights thereunder, hereby irrevocably constituting and appointing ------------------------------------------------------------------------------ attorney to transfer said Note on the books of the Issuer, with full power of substitution in the premises. Date: ------------------- --------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-10.C 7 EXHIBIT 10(C) 1 EXHIBIT NO. 10(C) DEVELOPMENT AGREEMENT --------------------- BY AND BETWEEN GP OHIO, L.L.C. (AS "DEVELOPER") AND PROGRESSIVE CASUALTY INSURANCE COMPANY (AS "PROGRESSIVE") 2 TABLE OF CONTENTS ----------------- 1. Recitals Incorporated......................................................1 2. The Project................................................................1 3. Changes in the Work........................................................4 4. Developer's Compliance Responsibilities....................................5 5. Construction Timetable.....................................................5 6. Progress Payments..........................................................7 7. Stipulated Sum.............................................................8 8. Insurance.................................................................10 9. Architect, Engineer and Other Professionals...............................10 10. Payment and Performance Bonds............................................11 11. Delay Damages............................................................11 12. Termination of Agreement.................................................11 13. Dispute Resolution.......................................................12 14. Warranties...............................................................13 15. Lien Removal.............................................................14 16. Progressive Delay........................................................15 17. Force Majeure............................................................15 18. Indemnification..........................................................16 19. Non-Developer Work.......................................................16 20. Maintain Project.........................................................17 21. Governing Law............................................................17 22. Notices..................................................................17 3 23. Progressive's Authorized Representative/Consultant.......................18 24. Successors and Assigns...................................................18 25. Regulated Substances.....................................................18 26. Time of the Essence......................................................19 27. Independent Contractor...................................................19 28. No Waiver................................................................19 29. Severability.............................................................19 30. Cooperation..............................................................19 31. Counterparts.............................................................19 32. Interest.................................................................19 33. Entire Agreement.........................................................20 34. Intentionally left blank.................................................20 35. Termination..............................................................20 36. Facsimile Signatures.....................................................20 37. Contingency..............................................................20 EXHIBITS: EXHIBIT A Site Plan/Survey.............................................. EXHIBIT B Description of Building and Outline Specifications, Schematic Building Plans and Master Site Plan........................... EXHIBIT C Project Schedule.............................................. EXHIBIT D Termination Fee Schedule...................................... EXHIBIT E Expense Categories............................................ EXHIBIT F Notice of Commencement........................................ ii 4 DEVELOPMENT AGREEMENT --------------------- This Development Agreement ("AGREEMENT"), made and entered into as of the 16th day of November, 1999, by and between GP Ohio, L.L.C., a Rhode Island limited liability company ("Developer"), and Progressive Casualty Insurance Company, an Ohio corporation ("Progressive"). W I T N E S S E T H: WHEREAS, Progressive has acquired the fee interest in certain parcel(s) of land, located in Mayfield Village, Ohio, as more particularly depicted on the site plan attached hereto as EXHIBIT A ("Property") and desires to have developed on the Property a data center and operations facility ("Building") containing approximately 80,000 square feet of gross rentable space and incidental improvements, including surface parking of approximately 70 spaces and landscaping; WHEREAS, Developer will oversee, develop and construct the improvements more particularly delineated herein in a timely manner; WHEREAS, Developer and Progressive desire to set forth their understanding of the respective rights and responsibilities of the parties in connection with the development, design, construction, equipping and furnishing of the Project (hereinafter defined) and the payment for such services; and WHEREAS, the obligations of Developer hereunder are being guaranteed by Gilbane Properties, Inc. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and intending to be legally bound hereby, the parties do hereby agree as follows: 1. RECITALS INCORPORATED. The recitals are hereby incorporated by reference and made a part of this Agreement. 2. THE PROJECT. Developer shall cause the completion of the design, construction and development of the Building upon the Property consisting of the base building elements (including parking) and interior improvements and the site work on the Property consisting of landscaping, sidewalks, driveways and related improvements, the preliminary scope of which is outlined on EXHIBIT B attached hereto and as shall be outlined in the Scope Documents to be prepared and approved in accordance with Section 2(b), below (collectively, the "Project") all in accordance with the final set of approved plans, drawings, specifications and schedules (collectively the "Plans"). As part of the "Work" defined below, Developer (A) shall advise Progressive and take the lead in negotiating and obtaining all governmental and private approvals necessary or required in connection with acquiring the Property, (B) shall enter into a 5 construction contract with Gilbane Building Company ("Contractor"), which Contractor shall hire subcontractors for construction of the Project, (C) shall retain, or cause to be retained, (x) Burt Hill Kosar Rittlemann Assoc., as architect ("Architect") to perform architectural and design services, and (y) H. F. Lenz, as engineers ("Engineer"), and other professionals to perform all other professional services required for the design and construction of the Project and (D) shall advise Progressive and take the lead in negotiating and obtaining all governmental subsidies. The contract with Contractor shall provide for payment to Contractor of a profits fee of 2% for contractor management services. All major subcontractors and equipment suppliers retained by Contractor shall be identified on a list submitted to Progressive for Progressive's approval within ten days after the date of execution of this Agreement. Progressive shall not unreasonably withhold or unduly delay its approval of the list of such major subcontractors and equipment suppliers. If Progressive timely objects to any major subcontractor or equipment supplier, Progressive, Developer and Contractor shall in good faith attempt to resolve their disagreement. If the parties are unable to reach agreement on the list of major subcontractors and equipment suppliers within a reasonable period, the matter shall be submitted to mediation as provided in Section 13. (a) The "Work" shall mean all professional design and engineering services and project administration for, and the completed new construction of, the Project in accordance with the Contract Documents (as hereinafter defined), in a timely manner with a specified target delivery date of October 30, 2000 (the "Delivery Date") and Final Completion Date (as hereinafter defined) of the 90th day after the Substantial Completion Date (as hereinafter defined), and includes labor necessary to produce such new construction, and materials and equipment incorporated or to be incorporated in such construction. All Work shall be performed in accordance with the Contract Documents. The "Contract Documents" shall consist of this Agreement, the Plans, the Building Description and Outline Specifications, the Schematic Building Plans, the Master Site Plan, the Project Schedule (hereinafter defined) and Change Orders. (b) Within the time frame established under the Project Schedule, Developer shall cause to be prepared and delivered to Progressive the "Building Description and Outline Specifications", "Schematic Building Plans" and "Master Site Plan" for the Project ("Scope Documents"), together with a supplement to this Development Agreement in substantially the form as that attached hereto as EXHIBIT B-1, formally adopting such Building Description and Outline Specifications, Schematic Building Plans and Master Site Plan into this Agreement. Progressive shall have 15 days after receipt of Developer's submittals to raise any objection thereto. If Progressive disapproves of the Scope Documents, Progressive's notice of disapproval shall specify in detail the basis for such disapproval. Developer shall promptly cause to be made such revisions to the Scope Documents as may be necessary to address Progressive's objections, and shall resubmit the Scope Documents for Progressive's approval to maintain the Project Schedule. Progressive shall review such revisions and notify Developer whether Progressive approves or disapproves the Scope Documents as modified. This process shall be repeated, if necessary, until Progressive's objections 2 6 have been addressed and Progressive has approved the Scope Documents; provided that, if the parties do not reach final agreement on the Scope Documents on or before November 10, 1999, either party shall have the right to terminate this Agreement by written notice to the other at any time thereafter and prior to the parties reaching agreement on the Scope Documents; provided that Progressive reimburses Developer for out-of-pocket third party expenses (not including Gilbane Building Company) incurred by Developer consistent with the schedule of anticipated expense categories set forth on EXHIBIT E attached hereto and pays to Developer the termination fee as required under Section 37. If Progressive fails to give Developer written notice of disapproval of the Scope Documents within 15 days after receipt of any submittal by Developer, Progressive shall be deemed to have approved the same. Upon approval of the Scope Documents, Progressive and Developer shall execute a supplement to this Agreement in substantially the form as that attached hereto as EXHIBIT B-1, formally adopting the Scope Documents as part of EXHIBIT B to this Agreement. (c) All Work shall be performed with all new material in a good and workmanlike manner, in accordance with the Plans mutually approved by Developer and Progressive. Developer shall cause to be delivered to Progressive proposed drawings, specifications and schedules consisting of (i) design development drawings and specifications and (ii) finish schedule. Such deliverables shall be prepared, reviewed, revised and approved or disapproved by the parties hereto in accordance with Sections 2 and 5, hereof, to produce a final set of Plans. Progressive's approval of all of the above plans, drawings, specifications and schedules shall not be unreasonably withheld, conditioned or delayed, and except as hereinafter set forth, Progressive shall not be entitled to condition its approval of such plans, drawings, specifications and schedules upon the inclusion therein of any design specifications that are materially inconsistent with the Scope Documents (including requiring a higher performance standard than any performance standard expressly set forth in the Scope Documents). Progressive's approval of such plans, drawings, specifications and schedules shall not be deemed an acknowledgement, representation or warranty that any of such plans, drawings, specifications or schedules meet code or represent good engineering, design or construction practices or be deemed to waive any design flaw or code violation. In the event Progressive disapproves plans, drawings, specifications or schedules or any portion thereof or any modifications thereto, Progressive's notice of disapproval shall specify in detail the reasonable basis for such disapproval. Developer shall promptly cause to be made such revisions to the plans, drawings, specifications or schedules as may be necessary to address Progressive's reasonable objections, and shall resubmit the plans, drawings, specifications or schedules to Progressive for Progressive's approval to maintain the Project Schedule. Progressive shall review such revisions and notify Developer whether Progressive approves or reasonably disapproves the plans, drawings, specifications and schedules as modified. This process shall be repeated, if necessary, until Progressive's reasonable objections have been addressed and Progressive has approved the Plans; provided that, if the parties do not reach final agreement on the Plans after a reasonable review period, the matter may be submitted by either party to 3 7 mediation under Section 13. If Progressive fails to give Developer written notice of disapproval of any plans, drawings, specifications or schedules within 15 days after receipt of any submittal by Developer, Progressive shall be deemed to have approved the same. (d) Developer shall maintain in good order one record copy of the Plans, Change Orders and other related documents, marked currently to record changes made during construction, and during construction Progressive shall have the right to review all such Plans, Change Orders and other related documents during regular business hours upon one business day's notice. Upon completion of the design and construction and prior to termination of this Agreement, Developer shall deliver to Progressive the following: (i) as-builts (to be provided by hard copy and computer diskette); (ii) all written specifications as amended; (iii) complete copies of all operations and maintenance manuals for all equipment installed in the Project as part of the Work; (iv) the warranties for the foregoing in conformity with Section 14 hereof and transfer of the same to Progressive; and (v) provide the necessary training and validation of operating systems to ensure a smooth transition to Progressive's management/operation of the facility. 3. CHANGES IN THE WORK. (a) A "Change Order" is a written order to Developer signed and approved by Progressive issued after execution of this Agreement, authorizing a change in the Work or an adjustment in the Stipulated Sum, the Delivery Date or the Final Completion Date. The Stipulated Sum may be changed only by Change Order. The Non-Developer Work (as defined in Section 19 hereof) shall be incorporated into the Developer's Work only by Change Order. The Delivery Date and Final Completion Date may be changed only by Change Order, Force Majeure (hereinafter defined) and Progressive Delay (hereinafter defined). A Change Order signed by Developer indicates its agreement therewith, including the adjustment (if any) in the Stipulated Sum (as defined in Section 7), the Delivery Date and the Final Completion Date. (b) Progressive, without invalidating this Agreement, may order changes in the Work within the general scope of this Agreement consisting of additions, deletions or other revisions; provided the Stipulated Sum, the Delivery Date and the Final Completion Date are adjusted in a manner reasonably satisfactory to Developer which approval of any proposed change in the Work shall not be unreasonably withheld, conditioned or delayed. All such changes in the Work must be authorized by Change Order, and shall be performed under the applicable conditions of the Contract Documents. (c) The cost or credit to Progressive resulting from a Change Order shall be determined by taking into account the increase or decrease in (i) the engineered cost for labor and materials of all contractors and subcontractors affected by the Change Order 4 8 and (ii) such contractors' and subcontractors' general overhead as a result of the Change Order. The Stipulated Sum shall be further increased or decreased to reflect the parties' agreed upon adjustment to the Developer's overhead and profit as a result of any Change Order, as follows: 5% of any net increase or decrease in costs attributable to a Change Order up to $100,000.00 and 3% of any net increase or decrease in costs attributable to a Change Order of more than $100,000.00; provided that no overhead or profit fee shall be charged by Developer for Change Orders adding any "future equipment" (i.e., generator, chiller, UPS, EGU's) contemplated in the Scope Documents. (d) If unit prices are stated in the Contract Documents or subsequently agreed upon, and if the quantities originally contemplated are so changed in a proposed Change Order that application of the agreed unit prices to the quantities of Work proposed will cause substantial inequity to Progressive or Developer, the applicable unit prices shall be equitably adjusted. (e) Developer shall prepare Change Orders for Progressive's approval and execution and shall have authority to make minor changes (not material in relation to the intent of this document, the Project and Project Schedule, Project quality or performance requirements as hereinafter defined) in the design and construction consistent with the intent of this Agreement, not materially inconsistent with the Plans, and not involving an adjustment in the Stipulated Sum or an extension of the Delivery Date and Final Completion Date. 4. DEVELOPER'S COMPLIANCE RESPONSIBILITIES. Developer shall be responsible for causing the Work (including, without limitation, all changes thereto) to comply with all applicable legal requirements existing as of execution of this Agreement, including (without limitation) requirements of building codes and zoning codes, all federal, state and municipal laws, including, without limitation, the Americans With Disabilities Act, and all recorded protective covenants and restrictions. Developer shall also be responsible for obtaining a certificate of occupancy for the Project. If there is any change between the date hereof and the Final Completion Date in any applicable legal requirements which requires a change in the Work in order to avoid a violation of any such applicable legal requirement, Developer shall be responsible for changing the Work in order to avoid a violation of such legal requirements, but the parties shall execute a Change Order to adjust the Stipulated Sum, if applicable, as a result of any increase or decrease in costs as a result of such change in legal requirements. If there is a change in any applicable legal requirement but the Work or portion thereof affected by such change is deemed to be "grandfathered" (i.e., the applicable legal requirement does not require that the Work be changed), such portion of the Work shall nevertheless be deemed to be in compliance with such applicable legal requirements and Developer shall not be required to change the Work to otherwise comply with such changed legal requirements. 5. CONSTRUCTION TIMETABLE. 5 9 (a) In performing the Work, Developer shall achieve the milestone dates set forth in the schedule (the "Project Schedule") in EXHIBIT C attached hereto so that the Substantial Completion Date shall occur on or before the Delivery Date and the Final Completion Date shall be achieved on the 90th day after the Substantial Completion Date. Time shall be of the essence as to the Delivery Date and Final Completion Date. The Project Schedule shall be updated by Developer from time to time in accordance with the progress of the Work, and copies of such updates shall be promptly furnished to Progressive; it being expressly understood, however, that such updates may not extend the Delivery Date and Final Completion Date, except pursuant to subsection 5(b) hereof. (b) The Delivery Date may be extended only by reason of (i) a Change Order or (ii) a Progressive Delay, or (iii) the occurrence of Force Majeure. In the event of a Change Order, the Delivery Date shall be accelerated or postponed, if at all, only as set forth in such Change Order. In the event (i) a Progressive Delay or Force Majeure occurs and (ii) Developer would have otherwise been able to perform all its obligations under the Contract Documents but for such delay, Developer's remedy shall be an extension of the Delivery Date by the number of days equal to the days Developer is actually delayed thereby, notwithstanding the exercise of commercially reasonable efforts. In the event of a Progressive Delay or Force Majeure, the Stipulated Sum shall be subject to an equitable adjustment to reflect the increase or decrease in costs incurred by Developer as a result of such Progressive Delay. (c) If at any time in the course of the performance of its Work, Developer shall fall materially behind the Project Schedule which is not due to a Change Order, Force Majeure or Progressive Delay, then Developer shall promptly submit to Progressive a plan, including proposed adjustments to the Project Schedule, if any, showing how the Developer plans to mitigate impact upon the timely completion of the other portions of the Work and how it plans to accelerate performance so as to regain any time lost. The cost and expense of overtime, or any other measures implemented to achieve the foregoing, shall be borne entirely by Developer. (d) For purposes herein, "Substantial Completion" (as identified on the Project Schedule) shall mean the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Plans so that Progressive can legally occupy or utilize the Work or designated portion thereof for its intended use. For purposes herein, "Substantial Completion Date" shall mean the date on which (i) the Architect and Engineer have certified to Progressive that the Work has been substantially completed within the definition of "Substantial Completion" set forth above ; (ii) a certificate of occupancy for the Project has been delivered; provided, however, that no certificate of occupancy shall be required of Developer to establish Substantial Completion if and to the extent such a certificate cannot be obtained because of a failure of Progressive to complete any of Progressive's Non-Developer Work (hereinafter defined) or because any Non-Developer Work fails to comply with any 6 10 applicable governmental codes, regulations, rules, ordinances or laws (provided that Developer shall not be excused if Progressive has retained Developer by separate agreement to perform such Non-Developer Work and it is Developer's default under such separate agreement that has in fact caused Progressive's failure to complete the Non-Developer Work or has caused the Non-Developer Work to fail to comply with any applicable governmental codes, regulations, rules, ordinances and laws); and (iii) Architect and Engineer deliver to Progressive a list of "Punch List Items" (as hereinafter defined), if any. (e) For purposes herein, "Final Completion Date" shall mean the date on which Architect and Engineer shall certify to Progressive that the Work is finally completed and shall be evidenced by (i) completion of all Punch List Items and (ii) delivery of as-built drawings and warranties. The parties expressly understand that the Final Completion Date may be changed only by Change Order, Force Majeure or Progressive Delay. (f) The Architect and Engineer shall deliver to Progressive for Progressive's review and approval a listing of the Punch List Items that the Architect and Engineer believe Developer is obligated by the provisions of this Agreement to complete. Progressive shall advise Developer and the Architect and Engineer within 15 days after receipt of Architect's and Engineer's lists of Punch List Items of any additional Punch List Items which Progressive believes Developer is obligated by the provisions of this Agreement to complete. Any disagreements between Developer and Progressive regarding Punch List Items shall be resolved in accordance with Section 13. The term "Punch List Items" shall mean details of construction and mechanical and electrical adjustments which are minor in character and do not materially interfere with Progressive's use or enjoyment of the Project or designated portion thereof for its business operations, and may also include landscaping and other items which do not materially affect Progressive's use of the Project but which cannot be immediately completed because of weather. 6. PROGRESS PAYMENTS. Payment to Developer of that portion of the Stipulated Sum included within the Professional Fees/Project Management category shall be disbursed: (i) 20% to Developer in the first monthly draw, and (ii) the balance in monthly progress payments on a percentage-of-completion basis, as hereinafter provided. Payment of that portion of the Stipulated Sum included within the Construction/Development Costs category shall be disbursed in monthly progress payments based on actual costs incurred by Developer, as hereinafter provided. No more than once each calendar month (which the parties expect in the ordinary course to be by the tenth day of the calendar month), Developer will submit to Progressive or its designee a requisition ("Requisition") for the percentage of the Project completed, with respect to payments toward the Professional Fees/Project Management portion of the Stipulated Sum, and for the actual costs incurred by Developer, with respect to payments toward the Construction/Development Costs portion of the Stipulated Sum, through the last day of the immediately preceding calendar month, less the aggregate of previous payments made by 7 11 Progressive to Developer hereunder and less Retainage (as hereinafter defined). Each Requisition will be in the form of AIA Document G702/703 and will be based on the Schedule of Values. Each Requisition shall be approved in writing by Developer confirming that the portion of the Work for which payment is requested has been completed. Each Requisition shall further include a certification by the Developer that the Developer has paid the Architect and Engineer, the Contractor and design professionals retained by Developer for all work performed by such parties for which Developer has received payment under previous Requisitions, and by the Contractor and major subcontractors that all of their respective subcontractors have been paid for all work performed by such subcontractors for which the Contractor has received payment under previous Requisitions. Within 20 days after the receipt of each approved Requisition, Progressive shall, unless Progressive and Developer otherwise agree, pay the full amount requested to Developer to disburse in accordance with the Requisition. In the case of a dispute, Developer and Progressive shall agree on the disputed value which shall be deducted from the payment while dispute resolution in Paragraph 13 is implemented. Progressive understands and acknowledges that prompt payment of all approved Requisitions is a critical component in Developer's ability to complete the Project within the time frame required and if any Requisition is not paid to Developer in full or as otherwise set forth in the Requisition, within 20 days after its due date, interest shall accrue (and be immediately due) on the unpaid amounts at the rate of 10% per annum until paid. As used herein, "Retainage" shall mean an amount equal to 10% of construction hard costs (but not of design or soft costs for which there shall be no retainage) until the Work is 50% completed, and zero percent (0%) of the final 50% of the Work, which Retainage balance shall be released/disbursed to Developer upon Final Completion of the Work. 7. STIPULATED SUM. (a) Progressive shall pay to Developer in consideration for Developer's performance of the Work, an agreed upon stipulated sum (the "Stipulated Sum"). The Stipulated Sum shall be divided into two categories, the first category sometimes referred to herein as the "Professional Fee/Project Management" category and the second category sometimes referred to as the "Construction/Development Costs" category. The Stipulated Sum shall be established in coordination with the preparation and approval of the Scope Documents. Upon approval of the Scope Documents by Progressive, Developer shall submit to Progressive the total amount of the "Stipulated Sum" to be paid Developer for the work hereunder. Progressive shall have ten business days after receipt of Developer's notice of the Stipulated Sum to object to such amount. If Progressive timely objects, Developer and Progressive shall negotiate in good faith to resolve any disagreement and confirm the Stipulated Sum. If Developer and Progressive are not able to reach agreement on the Stipulated Sum on or before November 18, 1999, either party may terminate this Agreement by written notice to the other given on or after November 19, 1999 and prior to reaching agreement on the Stipulated Sum; provided that Progressive reimburses Developer for out-of-pocket third party expenses incurred by Developer and pays to Developer the termination fee as required under Section 37. Upon establishment of the Stipulated Sum, the parties shall 8 12 execute the supplement to this Agreement in substantially the form as that attached hereto as EXHIBIT B-1, establishing the Scope Documents and Stipulated Sum agreed to by the parties. If Progressive fails to give Developer written notice of disapproval of the Stipulated Sum within ten days after receipt of Developer's notice thereof, Progressive shall be deemed to have approved the same. (b) Once established, the Stipulated Sum, subject to adjustment by approved Change Orders constitutes Developer's complete compensation for the Work and, without limitation, includes compensation for all (i) design, construction and development services rendered by Developer, the Architect, the Engineer, the Contractor and all other subcontractors and design and engineering professionals used by Developer, Architect, Engineer and/or Contractor pursuant to this Agreement; (ii) expenses of Developer, the Architect, the Engineer, the Contractor and all other subcontractors and design and engineering professionals used by Developer, Architect, Engineer and/or Contractor including, without limitation, the cost of all equipment, taxes, royalties, insurance premiums, and permits; (iii) fees earned by Developer, the Architect, the Engineer, the Contractor and all other subcontractors and design and engineering professionals used by Developer, Architect, Engineer and/or Contractor with respect to the design, construction and development services rendered pursuant to this Agreement; and (iv) all legal and other fees and expenses incurred by or on behalf of Developer. (c) The Stipulated Sum shall be broken into two categories, one category for professional fees and the second category for all other construction and development costs included within the scope of the Work ("Construction/Development Costs"). Within 45 days after the Final Completion Date, Developer shall submit to Progressive documentation detailing the total actual costs incurred by the Developer in completing the Work included within the Construction/Development Cost category of the Stipulated Sum. If such final accounting indicates that the total actual costs for that portion of the Work included within the Construction/Development Cost category is less than the portion of the Stipulated Sum established by the parties hereunder, Progressive shall pay Developer one-half of such savings within 20 days after receipt of Developer's statement and Progressive shall be deemed to have received a credit against the Stipulated Sum otherwise due from Progressive to Developer hereunder in an amount equal to the balance of such savings. If the actual costs of completing that portion of the Work included within the Construction/Development Cost category of the Stipulated Sum is greater than the amount of the Stipulated Sum for such category, Developer shall be solely responsible for such excess costs. Any decrease in the Stipulated Sum due to a Change Order modifying the scope of the Work shall accrue 100% to the benefit of Progressive. Progressive shall have the right to audit Developer's and Contractor's books and records to verify actual costs incurred by Developer and Contractor for all Work included within the Construction/Development Cost category of the Stipulated Sum; and Developer and Contractor shall make their 9 13 books and records available to Progressive and its accountants and agents during regular business hours. 8. INSURANCE. (a) Developer shall maintain until final completion or, as the case may be, shall be responsible for ensuring that Contractor maintain, as part of the Project and at no additional expense to Progressive, the insurance set forth in clause (b) below. The Developer shall also be responsible for the filing and settling of claims and liaison with insurance adjusters. The Developer shall send a copy of all policies to Progressive, which shall be deemed to have approved of such policies unless, within 30 days after receipt thereof, it shall by notice in writing advise the Developer to the contrary. (b) The Contractor shall maintain worker's compensation insurance, commercial general liability insurance (on an occurrence basis), automobile liability insurance and umbrella liability insurance with companies reasonably satisfactory to Progressive. The general liability policy shall be for a combined single limit for personal injury and property damage of not less than $2,000,000, and shall provide coverage, at a minimum, for (i) broad form contractual liability; (ii) products liability and completed operations; and (iii) broad form property damage coverage. The automobile liability policy shall be written for a combined single limit for bodily injury and property damage of not less than $1,000,000. The umbrella liability policy shall be for a maximum single limit of $20,000,000 for supplementing the comprehensive general liability policy and automobile liability policy. In the case of worker's compensation coverage, insurance shall be in amount statutorily required. The comprehensive general liability automobile liability and umbrella liability insurance policies shall name Progressive, Developer and any mortgagee of the Property ("Lender") as additional insureds. The foregoing insurance coverage shall be at the expense of Developer. The Contractor policies shall be maintained throughout the Project duration, shall include a Waiver of Subrogation, shall provide that such policy may not be cancelled or reduced in coverage without thirty days notice and shall have deductable levels of not more than: Worker's Compensation $250,000; Commercial General Liability %150,000; and automibile liability policy $0 (zero dollars). (c) Progressive shall also procure and maintain a builder's risk insurance policy on an "all risk" 100% replacement cost basis and shall name Developer and Contractor, as additional insureds. 9. ARCHITECT, ENGINEER AND OTHER PROFESSIONALS. Developer represents that the design agreements (the "Design Agreements") with Architect, Engineer and other professionals retained by Developer and/or Contractor for the Work shall, without limitation, contain the following: 10 14 (a) The Architect and Engineer shall be required to carry errors and omissions insurance, on an occurrence basis, in an amount not less than $2,000,000, and such other professionals shall be required to carry errors and omissions insurance in amounts reasonably acceptable to Developer and to Progressive. All such professionals shall be required to indemnify Progressive against errors and omissions including patent infringement; and (b) The rights to use the Plans and other related documents prepared in connection with the Work are and shall remain under the control of Progressive and may not be used by others without Progressive's consent (except that Developer and its agents may use such Plans and related documents only in connection with their performance of this Agreement). Such professionals shall be required to deliver to Progressive copies, including reproducible copies and computer diskettes, of the Plans and other related documents for information and reference in connection with Progressive's use and occupancy of the Project. Further, the Plans and other related documents may be used by Developer and Progressive, in whole or in part, or in modified form, for completion and maintenance of the Project by others, without further employment of, or payment of any compensation to, Architect, Engineer and other design professionals, in which event, Developer and Progressive shall release such professionals from any responsibility for the conformance of the incomplete portions of the Project to the Plans and other related documents and shall indemnify such professionals against and hold them harmless from all claims arising from causes other than the negligence or fault of such professionals. In the event of the termination of this Agreement for whatever reason, Developer shall immediately return and deliver to Progressive all originals, copies and reproductions of the Plans and other related documents then in the possession or control of Developer, Architect, Engineer and such other professionals retained by Developer. 10. PAYMENT AND PERFORMANCE BONDS. Developer shall, at its own cost and expense, procure payment and performance bonds for (i) each subcontractor or materialman, irrespective of contract value, involved with the Building envelope (exterior or roof) and (ii) at Developer's discretion, each subcontractor or materialman whose contract for the Project exceeds $100,000 in the aggregate. Progressive shall be a co-obligee with respect to such bonds. 11. DELAY DAMAGES. If the Substantial Completion Date does not occur on or before the Delivery Date, as such date may be extended by reason of Change Order, Force Majeure, or Progressive Delay, then Developer shall pay to Progressive, as liquidated damages for each business day of such delay, the Per Diem Delay Damage Amount from the Delivery Date until the Substantial Completion Date ("Delay Damages"). The "Per Diem Delay Damage Amount" shall be $3,000.00. 12. TERMINATION OF AGREEMENT. If Developer defaults or fails or neglects to carry out its Work in accordance with the Contract Documents, Progressive may give written notice that Progressive intends to terminate this Agreement, which notice shall contain a reasonably 11 15 detailed explanation of the reasons for the proposed termination. Developer shall correct the defaults, failure or neglect within 10 days after being given such notice; provided, however, if (i) the nature of such defaults, failure or neglect is such that they are not reasonably capable of being corrected within such 10 day period and (ii) Developer notifies Progressive of a reasonable alternative period reasonably acceptable to Progressive within fifteen days of receipt of such notice, Developer shall be allowed such reasonable alternative period to correct the defaults, failure or neglect so long as Developer promptly commences and diligently pursues such corrections to completion. If Developer fails to make such corrections within the 30 day period or fails to commence and diligently pursue to completion such corrections within the alternative period, then Progressive may, at its sole discretion and without prejudice to any other remedy, (x) make good such deficiencies and cause the deduction of the cost thereof from the payment due Developer or (y) with fifteen days notice, terminate the employment of Developer and take possession of the site and of all materials, equipment, tools and construction equipment and machinery thereon owned by Developer and, if Progressive so chooses, finish the Work by whatever method Progressive may deem expedient. If the expense of finishing the Work exceeds the unpaid balance of the Stipulated Sum, Developer shall pay the difference to Progressive on demand. Upon termination hereunder, those contracts for the design and/or construction of the Work designated by Progressive shall be assigned to Progressive for Progressive to use at Progressive's option to complete the Work. Progressive's remedies set forth hereunder are not exclusive, and Progressive has the right to pursue any other right or remedy available to it at law or in equity. 13. DISPUTE RESOLUTION. Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section 13, which shall be the sole and exclusive procedure for the resolution of any such dispute. (a) The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by direct negotiation between executives who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this Agreement. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within fifteen (15) days after delivery of the notice, the receiving party shall submit to the other a written response. The notice and the response shall include (a) a statement of each party's position and a summary of arguments supporting that position, and (b) the name and title of the executive who will represent that party and of any other person who will accompany the executive. Within 30 days after the delivery of the disputing party's notice, the executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. 12 16 (b) If the dispute has not been resolved by negotiation within 45 days of the disputing party's notice, or if the parties fail to meet within 20 days, the parties shall endeavor to settle the dispute by mediation using a mediator and mediation mutually agreeable to the parties. In the event that the parties are unable or unwilling to agree on a mediator or the mediation procedure to employ, then the parties shall endeavor to settle the dispute by mediation under the then current American Arbitration Association Commercial Mediation Rules. The cost of the mediator's services incurred in conjunction with any mediation conducted under this Section 13 shall be shared equally by the parties. (c) If the dispute has not been resolved by non-binding means as provided herein within 90 days of the initiation of such procedure, either party may initiate litigation upon 10 days written notice to the other party; provided, however, that if one party has requested the other to participate in a non-binding procedure and the other has failed to participate, the requesting party may initiate litigation before the expiration of the above period. (d) All applicable statutes of limitation and defenses upon the passage of time shall be tolled while the procedures specified in this Section 13 are pending. The parties will take such action, if any, required to effectuate such tolling. (e) Each party is required to continue to perform its obligations under this contract pending final resolution of any dispute arising out of or related to this Agreement, unless to do so would be impossible or impracticable under the circumstances. (f) If Progress Payment (Paragraph 6) has been reduced due to Progressive action, the amount deducted shall accrue interest as stated in Paragraph 32 if it is determined in the Dispute Resolution that the deduction from payment was not justified. 14. WARRANTIES. (a) Developer warrants and represents to Progressive that the Work (i) will be completed in accordance with the Contract Documents, (ii) will comply with all applicable covenants and restrictions and all applicable governmental codes, rules and regulations in effect at the execution of this Agreement, (iii) will be new (except for those portions of any existing improvements located upon the Property which are to remain as a part of the Project under the Plans), and (iv) will be free of all liens, claims and encumbrances consistent with the provisions of Section 15, hereof. In addition, Developer (i) shall obtain from the roofing manufacturer an industry standard 20 year warranty against roof leakage due to defective materials , (ii) shall obtain from the roofing subcontractor a one year warranty against roof leakage due to defective workmanship and (iii) shall use commercially reasonable efforts to obtain extended 13 17 warranties relating to major equipment included in the construction of the Project or the Work provided under any construction and/or supply contracts now or hereafter entered into by Developer or Contractor for construction of the Project and the Work. (b) Developer hereby guaranties to Progressive that all Work for the Project will be in conformance with the Contract Documents free from defects in workmanship and materials for a period of one year after Substantial Completion Date. (c) In the event that the Work or any portion thereof is found defective or not in accordance with the Contract Documents within the one year time period set forth in Section 14(b), Developer shall correct it or cause it to be corrected promptly after written notice from Progressive to do so. Developer shall not have any liability for any claimed breach of the above guarantee unless Progressive gives Developer written notice of breach of such guarantee, specifying the nature of the breach, within one year after the Substantial Completion Date. (d) On the first anniversary of the date following the Substantial Completion Date, Developer shall assign, and cause Contractor to assign, to Progressive the nonexclusive right along with Developer and Contractor to enforce, at Progressive's cost, if Progressive elects to pursue such enforcement, any and all warranties which Developer or Contractor may have relating to construction of the Project or the Work provided under any construction and/or supply contracts now or hereafter entered into by Developer or Contractor for construction of the Project and the Work. After such assignment, Progressive shall have the right, at Progressive's cost, to pursue any such claims in the name of Developer or Contractor. In such event, Developer and Contractor, at their sole cost, shall cooperate with Progressive in connection therewith; provided, however, that Developer and Contractor shall not be obligated to incur third-party costs. (e) Except as specifically set forth above, Developer makes no warranty or representation to Progressive as to the condition and/or suitability of the Project and Progressive waives and releases Developer from any other claim or cause of action Progressive may now or hereafter have or claim to have against Developer for or on account of the construction or condition of the Project, excepting only claims against Developer for (i) fraud or willful misconduct, (ii) Delay Damages, and/or (iii) failure to complete the Work in accordance with the Contract Documents and the terms of this Agreement. 15. LIEN REMOVAL. (a) If, at any time, there is any lien or claim of any kind whatsoever filed against the Project by Contractor, a subcontractor, Architect, Engineer or other design professional or anyone claiming under or through Developer, Contractor, a subcontractor, Architect, Engineer or other design professional for work performed or 14 18 materials, supplies or equipment furnished in connection with the Work, Developer shall, within 60 days, or such shorter period as is required by any loan secured by the Project, after the filing of same, cause such lien or encumbrance to be canceled and discharged of record by payment, bonding or otherwise, at Developer's sole cost and expense, and at no cost to Progressive. (b) If any lien or other encumbrance required to be removed at Developer's sole cost and expense pursuant to subsections 15(a), hereof, is not canceled and discharged of record as aforesaid, Progressive shall have the right to take such action as Progressive shall deem appropriate (which shall include the right to cause such lien or other encumbrance to be canceled and discharged of record), and in such event, all costs and expenses incurred by Progressive in connection therewith (including, without limitation, premiums for any bond furnished in connection therewith, and reasonable attorneys' fees, court costs and disbursements), together with interest thereon at the rate set forth in Section 32 hereof, shall be paid by Developer to Progressive, as applicable, on demand, or at the option of Progressive, as applicable, deducted from any payment then due or thereafter becoming due to Developer in accordance with provisions of this Agreement; and such deducted amount to be paid to Progressive. 16. PROGRESSIVE DELAY. For purposes hereof, a Progressive Delay shall mean delays or hindrances in the Work caused by the acts or omissions of Progressive in its performance of its obligations under this Agreement for the Project, or its failure to respond and give approvals and/or disapprovals within 10 business days after Progressive's Authorized Representative has acknowledged receipt of submittal. In the event of a Progressive Delay, Developer shall seek to minimize the period of delay or hindrance by means which include, without limitation, seeking alternate sources of labor or materials or acceleration of the Work. If in seeking to minimize the period of delay or hindrance added costs would be incurred, Developer shall have no obligation to act unless Progressive executes a Change Order to cover such added costs. If Developer wishes to make a claim for an extension of the Delivery Date and Final Completion Date or increase in the Stipulated Sum by reason of a Progressive Delay, Developer shall give prompt notice to Progressive of such claim. 17. FORCE MAJEURE. For purposes hereof, a Force Majeure shall mean delays or hindrances in the Work caused by (i) acts of God; (ii) strikes, labor disputes, labor shortages or material shortages (for reasons outside of Developer's reasonable control using Developer's professional expertise and good faith diligent efforts); (iii) blackouts; (iv) acts of public enemy; (v) orders of any kind of the government of the United States or of the State of Ohio or any department, agency, political subdivision or official of either of them, or any civil or military authority; (vi) riots; (vii) epidemics disabling the labor force; (viii) landslides; (ix) earthquakes affecting the Project; (x) fires; (xi) hurricanes and/or tornadoes; (xii) adverse weather conditions (i.e., the number of days in excess of the normal weather [rain or snow days] as defined for a 30 day period by the National Weather Bureau for the Cleveland, Ohio metropolitan area); (xiii) floods; (xiv) partial or entire failure of public utilities affecting the Project; (xv) delays associated with the existence, removal or remediation of any Regulated 15 19 Substance (as defined below); (xvi) delay in obtaining any necessary or required building permits, licenses and approvals (for reasons outside of Developer's reasonable control using Developer's professional expertise and good faith diligent efforts); (xvii) delays due to unforeseen soil or other underground conditions; or (xviii) any other similar cause or event beyond Developer's control. Developer shall give notice to Progressive of the occurrence of any event of Force Majeure that may give rise to a claim for an extension of the Delivery Date and Final Completion Date or adjustment to the Stipulated Sum as soon as reasonably possible after the discovery by Developer of such Force Majeure event. Developer shall thereafter use all reasonable diligence in attempting to overcome or lessen the impact of such Force Majeure event and shall keep Progressive reasonably informed of Developer's progress in mitigating the effects of any such Force Majeure event. Developer shall cooperate with Progressive, and allow Progressive to participate in attempting, to resolve or mitigate any such Force Majeure event, but Progressive shall not have any obligation to do so. 18. INDEMNIFICATION. Developer shall indemnify and hold Progressive harmless, to the extent permitted by law, from any and all third party claims or causes of action for loss, liability, damage or expense, including reasonable attorney's fees and disbursements, directly arising out of (i) the performance of the Work, including, but not limited to, any mechanics or construction liens arising as a result thereof, (ii) any failure of the Project or Work to comply with any applicable governmental laws, ordinances, rules and regulations in effect as of the Substantial Completion Date, (iii) any negligence of Developer, the Contractor or any subcontractor, (iv) any breach of Developer's warranties and representations under this Agreement, and (v) Developer's failure to comply with the performance of any of its other covenants or obligations under this Agreement; provided that such indemnity and hold harmless shall not apply to any loss, liability, damage or expense, including attorneys' fees, to the extent arising out of any negligent act or omission of Progressive or any officer, employee, agent, representative or contractor of Progressive. 19. NON-DEVELOPER WORK. Any other work, installations, furniture, fixtures and equipment relating to the Project desired by Progressive, to the extent not included within the scope of the Work under the Plans shall be deemed to be "Non-Developer Work" and shall be performed by and at the sole cost of Progressive. Developer shall cooperate with and afford Progressive's separate contractors reasonable opportunity for introduction and storage of their materials and equipment in a reasonably safe and secure area for execution of their Non-Developer Work. All such materials and equipment shall be insured by Progressive or its contractors or subcontractors, and all risk of loss, liability and responsibility for such stored materials and equipment shall belong to Progressive or its contractors or subcontractors. Any and all such Non-Developer Work performed by or on behalf of Progressive shall be performed in such a manner so as to cause the least amount of interference with Developer's completion of the Work; and Developer shall have overall control of coordinating any such Non-Developer Work so as to insure that such Non-Developer Work does not hinder or delay completion of the Work. 16 20 20. MAINTAIN PROJECT. Throughout the performance of the Work, Developer shall keep the Project free from accumulation of waste materials or rubbish caused by Developer's operations; it being expressly understood by the parties hereto that Progressive and its contractors shall be responsible for such obligation with respect to any Non-Developer Work. On or before the Final Completion Date, Developer shall remove from and about the Project Developer's tools, construction equipment, machinery, surplus materials, waste materials and rubbish and provide the Project in a clean state (i.e., relative to the Work). 21. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio. If any provision of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby and each provision of the Agreement shall be valid and enforceable to the fullest extent permitted by law. 22. NOTICES. All notices and demands by any party to any other shall be given in writing and sent by a nationally recognized overnight courier or by United States certified mail, postage prepaid, return receipt requested, and addressed as follows: To Developer: GP Ohio, L.L.C. c/o Gilbane Properties, Inc. 7 Jackson Walkway Providence, Rhode Island 02903 Attn.: Michael E. Culbert With a copy to: GP Ohio, L.L.C. c/o Gilbane Properties, Inc. 7 Jackson Walkway Providence, Rhode Island 02903 Attn.: Robert V. Gilbane With a copy to: Michael J. Dwyer Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 To Progressive: Progressive Casualty Insurance Company 300 North Commons Boulevard Mayfield Village, OH 44143 Attention: Daniel Schluer With a copy to: Michael Uth Assistant General Counsel Progressive Casualty Insurance Company 6300 Wilson Mills Road 17 21 Mayfield Village, Ohio 44143 Any party may, upon prior notice to the others, specify a different address for the giving of notice. Notices shall be effective one day after sending if sent by overnight courier or two days after sending if sent by certified mail, return receipt requested. 23. PROGRESSIVE'S AUTHORIZED REPRESENTATIVE/CONSULTANT. Progressive designates Daniel Schluer as a "Progressive's Authorized Representative", and anyone else whom, with prior notice to Developer, Progressive may designate as a Progressive's Authorized Representative. Any Progressive's Authorized Representative shall have the authority to act individually or jointly with any other Progressive Authorized Representative to approve in writing all plans, drawings, specifications, Change Orders, charges and approvals to this Agreement on behalf of Progressive. Progressive's Authorized Representative shall inform Developer of any errors, omissions, defects, deficiencies or other problems that such Progressive's Authorized Representative believes may exist in order to assist Developer in rectifying same, but this undertaking shall not in any way affect the obligations and responsibilities of Developer under this Agreement. Developer shall keep Progressive's Authorized Representative informed as to the progress of the Work, shall provide Progressive's Authorized Representative with copies of the Project Monthly Report and updates or refinements to the Project Schedule and keep Progressive's Authorized Representative reasonably informed of upcoming key milestone events in the Project Schedule. 24. SUCCESSORS AND ASSIGNS. Except as expressly otherwise provided, all of the terms, covenants and conditions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be assigned without the prior written consent of all parties to this Agreement, which consent shall not unreasonably be withheld except that Progressive may assign this Agreement or delegate any of its rights or obligation hereunder to any of its affiliates upon notice to Developer; provided that Progressive shall remain liable for the full performance of all of its obligations under this Agreement. 25. REGULATED SUBSTANCES. As used herein, the term "Regulated Substance" shall mean and include any, each and all substances or materials now or hereafter regulated pursuant to any Environmental Laws, including, but not limited to, any such substance or material now or hereafter defined as or deemed to be a "Regulated Substance", "Pesticide", "Hazardous Substance" or "Hazardous Waste" or included in any similar or like classification or categorization thereunder. As used herein, the term "Environmental Laws" shall mean and include the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, the Hazardous Materials Transportation Act, the Toxic Substances and Control Act, the Federal Insecticide, Fungicide and Rodenticide Act and all applicable state and local environmental laws, ordinances, rules, requirements, and regulations, as any of the foregoing may have been or may be from time to time amended, supplemented or supplanted and any and all other federal, state or local laws, ordinances, rules, requirements, and regulations, now or 18 22 hereafter existing, relating to the preservation of the environment or the regulation or control of petroleum products, toxic or hazardous substances or materials or other environment threatening substances or materials. Developer shall not bring unto the Project site (or allow to be brought onto the Project site) any Regulated Substance, except such materials as are routinely used in connection with construction and then only in accordance with appropriate guidelines, standards, and practices in the industry. Developer shall advise Progressive immediately if Developer becomes aware of Regulated Substances on or near the Project site. 26. TIME OF THE ESSENCE. Time shall be of the essence with respect to this Agreement and of every provision hereof. 27. INDEPENDENT CONTRACTOR. It is expressly understood and agreed by the parties hereto that Developer, in performing its obligations under the Contract Documents, shall be deemed an independent contractor and not an agent, employee or partner of Progressive. 28. NO WAIVER. The failure of Progressive to insist upon the strict performance of any provisions of the Contract Documents, the failure of Progressive to exercise any right, option or remedy hereby reserved, or the existence of any course of performance hereunder shall not be construed as a waiver of any provision hereof or of any such right, option or remedy or as a waiver for the future of any such provision, right, option or remedy or as a waiver of a subsequent breach thereof. The consent or approval by Progressive of any act by Developer requiring Progressive's consent or approval shall not be construed to waive or render unnecessary the requirement for Progressive's consent or approval of any subsequent similar act by Developer. Progressive's approval of payment of any amount due hereunder with knowledge of a breach of any provision or requirement of the Contract Documents shall not be deemed a waiver of such breach. No provision of the Contract Documents shall be deemed to have been waived unless such waiver shall be in writing signed by the party to be charged. 29. SEVERABILITY. If any term or provision of this Agreement shall be determined to be invalid or unenforceable in any respect, it shall be replaced with a substantially similar provision to the greatest extent possible and the Agreement shall remain in full force and effect. 30. COOPERATION. The parties agree to cooperate to achieve the objectives of this Agreement and to use reasonable and good faith efforts to resolve all disputes and disagreements that may arise hereunder. 31. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but both of such counterparts together shall be deemed to be one and the same instrument. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for the other counterpart. 32. INTEREST. Any amount due hereunder which is not paid when due shall bear interest at an annual rate equal to the greater of (i) 1% per annum in excess of the Prime Rate or (ii) 10% per annum (but in no event shall such rate of interest exceed the maximum rate of interest 19 23 permitted to be charged by law) from the date due until paid, compounded monthly, but the payment of such interest shall not excuse or cure any default by any party under this Agreement. "Prime Rate" means the highest base rate on corporate loans posted by at least 75% of the 30 largest banks in the United States as published from time to time by THE WALL STREET JOURNAL. 33. ENTIRE AGREEMENT. This Agreement and the exhibits attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understandings between Developer and Progressive concerning the Property and the development of the Project thereon and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than are herein set forth. No alteration, amendment, change or addition to this Agreement shall be binding upon Developer or Progressive unless reduced to writing and signed by each party. 34. INTENTIONALLY LEFT BLANK. 35. TERMINATION. Except for Developer's obligation under Section 14, Section 15 and Section 18, and except for any liability for Delay Damages under Section 11, Developer's obligations and liability under this Agreement shall expire following the occurrence of the Final Completion Date and the assignment of any documents to be assigned upon final completion (i.e. assignment of warranties). This Section 35 shall in no way lessen or otherwise affect the liability the Architect, Engineer and other design professionals may have with respect to the Project. 36. FACSIMILE SIGNATURES. Either party hereto may execute this Agreement by facsimile signature which facsimile signature shall be deemed to be an original signature. 37. CONTINGENCY. Notwithstanding anything contained in this Agreement to the contrary, Developer's and Progressive's obligations under this Agreement shall be contingent upon (a) Developer obtaining government approvals, permits and licenses necessary or required for the start of construction of the Project, and (b) Progressive and Developer agreeing on the Scope Documents and Stipulated Sum as contemplated under Sections 2(b) and 7(a). Upon satisfaction of contingencies (a) and (b), prior to commencement of construction of the Project, Developer shall notify Progressive of Developer's intent to commence construction of the Project and Progressive shall have 3 days after receipt of any such notice to give notice of termination of this Agreement; the failure of Progressive timely to terminate upon receipt of such notice shall be deemed a waiver of Progressive's right to terminate this Agreement under this Section 37. In addition, if such contingencies have not been satisfied or waived on or before November 18, 1999, Progressive and/or Developer shall have the right to terminate this Agreement effective as of November 19, 1999 by written notice to the other. In the event of termination under this Section 37, Progressive shall pay to Developer all out-of-pocket third party expenses incurred by Developer in design and pre-construction development activities together with a termination fee in the amount set forth on EXHIBIT D for the applicable date 20 24 of termination to compensate Developer for its labor and efforts hereunder through the date of termination. 38. NOTICE OF COMMENCEMENT. Developer acknowledges that it has received a copy of the Notice of Commencement attached hereto as EXHIBIT F and that at all times following the date Work commences, Developer will keep a copy of such Notice of Commencement posted in a conspicuous place on the Project site. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day, month and year first above written. (Developer) GP Ohio, L.L.C. By: Gilbane Properties, Inc., Managing Member By: /s/ Edward T. Broderick -------------------------------------- Title: Vice President (Progressive) Progressive Casualty Insurance Company By: /s/ Daniel E. Schluer ------------------------------------------- TITLE: Senior Real Estate Project Manager 21 25 EXHIBIT A --------- Property Depiction/Survey (Property Depiction/Survey) 26 EXHIBIT B --------- Preliminary Scope Documents 27 Development Agreement - Exhibit B Exhibit B-1 - Schedule A PROGRESSIVE CASUALTY INSURANCE COMPANY Building Description and Outline Specification ---------------------------------------------- October 29, 1999 This section outlines the design specifications, which have been developed for Progressive's requirements. I. GENERAL PROJECT OVERVIEW Project Description - ------------------- Progressive intends to develop a state-of-the-art Data/Information Systems Center in suburban Mayfield Village, Ohio. The project will be master planned to accommodate growth. The Phase I project is designed to house the data center for Progressive's primary computer and processing equipment. The Phase I building will be approximately 80,000 square feet comprised of the following space: 37,600 sf Data Processing Area 25,000 sf Mechanical Room/Utility & Support Area 2,400 sf Loading 11,550 sf Office/Support Area 3,450 sf Core Area ------- 80,000 sf Total Area * * A generator building of approximately 6,000 -square-feet will be provided The design criteria for the mechanical and electrical systems will be as follows: - - Uninterruptible Power Supply = 2N+2 - - Generators = 2N - - Chilled Water Plant = 2N - - Make-up Water = 2N - - Fire Protection = N - - Electrical Distribution = 2N - - Chilled Water Distribution = 1.5N - - Other = N The above design criteria is based on the final system configuration with all future equipment installed. 1 28 The building shall be designed to accommodate state-of-the-art systems with the intent of expanding to meet long-term data processing requirements. The building utility infrastructure will enable building operation to be independent of local utilities during an outage for approximately three days for on-site fuel and one day for water storage. For the office/support area design and planning will incorporate relevant office building technology and also provide an infrastructure for long-term future growth and ongoing facility change. Building Concept - ---------------- The exterior building appearance in both design and finish shall be responsive to surrounding topography and the corporate image/culture the Company intends to portray. The building will be broken into four (4) principal elements: the data processing area; office/support areas; the entrance/ core lobby area, and; the mechanical/electrical and utility service area. These building elements will be focused in a single-story building where the facade will be concrete panels with minimum window openings. The main lobby will be a focal point of the building and act as a central security/control point. The finishes planned for the main entrance are ceramic tile with a walk off mat insert in the vestibules. The lobby will have a pass-through counter/window separating Lobby and adjacent Security Room. A separate generator building will be provided. Add alternates shall be obtained from all major equipment suppliers and subcontractors for future equipment attic stock and extended equipment maintenance/warranties. These alternatives will be presented to Progressive during project implementation for approval/funding or rejection. Bay Size - -------- Shall be approximately 30'x 40'; with mechanical and electrical plant bays being approximately 30' x 50'. Building Module - --------------- 24" x 48" shall be incorporated Floor Configuration - ------------------- General - ------- - - Floor size is approximately 80,000 square feet for a single-story configuration General building area Phase I building: Data processing 37,600 Mech/Elec. & support 25,000 Loading 2,400 Office/Support 11,550 CORE AREA 3,450 ---------------------------------- Total 80,000 SF 2 29 - - In addition an independent generator building of approximately 6,000 SF will be constructed as shown on the site plan. - - All slabs shall be designed to accommodate a 2' x 2' raised floor system, 48" high, designed for a uniform load of 300 lbs. and a concentrated load of 1,250 lbs). Raised floor shall be installed in accordance with the attached approved Schematic Floor Plan. Codes/Standards/Requirements - ---------------------------- All design and construction shall be in accordance with applicable local, state, federal codes and standards, ADA, Progressive and their underwriters' requirements as identified herein. In the event of a conflict between the applicable codes or standards, the more stringent shall prevail. Loading - ------- Loading/Receiving - ----------------- - - Two four foot (4') high docks shall be provided with appropriate bumpers, seals, lighting and air pillow levelers. Loading dock area shall be enclosed and a secured and heated receiving area shall be provided. Overhead doors shall be motorized and interior walls shall be painted white. Geotechnical - ------------ Geotechnical report will be prepared for the site. Building and site shall be designed accordingly utilizing an appropriate foundation system. Spread footing design has been assumed for this proposal. Environmental - ------------- A Phase I environmental survey has been completed by Progressive and no environmental problems were noted as a result thereof. II. SITEWORK Site Plan - See attached approved Schematic Plan - --------- Site Utilities - - All required utilities shall be extended underground from points indicated on Bialosky Partners Drawings M400 and #100A, both dated October 5, 1999, Bulletin #67 , to the building with adequate capabilities to meet the project requirements as described herein. All utility work beyond limits of Work shall be by others. - - Required communication service will be identified and coordinated by Progressive. Base building will provide Main Distribution Frame Room and access via conduit. The conduit will be provided to points as shown on the above referenced plans. 3 30 - - Domestic water will be supplied from the Campus Water Distribution System to the building and on-site storage tank. - - Fire protection water will be supplied from the Campus Water Distribution System to the building and on-site storage tank. - - Site storm drainage and exterior gutter drains shall be piped underground and discharged into appropriate storm drainage system, as provided by Progressive to a point approximately 30 feet outside building and shown on Exhibit A. Sheet draining of parking lot to catch basins and/or swells in non-paved areas may be incorporated prior to runoff entering underground piping system. - - Separate waste and sanitary lines will be extended from the building and converge at the sanitary man-hole located outside of the building. - - Two primary electric services shall be provided at Progressive's cost. Conduit to a match point shown on Exhibit A (30' from building) will be provided. An allowance of $20,000 is provided for the two primary feeder cables from Central Chilled Water Plant to project transformers. Roads and Driveways - ------------------- - - Paving sections shall conform to final civil geotechnical recommendations. - - Heavy duty paving section shall be provided for truck access. - - Fire access shall be provided around building as required by code. - - Concrete curbs shall be provided at all site and building entrances. Parking - ------- A minimum of 60 parking spaces (other parking spaces will be provided on-site by Progressive, if needed) will be provided for the project. Security with regards to vehicle access and visitor parking will be a site plan consideration. Parking Stalls - Minimum 9' width striped stalls - -------------- - - Visitor and service parking areas shall be provided as appropriate. Lighting - -------- - - Metal halide lamps on poles (match existing) achieving between one-half and one foot candles and laid out to match existing. Landscaping - ----------- - - Will be consistent with surrounding area and integrated with final site master plan creating a corporate campus environment. All work included in Landscape Allowance of $25,000. Access, Security - $50,000 Allowance - ------------------------------------ 4 31 - - The building shall be equipped with an electronic surveillance system to monitor areas of the building interior and exterior (cameras shall be provided in appropriate location). - - A card access system with programmable levels of security shall be provided at exterior doors and raised floor perimeter. The base system will be expandable to permit future monitoring of systems and be an extension of the existing campus system. - - System shall be CardKey. - - Base building shall include rough-in for fifteen cameras on/or within the building and contacts at all exterior doors. Three (3) electronic strikes shall be provided at exterior doors. All other security cost provided in Security System Allowance of $50,000. Signage - ------- - - Signage shall meet applicable Code and ADA requirements (signage allowance of $20,000 has been included). Loading Area - ------------ - - Security: surveillance camera (see Security Section). - - Finishes: Sealed exposed concrete floor. - - Eight foot chain link fence and access/security gates to be provided via Fencing Allowance of $20,000. III. STRUCTURAL Design Loads - Floors - --------------------- Structural floor systems shall be designed with the minimum live loads, including partitions: - - Dock Areas: 200 psf - - All Other Areas: 150 psf, including partitions. Structural System - ----------------- - - The structural system will be designed to meet load requirements and applicable codes. Foundations - ----------- - - Foundations shall be designed and constructed with proper consideration given to soil, rock and ground water conditions of the site. - - Final foundation design (assumed to be a spread footer) shall be consistent with geotechnical and structural engineers' recommendations. All concrete shall have a minimum 28-day compressive strength of 3,000 psi. Slab on grade floors shall be consistent with design loads described above. 5 32 IV. EXTERIOR WALL Combination of cast concrete and punched windows. System Performance Criteria - --------------------------- - - Wind Loads: Minimum as required by code or higher as recommended by structural engineer. - - Thermal Values: As required by Ohio Code. - - Walls/Spandrels: Minimum to be selected by architect. - - Glass: Insulated double pane. - - Water infiltration: no uncontrolled leakage inboard of system (as designed by system performance criteria.) - - Fire protection: as required by code. - - A vapor barrier system will be incorporate to permit elevated humidity levels (50%RH) during the winter. V. ROOFING Roofing materials shall comply with all applicable codes. Roofing System Criteria - ----------------------- - - The system shall be a three-ply modified Bitumen roofing system. - - Warranty: Twenty years from the system manufacturer. - - The roof will be pitched at a slope of .25" per 12". - - Insulation: Polyisocianurate at a thickness required complying with Ohio Energy Code. (Minimum R20). - - Insulation mechanically fastened to meet FM 1-90. - - Pavers: Pavers are not being provided since roof mounted equipment is minimal. - - All roof drainage will be outside the data processing building. VI. PUBLIC AREAS The design and selection of finish materials for public areas should be appropriate for Progressive's corporate image. Durability and ease of maintenance be considered in the selection of finishes. Main Lobby - ---------- - - Lobby floors shall be a ceramic tile with walk off mat insert in the vestibule. - - A pass-through counter with glass window shall be provided between Security Room and entrance lobby. 6 33 - - Rough-in for a Lobby pay telephone shall be provided. - - A building directory shall be incorporated into the lobby design. - - The ceiling shall be a flat painted dry-wall for perimeter with 2 x 2 tegular edge tile inserts. Lobby wall finishes shall be a combination of Type II wall covering and paint. Toilets - ------- - - Toilet areas shall be located as shown on floor plan and installation is to comply with code and ADA requirements. - - Fixture count will conform to variance request and floor plan. - - Ceilings shall be flat drywall tile with can downlight cove lighting. - - At the wet wall, full height glazed ceramic tile. - - At all other toilet room walls a serviceable vinyl wall covering. - - Corian, or equal for lavatory countertops with under-counter sinks. - - Toilet partitions shall be ceiling hung with baked enamel finish. - - Toilets shall be wall-mounted. - - Flooring shall be ceramic tile. - - Provide floor drain in each toilet room. BASE BUILDING FINISHES Electrical/Telephone Closet/ Mechanical Room - -------------------------------------------- - - Ceiling - Exposed structure - - Walls- Painted - - Flooring - sealed concrete Walls and Partitions - -------------------- CORE AREAS AND DEMISING WALLS - - 5/8" gypsum board on metal studs 16" on center, all joints and corners to be taped, bedded and ready for finishing. Erect from floor to underside of roof deck. - - Insulation will be provided. 7 34 Toilet Rooms - ------------ - - 5/8" gypsum (water resistant) board on metal studs 16" on center. Erected from floor to structure with insulation blanket. Doors - ----- Building Entries - - Front entrance doors shall be a part of the entry glazing system with automatic opening capabilities. Doors shall be aluminum storefront. Other Exterior Doors - - UL labeled hollow metal painted. Rated per code. Core Area Doors - - 3'x 8' solid core stain grade wood doors equipped with hinges and standard hardware package. Doors and frames shall be rated where required by code. Kick plates shall be provided at all bathrooms. Core Area Frames - - Hollow metal frames painted to match adjacent wall surface. Double Doors - - All double doors shall have 4' to 2' leafs. 4' leaf shall have a piano hinge or four hinges. 0 VII. MECHANICAL Heating, Ventilating and Air Conditioning - ----------------------------------------- - - Electrical centrifugal chillers shall be as manufactured by Carrier, Trane or York. - - Chiller efficiency shall be 0.6kw/ton for R134A or 0.55 kw/ton for R123 at full load conditions. Chillers shall be furnished with inverter-rated motors with variable frequency drives. - - Building envelope (base on ASHRAE standard 90.1) will have a wall U-factor of .082 and a roof U-factor of .053. - - The inside/outside parameters (based on ASHRAE Fundamentals - 1997) - Inside Temperature: 72 (degrees)F @ 50% RH - Summer Design Temperature: 91(degrees)F db, 73(degrees)F wb - Winter Design Temperature: 1 (degree)F db 8 35 - - Initial installation shall include three 500 ton centrifugal chillers and space for one additional machine. - - Commissioning of critical systems by H.F. Lenz shall be included. - - One year warranties for all equipment shall be included as part of the equipment purchase packages. Add alternates shall be provided for three or five years maintenance contracts on all critical equipment. - - Conditioning of computer room space shall be by chilled-water down-flow environmental control units (ECU), each equipped with manufacturer's standard humidification system. 34 units rated at 26 tons (total), each, shall be provided. - - Conditioning of occupied support areas shall by a central variable-air-volume air handling unit. - - Piping in Data Center Chilled Water Plant shall be furnished with colored PVC jacket for easy identification and durability. - - The data center shall be connected to the main Progressive chilled water plant to provide cooling equal to the critical load of 910 tons in the event that the data center's chiller plant is unable to satisfy the connected load. This shall be accomplished by tying into the existing chilled water plant's primary loop with a bridge and a `T to T' connection. The water will be pumped to two (2) plate-frame heat exchangers. The heat exchangers shall be piped in parallel with the data center's chillers to provide back-up/supplemental cooling to either of the 1,000-ton plants in the event of a failure. - - Butterfly valves in the chilled water system shall be used. - - Outdoor air provisions shall be as follows; human occupied areas = 20 cfm/per person based on an occupancy of 80 plus an allowance for space pressurization. - - Outdoor air shall be introduced through the central air handling unit. - - A Smoking area shall be provided outside main entrance. A 5' x 10' bus shelter with light and electric heat shall be provided. - - Cooling towers shall be induced draft units, one cell per chiller. Towers shall have stainless steel basins. Towers shall be equipped for winter operation. Cooling towers shall be equipped with variable frequency drives. Cooling towers will be designed at 95 FDB and 78 FWB outside air conditions. - - Chilled water and condenser water circulating pumps shall be provided. Only the secondary chilled water pumps will be equipped with variable frequency drives. The drives will be equipped with a bypass feature. VIII. MONITORING SYSTEM All work outlined in this Section shall be included in the Monitoring System Allowance. Allowance of $387,600 shall include cost of all work directly related to this Scope of Work (contractor/sub-contractor related costs). A central automated direct digital control Building Monitoring System (BMS) shall be provided as described below. 9 36 The following functions should flow through the control points of the BMS by taking each system individually and addressing the control points: - - Under raised floor monitoring - - HVAC Control - - Life Safety Interface (as required by code) - - Space comfort level monitoring - - Water detection system - - Water supply systems (per code) - - Electric power distribution - - Other programmable controls It is important that the BMS design be capable of expansion and have a proven track record of performance. System should include an additional view-only monitor to be located at the Reception/Security Desk. HVAC Control - ------------ - - The BMS system shall be designed to be expandable and provide initially 500 pts. - - Start and stop designated equipment within the project. All controllable systems should have remote reset capabilities. - - The air handling unit should be controlled with not less than temperatures, stop/start, filter alarms and dampers. - - Space temperature and humidification level should be read one per air handler zone. LIFE SAFETY (SEPARATE SYSTEM) Life safety control measures which must be considered with the Building Management System's comprehensive plan include: - - Remote control monitoring of fire and jockey pump. - - Status reporting of fire protection systems controls. - - Capability of printing hard copy in engineers office. IX. PLUMBING General - ------- 10 37 - - This section establishes the design criteria for all plumbing work to be executed in the proposed facility and supplements local, state and national codes and laws applicable to the work being undertaken. - - In case of conflict between any code, standard or this RFP requirement, the more stringent provision shall prevail. Systems - ------- - - Domestic water supply system. - - Sanitary fixtures. - - Sanitary drainage and vent system. - - Storm drainage system. - - HVAC system drainage - - Below raised floor drainage. Plumbing - -------- Domestic Water Supply System - - Metered domestic service will be extended from the campus distribution system. - - On-site storage tank (132,000 gallons) will be provided for fire reserve, cooling system make-up and domestic water requirements. - - Parallel back flow preventers will be provided. check valve. Sanitary Fixtures - - All fixtures are to be wall hung. - - All fixtures are to be water saver type and utilize sensor controls. Core Areas - - One (1) men's and one (1) women's toilet rooms. - - One electric hot water heater. Fixture count to be based on attached drawings. A variance shall be obtained for reduced count. - - All toilet rooms shall be accessible to and usable by the physically disabled, as required by local code and the Americans With Disabilities Act (ADA). - - Drinking fountains: Two (2) or per code. - - One vending area/kitchenette for building with water and drainage. Sanitary Drainage System - - Provide a complete sanitary drainage system for the fixtures, floor drains, etc. 11 38 - - Single system trap primer shall be utilized. - - Separate condensate and sanitary drainage systems will be placed below the slab. The systems will converge at the sanitary man-hole outside of the building. This is to protect the raised floor drainage system should the waste lines become blocked. Storm Drainage - - Provide a complete system with gutters and downspouts and connect to the site drainage system. The design will avoid any penetrations through the data processing area. X. FIRE PROTECTION General - ------- - - This section establishes the design criteria for the fire protection work to be executed at the proposed facility. - - Provide an automatic cycling pre-action sprinkler system. - - Dry pendant, semi-recessed sprinkler heads will be provided in all areas with ceilings. Areas without ceilings will be equipped with up-turned sprinkler heads. - - Each sprinkler system shall have a water flow alarm, tamper switches and zone valves connected to a central annunciator panel. - - An underfloor water and smoke detection system throughout the entire raised floor area. - - All above raised floor computer equipment areas shall be protected with pre-action sprinkler system. - - The generator fuel storage rooms will be protected by foam systems. - - The generator room area will be protected by a dry sprinkler system. - - The fire protection system shall be supported by an electric fire pump. The fire pump shall operate from both a normal and emergency power source. XI. ELECTRICAL General - ------- This document establishes electrical design criteria for the proposed facility and shall be used to supplement local, state and national codes and laws which are applicable to the work being undertaken, and those laws dealing with environmental protection, occupational safety and health. In case of conflict, the more stringent requirement shall govern. Standards for Materials - ----------------------- 12 39 All materials shall be new and shall conform to the applicable standard or standards where such have been established for particular material in question. Publications and standards or the organizations listed below are applicable to materials specified herein: - - Underwriters Laboratories, Inc. (UL) - - National Electrical Manufacturers Association (NEMA) - - Other general criteria: - - All electrical motors shall be premium efficiency, inverter duty rated. - - All variable frequency drives shall be of the same manufacturer and model to minimize parts inventory. _ All variable frequency drives shall be provided with RFI/EMI shielding, line inductors, bypasses and 2 spare circuit boards of each type used. - - All circuit breakers 400 amps and larger shall be 100% rated. Scope of Work - ------------- Furnish all material, labor, transportation, tools, equipment and supervision to completely install and leave ready for operation, complete electrical systems in accordance with this proposal. - - Main switchgear, paralleling gear, switchboards, panel boards, distribution boards, transformers, feeders and other equipment for the complete power distribution system. - - Wiring, branch circuiting, conduit systems and devices. - - Lighting system. - - Power wiring and connection for mechanical equipment furnished under other sections. - - Emergency power distribution system should support selected lighting fixtures at all paths of egress as required by applicable code. - - Fire alarm system. The Normal Power System consists of two in-coming services of 5,000 amperes, each. Each service will be fed from a separate transformer rated 3000 KVA, 3 phase, 4 wire, 60 hertz. Each transformer will be fed from a separate utility company primary feeder (provided by the power company). EMERGENCY GENERATOR SYSTEM - - Initial installation shall include three, 2000 kw diesel generators with space for one additional unit . - - The diesel generators shall be as manufactured by CAT or equal. - - The diesel generators shall be standby-duty units with critical mufflers, engine mounted radiators. - - Four 5,000 gallon fuel storage tanks shall be provided. The tanks shall be housed within above-grade, fire-rated vaults as part of the generator building. - - These diesel generators shall furnish both critical and life safety loads. 13 40 UPS System - ---------- - - 4,500 kva UPS shall be provided in six 750 kva modules. Initially four modules, with associated battery strings, will be installed with space for two additional units and their batteries. - - Battery capacity will be 8 minutes. - - PDU's will be furnished under the stated allowance. Progressive provided data will be used to size and configure the PDU arrangement. Main Distribution Frame Room - ---------------------------- - - Provide four (4) sets of six (6) 4" incoming conduits stubbed 6" AFF in building main distribution frame room and extending beyond building site parameter wall underground to connect to conduits extending to utility access by others (see Exhibit A) - - Provide No. 16 galvanized iron "pull wire" or nylon zip string in each telephone conduit opening. - - Provide equipment backboards. Provide 4' x 8', 3/4" fireproof plywood sheets secured to wall around the interior of the room - - Provide one #1/0 copper ground wire for each backboard tied back to main switch gear ground. - - The ceiling shall be exposed structure. - - The finished floor shall be a sealed concrete. - - The Room dimension shall be approximately 30' x 50'. Fire Alarm System - ----------------- Provide a complete stand-alone fire alarm system to comply with Building Code, ADA, and all ordinances having jurisdiction over this project. Fire alarm system shall be individually addressable multiplexed type and shall include, the following: - - Main FACP and one annunciator panel. - - Manual pull stations. - - Horn/strobe devices. - - Smoke detectors in all mechanical equipment rooms, electrical rooms, telephone rooms and lobbies and below the raised floor area. - - Smoke detectors in supply and return ducts or each air handler system in outside air intake fans as required by code. - - Monitoring of all sprinkler system alarm valves, flow switches, tamper switches, etc. as required by code. - - System shall be compatible with existing systems on campus and communicate with the local fire department. 14 41 Lighting System - --------------- - - 4' Utility Fluorescent - Mechanical and Electrical Equipment areas. - - 27 cell parabolic in all office/support areas providing 50 initial foot candles at 3' above an open finish floor. - - All computer raised floor areas and storage areas shall utilize acrylic prismatic lensed fixtures. 15 42 Lightning Protection - -------------------- - - Provide and install a complete lightning protection system in compliance with NFPA No. 780. System shall be installed for a UL Master Label A. Intermediate Distribution Frame Room - ------------------------------------ - - The Intermediate Distribution Frame Room shall be approx. 8'x 10'. - - The ceiling shall be exposed structure. - - The finished floor shall be a static-free tile. - - Provide equipment backboards. Provide 4'x 8', 3/4" fireproof plywood sheets secured to wall around the interior of the room and painted white. - - Provide one #1/0 copper ground wire for each backboard tied back to main switch gear ground XII. VERTICAL TRANSPORTATION - - None Required 16 43 XIII. ALLOWANCES: ALL ALLOWANCES SHALL INCLUDE COST OF ALL WORK DIRECTLY RELATED TO THE SPECIFIC SCOPE OF WORK INCLUDING ALL EQUIPMENT CONTRACTOR/SUBCONTRACTOR COSTS. BMS/Monitoring System(s) $387,600 Fencing $ 20,000 Commissioning by Independent Contractor $ 75,000 Architectural Screening $ 10,000 Landscaping $ 25,000 Appliance $ 8,000 Control Room Millwork $ 15,000 Compactor $ 40,000 Bailer $ 15,000 Attic Stock/Spare Parts - Equipment $ 30,000 Signage $ 20,000 Modifications within Central Chilled Water Plant $ 75,000 PDU's $428,000 Security $ 50,000 Emergency Power-Off System $ 20,000 Primary feeder cables from Chilled Water Plant. $ 20,000 17 44 EXHIBIT B-1 ----------- Supplement to Development Agreement This Supplement to Development Agreement is made and entered into as of the 16th day of November, 1999, by and between GP Ohio, L.L.C., a Rhode Island limited liability company ("Developer") and Progressive Casualty Insurance Company, a Ohio corporation ("Progressive"). RECITALS: A. Developer and Progressive have previously entered into a Development Agreement dated as of November 16, 1999. B. Section 2(b) of the Development Agreement anticipates that Developer and Progressive will mutually agree on certain "Scope Documents" consisting of a building description and outline specifications, schematic building plans and master site plan for the Project (as defined in the Development Agreement). Section 7(a) of the Development Agreement further anticipates that Developer and Progressive will establish the "Stipulated Sum" to be paid by Progressive to Developer for Developer's performance of the Work under the Development Agreement. C. Developer and Progressive have reached agreement on the Scope Documents and Stipulated Sum for the Development Agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties do hereby agree as follows: 1. Attached hereto as SCHEDULE A is the final, approved Building Description and Outline Specifications, Schematic Building Plans and Master Site Plan for the Project. SCHEDULE A attached hereto is hereby incorporated in and shall be deemed a part of EXHIBIT B to the Development Agreement, superseding the preliminary Scope Documents identified in the EXHIBIT B previously attached to the Development Agreement. From and after the date hereof, any and all reference to the Scope Documents and/or EXHIBIT B in the Development Agreement shall be deemed to refer to SCHEDULE A attached hereto. 2. The agreed upon Stipulated Sum under the Development Agreement is hereby established and confirmed to be $24,713,000.00, consisting of a Professional Fees/Project Management category of $2,131,000.00 and a Construction/Development Cost category of $22,582,000.00. 3. Except as expressly modified herein, the Development Agreement remains in full force and effect. 45 4. Terms and conditions of this Supplement shall be binding upon and shall insure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the undersigned have executed this Supplement as of the date first written above. (Developer) GP Ohio, L.L.C. By: Gilbane Properties, Inc., Managing Member By: /s/ Robert V. Gilbane ---------------------------------- Title: President (Progressive) Progressive Casualty Insurance Company By: /s/ Daniel E. Schluer ---------------------------------- Title: Senior Real Estate Project Manager 1 46 EXHIBIT C --------- Project Schedule (Construction Schedule) 47 EXHIBIT D --------- Termination Fee Schedule PERIOD TERMINATION FEE - ------ --------------- On or before September 1, 1999 $100,000 September 1, 1999 to October 31, 1999 $175,000 November 1, 1999 to November 15, 1999 $225,000 On or after November 16, 1999 $275,000 48 EXHIBIT E --------- Expense Categories Design Services $1,477,000 Permits and Fees 25,000 Professional Services Expenses 165,000 49 EXHIBIT F --------- Notice of Commencement 50 ORIGINAL -------- NOTICE OF COMMENCEMENT ---------------------- ( SECTION 1311.04 O.R.C.) STATE OF OHIO, COUNTY OF CUYAHOGA, SS: Daniel E. Schluer being first duly cautioned and sworn states that he is the Senior Real Estate Project Manager of Progressive Casualty Insurance Company, the Owner, that he is duly authorized to give this Notice of Commencement, that the information contained hereinbelow is true as he verily believes, and states the following: 1. NOTICE. Notice is hereby given pursuant to section 1311.04 of the Ohio Revised Code that an Improvement which may be the subject of Mechanic Lien is about to begin. 2. DESCRIPTION. The legal description of the real property upon which the Improvement is to be made is attached as Exhibit A hereto, said exhibit being incorporated by reference into this notice as if fully set forth herein. 3. IMPROVEMENT. The Improvement will be new construction of an approximately 80,000 square foot data center building and associated site improvements. The building will share an address of 300 North Commons Boulevard, Mayfield Village, OH with other buildings on the site. Construction is scheduled to begin November 1, 1999. 4. CONTRACTING PARTY. Progressive Casualty Insurance Company, whose address is 6300 Wilson Mills Road, Mayfield Village, Ohio 44143, is the Owner who contracted for the Improvement. 5. OWNERS DESIGNEE. No designee has been appointed by the Owner for this Improvement. 6. ORIGINAL CONTRACTOR(S). The following is a complete list of the original contractors working on the Improvement and the dates of their contracts: 1) Name: Gilbane Properties, L.L.C. Address: 7 Jackson Walkway Providence, RI 02903-3623 7. LENDING INSTITUTION(S). There are no lending institutions providing financing for the Improvement. 8. SURETIES. No sureties have provided any bonds for the Improvement. 51 9. NOTICE. TO LIEN CLAIMANTS AND SUBSEQUENT PURCHASERS TAKE NOTICE THAT LABOR OR WORK IS ABOUT TO BEGIN ON OR MATERIALS ARE ABOUT TO BE FURNISHED FOR AN IMPROVEMENT TO THE REAL PROPERTY DESCRIBED IN THIS INSTRUMENT. A PERSON HAVING A MECHANICS' LIEN MAY PRESERVE THE LIEN BY PROVIDING A NOTICE OF FURNISHING TO THE ABOVE-NAMED DESIGNEE AND HIS ORIGINAL CONTRACTOR, IF ANY, AND BY TIMELY RECORDING AN AFFIDAVIT PURSUANT TO SECTION 1311.06 OF THE REVISED CODE. A COPY OF THIS NOTICE MAY BE OBTAINED UPON MAKING A WRITTEN REQUEST BY CERTIFIED MAIL TO THE ABOVE-NAMED OWNER, PART OWNER, LESSEE, DESIGNEE, OR THE PERSON WITH WHOM YOU HAVE CONTRACTED. 10. PREPARER. The following is the name and address of the person who prepared this Notice of Commencement. 1) Name: Daniel E. Schluer Address: 300 North Commons Boulevard Mayfield Village, OH 44143 11. Further Affiant sayeth naught. /s/ Daniel E. Schluer ---------------------- Daniel E. Schluer Sworn to and subscribed in my presence this 26th day of October, 1999. /s/ Rachael J. Lardie ---------------------- NOTARY PUBLIC 52 EXHIBIT A LEGAL DESCRIPTION Situated in the Village of Mayfield, County of Cuyahoga and State of Ohio, and known as being part of Original Mayfield Township Lot Nos. 15 and 25, Tract No. 1, and being further bounded and described as follows: Commencing at a 1 inch diameter iron pin monument found in the centerline of S.O.M. Center Road, (S.R. 91), 60 feet wide, at its intersection with the Southerly line said Original Lot No. 15; Thence North 1(degree)15'18" East, along the centerline of S.O.M. Center Road a distance of 692.89 feet to the Southeasterly corner of land conveyed to the Village of Mayfield by deed recorded in Volume 97-11623, Page 25 of Cuyahoga County Records; Thence North 89(degree)23'28" West along the Southerly line of land so conveyed to the Village of Mayfield a distance of 777.90 feet to capped iron pin set at the principal place of beginning of the parcel of land herein described; Thence South 43(degree)26'00" West, a distance of 940.00 feet to a capped iron pin set; Thence South 56(degree)26'40" West, a distance of 881.08 feet to a capped iron pin set in the Easterly Limited Right of Way of State Highway No. 1, (Interstate 271); Thence North 3(degree)14'16" West, along said Easterly Limited Right of Way line a distance of 129.87 feet to a capped iron pin set at an angle therein; Thence North 5(degree)47'36" East, continuing along said Easterly Limited Right of Way line a distance of 560.68 feet to a capped iron pin set at an angle therein; Thence North 0(degree)17'43" East, continuing along said Easterly Limited Right of Way line distance of 116.18 feet to a capped iron pin set at the Southwesterly corner of land conveyed to the C.E.I. Co. by deed recorded in Volume 14210, Page 869 of Cuyahoga County Records; Thence South 89(degree)23'28" East, along the Southerly line of land so conveyed the C.E.I. Co. a distance of 30.00 feet to a capped iron pin set at the Southeasterly corner of said land; Thence North 2(degree)20'48" East, along the Easterly line of land so conveyed to the C.E.I. Co. a distance of 108.52 feet to a capped iron pin set at the Northeasterly corner of said land; Thence North 89(degree)23'28" West, along the Northerly line of land so conveyed to the C.E.I. Co. distance of 35.00 feet to a capped iron pin set at the Northwesterly corner of said land, in the Easterly Limited Right of Way of State Highway No. 1, (Interstate 271); Thence North 0(degree)17'43" West, along said Easterly Limited Right of Way line a distance of 181.02 feet to a capped iron pin set at an angle therein; Thence North 3(degree)25'45" East, continuing along said Easterly Limited Right of Way line a distance of 90.58 feet to a 3/4 inch diameter iron pin found at the Southwesterly corner of land conveyed to the Village of Mayfield, aforesaid; Thence South 89(degree)23'28" East, along said Southerly line a distance of 1313.32 feet to principal place of beginning and containing 19.6383 acres of land, be the same more or less as surveyed by Stephen Hovancsek and 53 Associates, Inc., Registered Surveyor No. 5160, State of Ohio in January 1998, but subject to all legal highways. Bearings are to an assumed meridian and are used to denote angles only. All capped iron pins set are 5/8 inch diameter rebar, 30 inches long, with a plastic cap marked SH&A 5160. Prior instrument reference: Volume 97-11876, Page 01. EX-10.D 8 EXHIBIT 10(D) 1 Exhibit No. 10(D) AIRCRAFT PURCHASE AGREEMENT --------------------------- THIS AIRCRAFT PURCHASE AGREEMENT (this "Agreement") is entered into as of this 23rd day of April, 1999, by and between Village Transport Corp., a Delaware corporation having an office at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ("Seller"), and ACME Acquisition Corporation, an Ohio corporation having an office at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ("Buyer"). 1. PURCHASE AND SALE. Upon and subject to the terms and conditions set forth herein, at Closing (as defined below), Seller shall sell and deliver to Buyer, and Buyer shall purchase from Seller, the following: (a) CANADAIR CHALLENGER 601-1A Serial No. 3007, bearing United States Registration No. N711SX, equipped with two (2) General Electric CF 34-1A engines, bearing manufacturer's Serial Nos. 350-105 and 350-104, and all related avionics, appliances, parts, instruments, equipment and accessories, and as described in the specifications attached hereto as Exhibit A (the "Challenger"); and (b) all related manuals and catalogs (as set forth in Exhibit A-1), documents, logbooks and maintenance and other records (the "Challenger Documents"). 2. PAYMENT. In consideration for good and marketable title to the Challenger and the Challenger Documents as herein provided, at Closing, Buyer hereby agrees to pay to Seller, and Seller agrees to accept from Buyer, by wire transfer the aggregate sum of TWELVE MILLION ONE HUNDRED SEVENTEEN THOUSAND TWO HUNDRED AND FORTY-THREE U.S. Dollars ($12,117,243.00) (the "Purchase Price"). 3. CLOSING. (a) TIME AND PLACE. The closing of the transaction contemplated herein (the "Closing") shall take place at Wilmington, Delaware, or at such other location as the parties may mutually agree. The Closing shall take place on a date ("Closing Date") to be selected by mutual agreement of the parties, which shall be on or about April 23, 1999, but no later than July 31, 1999, subject to Sections 12 and 16 below, unless a later date is mutually agreed upon by the parties. (b) EVENTS AT CLOSING. At Closing, Seller shall sell and convey to Buyer, against delivery of the Purchase Price, as provided at Section 2 above, good and marketable title to the Challenger, free and clear of all liens, encumbrances, claims and rights of third parties. Possession of the Challenger will be delivered by Seller to Buyer at the time and place of Closing. (c) OBLIGATIONS OF SELLER. At Closing, Seller shall deliver, or cause to be delivered, to Buyer the following: (i) possession of and title to the Challenger and the Challenger Documents; 2 (ii) an Aircraft Bill of Sale (FAA AC Form 8050-2), executed in favor of Buyer, covering the Challenger (the "FAA Bill of Sale") in substantially the form of Exhibit B hereto; (iii) a Bill of Sale, in the form of Exhibit C hereto, executed in favor of Buyer, covering the Challenger; (iv) all equipment, parts and personal property presently in the Challenger and other additional equipment, parts and personal property described in Exhibit D hereto; and (v) an assignment of all warranties relating to the Challenger which are then in effect and assignable. (d) OBLIGATIONS OF BUYER. At Closing, Buyer shall deliver to Seller, or as otherwise provided herein, the following: (i) the Purchase Price in the manner described at Section 2 above; and (ii) an aircraft delivery receipt covering the Challenger in the form attached hereto as Exhibit E; 4. FAA FILING. The parties hereby agree that duplicate originals of all documents required to be filed with the United States Federal Aviation Administration ("FAA"), including AC Form 8050-1 and AC Form 8050-2, in order to convey the Challenger to Buyer, shall be prepositioned with Aero Records & Title Co, for filing with the FAA upon Closing and receipt of filing instructions from the parties hereto. 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to Buyer that, as of the date hereof and as of the Closing Date: (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary power and authority to conduct its business and to enter into and perform its obligations under this Agreement and each document delivered hereunder; (b) This Agreement, each document delivered hereunder, and all transactions contemplated hereby and thereby, have been duly authorized by all necessary action on the part of Seller; (c) This Agreement and all documents delivered hereunder constitute the legal, valid and binding obligations of Seller, enforceable in accordance with their terms; (d) Record title to the Challenger is held in the name of Seller; Seller is the beneficial owner of the Challenger, holds valid and lawful title to the Challenger and has all legal right and authority necessary to sell and convey the Challenger to Buyer, as herein provided, and to carry out all of its obligations hereunder; 2 3 (e) At Closing, Seller shall transfer and convey to Buyer title to the Challenger and, by the deliveries to be made at Closing, Buyer will have good and marketable title to the Challenger, free and clear of any and all liens, encumbrances, claims and rights of others; (f) At Closing, the Challenger and all associated equipment and accessories (i) will be current on the Bombardier Aerospace maintenance program, (ii) will have a current United States Certificate of Airworthiness issued by the FAA, (iii) will not be subject to any outstanding mandatory airworthiness directives; and (iv) will comply with all statutes, laws, rules, and regulations of governmental or regulatory authorities applicable thereto; (g) All sales, use, personal property and excise taxes, and all other taxes, proper charges and assessments, based upon or relating to the ownership, maintenance, purchase, use or operation of the Challenger prior to the date hereof, or the Closing Date, as applicable, have been duly paid and satisfied; (h) At Closing, the Challenger will conform to the specifications attached hereto as Exhibit A; (i) At the Closing Date, the flight logs and maintenance records relating to the Challenger will be complete and accurate in all material respects and will be in conformity with all applicable FAA regulations; and (j) At Closing, all representations of Seller to Buyer set forth in Exhibit F will be true, accurate and complete. EXCEPT AS TO TITLE AND THE MATTERS SET FORTH IN THIS SECTION 5, THE CHALLENGER WILL BE SOLD AND DELIVERED TO BUYER "AS IS" AND SELLER MAKES NO OTHER WARRANTIES, GUARANTEES OR REPRESENTATIONS OF ANY KIND WITH RESPECT TO THE CHALLENGER, WHETHER EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT FOR THOSE REPRESENTATIONS, WARRANTIES AND COVENANTS EXPRESSLY SET FORTH IN THIS AGREEMENT, BUYER HEREBY WAIVES ALL WARRANTIES, GUARANTEES, OBLIGATIONS, LIABILITIES, RIGHTS AND REMEDIES AGAINST SELLER. EXCEPT AS TO TITLE AND THE OBLIGATIONS OF SELLER UNDER SECTIONS 9, 10 AND 11 HEREOF, BUYER HEREBY WAIVES ANY CLAIM AGAINST SELLER FOR LOSS OF USE, REVENUE OR PROFIT WITH RESPECT TO THE CHALLENGER OR ANY OTHER INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES. 3 4 6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller that, as of the date hereof and as of the Closing Date: (a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio; (b) Buyer has all necessary power and authority to conduct its business and to enter into and perform its obligations under this Agreement and each document delivered hereunder; (c) This Agreement, each document delivered hereunder, and all transactions contemplated hereby and thereby, have been duly authorized on behalf of Buyer by all necessary corporate action; and (d) This Agreement and each document delivered hereunder constitute the legal, valid and binding obligations of Buyer, enforceable in accordance with their terms. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The obligation of Buyer to purchase the Challenger, and to otherwise consummate the transactions contemplated by this Agreement, is subject to the following conditions: (a) Each of the representations and warranties of Seller contained this Agreement shall be true and correct as of the date hereof and as of the Closing Date, as if each were again made at such time; (b) Seller shall have performed and complied with all covenants, agreements and conditions contained in this Agreement required to be performed or complied with by it on or prior to the Closing Date; (c) All proceedings to be taken by Seller shall have been taken; all consents and governmental approvals to be obtained in connection with the transactions contemplated by this Agreement shall have been obtained; and all documents incident thereto shall be reasonably satisfactory in form and substance to Buyer; and (d) No action, proceeding or inquiry shall be pending or threatened by any third party (other than a person claiming by or through Buyer) or any governmental or regulatory authority to restrain or prevent the consummation of the transactions contemplated hereby. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligation of Seller to sell the Challenger to Buyer, and to otherwise consummate the transactions contemplated by this Agreement, is subject to the following conditions: (a) Each of the representations and warranties of Buyer contained in this Agreement shall be true and correct as of the date hereof and as of the Closing Date, as if each were again made at such time; 4 5 (b) Buyer shall have performed and complied with all covenants, agreements and conditions contained in this Agreement required to be performed or complied with by it on or prior to the Closing Date (including, without limitation, the payment, deposit or delivery in full of the Purchase Price); (c) All proceedings to be taken by Buyer shall have been taken; all consents and governmental approvals to be obtained in connection with the transactions contemplated by this Agreement shall have been obtained; and all documents incident thereto shall be reasonably satisfactory in form and substance to Seller; and (d) No action, proceeding or inquiry shall be pending or threatened by any third party (other than a person claiming by or through Seller) or any governmental or regulatory authority to restrain or prevent the consummation of the transactions contemplated hereby. 9. TAXES. The consideration to be paid for the Challenger hereunder does not include any sales, use, personal property, excise or other similar taxes or assessments which may be hereafter imposed by any governmental authority upon the sale transaction or, with respect to periods after Closing, upon the Challenger or the use by Buyer thereof. Buyer agrees to pay, or to indemnify Seller against, any and all such taxes or assessments, except for any taxes on the income or gain resulting from the sale of the Challenger (or at its sole expense to defend against the imposition of any such taxes). The consideration to be paid for the Challenger includes, if applicable, all sales, excise and similar taxes assessed on the sale of materials and equipment to Seller for incorporation into the Challenger, and any personal property taxes assessed against the Challenger, or any part thereof, prior to Closing, and Buyer is not responsible for any additional payment with respect thereto. Seller shall also pay when due any taxes imposed by any governmental authority on the income or gain resulting from the sale of the Challenger hereunder. 10. INDEMNIFICATION. (a) Seller agrees to indemnify, defend and hold harmless Buyer, its affiliates, and each of their respective officers, agents and employees, from and against any and all demands, actions, obligations, damages, liabilities, costs and expenses (including reasonable attorneys' fees) relating to or arising out of any and all claims and causes of action which have accrued prior to the Closing Date (regardless of when asserted) with respect to or arising out of the ownership, maintenance, condition, operation or use of the Challenger prior to the Closing Date. (b) Buyer agrees to indemnify, defend and hold harmless Seller, its affiliates, and each of their respective officers, agents and employees, from and against any and all demands, actions, obligations, damages, liabilities, costs and expenses (including reasonable attorneys' fees) relating to or arising out of any and all claims and causes of action which accrue on or after the Closing Date (regardless of when asserted) with respect to or arising out of the ownership, maintenance, condition, operation or use of the Challenger on or after the Closing Date. 5 6 11. CONTRACTUAL INDEMNIFICATION. Each of the parties hereto (the "Indemnifying Party") covenants and agrees to indemnify, defend and hold harmless the other party, its affiliates, and each of their respective officers, agents and employees, from and against any and all claims, demands, actions, damages, obligations, liabilities, costs and expenses (including reasonable attorneys' fees) arising out of any breach of any covenant, representation or warranty made by such Indemnifying Party in this Agreement. The obligations to indemnify contained in this Agreement shall survive Closing and the consummation of the transactions contemplated by this Agreement. 12. RISK OF LOSS. Seller shall continue to maintain the Challenger in accordance with the requirements of this Agreement up to the Closing Date. In the event that, prior to Closing, the Challenger is destroyed, lost, stolen or damaged to the extent that "Major Repairs" (defined to mean repairs which cost in excess of $25,000 in the aggregate) are necessary, Seller and Buyer shall each have the right to terminate this Agreement by notice to the other, in which case both parties shall be released from all obligations hereunder. If the Challenger is damaged to a lesser extent prior to Closing, Seller shall be obligated to repair same at its own expense, and the Closing shall be extended for a reasonable period (but in no event longer than 60 days) to permit such repair. 13. EXPENSES. Regardless of whether the transactions contemplated hereby shall be consummated, each party hereto shall pay its own expenses (including attorney's fees) incidental to the negotiation, documentation and consummation of such transactions. Each of the parties hereby covenants and agrees to indemnify, defend and save harmless the other against any and all claims and liabilities which may arise in connection with any third party claim for brokerage or similar fees arising out of any commitments made by or services performed for the covenanting party (real or alleged) in connection with the sale of the Challenger. 14. GOVERNMENTAL APPROVALS. The Closing shall be subject to all governmental and regulatory approvals required for consummation of the transaction, including without limitation, the registration of the transfer of ownership to the Challenger with the FAA or other applicable authority. 15. ASSIGNMENT. Neither party may assign its respective rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. All representations, warranties and covenants of each party hereunder shall inure to the benefit of the other party and its permitted assignees. 16. FORCE MAJEURE. Subject to the terms and conditions set forth herein, the parties hereto shall use reasonable efforts to consummate the transactions provided for herein on or before May 31, 1999. In the event that either Seller or Buyer is unable to perform its obligations hereunder, or to deliver the required documents, instruments or items of property at Closing, by reason of any act of God, weather, act of government, strike, shortage of supply or other cause not reasonably within the control of such party, the date set for Closing shall be extended until the cause of such inability to perform or deliver shall have been cured; provided, however, such Closing shall not be delayed more than thirty-one (31) days. In the event that the Closing is so delayed, but does not occur on or before July 31, 1999, in accordance with this Section 16, upon the written demand of either party, the parties shall be released from their respective obligations 6 7 hereunder and, in such event, neither party will have any further responsibility or liability to the other. 17. FURTHER ASSURANCES. From time to time after Closing, Seller shall promptly do, acknowledge, execute and deliver all such further acts, deeds, bills of sale, transfers, conveyances, certificates of title, registrations of title and/or other documents and things as Buyer may reasonably request in order to transfer to and vest and confirm in Buyer the Challenger and to otherwise fully consummate the transactions provided for herein. 18. NOTICES. All notices and requests in connection with this Agreement shall be given in writing and shall be given by facsimile, telegram, cable, telex or teletype, confirmed by certified mail, as follows: If to Seller: If to Buyer: Village Transport Corp. Mr. Peter B. Lewis 6300 Wilson Mills Road c/o The Progressive Corporation Mayfield Village, Ohio 44143 6300 Wilson Mills Road Attention: David M. Schneider, Secretary Mayfield Village, Ohio 44143 19. MISCELLANEOUS. (a) This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and permitted assigns. (b) The headings of the Sections of this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of such Sections. (c) This Agreement and the Exhibits hereto constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes any and all other written or oral representations, negotiations, agreements or understandings between the parties. (d) No representations, warranties, inducements, agreements, promises or understandings which alter, modify, limit or add to the terms, provisions or conditions hereof shall have any force or effect unless the same are recorded in a written instrument duly executed by the parties to be bound thereby. (e) This Agreement is not intended to benefit, and shall not confer any rights or remedies on, any party other than Seller and Buyer and their permitted assignees, if any. (f) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original. (g) This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. 7 8 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered by its duly authorized representative, as of the day and year first above written. SELLER: BUYER: Village Transport Corp. ACME Acquisition Corporation By: /s/ David M. Schneider By: /s/ Peter B. Lewis ----------------------------------- ------------------------------- David M. Schneider, Secretary Peter B. Lewis, President 8 9 EXHIBIT A SPECIFICATIONS Serial Number: 3007 Total Time: 5063.1 hrs. Registration Number: N711SX Total landings: 2938 Date of Manufacture: June 17, 1983 ENGINES ------- Engine #1 Engine #2 Serial Number: 350105 Serial Number: 350104 Total Time: 5,063.1 hrs. Total Time: 4864.1 hrs. Total Cycles: 3,165.7 Total Cycles: 2997.1 Time Since Hot Section: 890.4 hrs. Time Since Hot Section: 890.4 hrs. Cycles Since Hot Section: 500.7 Cycles Since Hot Section: 500.7 (Both engines are due for overhaul at 6000 hrs. total time. The #1 HPT blades were replaced with the P142 "Serpentine Cooled" blades at the last Hot Section Inspection on both engines.) MAINTENANCE ----------- The 4800 hour and 180 month inspections were performed by Bombardier Aviation Services Tucson facility on 2/97. EXTERIOR -------- Canadair Challenger paint scheme done by Bombardier Aviation Services Tucson facility on 2/97. Overall Materhorn White, Pratt & Lambert JetGlo 570-535, with bottom and stripes Gloss Black, Pratt & Lambert JetGlo 571-900. AVIONICS -------- AUTOPILOT: Sperry Dual Channel SPZ 600 EFIS: Sperry Dual EFIS 800 (4 tubes) COMM: Triple Collins VHF-22C NAV: Dual Collins VIR-32 ADF: Dual Collins ADF-60 DME: Dual Collins DME-42 TRANSPONDER: Dual Honeywell RCZ-852 RADAR: Sperry Primus 800 Color IRS: Dual Honeywell Laseref FMS: Dual Universal 1-C with GPS HF: Dual Collins HF 9000 SELCAL: Motorola NA138-714 FLIGHT PHONE: Wulfsberg FF VI (with Privacy Mod) ELT: Dorne & Margolin 9 10 CVR: Fairchild A-100A FDR: Provisions for Fairchild F 800 Digital ALT: Collins ALT-55B RMI: Collins BDI-36 TCAS: Honeywell TCAS 2000 EGPWS: Allied Signal with windshear INTERIOR -------- Ten passenger executive interior with grey color theme. Six grey leather berthable chairs with lumbar support. Four passenger fabric devan converts to berth for one. Most fabrics and carpet new by KC Aviation, Appleton, 1/96. Forward full service galley with microwave oven, ERDA warming oven, and TIA Electric coffee brewing/hot water system. Aft private lavatory. Cabin entertainment system with TV Monitor, Airshow 200, Sony VCR, Sony 10 Disc CD player, Sony Cassette player, Upgraded speakers and individual headphone station at each seat. ADDITIONAL FEATURES ------------------- RVSM RNP-5/RNP-10 Approved Increased Take-off Weight Mod Powered Fuel Crossfeed Mod Spoiler Auto Depoloy Mod Innotech 2000 Soundproofing Nose Gear Door Inadvertant Closure Mod Large KC Aviation Jumpseat (Certified for take-off & landing) Remote Single Point Refueling Panel Remote Skydrol Replenishing System Bleed Air Pressurized Water System Aft Fuselage Storage Compartment 8.33 Khz frequency spacing modification to all three VHF Comms New Collins Pro-Line CTL Control Heads Aft Fuselage Mounted Tronair Towbar and Head 10 11 EXHIBIT A-1 CHALLENGER DOCUMENTS 1. Aircraft logbook. 2. Engine logbooks. 3. APU logbook. 4. Airframe maintenance manual. 5. Engine maintenance manual. 6. All other maintenance manuals. 11 12 EXHIBIT B FAA BILL OF SALE 12 13 EXHIBIT C BILL OF SALE Village Transport Corp. ("Seller"), a Delaware corporation having an office at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143, in consideration of the sum of one dollar ($1.00), and other good and valuable consideration, to it in hand paid by ACME Acquisition Corporation, an Ohio corporation having an office at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ("Buyer"), the receipt and sufficiency of which are hereby acknowledged, does hereby sell, convey, transfer and deliver unto said Buyer the Canadair Challenger aircraft, bearing United States Registration No. N711SX, bearing manufacturer's Serial No. 3007 and equipped with two General Electric CF 34-1A engines, bearing manufacturer's Serial Numbers 350-105 and 350-104, and all related avionics, appliances, parts, instruments, equipment and accessories, and as described in the specifications attached as Exhibit A hereto, and all related manuals and catalogues (as described in Exhibit A-1 hereto), service bulletins documents and logbooks (hereinafter collectively referred to as the "Aircraft"). TO HAVE AND TO HOLD, said Aircraft, as described, to Buyer, its successors and assigns forever. Seller hereby warrants that, at the time of the sale to be effected hereby, Seller is the lawful owner of the Aircraft and has good and lawful right to sell the same to Buyer, as herein provided, and that title to the Aircraft is free from any lien, charge or encumbrance whatsoever, and that Seller will defend said title against any and all claims. Seller further covenants and agrees to execute and deliver, or cause to be executed and delivered, all such further instruments and documents, and to do or cause to be done all such acts and things, as may be reasonably requested by Buyer in order to better convey and confirm 13 14 unto Buyer title to and possession of the Aircraft hereby sold, conveyed, transferred and delivered. This Bill of Sale, and the representations, warranties and covenants herein contained, shall inure to the benefit of Buyer and its successors and assigns, and shall survive the execution and delivery hereof. IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be signed on this 23rd day of April, 1999. Village Transport Corp., as Seller - ------------------------------- By: David M. Schneider Title: Secretary 14 15 EXHIBIT D CHALLENGER ADDITIONAL EQUIPMENT, PARTS AND OTHER PERSONAL PROPERTY APU: ---- Garrett Turbine Engine Company Model Number: GTCP 36-100E Total Time: 3197 hrs. Serial Number: P239C Time Since Hot Section: 758 hrs. 15 16 EXHIBIT E AIRCRAFT DELIVERY AND ACCEPTANCE RECEIPT ACME Acquisition Corporation (the "Buyer"), hereby accepts and acknowledges receipt from Village Transport Corp. (the "Seller"), in accordance with the terms and conditions of that certain Aircraft Purchase Agreement dated April _____, 1999, entered into between Buyer and Seller, of one (1) Canadair Challenger, Serial No. 3077, bearing United States Registration No. N711SX. The aircraft referred to above was received by the undersigned Buyer on the date and at the location set forth below. IN WITNESS WHEREOF, this instrument has been duly signed by the undersigned, by its duly authorized representative in Wilmington, Delaware on April 23, 1999 at a.m./p.m. local time. BUYER ACME Acquisition Corporation --------------------------------------- By: Peter B. Lewis Its: President 16 17 EXHIBIT F SELLER'S ADDITIONAL REPRESENTATIONS 1. The Challenger was painted in April, 1997, by Bombardier Aviation. 2. The Challenger has 5,063.1 hours of flight. 3. The Challenger left and right engines have 5,063.1 and 4,864.1 hours and 3,165.7 and 2,997.1 cycles, respectively. 17 EX-10.E 9 EXHIBIT 10(E) 1 Exhibit No. 10(E) AIRCRAFT MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (the "Agreement") made and entered into as of this 23rd day of April, 1999, by and between Village Transport Corp., a Delaware corporation having an office at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ("Manager"), and ACME Operating Corporation, an Ohio corporation having an office at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ("ACME"). WITNESSETH: WHEREAS, ACME pursuant to an Aircraft Lease Agreement ("Lease") dated of even date herewith, leases the aircraft (the "Aircraft") bearing the manufacturer's Serial Number and Federal Aviation Administration Registration Number set forth on the Schedule hereto, equipped with two General Electric CF 34-1A engines as more particularly described in the Lease Schedule (hereinafter called the "Aircraft"); and WHEREAS, ACME is desirous of engaging the services of Manager to provide certain management services with respect to the Aircraft; and WHEREAS, Manager is desirous of providing certain management services pertaining to the Aircraft on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the parties hereto hereby agree as follows: 1. ACME hereby engages Manager, and Manager hereby agrees, to provide certain management services with respect to the Aircraft for the benefit of the ACME. 2. Manager hereby agrees for the benefit and at the direction of ACME that it shall provide the services set forth below: 3. (a) Throughout the term of this Agreement, Manager shall, at ACME's cost and expense, (1) inspect, maintain, service, repair, overhaul and test the Aircraft by duly competent personnel, in accordance with FAA approved maintenance and preventive repair programs therefor, so as to keep the Aircraft in good operating condition, ordinary wear and tear excepted, and in such condition as may be necessary to enable the airworthiness certification of the Aircraft to be maintained in good standing at all times under 49 U.S.C. Section 40101, et seq., as in effect from time to time; (2) maintain all records, logs and other materials required by the FAA to be maintained in respect of the Aircraft and make the same available for ACME's inspection; and (3) comply with all laws of each and every jurisdiction in which the Aircraft may be operated and with all rules of the FAA and each and every other legislative, executive, administrative or judicial body exercising any power or jurisdiction over the Aircraft, and shall maintain the Aircraft in proper condition for operation under such laws and rules including, without limitation, all manufacturers recommended maintenance. Manager also agrees not to 2 operate or locate the Aircraft, or suffer the Aircraft to be operated or located, in any area excluded from coverage by any insurance required by the terms of this Agreement. (b) The cost of compliance with any airworthiness or similar directive, or regulation issued by the FAA or other governmental agency ("Airworthiness Directive") and the cost of complying with any mandatory or recommended service bulletins or letters, shall be borne by ACME. 4. (a) Manager hereby agrees to identify and make available to ACME at the inception of this Agreement, certain pilots, from a group of professionally qualified pilots who shall be familiar with and licensed to operate the Aircraft, from which ACME shall, in its own discretion, designate two (2) of such pilots to operate the Aircraft for ACME, and thereafter such designated pilots shall be ACME's pilots of the Aircraft. The pilot designation shall be in writing and signed by ACME, which writing shall be binding upon ACME. (b) ACME shall be permitted to remove any of such pilots by providing written notice to Manager and designate new pilots, who shall thereafter be ACME's pilots of the Aircraft. (c) Notwithstanding the foregoing, the pilots designated by ACME shall be subject to (i) availability, (ii) the rules and regulations promulgated by the FAA, and (iii) strikes and labor disputes. (d) ACME may at any time provide its own pilots upon twenty-four (24) hours prior notice to Manager. (e) ACME hereby directs Manager and Manager hereby agrees to make all necessary take-off, flight and landing arrangements for flights operated by ACME. Manager shall pay, at Manager's cost and expense, the following operating expenses relating to the Aircraft: crew salary and benefits, telephone and costs associated with providing information services. ACME shall, at all reasonable times, have the right to inspect Manager's records with respect to the Aircraft. (f) ACME will pay all operating expenses related to the Aircraft except those set forth in paragraph (e) of this Section 4. Such operating expenses shall include, but shall not be limited to: fuel, storage, domestic landing fees, all federal, state and local taxes, charges, imposts, duties and excise taxes and with respect to flights outside the 48 contiguous states of the continental United States (the "Continental United States"), for foreign permit, overflight, navigation, and air space fees, customs, head taxes and similar assessments relating to the ownership, operation, maintenance or the use of the Aircraft by ACME, registration and handling costs, catering, crew travel and lodging, hangar and tie-down costs, flight planning and weather contract services, maintenance supplies, outside pilot services (if any), equipment costs, sales and use taxes and any other taxes and licensing fees associated with the Aircraft. 5. ACME shall obtain, at ACME's expense, all-risk aircraft hull insurance with no deductible with respect to the Aircraft, against any loss, theft or damage to the Aircraft, including 2 3 extended coverage with respect to any engines or parts while removed from the Aircraft, for the fair market value of the Aircraft, naming Manager and ACME, as named insureds and loss payees with losses payable as their respective interests may appear. ACME shall likewise pay for and arrange to procure liability insurance for the Aircraft in the form and substance and with such insurers approved by Manager but in an amount not less than One Hundred Million Dollars ($100,000,000) single limit liability coverage and shall cause ACME and Manager, to be named as additional insureds. Copies of such policies and certificates of Insurance shall be furnished by the ACME to Manager promptly upon the execution of this Agreement. Such Insurance shall be maintained by ACME in full force and effect throughout the term hereof and the insurer shall provide ACME and Manager thirty (30) days advance notice of cancellation or material alteration. All such insurance shall contain a Breach of Warranty Endorsement in favor of ACME and Manager. 6. At ACME's direction, Manager hereby agrees that it will provide assistance to and consult with ACME in all matters regarding the Aircraft including but not limited to: (a) FAA and manufacturers correspondence and directives; (b) Enforcement of warranty claims; (c) Enforcement, litigation and settlement of insurance matters; and (d) Parts replacement, services and maintenance arrangements. 7. As compensation for the services to be performed by Manager hereunder, ACME hereby agrees to pay to Manager an annual Management Fee in an amount equal to $405,200; provided, that the parties agree to adjust the Management Fee at each anniversary of the date hereof. The Management Fee shall be payable in twelve equal monthly installments each of which shall be due on the first day of each calendar month during the term of this Agreement. 8. In addition, ACME agrees that it shall provide Manager with the following information for each proposed flight: (a) proposed departure point; (b) destination; (c) date and time of flight; (d) the number of anticipated passengers; (e) the nature and extent of luggage to be carried; (f) the date and time of a return flight, if any; and 3 4 (g) any other information concerning the proposed flight that may be pertinent or is reasonably required by Manager. 9. Manager agrees that, throughout the term of this Agreement, it shall not cause or permit, through any of its own acts or failures to act, any liens, claims or encumbrances to attach to the Aircraft other than mechanics liens to be discharged in the ordinary course of business. 10. ACME acknowledges that Manager shall have no liability for delay or failure to furnish the pilots pursuant to this Agreement. Manager shall not otherwise be liable to ACME for any direct, indirect, special, consequential or other damages caused directly or indirectly by any such delay or failure to furnish the pilots. ACME and Manager further agree that when, in the reasonable view of ACME or the pilots of the Aircraft, safety may be compromised, ACME or the pilots may terminate a flight, refuse to commence a flight, or take other action necessitated by such safety considerations without liability for loss, injury, damage or delay. ACME can dictate other limitations of flights. ACME acknowledges that the ACME shall operate the Aircraft at all times in accordance with applicable FAA Regulations. 11. Upon the occurrence of an Event of Default (as hereinafter defined) under this Agreement, Manager will cease all activities hereunder. In addition to the foregoing, Manager shall have all right to bring an action or claim against ACME for all sums which may be due and owing hereunder and to pursue all other remedies available to it at law or in equity. For purposes hereof, the term "Event of Default" shall mean the occurrence and continuation of any of the following events of default hereunder: (a) The failure of ACME to pay when due the Management Fee set forth in Section 7 hereof or any taxes or similar assessments levied or imposed against components of such fee, as set forth in said Section 7, with a ten (10) day period of grace after written notice of nonpayment; (b) The material breach by ACME of any other provision of this Agreement, which material breach shall continue for thirty (30) days after written notice to ACME; (c) If ACME shall: (1) admit in writing its inability to pay, or fail to pay, its debts generally as they become due; (2) file a petition in bankruptcy or a petition to take advantage of any insolvency act or file an answer admitting or failing to deny the material allegations of such petition: (3) make an assignment for the benefit of its creditors; (4) consent to the appointment of, or possession by, a custodian for itself or for the whole or substantially all of its property; or 4 5 (5) file a petition or answer seeking reorganization or arrangement or other aid or relief under any bankruptcy or insolvency laws or any other law for the relief of debtors or file an answer admitting, or fail to deny, the material allegations of a petition filed against it for any such relief. (d) If a court of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent of ACME, a custodian for ACME or the whole or substantially all of its property, or approving a petition filed against it seeking liquidation, reorganization or arrangement of ACME under any bankruptcy or insolvency laws or any other law for the relief of debtors, and such order, judgment or decree shall not be vacated or set aside or stayed within sixty (60) days from the date of entry thereof; or, (e) If, under the provision of any law for the relief of debtors, any court of competent jurisdiction or custodian shall assume custody or control of ACME or of the whole or any substantial part of its property without the consent of ACME, and such custody or control shall not be terminated or stayed within sixty (60) days from the date of assumption of such custody or control. 12. This Agreement shall commence on the date of execution hereof and shall terminate on the earlier of (i) thirty (30) days after the date Manager elects to terminate this Agreement as a result of ACME's default, or (ii) after the first anniversary hereof, thirty (30) days after either party elects, by written notice to the other party, to terminate this Agreement. 13. Manager represents and warrants to ACME as follows: (a) Manager is a corporation duly and validly organized and existing in good standing under the laws of the state of its incorporation. Manager has the power and authority to enter into this Agreement and to execute, deliver or receive all other instruments and documents executed and delivered and received, in connection with the transactions contemplated hereunder; (b) There is no action, suit or proceeding pending against Manager before or by any court, administrative agency or other governmental authority, or threatened, which brings into question the validity of, or in any way legally or financially (in the case of performance) impairs or would if adversely determined impair the execution, delivery or performance by Manager of this Agreement; (c) The execution and delivery of this Agreement by Manager and the performance by it of its obligations hereunder, have been duly authorized by all necessary corporate action of Manager and do not violate or conflict with (i) any provision of Manager's Certificate of Incorporation or By-Laws, (ii) any law or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority or (iii) any Agreement entered into or binding on Manager or its affiliated companies, whether relating to the Aircraft or otherwise; 5 6 (d) This Agreement constitutes the valid and binding obligations of Manager enforceable in accordance with its terms, subject, however, to (i) laws of general application affecting creditors' rights and (ii) judicial discretion, to which equitable remedies are subject; and (e) Manager is not subject to any restriction (which has not been complied with) or agreement which, with or without the giving of notice, the passage of time, or both, prohibits or would be violated by, or be in conflict with, the execution, delivery and consummation of this Agreement. 14. ACME represents and warrants to Manager as follows: (a) ACME is duly and validly organized and existing in good standing under the laws of the state of its incorporation; (b) ACME has the power and the authority to enter into this Agreement, and to carry out the transactions contemplated hereunder; (c) The execution and delivery of this Agreement by ACME, and the performance of its obligations hereunder, have been duly authorized by all necessary action of ACME and do not violate or conflict with (i) any provision of ACME's Certificate of Incorporation or By-Laws or (ii) any law or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority. There is no action, suit or proceeding pending or threatened against ACME before any court, administrative agency or other governmental authority which brings into question the validity of, or might in any way impair, the execution, delivery or performance by ACME of this Agreement; and (d) This Agreement constitutes the valid and binding obligations of the ACME enforceable in accordance with its terms, subject, however, to (i) laws of general application affecting creditors' rights and (ii) judicial discretion, to which equitable remedies are subject. 15. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their representatives, successors and permitted assigns. This Agreement shall not be assignable by either party except upon the express written consent of the other party. 16. This Agreement constitutes the entire understanding among the parties with respect to the subject matter hereof, and any changes or modifications hereto must be in writing and signed by authorized representatives of both parties. The parties hereto further agree that the courts of the United States and State of Ohio shall have jurisdiction over the parties with regard to any disputes arising under this Agreement or arising out of the operation, maintenance, inspection, servicing or occupancy of the Aircraft during the term of the Agreement and that this Agreement shall be interpreted and governed by the laws of the State of Ohio. 17. Any notice, request or other communication to either party by the other hereunder shall be made in writing and shall be deemed given on the earlier of the date (i) personally delivered with receipt acknowledged, or (ii) telecopied at time of transmission or (iii) three (3) 6 7 days after mailed by certified mail, return receipt requested, postage prepaid and addressed to the party at the address set forth in the first paragraph of this Agreement. The address of a party to which notices or copies of notices are to be given may be changed from time to time by such party by written notice to the other party. 18. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, all of which together shall constitute one and the same agreement. 19. In the event that any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be unimpaired and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable provision, which, being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK. 7 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written. The persons signing below warrant their signatures. ACME Operating Corporation By: /s/ Peter B. Lewis ---------------------------------- Peter B. Lewis, President Village Transport Corp. By: /s/ David M. Schneider ---------------------------------- David M. Schneider, Secretary 8 9 SCHEDULE Minimum Telephonic Notice: 24 hours Serial No.: 3007 FAA Registration No.: N711SX EX-10.H 10 EXHIBIT 10(H) 1 Exhibit (10)(H) THE PROGRESSIVE CORPORATION 2000 GAINSHARING PLAN --------------------- 1. The Progressive Corporation and its subsidiaries ("Progressive" or the "Company") have adopted The Progressive Corporation 2000 Gainsharing Plan (the "Plan") as part of their overall compensation program. The objective of the compensation program is to pay competitive base salaries and for gainsharing to bring total cash compensation to the top of the market when Core Business (as defined below) and assigned Business Unit performance meets expectations. Participants will have the opportunity to earn cash compensation in excess of the top of the market when Core Business and assigned Business Unit performance exceeds expectations. 2. Plan participants for each Plan year shall be selected by the Executive Compensation Committee (the "Committee") of the Board of Directors of The Progressive Corporation from those officers and regular employees of Progressive who are assigned primarily to the Core Business, other operating business or a corporate support function as of December 1 (or such other date as may be determined by the Chief Human Resource Officer) of that Plan year. The gainsharing opportunity, if any, for those executive officers who participate in The Progressive Corporation 1999 Executive Bonus Plan will be provided by and be a component of that plan. The Plan shall be administered by or under the direction of the Committee. 3. Annual Gainsharing Payments under the Plan will be determined by application of the following formula: Annual Gainsharing Payment = Paid Earnings x Target Percentage x Performance Factor 4. Paid Earnings for any Plan year means the following items paid to a participant during the Plan year: (a) regular, vacation, sick, holiday, funeral and overtime pay, (b) lump sum merit adjustments based on performance and (c) retroactive payments of any of the foregoing items relating to the same Plan year. For purposes of the Plan, Paid Earnings shall not include any short-term or long-term disability payments made to the participant, the earnings replacement component of any worker's compensation award or any other bonus or incentive compensation awards. Notwithstanding the foregoing, if the sum of the regular, vacation, sick, holiday and funeral pay received by a participant during a Plan year exceeds his/her salary range maximum for that Plan year, then his/her Paid Earnings for that Plan year shall equal his/her salary range maximum, plus any of the following items received by such participant during that Plan year: (a) overtime pay, (b) retroactive payments of regular, vacation, sick, holiday, overtime and funeral pay and (c) lump sum merit adjustments. 1 2 5. Target Percentages vary by position. Target Percentages for Plan participants typically are as follows:
============================================================================================ POSITION TARGET % - -------------------------------------------------------------------------------------------- Senior Executives, General Managers and Senior Process Leaders/Managers 40 - 135% - -------------------------------------------------------------------------------------------- Top Functional/Line Managers 30 - 45% - -------------------------------------------------------------------------------------------- Senior Functional/Line Managers 25% - -------------------------------------------------------------------------------------------- Middle Functional/Line Managers 15 - 20% - -------------------------------------------------------------------------------------------- Senior Professionals and Managers 12 - 15% - -------------------------------------------------------------------------------------------- Professionals and Supervisors 8% ============================================================================================
Target Percentages will be established within the above ranges by, and may be changed with the approval of (a) the Chairman and CEO or CEO - Insurance Operations, (b) Chief Human Resource Officer and (c) the Chief Financial Officer (collectively, the "Designated Executives"). Target Percentages also may be changed from year to year by the Designated Executives. 6. THE PERFORMANCE FACTOR ---------------------- A. GENERAL ------- The Performance Factor shall consist of one or more Profitability and Growth Components, as described below (the "Performance Component"). The Performance Components will be weighted to reflect the nature of the individual participant's assigned responsibilities. The weighting factors may differ among participants and will be determined, and may be changed from year to year, by or under the direction of the Committee. B. PROFITABILITY AND GROWTH COMPONENTS ----------------------------------- The Profitability and Growth Components measure overall operating performance of Progressive's Personal Lines segment (excluding Midland Financial Group, Inc.) and commercial vehicle insurance business unit (collectively, the "Core Business"), as a whole, or the participant's assigned Business Unit, for the Plan year for which an Annual Gainsharing Payment is to be made. For purposes of computing a Performance Score for these Components, operating performance results are measured by a Gainsharing Matrix, as established by or under the direction of the Committee for the Plan year, which assigns a Profitability and Growth Performance Score to various combinations of profitability (as measured by the Gainsharing Combined Ratio) and growth (based on year-to-year change in Net Written Premium) outcomes. 2 3 The Gainsharing Combined Ratio is determined for the Core Business, or assigned Business Unit, using the GAAP combined ratio as a measure of profitability. The Gainsharing Combined Ratio is then matched with growth in Net Written Premium using the Gainsharing Matrix to determine a Profitability and Growth Performance Score. C. COMPONENT WEIGHTING ------------------- Performance Components for the Core Business and assigned Business Unit are weighted as determined by or under the direction of the Committee. For participants in the Core Business, the typical weighting will be as follows: - ----------------------------------------------------------------------- PERFORMANCE COMPONENT WEIGHTING - ----------------------------------------------------------------------- Core Business Profitability and Growth Results 75% - ----------------------------------------------------------------------- Business Unit Profitability and Growth Results 25% - ----------------------------------------------------------------------- Total 100% - ----------------------------------------------------------------------- There will typically be no Business Unit Profitability and Growth Component for participants assigned to a corporate support function (such as Finance, Human Resource and Law) and others who are not assigned primarily to a Business Unit. Individualized programs may be developed if and to the extent deemed appropriate by the Designated Executives. The Performance Score for each Performance Component is multiplied by the assigned weighting factor to produce a Weighted Performance Score. The sum of the Weighted Performance Scores equals the Performance Factor. The final Performance Factor can vary from 0 to 2.0, based on actual performance versus the pre-established objectives. 7. Subject to Paragraph 8 below, no later than December 31 of each Plan year, each participant will receive an initial payment in respect of his or her Annual Gainsharing Payment for that Plan year equal to 75% of an amount calculated on the basis of Paid Earnings for the first 11 months of the Plan year, one month of estimated earnings, performance data through the first 11 months of the Plan year (estimated, if necessary) and one month of forecasted operating results. No later than February 15 of the following year, each participant shall receive the balance of his or her Annual Gainsharing Payment, if any, for such Plan year, based on his or her Paid Earnings and performance data for the entire Plan year. Any Plan participant who is then eligible to participate in The Progressive Corporation Executive Deferred Compensation Plan ("Deferral Plan") may elect to defer all or a portion of the Annual Gainsharing Payment otherwise payable to him/her under this Plan, subject to and in accordance with the terms of the Deferral Plan. 3 4 8. Unless otherwise determined by the Committee or as provided at Paragraph 10 hereof, in order to be entitled to receive any portion of an Annual Gainsharing Payment for any Plan year, the participant must be employed by Progressive on the payment date for that portion of the Annual Gainsharing Payment. Annual Gainsharing Payments will be net of any legally required deductions for federal, state and local taxes and other items. 9. The right to any Annual Gainsharing Payment hereunder may not be transferred, assigned or encumbered by any participant. Nothing herein shall prevent any participant's interest hereunder from being subject to involuntary attachment, levy or other legal process. 10. The Plan shall be administered by or under the direction of the Committee. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines, procedures and practices governing the Plan as it shall, from time to time, in its sole discretion, deem advisable. The Committee shall have full authority to determine the manner in which the Plan will operate, to interpret the provisions of the Plan and to make all determinations hereunder. All such interpretations and determinations shall be final and binding on Progressive, all Plan participants and all other parties. No such interpretation or determination shall be relied on as a precedent for any similar action or decision. Unless otherwise determined by the Committee, all of the authority of the Committee hereunder (including, without limitation, the authority to administer the Plan, select the persons entitled to participate herein, interpret the provisions thereof, waive any of the requirements specified herein and make determinations hereunder and to select, establish, change or modify Performance Components and their respective weighting factors, performance targets and Target Percentages) may be exercised by the Designated Executives. In the event of a dispute or conflict, the determination of the Committee will govern. 11. The Plan may be terminated, amended or revised, in whole or in part, at any time and from time to time by the Committee, in its sole discretion. 12. The Plan will be unfunded and all payments due under the Plan shall be made from Progressive's general assets. 13. Nothing in the Plan shall be construed as conferring upon any person the right to remain a participant in the Plan or to remain employed by Progressive, nor shall the Plan limit Progressive's right to discipline or discharge any of its officers or employees or change any of their job titles, duties or compensation. 14. Progressive shall have the unrestricted right to set off against or recover out of any Annual Gainsharing Payment or other sums owed to any participant under the Plan any amounts owed by such participant to Progressive. 4 5 15. This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable to participants by or due from Progressive. Without limiting the generality of the foregoing, this Plan supersedes and replaces The Progressive Corporation 1999 Gainsharing Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1999 (the "Termination Date"); provided, that any bonuses or other sums earned and payable under the Prior Plan with respect to any Plan year ended on or prior to the Termination Date shall be unaffected by such termination and shall be paid to the appropriate participants when and as provided thereunder. 16. This Plan is adopted, and is to be effective, as of January 1, 2000. This Plan shall be effective for 2000 and for each calendar year thereafter unless and until terminated by the Committee. 17. This Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 5 EX-10.P 11 EXHIBIT 10(P) 1 EXHIBIT NO. 10(P) THE PROGRESSIVE CORPORATION 1995 INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS. The purpose of The Progressive Corporation 1995 Incentive Plan (the "Plan") is to enable The Progressive Corporation (the "Company") to attract, retain and reward key employees of the Company and its Subsidiaries and Affiliates and strengthen the mutuality of interests between such key employees and the Company's shareholders by offering such key employees equity or equity-based incentives. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity (other than the Company and its Subsidiaries) that is designated by the Board as a participating employer under the Plan. (b) "Award" means any award of Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Book Value" means, as of any given date, on a per share basis (1) the shareholders' equity in the Company as of the end of the immediately preceding fiscal year as reflected in the Company's audited consolidated balance sheet as of such year-end date, subject to such adjustments as the Committee shall specify at or after grant, divided by (2) the number of outstanding shares of Stock as of such year-end date, subject to such adjustments as the Committee shall specify for events subsequent to such year-end date. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (f) "Committee" means the Committee referred to in Section 2 of the Plan. (g) "Company" means The Progressive Corporation, an Ohio corporation, or any successor corporation. (h) "Deferred Stock" means an award of the right to receive Stock at the end of a specified deferral period granted pursuant to Section 8. 2 (i) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. (j) "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Commission. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means, as of any given date, the mean between the highest and lowest quoted selling price, regular way, of the Stock on such date on the New York Stock Exchange or, if no such sale of the Stock occurs on the New York Stock Exchange on such date, then such mean price on the next preceding day on which the Stock was traded. If the Stock is no longer traded on the New York Stock Exchange, then the Fair Market Value of the Stock shall be determined by the Committee in good faith. (m) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option", within the meaning of Section 422 of the Code or any successor section thereto. (n) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (o) "Other Stock-Based Award" means an award granted pursuant to Section 10 that is valued, in whole or in part, by reference to, or is otherwise based on, Stock. (p) "Plan" means The Progressive Corporation 1995 Incentive Plan, as amended from time to time. (q) "Restricted Stock" means an award of shares that is granted pursuant to Section 7 and is subject to restrictions. (r) "Section 16 participant" means a participant under the Plan who is then subject to Section 16 of the Exchange Act. (s) "Stock" means the Common Shares, $1.00 par value per share, of the Company. (t) "Stock Appreciation Right" means an award of rights that is granted pursuant to Section 6. 3 (u) "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock and Deferred Stock, if the Committee so determines) that is granted pursuant to Section 5. (v) "Stock Purchase Right" means an award of the right to purchase Stock that is granted pursuant to Section 9. (w) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. In addition, the terms "Change in Control," "Potential Change in Control" and "Change in Control Price" shall have the meanings set forth, respectively, in Sections 11(b), (c) and (d) and the term "Cause" shall have the meaning set forth in Section 5(b)(8) below. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Executive Compensation Committee of the Board (the "Committee"). The Committee shall consist of not less than three directors of the Company, all of whom shall be Disinterested Persons and "outside directors", as defined in Section 162(m) of the Code and the regulations promulgated thereunder. Such directors shall be appointed by the Board and shall serve as the Committee at the pleasure of the Board. The functions of the Committee specified in the Plan shall be exercised by the Board if and to the extent that no Committee exists which has the authority to so administer the Plan. The Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Award(s) to be granted to each participant, the consideration, if any, to be paid for such Award(s), the timing of such Award(s), the terms and conditions of Awards granted under the Plan and the terms and conditions of the related agreements which will be entered into with participants. As to the selection of and grant of Awards to participants who are not Section 16 participants, the Committee may delegate its responsibilities to members of the Company's management consistent with applicable law. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Company or other advisors to prepare such materials or perform such analyses as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. 4 Any interpretation and administration of the Plan by the Committee, and all actions and determinations of the Committee, shall be final, binding and conclusive on the Company, its shareholders, Subsidiaries, Affiliates, all participants in the Plan, their respective legal representatives, successors and assigns, and upon all persons claiming under or through any of them. No member of the Board or of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. SECTION 3. STOCK SUBJECT TO THE PLAN. (a) Aggregate Stock Subject to the Plan. Subject to adjustment as provided below in Section 3(c), the total number of shares of Stock reserved and available for Awards under the Plan is 5,000,000. Any Stock issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. (b) Forfeiture or Termination of Awards of Stock. If any Stock subject to any Award granted hereunder is forfeited or an Award otherwise terminates or expires without the issuance of Stock, the Stock subject to such Award shall again be available for distribution in connection with future Awards under the Plan as set forth in Section 3(a), unless the participant who had been awarded such forfeited Stock or the expired or terminated Award has theretofore received dividends or other benefits of ownership with respect to such Stock. For purposes hereof, a participant shall not be deemed to have received a benefit of ownership with respect to such Stock by the exercise of voting rights or the accumulation of dividends which are not realized due to the forfeiture of such Stock or the expiration or termination of the related Award without issuance of such Stock. (c) Adjustment. In the event of any merger, reorganization, consolidation, recapitalization, share dividend, share split, combination of shares or other change in corporate structure of the Company affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares of Stock reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, in the number and purchase price of shares subject to outstanding Stock Purchase Rights granted under the Plan, and in the number of shares subject to Restricted Stock Awards, Deferred Stock Awards and any other outstanding Awards granted under the Plan as may be approved by the Committee, in its sole discretion; provided that the number of shares subject to any Award shall always be a whole number. Any fractional shares shall be eliminated. (d) Annual Award Limit. No participant may be granted Stock Options or other Awards under the Plan with respect to an aggregate of 5 more than 300,000 shares of Stock (subject to adjustment as provided in Section 3(c) hereof) during any calendar year. SECTION 4. ELIGIBILITY. Officers and other key employees of the Company and its Subsidiaries and Affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth or profitability of the business of the Company or its Subsidiaries or Affiliates are eligible to be granted Awards under the Plan. SECTION 5. STOCK OPTIONS. (a) Grant. Stock Options may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside of the Plan. However, no Incentive Stock Option shall be issued in tandem with any other Award other than a Stock Appreciation Right as provided for in Section 6. The Committee shall determine the individuals to whom, and the time or times at which, grants of Stock Options will be made, the number of shares purchasable under each Stock Option and the other terms and conditions of the Stock Options in addition to those set forth in Sections 5(b) and 5(c). Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types which shall be indicated on their face: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Subject to Section 5(c) hereof, the Committee shall have the authority to grant to any participant Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. (b) Terms and Conditions. Options granted under the Plan shall be evidenced by Option Agreements, shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (1) Option Price. The option price per share of Stock purchasable under a Non-Qualified Stock Option shall be determined by the Committee at the time of grant and shall not be less than fifty percent of the Fair Market Value of the Stock at the date of grant. The option price per share of Stock purchasable under an Incentive Stock Option shall be determined by the Committee at the time of grant and shall be not less than 100% of the Fair Market Value of the Stock at the date of grant (or 110% of the Fair Market Value of the Stock at the date of grant in the case of a participant who at the date of grant owns shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company 6 or its parent or subsidiary corporations (as determined under Section 424(d), (e) and (f) of the Code)). (2) Option Term. The term of each Stock Option shall be determined by the Committee and may not exceed ten years from the date the Option is granted (or, with respect to Incentive Stock Options, five years in the case of a participant who at the date of grant owns shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations (as determined under Section 424(d), (e) and (f) of the Code)). (3) Exercise. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided in Section 5(b)(6) and Section 11, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to six months and one day following the date of grant. If any Stock Option is exercisable only in installments or only after a specified vesting date, the Committee may accelerate or waive, in whole or in part, such installment exercise provisions or vesting date, at any time at or after grant based on such factors as the Committee shall determine, in its sole discretion. (4) Method of Exercise. Subject to whatever installment exercise provisions apply with respect to such Stock Option, and the six month and one day holding period set forth in Section 5(b)(3), Stock Options may be exercised in whole or in part, at any time during the option period, by giving to the Company written notice of exercise specifying the number of shares of Stock to be purchased. Such notice shall be accompanied by payment in full of the option price of the shares of Stock for which the Option is exercised, in cash or by check or such other instrument as the Committee may accept. Subject to the following sentence, unless otherwise determined by the Committee, in its sole discretion, at or after grant, payment, in full or in part, of the option price of (i) Incentive Stock Options may be made in the form of unrestricted Stock then owned by the participant and (ii) Non-Qualified Stock Options may be made in the form of unrestricted Stock then owned by the participant or Stock that is part of the Non-Qualified Stock Option being exercised. Notwithstanding the foregoing, any election by a Section 16 participant to satisfy such payment obligation, in whole or in part, with Stock that is part of the Non-Qualified Stock Option being exercised shall be subject to approval by the Committee, in its sole discretion. The value of each 7 such share surrendered or withheld shall be 100% of the Fair Market Value of the Stock on the date the Option is exercised. No Stock shall be issued pursuant to an exercise of an Option until full payment has been made. A participant shall not have rights to dividends or any other rights of a shareholder with respect to any Stock subject to an Option unless and until the participant has given written notice of exercise, has paid in full for such shares, has given, if requested, the representation described in Section 14(a) and such shares have been issued to him. (5) Non-Transferability of Options. No Stock Option shall be transferable by the participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the participant's lifetime, only by the participant or, subject to Sections 5(b)(3) and 5(c), by the participant's authorized legal representative if the participant is unable to exercise an Option as a result of the participant's Disability. (6) Termination by Death. Subject to Section 5(c), if any participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such participant may thereafter be exercised, to the extent such Option was exercisable at the time of death or would have become exercisable within one year from the time of death had the participant continued to fulfill all conditions of the Option during such period (or on such accelerated basis as the Committee may determine at or after grant), by the estate of the participant (acting through its fiduciary), for a period of one year (or such other period as the Committee may specify at or after grant) from the date of such death. The balance of the Stock Option shall be forfeited. (7) Termination by Reason of Disability. Subject to Sections 5(b)(3) and 5(c), if a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Stock Option held by such participant may thereafter be exercised, to the extent such Option was exercisable at the time of termination or would have become exercisable within one year from the time of termination had the participant continued to fulfill all conditions of the Option during such period (or on such accelerated basis as the Committee may determine at or after grant), by the participant or by the participant's duly authorized legal representative if the participant is unable to exercise the Option as a result of the participant's Disability, for a period of one year (or such other period as the Committee may specify at or after grant) from the date of such termination of employment; provided, however, that in no event may any such Option be exercised prior to six months and one day from the date of grant; and provided, further, that if the participant dies within such one-year period (or such other period as 8 the Committee shall specify at or after grant), any unexercised Stock Option held by such participant shall thereafter be exercisable by the estate of the participant (acting through its fiduciary) to the same extent to which it was exercisable at the time of death for a period of one year from the date of such termination of employment. The balance of the Stock Option shall be forfeited. (8) Other Termination. Unless otherwise determined by the Committee at or after the time of granting any Stock Option, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, all Stock Options held by such participant shall thereupon immediately terminate, except that if the participant is involuntarily terminated by the Company or any Subsidiary or Affiliate without Cause, any such Stock Option may be exercised, to the extent otherwise exercisable at the time of such termination, at any time during the lesser of two months from the date of such termination or the balance of such Stock Option's term. For purposes of this Plan, "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which, in the judgment of the Committee, is harmful to the business or reputation of the Company or any Subsidiary or Affiliate. (c) Incentive Stock Options. Notwithstanding Section 4, only key employees of the Company or any Subsidiary shall be eligible to receive Incentive Stock Options. Notwithstanding Sections 5(b)(6) and (7), an Incentive Stock Option shall be exercisable by (i) a participant's authorized legal representative (if the participant is unable to exercise the Incentive Stock Option as a result of the participant's Disability) only if, and to the extent, permitted by Section 422 of the Code and Section 16 of the Exchange Act and the rules and regulations promulgated thereunder and (ii) by the participant's estate, in the case of death, or authorized legal representative, in the case of Disability, no later than 10 years from the date the Incentive Stock Option was granted (in addition to any other restrictions or limitations which may apply). Anything in the Plan to the contrary notwithstanding, no term or provision of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the participant(s) affected, to disqualify any Incentive Stock Option under such Section 422 or any successor Section thereto. (d) Buyout Provisions. The Committee may at any time buy out for a payment in cash, Stock, Deferred Stock or Restricted Stock an Option previously granted, based on such terms and conditions as the Committee shall establish and agree upon with the participant, provided that no such transaction involving a Section 16 participant shall be structured or effected in a manner that would violate, or result in any liability on the 9 part of the participant under, Section 16 of the Exchange Act or the rules and regulations promulgated thereunder. SECTION 6. STOCK APPRECIATION RIGHTS. (a) Grant. Stock Appreciation Rights may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside of the Plan. The Committee shall determine the individuals to whom, and the time or times at which, grants of Stock Appreciation Rights will be made and the other terms and conditions of the Stock Appreciation Rights in addition to those set forth in Section 6(b). Any Stock Appreciation Right granted under the Plan shall be in such form as the Committee may from time to time approve. In the case of Non-Qualified Stock Options, such rights may be granted either at or after the time of the grant of the related Non-Qualified Stock Options. In the case of Incentive Stock Options, such rights may be granted in tandem with Incentive Stock Options only at the time of the grant of such Incentive Stock Options and exercised only when the Fair Market Value of the Stock subject to the Option exceeds the option price of the Option. Stock Appreciation Rights issued in tandem with Stock Options ("Tandem SARs") shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant if a Stock Appreciation Right is granted with respect to less than the full number of shares of Stock subject to the related Stock Option. All Stock Appreciation Rights granted hereunder shall be exercised, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the participant shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). (b) Terms and Conditions. Stock Appreciation Rights granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: (1) Tandem SARs shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6, and Stock Appreciation Rights granted separately ("Freestanding SARs") shall be exercisable as the Committee shall determine; provided, however, that any Stock Appreciation Right granted to a Section 16 participant shall not be exercisable at any time prior to six months and one day from the date of the grant of such Stock Appreciation Right, except that this limitation shall not 10 apply in the event of the death of the participant prior to the expiration of the six-month and one-day period. (2) Upon the exercise of a Stock Appreciation Right, a participant shall be entitled to receive an amount in cash or shares of Stock, as determined by the Committee, equal in value to the excess of the Fair Market Value of one share of Stock on the date of exercise of the Stock Appreciation Right over (i) the option price per share specified in the related Stock Option in the case of Tandem SARs, which price shall be fixed no later than the date of grant of the Tandem SARs, or (ii) the price per share specified in the related Stock Appreciation Rights Agreement in the case of Freestanding SARs, which price shall be fixed at the date of grant and shall be not less than fifty percent of the Fair Market Value of the Stock on the date of grant, multiplied by the number of shares of Stock in respect of which the Stock Appreciation Right shall have been exercised. The Committee, in its sole discretion, shall have the right to determine the form of payment (i.e. cash, Stock or any combination thereof) and to approve any election by the participant to receive cash, in whole or in part, upon exercise of the Stock Appreciation Right. When payment is to be made in Stock, the number of shares of Stock to be paid shall be calculated on the basis of the Fair Market Value of the Stock on the date of exercise. Notwithstanding the foregoing, the Committee may unilaterally limit the appreciation in value of any Stock Appreciation Right at any time prior to exercise. (3) Upon the exercise of a Tandem SAR, the Stock Option or part thereof to which such Tandem SAR is related shall be deemed to have been exercised. (4) In its sole discretion, the Committee may grant "Limited" Stock Appreciation Rights under this Section 6; that is, Freestanding SARs that become exercisable only in the event of a Change in Control or a Potential Change in Control, subject to such terms and conditions as the Committee may specify at grant. Such Limited Stock Appreciation Rights shall be settled solely in cash. (5) Stock Appreciation Rights shall not be transferable by the participant other than by will or by the laws of descent and distribution, and all Stock Appreciation Rights shall be exercisable, during the participant's lifetime, only by the participant or, subject to Section 6(b)(6), by the participant's authorized legal representative if the participant is unable to exercise a Stock Appreciation Right as a result of the participant's Disability. (6) Unless varied by the Committee, Stock Appreciation Rights shall be subject to the terms and conditions specified for Stock Options in Sections 5(b)(6), (7) and (8) and 5(d), except that the terms and conditions applicable to any Stock Appreciation Right held 11 by a Section 16 participant shall not be varied in a manner that would cause the exercise or cancellation of such Stock Appreciation Right to fail to qualify for any applicable exemption from Section 16(b) of the Exchange Act provided by Rule 16b-3 thereunder. SECTION 7. RESTRICTED STOCK. (a) Grant. Shares of Restricted Stock may be issued alone, in addition to or in tandem with other Awards under the Plan or cash awards made outside of the Plan. The Committee shall determine the individuals to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares of Restricted Stock to be awarded to each participant, the price (if any) to be paid by the participant (subject to Section 7(b)), the date or dates upon which Restricted Stock Awards will vest and the period or periods within which such Restricted Stock Awards may be subject to forfeiture, and the other terms and conditions of such Awards in addition to those set forth in Section 7(b). The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine in its sole discretion. (b) Terms and Conditions. Restricted Stock awarded under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. A participant who receives a Restricted Stock Award shall not have any rights with respect to such Award, unless and until such participant has executed an agreement evidencing the Award in the form approved from time to time by the Committee and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. (1) The purchase price for shares of Restricted Stock shall be determined by the Committee at the time of grant and may be equal to their par value or zero. (2) Awards of Restricted Stock must be accepted by executing a Restricted Stock Award agreement and paying whatever price (if any) is required under Section 7(b)(1). (3) Each participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award. 12 (4) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the participant shall have delivered to the Company a stock power, endorsed in blank, relating to the Stock covered by such Award. (5) Subject to the provisions of this Plan and the Restricted Stock Award agreement, during a period set by the Committee commencing with the date of such Award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber the shares of Restricted Stock awarded under the Plan. The Restriction Period shall not be less than six months and one day in duration ("Minimum Restriction Period"). Subject to these limitations and the Minimum Restriction Period requirement, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance or such other factors and criteria as the Committee may determine, in its sole discretion. (6) Except as provided in this Section 7(b)(6), Section 7(b)(5) and Section 7(b)(7), the participant shall have, with respect to the shares of Restricted Stock awarded, all of the rights of a shareholder of the Company, including the right to vote the Stock, and the right to receive any dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(f), in additional Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (7) No Restricted Stock shall be transferable by a participant otherwise than by will or by the laws of descent and distribution. (8) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Restricted Stock held by such participant shall thereafter vest or any restriction lapse, to the extent such Restricted Stock would have become vested or no longer subject to restriction within one year from the time of death had the participant continued to fulfill all of the conditions of the Restricted Stock Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Restricted Stock shall be forfeited. 13 (9) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Restricted Stock held by such participant shall thereafter vest or any restriction lapse, to the extent such Restricted Stock would have become vested or no longer subject to restriction within one year from the time of termination had the participant continued to fulfill all of the conditions of the Restricted Stock Award during such period (or on such accelerated basis as the Committee may determine at or after grant), subject in all cases to the Minimum Restriction Period requirement. The balance of the Restricted Stock shall be forfeited. (10) Unless otherwise determined by the Committee at or after the time of granting any Restricted Stock, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, the Restricted Stock held by such participant which is unvested or subject to restriction at the time of termination shall thereupon be forfeited. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 8. DEFERRED STOCK. (a) Grant. Deferred Stock may be awarded alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside of the Plan. The Committee shall determine the individuals to whom, and the time or times at which, Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the other terms and conditions of the Award in addition to those set forth in Section 8(b). The Committee may condition the grant of Deferred Stock upon the attainment of specified performance goals or such other factors as the Committee shall determine, in its sole discretion. 14 (b) Terms and Conditions. Deferred Stock Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (1) The purchase price for shares of Deferred Stock shall be determined at the time of grant and may be equal to their par value or zero, as determined by the Committee. Subject to the provisions of the Plan and the Award agreement referred to in Section 8(b)(9), Deferred Stock Awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 8(b)(8), where applicable), share certificates shall be delivered to the participant, or his legal representative, for the shares covered by the Deferred Stock Award. The Deferral Period applicable to any Deferred Stock Award shall not be less than six months and one day ("Minimum Deferral Period"). (2) Unless otherwise determined by the Committee at grant, amounts equal to any dividends declared during the Deferral Period with respect to the number of shares covered by a Deferred Stock Award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Stock, or otherwise reinvested, all as determined at or after the time of the Award by the Committee, in its sole discretion. (3) No Deferred Stock shall be transferable by a participant otherwise than by will or by the laws of descent and distribution. (4) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Deferred Stock held by such participant shall thereafter vest or any restriction lapse, to the extent such Deferred Stock would have become vested or no longer subject to restriction within one year from the time of death had the participant continued to fulfill all of the conditions of the Deferred Stock Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Deferred Stock shall be forfeited. (5) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Deferred Stock held by such participant shall thereafter vest or any restriction lapse, to the extent such Deferred Stock would have become vested or no longer subject to restriction within one year from the time of termination had the participant continued to fulfill all of the conditions of the Deferred Stock Award during such period (or on such accelerated basis as the Committee may determine at or after grant), subject in all cases to the Minimum Deferral Period requirement. The balance of the Deferred Stock shall be forfeited. 15 (6) Unless otherwise determined by the Committee at or after the time of granting any Deferred Stock Award, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, all Deferred Stock held by such participant which is unvested or subject to restriction shall thereupon be forfeited. (7) Based on service, performance or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Stock Award or waive a portion of the Deferral Period for all or any part of such Award, subject in all cases to the Minimum Deferral Period requirement. (8) A participant may elect to further defer receipt of a Deferred Stock Award (or an installment of an Award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and the terms of this Section 8 and such other terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions approved by the Committee, such election must be made at least 12 months prior to completion of the Deferral Period for such Deferred Stock Award (or such installment). (9) Each such Award shall be confirmed by, and subject to the terms of, a Deferred Stock Award agreement evidencing the Award in the form approved from time to time by the Committee. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Deferred Stock Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 9. STOCK PURCHASE RIGHTS. (a) Grant. Stock Purchase Rights may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside the Plan. The Committee shall determine the individuals to whom, and the time or times at which, grants of Stock Purchase Rights will be made, the number of shares of Stock which may be purchased pursuant to the Stock Purchase Rights, and the other terms and conditions of the Stock Purchase Rights in addition to those set forth in 16 Section 9(b). The Stock subject to the Stock Purchase Rights may be purchased, as determined by the Committee at the time of grant: (1) at the Fair Market Value of such Stock on the date of grant; (2) at 50% of the Fair Market Value of such Stock on the date of grant; (3) at an amount equal to the Book Value of such Stock on the date of grant; or (4) at an amount equal to the par value of such Stock on the date of grant. Subject to Section 9(b) hereof, the Committee may also impose such deferral, forfeiture or other terms and conditions as it shall determine, in its sole discretion, on such Stock Purchase Rights or the exercise thereof. Each Stock Purchase Right Award shall be confirmed by, and be subject to the terms of, a Stock Purchase Rights Agreement which shall be in form approved by the Committee. (b) Terms and Conditions. Stock Purchase Rights may contain such additional terms and conditions not inconsistent with the terms of the Plan as the Committee shall deem desirable, and shall generally be exercisable for such period as shall be determined by the Committee. However, Stock Purchase Rights granted to Section 16 participants shall not become exercisable earlier than six months and one day after the grant date. Stock Purchase Rights shall not be transferable by a participant other than by will or by the laws of descent and distribution. SECTION 10. OTHER STOCK-BASED AWARDS. (a) Grant. Other Awards of Stock and other Awards that are valued, in whole or in part, by reference to, or are otherwise based on, Stock, including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Stock Awards or options valued by reference to Book Value or subsidiary performance, may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside of the Plan. At the time the Stock or Other Stock-Based Award is granted, the Committee shall determine the individuals to whom and the time or times at which such Stock or Other Stock-Based Awards shall be awarded, the number of shares of Stock to be used in computing an Award or which are to be awarded pursuant to such Awards, the consideration, if any, to be 17 paid for such Stock or Other Stock-Based Awards, and all other terms and conditions of the Awards in addition to those set forth in Section 10(b). The provisions of Other Stock-Based Awards need not be the same with respect to each participant. (b) Terms and Conditions. Other Stock-Based Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (1) Subject to the provisions of this Plan and the Award agreement referred to in Section 10(b)(5) below, Stock awarded or subject to Awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Stock is issued, or, if later, the date on which any applicable restriction, performance, holding or deferral period or requirement is satisfied or lapses. All Stock or Other Stock Based Awards granted under this Section 10 shall be subject to a minimum holding period (including any applicable restriction, performance and/or deferral periods) of six months and one day ("Minimum Holding Period"). (2) Subject to the provisions of this Plan and the Award agreement and unless otherwise determined by the Committee at the time of grant, the recipient of an Other Stock-Based Award shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares of Stock covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (3) Subject to the Minimum Holding Period, any Other Stock-Based Award and any Stock covered by any such Award shall vest or be forfeited to the extent, at the times and subject to the conditions, if any, provided in the Award agreement, as determined by the Committee, in its sole discretion. (4) In the event of the participant's Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive, in whole or in part, any or all of the remaining limitations imposed hereunder or under any related Award agreement (if any) with respect to any part or all of any Award under this Section 10, provided that the Minimum Holding Period requirement may not be waived, except in case of a participant's death. 18 (5) Each Award shall be confirmed by, and subject to the terms of, an agreement or other instrument evidencing the Award in the form approved from time to time by the Committee, the Company and the participant. (6) Stock (including securities convertible into Stock) issued on a bonus basis under this Section 10 shall be issued for no cash consideration. Stock (including securities convertible into Stock) purchased pursuant to a purchase right awarded under this Section 10 shall bear a price of at least 50% of the Fair Market Value of the Stock on the date of grant. The purchase price of such Stock, and of any Other Stock Based Award granted hereunder, or the formula by which such price is to be determined, shall be fixed by the Committee at the time of grant. (7) In the event that any "derivative security", as defined in Rule 16a-1(c) (or any successor thereto) promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, is awarded pursuant to this Section 10 to any Section 16 participant, such derivative security shall not be transferrable other than by will or by the laws of descent and distribution. SECTION 11. CHANGE IN CONTROL PROVISION. (a) Impact of Event. In the event of: (1) a "Change in Control" as defined in Section 11(b) or (2) a "Potential Change in Control" as defined in Section 11(c), the following acceleration and valuation provisions shall apply: (1) Any Stock Appreciation Rights and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (2) The restrictions and deferral limitations applicable to any Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards shall lapse and such shares and awards shall be deemed fully vested; and (3) The value of all outstanding Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control or Potential Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Section 11(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred; 19 provided, however, that the provisions of Sections 11(a)(1)-(3) shall not apply with respect to Awards granted to any Section 16 participant which have been held by such participant for less than six months and one day as of the date that such Change in Control or Potential Change in Control is determined to have occurred. (b) Definition of Change in Control. For purposes of Section 11(a), a "Change in Control" means the happening of any of the following: (1) When any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; provided, however, that the terms "person" and "group" shall not include any "Excluded Director", and the term "Excluded Director" means any director who, on the effective date of the Plan, is the beneficial owner of or has the right to acquire an amount of Stock equal to or greater than five percent of the number of shares of Stock outstanding on such effective date; and further provided that, unless otherwise determined by the Board or any committee thereof, the terms "person" and "group" shall not include any entity or group of entities which has acquired Stock of the Company in the ordinary course of business for investment purposes only and not with the purpose or effect of changing or influencing the control of the Company, or in connection with or as a participant in any transaction having such purpose or effect, ("Investment Intent"), as demonstrated by the filing by such entity or group of a statement on Schedule 13G (including amendments thereto) pursuant to Regulation 13D under the Exchange Act, as long as such entity or group continues to hold such Stock with an Investment Intent; (2) When, during any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 11(b)(2); or 20 (3) The occurrence of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, by merger or otherwise; provided, however, a change in control shall not be deemed to be a Change in Control for purposes of the Plan if the Board approves such change prior to either (i) the commencement of any of the events described in Section (b)(l), (2), or (3) or (c)(l) or (ii) the commencement by any person other than the Company of a tender offer for Stock. (c) Definition of Potential Change in Control. For purposes of Section 11(a), a "Potential Change in Control" means the happening of any one of the following: (1) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b); or (2) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee)) of securities of the Company representing 5% or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (d) Change in Control Price. For purposes of this Section 11, "Change in Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index, or paid or offered in any bona fide transaction related to a Change in Control or Potential Change in Control of the Company, at any time during the 60-day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee, except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the participant exercises such Stock Appreciation Rights or, where applicable, the date on which a cashout occurs under Section 11(a)(3). SECTION 12. AMENDMENTS AND TERMINATION. The Board may at any time, in its sole discretion, amend, alter or discontinue the Plan, but no such amendment, alteration or discontinuation shall be made which would impair the rights of a participant under an Award theretofore granted, without the participant's consent. The Company shall 21 submit to the shareholders of the Company for their approval any amendments to the Plan which are required by Section 16 of the Exchange Act, or the rules and regulations thereunder, to be approved by the shareholders. The Committee may at any time, in its sole discretion, amend the terms of any Award, but no such amendment shall be made which would impair the rights of a participant under an Award theretofore granted, without the participant's consent; nor shall any such amendment be made which would make the applicable exemptions provided by Rule 16b-3 under the Exchange Act unavailable to any Section 16 participant holding the Award without the participant's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one-for-one or other basis), including previously granted Stock Options having a higher option price. Subject to the above provisions, the Board shall have all necessary authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments. SECTION 13. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant by the Company, nothing contained herein shall give any such participant any rights that are greater than those of a general creditor of the Company. SECTION 14. GENERAL PROVISIONS. (a) The Committee may require each participant acquiring Stock pursuant to an Award under the Plan to represent to and agree with the Company in writing that the participant is acquiring the Stock without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All shares of Stock or other securities delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any certificates for such shares to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to 22 shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) Neither the adoption of the Plan, nor its operation, nor any document describing, implementing or referring to the Plan, or any part thereof, shall confer upon any participant under the Plan any right to continue in the employ, or as a director, of the Company or any Subsidiary or Affiliate, or shall in any way affect the right and power of the Company or any Subsidiary or Affiliate to terminate the employment, or service as a director, of any participant under the Plan at any time with or without assigning a reason therefor, to the same extent as the Company or any Subsidiary or Affiliate might have done if the Plan had not been adopted. (d) For purposes of this Plan, a transfer of a participant between the Company and its Subsidiaries and Affiliates shall not be deemed a termination of employment. (e) No later than the date as of which an amount first becomes includable in the gross income of the participant for federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state or local taxes or other items of any kind required by law to be withheld with respect to such amount. Subject to the following sentence, unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including unrestricted Stock previously owned by the participant or Stock that is part of the Award that gives rise to the withholding requirement. Notwithstanding the foregoing, any election by a Section 16 participant to settle such tax withholding obligation with Stock that is part of such Award shall be subject to approval by the Committee, in its sole discretion. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (f) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or in Deferred Stock or other types of Awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options, Stock Purchase Rights and other Plan Awards). (g) The Plan, all Awards made and actions taken thereunder and any agreements relating thereto shall be governed by and construed in accordance with the laws of the State of Ohio. (h) All agreements entered into with participants pursuant to the Plan shall be subject to the Plan. 23 (i) The provisions of Awards need not be the same with respect to each participant. SECTION 15. SHAREHOLDER APPROVAL; EFFECTIVE DATE OF PLAN. The Plan was adopted by the Board on February 10, 1995 and is subject to approval by the holders of the Company's outstanding Stock, in accordance with applicable law. The Plan will become effective on the date of such approval. SECTION 16. TERM OF PLAN. No Award shall be granted pursuant to the Plan on or after February 10, 2005, but Awards granted prior to such date may extend beyond that date. EX-11 12 EXHIBIT 11 1 EXHIBIT NO. 11 THE PROGRESSIVE CORPORATION COMPUTATION OF EARNINGS PER SHARE (MILLIONS - EXCEPT PER SHARE AMOUNTS)
Years Ended December 31, 1999 1998 1996 ----------------------------------------------------------------------------- Per Per Per Amount Share Amount Share Amount Share ----------------------------------------------------------------------------- BASIC: Net income $295.2 $4.05 $456.7 $6.30 $400.0 $5.56 ============================================================================= Average shares outstanding 72.9 72.5 72.0 ============== ============== ============== DILUTED: Net income $295.2 $3.96 $456.7 $6.11 $400.0 $5.31 ============================================================================= Average shares outstanding 72.9 72.5 72.0 Net effect of dilutive stock options 1.7 2.2 3.3 -------------- -------------- -------------- Total 74.6 74.7 75.3 ============== ============== ==============
EX-13 13 EXHIBIT 13 1 Exhibit 13 The Progressive Corporation 1999 Annual Report 2 1999 Financial Highlights 7 Vision, Core Values and Objectives 10 Letter to Shareholders 16 Financial Review 32 2 3 The Progressive insurance organization began business in 1937. Progressive Casualty Insurance Company was founded in 1956 to be among the first specialty underwriters of nonstandard auto insurance. The Progressive Corporation, an insurance holding company formed in 1965, owns 82 subsidiaries and has one mutual insurance company affiliate. The companies provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. About the Art - ----------------------- Much about Progressive fits the statement "not what you'd expect from an insurance company." To illustrate this concept in the Annual Report, we commissioned artist Gregory Crewdson to investigate the idea of the end of status quo with his evocative photographs. Crewdson's work explores a kind of mystery and strangeness in recognizable scenes and landscapes. His elaborately staged photographs address this notion of the "unexpected." Crewdson's work will become part of Progressive's growing collection of contemporary art. [Art - pages 4 through 6] 3 4 1999 FINANCIAL HIGHLIGHTS (millions-except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL COMPOUNDED RATE OF INCREASE ---------------------------- 5-YEAR 10-YEAR 1999 1998 % CHANGE 1995-1999 1990-1999 - -------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR Direct premiums written $ 6,305.3 $ 5,451.3 16% 19% 17% Net premiums written 6,124.7 5,299.7 16 20 18 Net premiums earned 5,683.6 4,948.0 15 21 17 Total revenues 6,124.2 5,292.4 16 20 16 Operating income 266.7 449.3 (41) 5 10 Net income 295.2 456.7 (35) 2 14 Per share:(1) Operating income 3.58 6.01 (40) 5 11 Net income 3.96 6.11 (35) 2 15 Underwriting margin(2) 1.7% 8.4% 6 6 AT YEAR-END Consolidated shareholders' equity $ 2,752.8 $ 2,557.1 8 19 20 Common Shares outstanding 73.1 72.5 1 1 -- Book value per share $ 37.66 $ 35.27 7 20 21 Market capitalization $ 5,345.4 $ 12,279.7 (56) 16 18 Return on average shareholders' equity(2) 10.9% 19.3% 17 20 STOCK PRICE APPRECIATION (DEPRECIATION)(3) 1-YEAR 5-YEAR 10-YEAR Progressive (56.7)% 16.2% 19.7% S&P 500 21.0% 28.5% 18.1%
(1) Presented on a diluted basis. (2) The 5- and 10-year amounts represent averages for the period, not rates of increase. (3) Assumes dividend reinvestment. [Art - pages 8 and 9] 7 5 VISION, CORE VALUES AND OBJECTIVES Communicating a clear picture of Progressive by stating what we try to achieve (Vision), what guides our behavior (Core Values), what our people expect to accomplish (Objectives), and how we evaluate performance (Measurements), permits all people associated with Progressive to understand their role and to enjoy their contributions. Vision - ------------------------- We seek to be an excellent, innovative, growing and enduring business by cost-effectively and profitably reducing the human trauma and economic costs of auto accidents and other mishaps, and by building a recognized, trusted, admired, business-generating brand. We seek to earn a superior return on equity and to provide a positive environment which attracts quality people who develop and achieve ambitious growth plans. 10 6 Core Values - ---------------------------------------------------------- Progressive's Core Values are pragmatic statements of what works best for us in the real world. They govern our decisions and behavior. We want them understood and embraced by all Progressive people. Growth and change provide new perspective, requiring regular refinement of Core Values. INTEGRITY We revere honesty. We adhere to high ethical standards, report promptly and completely, encourage disclosing bad news and welcome disagreement. GOLDEN RULE We respect all people, value the differences among them and deal with them in the way we want to be dealt with. This requires us to know ourselves and to try to understand others. OBJECTIVES We strive to communicate clearly Progressive's ambitious objectives and our people's personal and team objectives. We evaluate performance against all these objectives. EXCELLENCE We strive constantly to improve in order to meet and exceed the highest expectations of our customers, shareholders and people. We teach and encourage our people to improve performance and to reduce the costs of what they do for customers. We base their rewards on results and promotion on ability. PROFIT The opportunity to earn a profit is how the competitive free-enterprise system motivates investment to enhance human health and happiness. Expanding profits reflect our customers' and claimants' increasingly positive view of Progressive. We value all people's well-being and strive to give back to our communities. 11 7 Financial Objectives and Measurements - --------------------------------------------------------------- Consistent achievement of superior results requires that our people understand Progressive's objectives and their specific role, and that their personal objectives dovetail with Progressive's. Our objectives are ambitious yet realistic. We are committed to achieving financial objectives over rolling five-year periods. Experience always clarifies objectives and illuminates better strategies. We constantly evolve as we monitor the execution of our strategies and progress toward achieving our objectives. RETURN ON SHAREHOLDERS' EQUITY Our most important financial goal is to achieve an after-tax return on shareholders' equity over a five-year period that is at least 15 percentage points greater than the rate of inflation (measured by the Consumer Price Index which was 2.7% in 1999, and averaged 2.4% over the past five years and 2.9% over the past ten years). Return on equity was 10.9% in 1999, and averaged 17.5% over the past five years and 19.6% over the past ten years. PROFITABILITY Progressive is driven by the goal of producing a calendar year 4% underwriting profit. Overall, we had an underwriting profit of 1.7% in 1999, 5.9% for the past five years and 5.8% for the past ten years. Estimated industry results for the personal auto insurance market for the same periods were underwriting losses of 2.8%, 1.2% and 2.2%. GROWTH We seek increases in net premium volume that are at least 15 percentage points greater than the rate of inflation. Companywide net premiums written increased 15.6% in 1999, 20.0% compounded annually over the past five years and 18.1% over the past ten years. Net premiums written in the personal auto insurance market for the same periods grew 2.6%, 4.4% and 5.0%. 12 8 ACHIEVEMENTS We are convinced that the best way to maximize shareholder value is to achieve these financial objectives consistently. A shareholder who purchased 100 shares of Progressive for $1,800 in our first public stock offering on April 15, 1971, owned 7,689 shares on December 31, 1999, with a market value of $562,000, for a 22.3% compounded annual return, compared to the 9.8% return achieved by investors in the Standard & Poor's 500 during the same period. In addition, the shareholder received dividends of $1,999 in 1999, bringing total dividends received to $20,265 since the shares were purchased. In the ten years since December 31, 1989, Progressive shareholders have realized compounded annual returns of 19.7%, compared to 18.1% for the S&P 500. In the five years since December 31, 1994, Progressive shareholders' returns were 16.2%, compared to 28.5% for the S&P 500. In 1999, the returns were (56.7)% on Progressive shares and 21.0% on the S&P 500. Over the years, when we have had adequate capital and believe it is appropriate, we have repurchased our shares. Since 1971, we spent $614.3 million repurchasing our shares, at an average cost of $9.11 per share. During 1999, we repurchased 6,044 Common Shares to offset obligations under various employee benefit plans.
1999 Objectives and Accomplishments - ------------------------------------------------------------------------------------- LAST LAST 1999 5 YEARS 10 YEARS - ------------------------------------------------------------------------------------- RETURN ON SHAREHOLDERS' EQUITY Objective 17.7% 17.4% 17.9% Accomplishment 10.9 17.5 19.6 UNDERWRITING PROFIT (LOSS) Objective 4.0 4.0 4.0 Accomplishment 1.7 5.9 5.8 Industry-Personal Auto Insurance Market (2.8) (1.2) (2.2) GROWTH (ANNUALIZED) Objective 17.7 17.4 17.9 Accomplishment 15.6 20.0 18.1 Industry-Personal Auto Insurance Market 2.6 4.4 5.0 - --------------------------------------------------------------------------------------
[Art - pages 14 and 15] 13 9 LETTER TO SHAREHOLDERS 16 10 Progressive's strategy is to become the number one choice of U.S. consumers for auto insurance. Progressive has consciously decided to narrow its business focus within the framework of that objective. If past is prologue, Progressive will experience a resurgence. We increased prices ahead of competitors which will likely slow our volume, allowing us to focus on developing our current claim representatives rather than focus on building the staff as we have for the past few years. We expect that this in turn should produce lower loss costs. A key part of the improved customer experience is building customer trust and loyalty, which we do in part by continually identifying new and better ways to serve customers. The theme for this annual report is "not what you'd expect." Progressive has routinely redefined what you should expect from an auto insurance company by consistently dreaming, thinking outside the lines and having the will to do things never before tried. Progressive's future depends on continuing to do that. Progressive must lead. Leaders always go where others never have been. 1999 was a mixed year for Progressive. Many positive accomplishments, including a 16% increase in annual premium volume and becoming the 4th largest U.S.auto insurer, were overshadowed by a 6.7 point decrease in the Company's year-to-year underwriting profit (from 8.4% in 1998 to 1.7% in 1999) with a concomitant decline in earnings per share from $6.11 in 1998 to $3.96 in 1999. Progressive shareholders had a wild ride as Progressive's stock traded at an all-time high price of 174+ on January 12 and then plummeted to close 1999 at $73.125. Disappointing 1999 performance caused us to reappraise all of our assumptions, abilities, approaches, advantages and attitudes. This letter shares our view of what happened and why, what we are doing about each issue, how we view both competition and the social/political environment vis-a-vis auto insurance, what our strategy is and how we will execute it. 17 11 What Happened and What We Are Doing - ------------------------------------------------------------ RATE CHANGES In 1999, we were surprised by the sudden reversal in the long-term trend of reducing accident frequency and severity, resulting in loss cost increases not contemplated in the rates we charged. We attribute the change to forces both inside and outside Progressive. Progressive decreased rates an average of 1.3% during the first six months of 1999, only to increase rates 4.4% in the second half of the year, primarily in the fourth quarter. It is likely that these rate increases will slow volume growth in 2000, and, since the majority of our policies are annual, we will not see the full impact of these rate changes on earnings until the fourth quarter of 2000. We will take advantage of this slow down to increase the tenure of our claim force and to improve our service to customers, agents and claimants. OPERATING GOALS We recognized that the way we structured our goals and incentive compensation program for 1999 helped drive our disappointing calendar underwriting results. We created internal incentives that credited a portion of anticipated future policy renewal profits to current results to encourage growing the business acquired directly. Although expanding the direct business is key to Progressive's long-term viability, we learned that we are unable to measure accurately either who will renew and/or the likely future profit margins on the renewals. The insoluble issues include that we often change prices and/or risk categories, and that distribution is changing fast so that history may no longer be a good predictor. We decided that anticipating profit to be earned on policies to be renewed in the future can lead to flawed conclusions, inadequate pricing and GAAP underwriting losses. In response, we based our goals and manager incentives for 2000 on calendar year results. CLAIM FOCUS Progressive's premium volume has expanded from $2,457.2 million in 1994 to $6,124.7 million in 1999, a compound annual growth rate of 20%. Our number of claims handled has grown at a similar rate, from 348,000 in 1994 to 988,000 in 1999. Automobile insurance is a personal service business. Claim handling, a highly technical job, is the most significant of Progressive's services. It takes about two years to train and develop a new claim representative to be a consistently excellent claim handler. The claim staff expanded from 3,093 in 1994 to 7,561 in 1999, with average claim representative tenure of 3.7 years, bringing with it predictable but unmeasurably lower claim handling quality and increased loss costs. As premium growth slows, we expect to see a reduction in new claim representative hiring and an increase in average claim representative tenure. Our claim effort is focused on building our industry recognized Immediate Response(R) claims service with the goal of improved total resolution (pay and conclude with happy customers and claimants). Continuously delighting customers drives us to create new customer/claimant services. 18 12 RESERVE ADEQUACY In 1999, we reduced loss reserves relating to prior accident years, amounting to .5 combined ratio points, compared to 3.7 points in 1998, 2.5 points in 1997 and 3.3 points in 1996. We believe that our loss reserves are fairly stated; we continually monitor their adequacy to ensure that we remain properly reserved. ADVERTISING During 1999, we continued to increase our understanding of advertising, brand building and direct sales management. Our inexperience, and probably a bit of hubris, beginning with our advertising and sponsorship associated with Super Bowl XXXIII, led us to incur significant costs without achieving proportionate benefits. Although we didn't get the hoped-for consumer response, we did achieve a boost in overall awareness of Progressive as an auto insurer. We also learned about advertising agency and media selection management, more about what messages sell best and more about call center management--all developing skills for Progressive. We changed advertising agencies and, in 2000, are running a new series of advertising spots leading with our strongest attribute--Progressive's own people explaining the many advantages we have to offer with a greater focus on generating calls and sales while building the brand. STOCK PRICE The question I am most often asked is, "Why did PGR drop from the $170s to the $60s?" Because my personal net worth has always been based on the value of Progressive stock, I have 30 years experience with, and interest in, the stock's price. I respond to the question first with an honest, "I don't know." Then I reminisce. In December 1974, Progressive dropped from the $27 per share it sold at in early 1973 to nearly $2 per share, a decline which rendered me insolvent. Since 1974, I have known that inexplicably high prices are possible and can be followed by precipitous price drops. My personal explanation for last year's Progressive stock price gyrations is that after 35 years of being an exciting growth company, Progressive was finally recognized as such. In the euphoria of last year's stock market and despite our comments to the contrary, some assumed we would achieve both the wide profit margins and high growth of the late '90s well into the future. When it became clear that we would sustain neither the margin nor the growth rate during a cyclical auto insurance downturn, the stock price plummeted. Through the efforts discussed above, I believe that we have both the strategy and determination in place to return to more profitable times. It is possible that the many changes implemented in 1999 (e.g., program design, credit vendors, etc.) interacted to cause unanticipated risk selection problems. In 2000, we will focus more on improving what we've developed rather than creating new processes and systems. [Art - pages 20 and 21] 19 13 The Current Environment ---------------------------------------- Auto insurance is a cyclical business. From 1974 through 1991, the auto insurance industry lost an annual average of 6% in underwriting. During that same period, Progressive made an average 1% underwriting profit. From 1992 through 1998, the auto insurance industry lost only 1% in underwriting, similar to results in the seven years prior to 1974. During that same period, 1992 through 1998, Progressive made an average underwriting profit of 7.9%. It appears that the cycle began to turn again in 1999, meaning that Progressive will have to continue to outperform the industry in order to achieve our targeted 4% underwriting profit. Progressive now competes directly with the largest auto insurance companies in the U.S., most of which are well-capitalized and very experienced. In addition, industry consolidation is underway, which will probably result in fewer, but much stronger, competitors. Multiple-line companies doing business with insurance agents confront increasing competitive disadvantages from the insurers specializing in automobile insurance. Some sold their personal lines business in 1999--more will. This trend could benefit Progressive, which sells more auto insurance through Independent Agents than any other auto insurer. On the other hand, we anticipate greater competition for agent business. Progressive's product and service innovations have changed the competitive landscape. Customers are beginning to expect 24-hour service and the ability to buy when and where it is convenient for them. Customers also want special pricing and coverages to meet their unique needs. Technology presents continuous opportunity and challenge. Much money and energy is being invested to develop new ways to distribute auto insurance over the Internet, as well as new ways to make it easy and inexpensive for consumers to compare prices and other aspects of individual insurer offerings. Technology becomes increasingly critical to everything we do. 22 14 Personal Lines Business -------------------------------------------- In 1999, we continued to focus on growing our Personal Lines business. Insurance written for private passenger automobiles, motorcycles and recreation vehicles accounted for 93% of Progressive's total net premiums written in 1999. In 1999, Personal Lines net premiums written were $5,702.4 million, an increase of 16% as compared to 1998. The underwriting profit margin was 1.2% in 1999, compared to 7.9% last year. Although we had several significant missteps in 1999, our fundamental strategy remains sound. OFFER A CHOICE IN HOW TO BUY Progressive recognizes the importance of providing consumers choices in how to buy based on where, when and how they want it. Accordingly, we continue to pursue a multiple-distribution approach. We view no distribution method through which we sell as superior to any other. No matter whether our customers choose to buy through an Independent Insurance Agent or direct through 1-800-AUTO-PRO(R) or progressive.com, we believe that to get the business we seek, we have to provide the lowest price. Therefore, we identify and market to those groups with the greatest likelihood of buying. We also know that we have to be as efficient as possible. To continue to be successful, we need to be the leader in market innovation. During 1999, one of our more significant achievements was the success we experienced in selling auto insurance over the Internet. By continuing to offer our products for sale in every way in which customers wish to shop, we believe we can achieve our goal of being consumers' number one choice for auto insurance. BECOME A RECOGNIZED, TRUSTED BRAND Progressive's brand promotion can be seen in a variety of media in every market where we do business, completing in 1999, our multi-year rollout of our direct distribution option. Despite the fact that we have been the largest seller of auto insurance through Independent Insurance Agents for several years, it is only recently that we have become more of a household name. During 1999, our brand profile with consumers continued to rise. Our awareness measures, particularly our awareness levels with age segments up to 35, an attractive part of our new acquisition range, have all improved. Our advertising, which was initially centered around our promise to give the rates of several of our largest competitors, seems to have resonated well with consumers and earned their trust. During 1999, we attempted several creative directions to build awareness and communicate our size and innovative service features. As our brand strengthened and awareness grew, consumer confidence was expressed in increased conversion rates. We ended 1999 much stronger than we entered, with many lessons learned. PROVIDE A COMPETITIVE PRICE FOR ALL DRIVERS In 1996, we migrated to a goal to produce a 4% underwriting profit over the entire retention period of a policyholder. In mid-1999, we realized this approach was not consistent with our financial goals. Accordingly, we returned to our historic target of a calendar year 96 combined ratio in Personal Lines, with the intent to achieve that goal within the next few years. One important lesson of migrating to and then from profit targets based on the entire retention period of a policyholder was a better appreciation of the importance of customer retention. Beginning in 1999, we focused on better understanding what actions, in addition to price, we can take to retain our customers longer. While customer retention is an important tenet in our pricing strategy, the end goal is still to capture sufficient information so that we provide the lowest rates possible for all drivers while still earning a reasonable rate of return. We continue to believe that we do this as well as or better than anyone in the industry. BE EASY TO DO BUSINESS WITH We realized early on that, regardless of distribution method, people migrate to the company with the lowest rates. On the other hand, more and more people put a premium on their own time. Accordingly, in addition to providing a low-cost product, we have to be easy to do business with. What does that mean for Progressive? For a multi-distribution company, that means several things. From the Agency side, we must offer simple and reliable software on the desktop of each Agency's customer service representative. In the event that these representatives have a question, they need to be able to contact someone 24 hours a day, 7 days a week for an answer. Waiting until tomorrow is not acceptable. In addition, we are focusing on those Independent Agents who, like Progressive, deliver a superior customer experience at the point of sale. The same principles hold true for our direct operations. When customers call Progressive, either to purchase a policy or ask a question, they want a process that is efficient and customer friendly. Perhaps the most demanding customers are found on the Internet. Used to the control they exercise over the buying process, Internet customers demand a site that is both fast and efficient. To discover the ease of doing business with Progressive, we invite you to call a local agent, call us at 1-800-AUTO-PRO(R) or visit us at progressive.com. Sometimes we have the lowest price. Sometimes we don't. But one thing that is certain, Progressive is always working to ensure that we are easy to do business with. FOCUS ON SATISFACTORY CLAIM RESOLUTION FOR CUSTOMERS While most consumers make their purchasing decisions based on the cost of the product, some actually think about the service they will receive in the event they have an accident. A customer that had a claim under a 23 15 Progressive policy in 1999, would have received an in-person contact within nine hours about 42% of the time. Following this initial contact, the claim representative would have verified coverage, assessed the damage and provided a timely settlement. With five claim call centers open 24 x 7, and over 7,500 claim professionals in 350 field offices, we believe the overall process is as good as any in the industry. As we look forward to 2000, we expect that executing against these five tenets will allow us to move steadily toward our goal of becoming consumers' number one choice for auto insurance. 24 16 Other Businesses - --------------------------- The Company's other lines of business include writing insurance for small fleets of commercial vehicles, collateral protection and loan tracking for auto lenders and financial institutions, directors' and officers' liability and fidelity coverage for American Bankers Association member community banks and independent credit unions, and providing related claims, underwriting and system services. Revenues in these businesses were $437.0 million in 1999, compared to $405.5 million the prior year. Pretax operating profit was $41.8 million, compared to $61.9 million in 1998, and return on revenue was 9.6%, compared to 15.3% in 1998. Investments and Capital Management ------------------------------------------------- Progressive's investment and capital management goals are first to ensure that there is sufficient capital to support all the insurance premium we can profitably write, and second to maximize our total investment return. Our objectives are to finance growth internally, to sustain an A or better debt rating, to have a lower debt cost than peer companies and to repurchase stock cost effectively. Progressive's senior debt was rated A+ and A2 by Standard & Poor's and Moody's, respectively, at year-end 1999, and our debt to debt plus equity ratio was 27.6%. During 1999, we did not repurchase shares other than to fulfill obligations under certain employee benefit programs. Over the last ten years, we repurchased 20.8 million split-adjusted shares at an average cost of $20.89. The shares we bought back in the 1990s were purchased for $433 million and were worth $1.5 billion at the end of the decade, an annualized return of 38%, exceeding the S&P 500 index return of 18%. We do not follow a formulaic approach, but consider short- and long-term factors, both technical and fundamental, in deciding whether to repurchase shares. In 1999, some of the important considerations that caused us to hold off buying shares were the excessive capital in the industry and falling auto rate levels. Over the long term, we expect Progressive to be a much larger company and will need the capital we have now, if not more, but we will buy back shares when, in our judgement, we believe it is appropriate. In March 1999, we successfully issued $300 million of 30-year senior debt at 6.625% in a public offering. We intend to use these funds to pay the $300 million of debt ($150 million at 10% and $150 million at 10.125%) due at the end of 2000. At year-end 1999, $4,513.7 million, 70.2% of our total invested assets, were investment-grade, fixed-maturity securities, compared to $4,532.9 million and 79.9% in 1998. Non-investment-grade fixed-maturity securities were $248.0 million, 3.9% of total invested assets, compared to $128.0 million and 2.3% in 1998. The portfolio's duration was 3.0 years at year-end 1999, near the middle of our target range. We earned 3.0% on our fixed-income assets which was a good result relative to other fixed-income managers who had flat or declining total returns caused by the rise in interest rates (five-year government bonds rose 174 basis points from 4.5% to 6.3% in 1999). We increased our common stock investments during the year to $1,243.6 million, 19.3% of total invested assets, compared to $636.9 million and 11.2% in 1998. A truer representation of our common equity exposure at year end is $1,013.4 million, or 15.8%, which excludes $230.2 million of term trust certificates holding fixed-income investments. Our 11.6% equity return was in line with value oriented active equity managers, but underperformed relative to the Russell 3000's 20.9% because of our underweighting technology stocks throughout the year. Borrowing a terrific quote from Byron Wien at Morgan Stanley, as stated in Barron's, "In my lifetime, we've gone from valuing stocks based on dividends to earnings, to cash flow, and then momentum. Now stocks are priced on possibilities." At Progressive, we never adopted the "momentum" approach and focus on the intrinsic value of a company to invest in more than its "possibilities." Included in our fixed-maturity and common equity portfolios are $195.8 million, or 3.0%, of other risk assets. These include high yield and distressed debt, private equities and warrants, and mezzanine investments. No individual security in this category comprised more than 1% of Progressive's total investment portfolio. Our total return in this asset class was 7.1%. In 1999, Progressive earned $387.9 million of investment income before taxes, compared to $306.2 million in 1998, including realized gains of $47.2 million in 1999 and $11.4 million in 1998. The weighted average fully taxable equivalent book yield of the portfolio was 6.3% in both 1999 and 1998. 25 17 Management Transition - ------------------------------------------------------ We closed the year with another step in management transition. Glenn Renwick was named CEO-Insurance Operations. With Glenn assuming that new role officially on January 1, 2000, and Chuck Chokel already in a comparable position for Investments and Capital Management, the new generation of Progressive leadership is in place and leading the way. I am thrilled to continue to be deeply involved working with Glenn and Chuck as well as our senior staff officers. 2000 Focus -------------------- Helping customers and claimants resolve the inconvenience, pain and costs associated with automobile accidents is what Progressive is all about. In 2000, we will pursue, with all the energy, creativity and focus that we can bring to it, ways that we can change what we do to improve the claim experience that our customers and claimants have when they have the misfortune to be involved in a loss. We want to produce an even better experience from beginning to end for our customers in every one of their interactions with Progressive. Like customers for all services and products, auto insurance customers want more information about their opportunities and many more options as to how they can seize those opportunities. Our objective is to make the buying experience with Progressive the easiest, most interesting and gratifying of any auto insurer. The Internet has become the market of choice for people ages 18-35. As this age group has the highest propensity to shop for auto insurance, it is a market in which we are most interested. In 1999, Progressive extended its dominance in Internet auto insurance. We are unique in offering consumers the option to buy insurance directly online in 47 states, plus 26 18 the District of Columbia. During the year, we sold more than $70 million of auto insurance on the Internet (for the year, Internet sales, which either closed directly online or through a customer service representative, represented about 7% of our direct sales), gave over 1 million insurance quotes to consumers, and serviced over 65,000 customers online. For those consumers who prefer buying through an Independent Agent, we provided a quick online way to find a local Independent Agent, which was accessed by consumers over 5,000 times a month during 1999. Through "Personal Progressive" (located at progressive.com) we are able to provide our policyholders a personalized online insurance service center for billing, online payments, policy changes, individualized claim information and vehicle replacement quotes. We will launch a homeowners product in Arizona in March 2000 and plan to expand to a few additional states during the year. Progressive recognizes that many consumers and agents prefer the convenience of placing their home and auto insurance with the same company. The new product line will also include condominium owners' and renters' insurance policies. We will limit our rollout of these new products to states where the competitive and regulatory environments allow us to charge adequate premiums for the risk and provide reasonable opportunity to achieve an underwriting profit. The Future - ---------------------------- We begin 2000 excited about the opportunities that lie ahead yet respectful of the challenges that are implicit in our objectives and strategy. Much will be required to realize our vision. At Progressive, it is always as if we are just beginning our business. We believe the future is brighter than ever. We deeply appreciate the customers we are privileged to serve. Thank you for your business. Thanks to the more than 30,000 Independent Insurance Agents who did business with Progressive in 1999. We are grateful for our shareholders' continued confidence. To the 18,753 men and women who make Progressive a great company, thanks for all your contributions in 1999 and for the promise you bring to our future. Joy, Love and Peace /s/Peter B. Lewis Peter B. Lewis Chairman, President and Chief Executive Officer [Art - pages 28 through 31] 27 19 1999 FINANCIAL REVIEW Consolidated Financial Statements 34 Management's Discussion and Analysis 48 Quarterly Financial and Common Share Data 51 Ten Year Summaries 52 Quantitative Market Risk Disclosures 56 Analysis of Loss and LAE Development 58 Direct Premiums Written by State 58 32 20 REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of The Progressive Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/Pricewaterhousecoopers L.L.P. Cleveland, Ohio January 25, 2000 33 21
CONSOLIDATED STATEMENTS OF INCOME (millions-except per share amounts) - --------------------------------------------------------------------------------------------- For the years ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------- NET PREMIUMS WRITTEN $ 6,124.7 $ 5,299.7 $ 4,665.1 =============================================== REVENUES Premiums earned $ 5,683.6 $ 4,948.0 $ 4,189.5 Investment income 340.7 294.8 274.9 Net realized gains on security sales 47.2 11.4 98.5 Service revenues 47.5 38.2 45.3 Other income(1) 5.2 -- -- ----------------------------------------------- Total revenues 6,124.2 5,292.4 4,608.2 ----------------------------------------------- EXPENSES Losses and loss adjustment expenses 4,256.4 3,376.3 2,967.5 Policy acquisition costs 745.0 659.9 607.8 Other underwriting expenses 583.8 495.8 336.0 Investment expenses 9.5 7.4 9.9 Service expenses 40.9 30.8 43.9 Interest expense 76.4 61.1 64.6 ---------------------------------------------- Total expenses 5,712.0 4,631.3 4,029.7 ----------------------------------------------- NET INCOME Income before income taxes 412.2 661.1 578.5 Provision for income taxes 117.0 204.4 178.5 ----------------------------------------------- Net income $ 295.2 $ 456.7 $ 400.0 =============================================== COMPUTATION OF EARNINGS PER SHARE Basic: Average shares outstanding 72.9 72.5 72.0 =============================================== Per share $ 4.05 $ 6.30 $ 5.56 =============================================== Diluted: Average shares outstanding 72.9 72.5 72.0 Net effect of dilutive stock options 1.7 2.2 3.3 ----------------------------------------------- Total equivalent shares 74.6 74.7 75.3 =============================================== Per share $ 3.96 $ 6.11 $ 5.31 ===============================================
(1) See Note 12-Related Party Transaction for discussion. See notes to consolidated financial statements. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 34 22 CONSOLIDATED BALANCE SHEETS
(millions) - ---------------------------------------------------------------------------------------------------------------------- December 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Available-for-sale: Fixed maturities, at market (amortized cost: $4,650.9 and $4,171.6) $ 4,532.7 $ 4,219.0 Equity securities, at market: Preferred stocks (cost: $425.4 and $374.3) 422.4 376.5 Common stocks (cost: $1,127.8 and $512.2) 1,243.6 636.9 Short-term investments, at amortized cost (market: $229.0 and $441.9) 229.0 441.9 - ---------------------------------------------------------------------------------------------------------------------- Total investments 6,427.7 5,674.3 Cash 14.2 18.6 Accrued investment income 54.0 53.1 Premiums receivable, net of allowance for doubtful accounts of $42.9 and $34.0 1,760.8 1,456.2 Reinsurance recoverables 254.7 281.0 Prepaid reinsurance premiums 88.3 77.7 Deferred acquisition costs 343.4 299.1 Income taxes 273.7 192.9 Property and equipment, net of accumulated depreciation of $243.8 and $194.1 447.7 376.2 Other assets 40.2 34.0 ====================================================================================================================== Total assets $ 9,704.7 $ 8,463.1 ============================= LIABILITIES AND SHAREHOLDERS' EQUITY Unearned premiums $ 2,781.4 $ 2,329.7 Loss and loss adjustment expense reserves 2,416.2 2,188.6 Policy cancellation reserve 17.8 29.1 Accounts payable and accrued expenses 687.9 582.0 Debt 1,048.6 776.6 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 6,951.9 5,906.0 ====================================================================================================================== Shareholders' equity: Common Shares, $1.00 par value (authorized 300.0, issued 83.1, including treasury shares of 10.0 and 10.6) 73.1 72.5 Paid-in capital 481.6 448.3 Accumulated other comprehensive income: Net unrealized appreciation (depreciation) on investment securities (3.4) 113.3 Other (9.0) (9.6) Retained earnings 2,210.5 1,932.6 - ---------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,752.8 2,557.1 ====================================================================================================================== Total liabilities and shareholders' equity $ 9,704.7 $ 8,463.1 ======================================================================================================================
See notes to consolidated financial statements. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 35 23
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (millions-except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, Beginning of year $ 1,932.6 $ 1,534.8 $ 1,155.2 Net income 295.2 $ 295.2 456.7 $ 456.7 400.0 $ 400.0 ----------- ----------- ------------ Cash dividends on Common Shares ($.26, $.25 and $.24 per share) (19.0) (18.1) (17.3) Treasury shares purchased (.6) (39.8) (2.7) Other, net 2.3 (1.0) (.4) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, End of year $ 2,210.5 $ 1,932.6 $ 1,534.8 - ----------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Balance, Beginning of year $ 103.7 $ 116.0 $ 68.4 Change in unrealized appreciation (depreciation) (116.7) (9.0) 48.3 Other .6 (3.3) (.7) ----------- ----------- ------------ Other comprehensive income (loss) (116.1) (116.1) (12.3) (12.3) 47.6 47.6 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, End of year $ (12.4) $ 103.7 $ 116.0 - ----------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 179.1 $ 444.4 $ 447.6 =========== =========== ============ COMMON SHARES, $1.00 PAR VALUE Balance, Beginning of year $ 72.5 $ 72.3 $ 71.5 Stock options exercised .6 .6 .8 Treasury shares purchased -- (.4) -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance, End of year $ 73.1 $ 72.5 $ 72.3 - ----------------------------------------------------------------------------------------------------------------------------------- PAID-IN CAPITAL Balance, Beginning of year $ 448.3 $ 412.8 $ 381.8 Stock options exercised 12.0 10.9 13.3 Tax benefits on stock options exercised 20.4 25.6 17.6 Treasury shares purchased -- (2.4) (.2) Other 0.9 1.4 .3 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, End of year $ 481.6 $ 448.3 $ 412.8 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 2,752.8 $ 2,557.1 $ 2,135.9 ==================================================================== ========== ==========
There are 20.0 million Serial Preferred Shares authorized; no such shares are issued or outstanding. There are 5.0 million Voting Preference Shares authorized; no such shares have been issued. See notes to consolidated financial statements. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 36 24 CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) - --------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 295.2 $ 456.7 $ 400.0 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 71.8 56.1 36.6 Net realized gains on security sales (47.2) (11.4) (98.5) Gain on sale of property and equipment (5.2) -- -- Changes in: Unearned premiums 451.7 349.6 442.3 Loss and loss adjustment expense reserves 231.2 42.0 204.6 Accounts payable and accrued expenses 118.0 76.7 49.9 Policy cancellation reserve (11.3) (5.6) (8.6) Prepaid reinsurance premiums (10.6) 2.1 33.3 Reinsurance recoverables 26.3 36.5 62.7 Premiums receivable (304.6) (295.4) (310.9) Deferred acquisition costs (44.3) (39.5) (52.7) Income taxes (17.8) (71.3) (67.8) Other, net 21.9 21.5 43.8 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 775.1 618.0 734.7 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases: Available-for-sale: fixed maturities (6,076.7) (3,998.8) (6,764.3) equity securities (1,094.7) (942.9) (658.2) Sales: Available-for-sale: fixed maturities 5,182.5 3,210.2 5,840.0 equity securities 480.0 774.3 581.7 Maturities, paydowns, calls and other: Available-for-sale: fixed maturities 361.4 419.9 578.0 equity securities 26.6 126.0 125.4 Net (purchases) sales of short-term investments 221.0 (32.5) (248.6) (Receivable) payable on securities (19.1) 18.9 (2.0) Purchases of property and equipment (147.5) (174.2) (121.9) Sale of property and equipment 12.1 -- -- Purchase of subsidiaries, net of cash acquired (9.9) -- (48.0) - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,064.3) (599.1) (717.9) - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 12.6 11.5 14.1 Tax benefits from exercise of stock options 20.4 25.6 17.6 Proceeds from debt 301.4 -- -- Payments of debt (30.0) -- (20.4) Dividends paid to shareholders (19.0) (18.1) (17.3) Acquisition of treasury shares (.6) (42.6) (2.9) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 284.8 (23.6) (8.9) - --------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash (4.4) (4.7) 7.9 Cash, Beginning of year 18.6 23.3 15.4 - --------------------------------------------------------------------------------------------------------------------- Cash, End of year $ 14.2 $ 18.6 $ 23.3 =====================================================================================================================
See notes to consolidated financial statements. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 37 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 01 REPORTING AND ACCOUNTING POLICIES NATURE OF OPERATIONS The Progressive Corporation, an insurance holding company formed in 1965, owns 82 subsidiaries and has one mutual insurance company affiliate. The companies provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. BASIS OF CONSOLIDATION AND REPORTING The accompanying consolidated financial statements include the accounts of The Progressive Corporation, its subsidiaries and affiliate (the Company). All of the subsidiaries and the affiliate are wholly owned or controlled. All intercompany accounts and transactions are eliminated in consolidation. INVESTMENTS Available-for-sale: fixed maturity securities are securities held for indefinite periods of time, and may be used as a part of the Company's asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs or similar economic factors. These securities are carried at market value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in accumulated other comprehensive income. Market values are obtained from a recognized pricing service or other quoted sources. The asset-backed portfolio is accounted for under the retrospective method; prepayment assumptions are based on market expectations. Available-for-sale: equity securities include common stocks and nonredeemable preferred stocks and are reported at quoted market values. Changes in the market values of these securities, net of deferred income taxes, are reflected as unrealized appreciation or depreciation in accumulated other comprehensive income. Changes in value due to foreign currency exchange are limited by foreign currency hedges; unhedged amounts are not material and changes in value are recognized in income in the current period. Trading securities are securities bought principally for the purpose of selling them in the near term and are reported at market value. Changes in market value are recognized in income in the current period. During the year, the net activity in trading securities was not material to the Company's financial position, cash flows or results of operations and was recognized in the available-for-sale portfolio. Derivative instruments, as defined by Statement of Financial Accounting Standards (SFAS) 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments," include futures, options, short positions, forward positions, foreign currency forwards and interest rate swap agreements. Derivative instruments held or issued for purposes other than trading include derivative positions used for risk management purposes and hedge positions. Derivative positions used for risk management are evaluated as to their effectiveness to modify the Company's risk characteristics and enhance the yields of the available-for-sale portfolios. Hedges are evaluated on established criteria to determine the effectiveness of their correlation and ability to reduce risk of specific securities or transactions. Those instruments held or issued for risk management purposes are carried at market value in the appropriate available-for-sale portfolio based on the nature of the derivative instrument; changes in value of futures, options, foreign currency forwards and short positions are recorded to income in the current period, and changes in the value of forward positions and interest rate swaps are reflected in other comprehensive income as unrealized appreciation or depreciation, net of deferred income taxes. At disposition, changes in value of forward positions and interest rate swap agreements are recognized in income as "net realized gains or losses on security sales." Those instruments entered into for the purpose of hedging are carried at market value; changes in value follow the recognition of the asset being hedged. Gains or losses on closed hedge positions are recorded as basis adjustments to the cost of the assets hedged and amortized over their expected life. Unamortized amounts are recognized in income at the disposition of the assets hedged. Gains and losses on instruments entered into for the purpose of hedging anticipated transactions are deferred and amortized over the life of the hedged transaction, beginning at the inception of the transaction. Gains and losses on foreign currency hedges offset the foreign exchange gains and losses on the foreign equity portfolio. The net hedged gain or loss is not material and is recognized into income in the current period. Hedges that no longer qualify for hedge accounting due to lack of correlation are reclassified to derivative instruments held or issued for purposes other than trading and used for risk management purposes. Those instruments held or issued for trading purposes are carried at market value and include derivatives held or issued for the specific purpose of generating profits and all other derivatives not meeting the criteria for derivatives held or issued for other than trading purposes; changes in value are recorded to income in the current period. During the year, the net activity in derivative instruments held or issued for trading purposes was not material to the Company's financial position, cash flows or results of operations; gains or losses during the year were recognized in the available-for-sale portfolio. See Note 4-Investments for further discussion. Short-term investments include eurodollar deposits, commercial paper and other securities maturing within one year and are reported at amortized cost, which approximates market. Investment securities are exposed to various risks such as interest rate, market and credit. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value in the near term. Realized gains and losses on sales of securities are computed based on the first-in first-out method and include write downs on available-for-sale securities considered to have other than temporary declines in market value. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using accelerated methods for computers and straight line for all other fixed assets. The useful lives range from 3 to 4 years for computers, 10 to 31 years for buildings and improvements and 5 to 6 years for all other property and equipment. Property and equipment includes software capitalized for internal use. As of December 31, 1999, the Company had contractual commitments related to the Company's construction project in Mayfield Village, Ohio totalling $127.6 million, of which $60.9 million had been paid through 1999. Total interest capitalized related to the Company's construction projects and capitalized computer software costs was $3.4 million and $3.5 million in 1999 and 1998, respectively. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 38 26 INSURANCE PREMIUMS AND RECEIVABLES Insurance premiums written are earned primarily on a pro rata basis over the period of risk. For products where more than 50% cancellations are anticipated, premiums written and earned are reduced, though cancellations have not yet occurred.The Company provides insurance and related services to individuals, lenders and motor carriers throughout the United States, and offers a variety of payment plans to meet individual customer needs. Generally, premiums are collected in advance of providing risk coverage, minimizing the Company's exposure to credit risk. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss reserves represent the estimated liability on claims reported to the Company, plus reserves for losses incurred but not yet reported (IBNR). These estimates are reported net of amounts recoverable from salvage and subrogation. Loss adjustment expense reserves represent the estimated expenses required to settle these claims and losses. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. Such loss and loss adjustment expense reserves could be susceptible to significant change in the near term. REINSURANCE The Company's reinsurance transactions include premiums written under state-mandated involuntary plans for commercial vehicles (Commercial Auto Insurance Procedures-CAIP), for which the Company retains no indemnity risk (see Note 7-Reinsurance for further discussion). The remaining reinsurance arises from the Company seeking to reduce its loss exposure in its auto and non-auto programs and its strategic alliance relationships. Prepaid reinsurance premiums are recognized on a pro rata basis over the period of risk. EARNINGS PER SHARE Basic earnings per share are computed using the weighted average number of Common Shares outstanding. Diluted earnings per share include common stock equivalents, such as stock options, assumed outstanding during the period. DEFERRED ACQUISITION COSTS Deferred acquisition costs include commissions, premium taxes and other costs incurred in connection with writing business. These costs are deferred and amortized over the period in which the related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs. Based on current indications, management believes that these costs will be fully recoverable in the near term. The Company does not defer advertising costs. SERVICE REVENUES AND EXPENSES Service revenues consist primarily of fees generated from processing business for involuntary plans and are earned on a pro rata basis over the term of the related policies; acquisition expenses are deferred and amortized over the period in which the related revenues are earned. SUPPLEMENTAL CASH FLOW INFORMATION Cash includes only bank demand deposits. The Company paid income taxes of $116.5 million, $235.9 million and $166.9 million in 1999, 1998 and 1997, respectively. Total interest paid was $72.4 million for 1999 and $63.8 million for both 1998 and 1997. STOCK OPTIONS The Company follows the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its stock option activity in the financial statements. The Company granted all options currently outstanding at an exercise price equal to the market price at the date of grant and, therefore, under APB 25, no compensation expense is recorded. The Company follows the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation." NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which standardizes the accounting for derivative instruments and requires that all derivatives be recognized at fair value on the balance sheet. Changes in fair value are recorded in current period earnings or in other comprehensive income if the derivative transaction is a qualified cash flow hedge. The statement is effective for fiscal years beginning after June 15, 2000. The Company is currently analyzing the impact of this statement, but estimates that the net effect of all derivative transactions would not have been significant at December 31, 1999. ESTIMATES The Company is required to make estimates and assumptions when preparing its financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States (GAAP). Actual results could differ from those estimates. 02 LITIGATION The Company is named as defendant in various lawsuits generally relating to its insurance operations. All legal actions relating to claims made under insurance policies or in connection with previous reinsurance agreements are considered by the Company in establishing its loss and loss adjustment expense reserves. Various other legal and regulatory actions are currently pending that involve the Company and specific aspects of its conduct of business. The Company believes that the ultimate disposition of these lawsuits in excess of amounts currently reserved will not materially impact the Company's financial position, cash flows or results of operations. The Company is also named as defendant in a number of purported class action lawsuits, such as those alleging damages as a result of the Company's use of after-market parts or the alleged diminution of value to vehicles which are involved in accidents, and cases challenging other aspects of the Company's business. Other insurance companies face similar suits. The Company plans to vigorously contest these suits, but is currently unable to estimate the potential exposure. 03 CONTRACTUAL COMMITMENTS The Company has operating lease commitments and licensing and service agreements with terms greater than one year, some with options to renew at the end of the contract periods. The minimum commitments under such noncancelable contracts at December 31, 1999 are as follows (in millions): 2000-$61.0; 2001-$41.1; 2002-$19.8; 2003-$11.9; 2004-$5.5; and thereafter-$.2. Total expense incurred by the Company for such purposes for 1999, 1998 and 1997 was $96.3 million, $93.1 million and $83.3 million, respectively. 39 27 04 INVESTMENTS The components of pretax investment income and net realized gains on security sales for the years ended December 31 were:
(millions) - --------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Available-for-sale: fixed maturities $ 275.6 $ 233.9 $ 219.1 equity securities 53.4 34.1 24.6 Short-term investments 11.7 26.8 31.2 - --------------------------------------------------------------------------------------------------------------------- Investment income 340.7 294.8 274.9 - --------------------------------------------------------------------------------------------------------------------- Gross realized gains: Available-for-sale: fixed maturities 35.4 34.6 56.9 equity securities 135.8 159.1 121.4 Short-term investments .1 .2 -- Gross realized losses: Available-for-sale: fixed maturities (55.8) (37.1) (36.9) equity securities (68.3) (145.4) (42.9) - --------------------------------------------------------------------------------------------------------------------- Net realized gains on security sales 47.2 11.4 98.5 - --------------------------------------------------------------------------------------------------------------------- $ 387.9 $ 306.2 $ 373.4 =====================================================================================================================
The composition of the investment portfolio at December 31 was:
(millions) GROSS GROSS UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------- 1999 Available-for-sale: U.S. government obligations $ 322.6 $ -- $ (6.1) $ 316.5 State and local government obligations 1,352.9 8.8 (29.5) 1,332.2 Foreign government obligations 60.4 -- (1.4) 59.0 Corporate debt securities 935.3 .1 (25.0) 910.4 Asset-backed securities 1,897.3 .7 (66.9) 1,831.1 Other debt securities 82.4 1.6 (.5) 83.5 - ------------------------------------------------------------------------------------------------------------------------- 4,650.9 11.2 (129.4) 4,532.7 Preferred stocks 425.4 2.4 (5.4) 422.4 Common stocks 1,127.8 195.0 (79.2) 1,243.6 Short-term investments 229.0 -- -- 229.0 - ------------------------------------------------------------------------------------------------------------------------- $ 6,433.1 $ 208.6 $ (214.0) $ 6,427.7 ================================================================= 1998 Available-for-sale: U.S. government obligations $ 610.8 $ 4.1 $ (.4) $ 614.5 State and local government obligations 1,649.0 44.9 (.3) 1,693.6 Foreign government obligations 52.9 .4 -- 53.3 Corporate debt securities 315.5 4.5 (1.8) 318.2 Asset-backed securities 1,491.4 19.8 (24.3) 1,486.9 Other debt securities 52.0 .7 (.2) 52.5 - ------------------------------------------------------------------------------------------------------------------------- 4,171.6 74.4 (27.0) 4,219.0 Preferred stocks 374.3 14.0 (11.8) 376.5 Common stocks 512.2 144.3 (19.6) 636.9 Short-term investments 441.9 -- -- 441.9 - ------------------------------------------------------------------------------------------------------------------------- $ 5,500.0 $ 232.7 $ (58.4) $ 5,674.3 =========================================================================================================================
Included in the available-for-sale portfolio are trading securities. The net activity in trading securities was not material to the Company's financial position, cash flows or results of operations. At December 31, 1999 and 1998, trading securities had a net market value of $50.2 million and $(.4) million, respectively. 40 28 The composition of fixed maturities by maturity at December 31, 1999 was:
(millions) - --------------------------------------------------------------------------------------------------------- MARKET COST VALUE - --------------------------------------------------------------------------------------------------------- Less than one year $ 389.6 $ 389.4 One to five years 3,039.3 2,983.0 Five to ten years 1,057.2 1,016.6 Ten years or greater 164.8 143.7 - --------------------------------------------------------------------------------------------------------- $ 4,650.9 $ 4,532.7 =========================================================================================================
Asset-backed securities are reported based upon their projected cash flows. All other securities which do not have a single maturity date are reported at average maturity. Actual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations without prepayment penalties. At December 31, 1999, bonds in the principal amount of $74.2 million were on deposit with various regulatory agencies to meet statutory requirements. Securities with a market value of $2.9 million were held at December 31, 1999, by a bankruptcy remote subsidiary and are not available to the general creditors of the Company. The components of derivative financial instruments held or issued for purposes other than trading at December 31 were:
(millions) - -------------------------------------------------------------------------------------------------------------------- MARKET VALUE/ CONTRACT/ CARRYING VALUE AT NOTIONAL VALUE AT DECEMBER 31, DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Forward and future positions: Assets $ 1.3 $ 2.8 $ 2.1 $ 30.9 Call options: Liabilities (.9) -- 16.5 -- Anticipatory debt issuance hedges: Short futures position -- 4.4 -- 203.7 Interest rate swap hedge -- (11.0) -- 150.0 Foreign currency forward and future positions: Liabilities (1.3) (.5) 16.1 31.8 - -------------------------------------------------------------------------------------------------------------------- $ (.9) $ (4.3) $ 34.7 $ 416.4 ====================================================================================================================
Derivative instruments classified as held or issued for purposes other than trading are used to manage the Company's risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio, hedged securities or hedged cash flows. During 1998, anticipatory debt issuance hedges were entered into to hedge against possible rises in interest rates prior to the issuance of debt under the Company's outstanding $300 million shelf registration, which is intended to replace debt expiring in December 2000. During 1999, the $300 million debt was issued and the hedges were closed. During the life of the hedge, the interest rate swap performed as expected and was recorded as a deferred asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge. The deferred asset of $4.8 million is recognized as an adjustment to interest expense over the life of the debt. During 1998, the short futures position, driven by changing economic conditions, did not meet the established criteria for hedging correlation and was discontinued as a hedge. The short futures position recognized a net realized gain of $8.1 million in 1999, and a net realized loss of $9.2 million in 1998. Derivative instruments may also be used for trading purposes. The Company had net losses of $1.8 million (gross gains of $4.4 million; gross losses of $6.2 million) during 1999 and net losses of $1.2 million (gross gains of $9.9 million; gross losses of $11.1 million) during 1998 from derivatives used for trading purposes; these losses were not material to the Company's results of operations and are included in the results of the available-for-sale portfolio. At December 31, 1999, the Company had trading positions in treasury forwards and call and put options with net market values of $(.1) million and notional values of $129.4 million; the average market value for long positions was $(.4) million and the average market value for short positions was less than $.1 million in 1999. At December 31, 1998, the Company had short trading positions in foreign currency and treasury forwards with net market values of $(.4) million and notional values of $31.5 million; the average market values for long and short positions in 1998 were $(.2) million and $.5 million, respectively. For all derivative positions, net cash requirements are limited to changes in market values, which may vary based upon changes in interest rates, currency exchange rates and other factors. Exposure to credit risk is limited to the carrying value; unless otherwise noted, collateral is not required to support the credit risk. As of December 31, 1999, the Company had open investment funding commitments of $34.6 million. The Company had no uncollateralized lines or letters of credit as of December 31, 1999 or 1998. 41 29 05 STATUTORY FINANCIAL INFORMATION At December 31, 1999, $278.5 million of consolidated statutory policyholders' surplus represents net admitted assets of the Company's insurance subsidiaries that are required to meet minimum statutory surplus requirements in the subsidiaries' states of domicile. The subsidiaries may be licensed in states, other than their states of domicile, which may have higher minimum statutory surplus requirements. Generally, the net admitted assets of insurance subsidiaries that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the subsidiaries are licensed. During 1999, the insurance subsidiaries paid aggregate cash dividends of $89.6 million to the parent company. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $200.3 million in 2000 without prior approval from regulatory authorities. Statutory policyholders' surplus was $2,258.9 million and $2,029.9 million at December 31, 1999 and 1998, respectively. Statutory net income was $199.3 million, $330.4 million and $274.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. In 1998, the National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance, which will replace the current NAIC Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The implementation date established by the NAIC is January 1, 2001; however, the effective date will be specified by each insurance company's state of domicile. The Company is currently evaluating the potential effect of the Codification guidance, but does not expect it to have a material impact on the Company's statutory surplus. 06 LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Activity in the loss and loss adjustment expense reserves, prepared in accordance with GAAP, is summarized as follows:
(millions) - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Balance at January 1 $ 2,188.6 $ 2,146.6 $ 1,800.6 Less reinsurance recoverables on unpaid losses 242.8 279.1 267.7 - -------------------------------------------------------------------------------------------------------------------- Net balance at January 1 1,945.8 1,867.5 1,532.9 - -------------------------------------------------------------------------------------------------------------------- Net reserves of subsidiary purchased -- -- 82.2 - -------------------------------------------------------------------------------------------------------------------- Incurred related to: Current year 4,286.2 3,560.5 3,070.8 Prior years (29.8) (184.2) (103.3) - -------------------------------------------------------------------------------------------------------------------- Total incurred 4,256.4 3,376.3 2,967.5 - -------------------------------------------------------------------------------------------------------------------- Paid related to: Current year 2,919.2 2,376.0 1,971.5 Prior years 1,082.8 922.0 743.6 - -------------------------------------------------------------------------------------------------------------------- Total paid 4,002.0 3,298.0 2,715.1 - -------------------------------------------------------------------------------------------------------------------- Net balance at December 31 2,200.2 1,945.8 1,867.5 Plus reinsurance recoverables on unpaid losses 216.0 242.8 279.1 - -------------------------------------------------------------------------------------------------------------------- Balance at December 31 $ 2,416.2 $ 2,188.6 $ 2,146.6 ====================================================================================================================
The Company establishes case and IBNR reserves near the midpoint of the reasonable range of reserves. The Company's reserves have historically developed conservatively. In 1999, the Company experienced an increase in severity trends which led to less favorable development on prior accident years as compared to 1998 and 1997. Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. The Company does not believe that these claims will have a material impact on the Company's liquidity, financial condition, cash flows or results of operations. The Company writes auto insurance in the coastal states, which could be exposed to natural catastrophes, such as hurricanes. Although the occurrence of a major catastrophe could have a significant impact on the Company's quarterly results, the Company believes such an event would not be so material as to disrupt the overall normal operations of the Company. The Company is unable to predict if any such events will occur in the near term. 07 REINSURANCE Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. As of December 31, 1999 and 1998, 26% and 36%, respectively, of the "prepaid reinsurance premiums" and 49% and 56%, respectively, of the "reinsurance recoverables" relate to CAIP, for which the Company retains no indemnity risk. 42 30 The effect of reinsurance on premiums written and earned as of December 31 was as follows:
(millions) - -------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED - -------------------------------------------------------------------------------------------------------------------------- Direct premiums $ 6,305.3 $ 5,853.5 $ 5,451.3 $ 5,100.5 $ 4,825.2 $ 4,382.9 Ceded (180.6) (169.9) (151.6) (152.5) (160.1) (193.4) - -------------------------------------------------------------------------------------------------------------------------- Net premiums $ 6,124.7 $ 5,683.6 $ 5,299.7 $ 4,948.0 $ 4,665.1 $ 4,189.5 ==========================================================================================================================
Losses and loss adjustment expenses are net of reinsurance ceded of $132.8 million in 1999, $131.9 million in 1998 and $150.8 million in 1997. 08 INCOME TAXES Significant components of the Company's income tax provision were as follows:
(millions) - ----------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Current tax provision $ 136.2 $ 237.1 $ 241.6 Deferred tax benefit (19.2) (32.7) (63.1) - ----------------------------------------------------------------------------------------------------------------- Total income tax provision $ 117.0 $ 204.4 $ 178.5 =================================================================================================================
The provision for income taxes in the accompanying consolidated statements of income differed from the statutory rate as follows:
(millions) - --------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 412.2 $ 661.1 $ 578.5 ======================================================================= Tax at statutory rate $ 144.3 35% $ 231.4 35% $ 202.5 35% Tax effect of: Exempt interest income (22.1) (5) (23.1) (3) (19.6) (3) Dividends received deduction (6.1) (2) (6.6) (1) (7.0) (1) Other items, net .9 -- 2.7 -- 2.6 -- - --------------------------------------------------------------------------------------------------------------------------------- $ 117.0 28% $ 204.4 31% $ 178.5 31% =================================================================================================================================
Deferred income taxes reflect the impact for financial statement reporting purposes of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 1999 and 1998, the components of the net deferred tax assets were as follows:
(millions) - ----------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Deferred tax assets: Unearned premiums reserve $ 194.5 $ 161.2 Non-deductible accruals 45.8 43.1 Capitalized expenditures 1.9 10.9 Loss reserves 115.7 109.5 Other 20.3 18.7 Deferred tax liabilities: Deferred acquisition costs (120.2) (104.7) Unrealized (gains) losses 2.0 (61.0) - ----------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 260.0 $ 177.7 =================================================================================================================
The Company is able to demonstrate that the benefit of its deferred tax assets is fully realizable. 43 31 09 EMPLOYEE BENEFIT PLANS RETIREMENT PLANS The Company has a two-tiered Retirement Security Program. The first tier is a defined contribution pension plan covering all employees who meet requirements as to age and length of service. Contributions vary from 1% to 5% of annual eligible compensation up to the Social Security wage base, based on years of eligible service. Company contributions were $8.0 million in 1999, $6.5 million in 1998 and $5.1 million in 1997. The second tier is a long-term savings plan under which the Company matches, into a Company stock account, amounts contributed to the plan by an employee up to a maximum of 3% of the employee's eligible compensation. Company contributions were $11.3 million in 1999, $9.9 million in 1998 and $7.3 million in 1997. The Company has a defined benefit pension plan which covered employees hired before January 1, 1989, who met requirements as to age and length of service. This plan and future benefit accruals were frozen on December 31, 1993; the benefits accruals through the date the plan was frozen were based on years of service and career average compensation up to the Social Security tax base. As of December 31, 1999, the Company had a net pension asset of $4.9 million, compared to $3.5 million in 1998, and $2.0 million in 1997. The Company recognized expense of $2.3 million in 1999 and income of $.1 million in both 1998 and 1997. The Company's funding policy is to contribute annually the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. There is no past service liability requiring funding by the Company. POSTEMPLOYMENT BENEFITS The Company provides various postemployment benefits to former or inactive employees who meet eligibility requirements, their beneficiaries and covered dependents. Postemployment benefits include salary continuation and disability-related benefits including workers' compensation and, if elected, continuation of health-care benefits. The Company's liability was $2.4 million at December 31, 1999, compared to $1.8 million in 1998. POSTRETIREMENT BENEFITS The Company provides postretirement health and life insurance benefits to all employees who met requirements as to age and length of service at December 31, 1988. The Company recognized expenses of $.4 million in 1999, $.7 million in 1998 and $.2 million in 1997. The Company's funding policy is to contribute annually the maximum amount that can be deducted for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. DEFERRED COMPENSATION The Company maintains The Progressive Corporation Executive Deferred Compensation Plan (Deferral Plan), which permits eligible executives to defer receipt of some or all of their annual bonuses or other incentive awards. These deferred amounts are deemed invested in one or more investment funds, including Common Shares of the Company, offered under the Deferral Plan. All distributions from the Deferral Plan will be made in cash, except that distributions representing amounts deemed invested in Common Shares will be made in Common Shares. The Company reserved 300,000 Common Shares for issuance under the Deferral Plan. The Company established an irrevocable grantor trust to provide a source of funds to assist the Company in meeting its liabilities under the Deferral Plan. At December 31, 1999 and 1998, the trust held assets of $18.8 million and $14.6 million, respectively, of which $2.3 million and $3.9 million were held in Common Shares, to cover its liabilities. INCENTIVE COMPENSATION PLANS The Company's 1989 Incentive Plan and 1995 Incentive Plan provide for the granting of stock options and other stock-based awards to key employees of the Company. The 1989 Incentive Plan has 6,500,000 shares authorized and the 1995 Incentive Plan has 5,000,000 shares authorized. In addition to the Incentive Plans, the Company registered 1,425,000 and 650,000 Common Shares relating to stock options granted to key employees and directors of the Company, respectively. The nonqualified stock options granted are for periods up to ten years, become exercisable at various dates not earlier than six months after the date of grant, and remain exercisable for specified periods thereafter. All options granted have an exercise price equal to the market value of the Common Shares on the date of grant. A summary of all employee stock option activity during the three years ended December 31 follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE OPTIONS OUTSTANDING SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE - ---------------------------------------------------------------------------------------------------------------------------------- Beginning of year 4,705,811 $ 46.07 4,968,964 $ 35.52 5,109,390 $ 28.09 Add (deduct): Granted 476,850 139.18 441,210 124.61 726,889 69.82 Exercised (552,473) 22.54 (641,013) 16.99 (758,580) 17.44 Cancelled (171,725) 65.50 (63,350) 61.03 (108,735) 41.07 - ---------------------------------------------------------------------------------------------------------------------------------- End of year 4,458,463 $ 58.20 4,705,811 $ 46.07 4,968,964 $ 35.52 =============================================================================================== Exercisable, end of year 1,571,538 $ 25.15 1,342,801 $ 20.26 1,497,050 $ 15.53 =============================================================================================== Available, end of year 4,371,422 4,676,547 5,054,407 ==================================================================================================================================
44 32 The following employee options were outstanding or exercisable as of December 31, 1999:
- ------------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ------------------------------------------------------------------------------------------------------------------------- $ 13 - 20 610,615 1.71 years 15.70 610,615 $15.70 21 - 40 1,548,235 4.20 years 33.53 934,685 30.60 41 - 60 761,012 5.98 years 47.19 23,012 45.58 61 - 80 644,602 7.00 years 68.58 2,127 66.12 81 - 125 434,839 8.02 years 121.21 589 114.19 126 - 161 459,160 8.97 years 141.92 510 154.00 - ------------------------------------------------------------------------------------------------------------------------- $ 13 - 161 4,458,463 1,571,538 =========================================================================================================================
Under SFAS 123, the Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded, including 144,207 options awarded to directors. This model produced a value of 44.3% for 1999 awards, 40.6% for 1998 awards and 43.2% for 1997 awards. The following assumptions were used to derive the ratio: a 7-year option term; an annualized volatility rate of .284 for 1999, .259 for 1998 and .255 for 1997; a risk-free rate of return of 6.18% for 1999, 5.49% for 1998 and 6.63% for 1997; and a dividend yield of .18% for 1999, .20% for 1998 and .25% for 1997. The Company elected to account for terminations when they occur rather than include an attrition factor into its model. If compensation cost had been measured based on the fair-value based accounting method under SFAS 123, the following would have been disclosed for December 31:
(millions-except per share amounts) - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- PRO FORMA Net income $ 283.9 $ 447.3 $ 393.5 ============================================= Earnings per share Basic $ 3.90 $ 6.17 $ 5.46 Diluted 3.81 6.00 5.22 - -------------------------------------------------------------------------------------------------------------------------
The amounts charged to income for incentive compensation plans, including executive cash bonus programs for key members of management and a gainsharing program for all other employees, were $55.6 million in 1999, $107.5 million in 1998 and $85.8 million in 1997. 10 DEBT Debt at December 31 consisted of:
(millions) - -------------------------------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Market Market Cost Value Cost Value - -------------------------------------------------------------------------------------------------------------------------------- 6 5/8% Senior Notes due 2029 (issued: $300.0, March 1999) $ 293.7 $ 254.1 $ -- $ -- 7.30% Notes due 2006 (issued: $100.0, May 1996) 99.7 98.0 99.7 109.5 6.60% Notes due 2004 (issued: $200.0, January 1994) 199.3 193.7 199.1 199.4 7% Notes due 2013 (issued: $150.0, October 1993) 148.5 138.8 148.4 157.2 8 3/4% Notes due 1999 (issued: $30.0, May 1989) -- -- 29.9 30.4 10% Notes due 2000 (issued: $150.0, December 1988) 149.9 154.3 149.8 162.7 10 1/8% Subordinated Notes due 2000 (issued: $150.0, December 1988) 149.8 154.5 149.7 162.4 Other debt 7.7 7.7 -- -- - -------------------------------------------------------------------------------------------------------------------------------- $ 1,048.6 $ 1,001.1 $ 776.6 $ 821.6 ================================================================================================================================
Debt includes amounts the Company has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. During 1999, there were no bank borrowings outstanding. Market values are obtained from publicly quoted sources. 45 33 The Company's debt is noncallable, except for the 6 5/8% Senior Notes which may be redeemed all or in part at any time, subject to a "make whole" provision; interest is payable semiannually. In May 1990, the Company entered into a revolving credit arrangement with National City Bank, which is reviewed by the bank annually. Under this agreement, the Company has the right to borrow up to $10.0 million. By selecting from available credit options, the Company may elect to pay interest at rates related to the London interbank offered rate, the bank's base rate or at a money market rate. A commitment fee is payable on any unused portion of the committed amount at the rate of .125 percent per annum. The Company had no borrowings under this arrangement at December 31, 1999 or 1998. Aggregate principal payments on debt outstanding at December 31, 1999, are $300.4 million for 2000, $.4 million for 2001, $0 for 2002, $.9 million for 2003, $206.0 million for 2004 and $550.0 million thereafter. 11 SEGMENT INFORMATION During 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which requires companies to report financial and descriptive information about their reportable operating segments. The Company writes personal automobile and other specialty property-casualty insurance and related services throughout the United States. The Company's Personal Lines business is predominantly auto insurance and is organized by states. The Company's 39 state/community managers are located in or near the market served. These managers are measured and paid based on profit and growth in their state(s)/community and manage claims, distribution, advertising, budgets, price levels, agent development, regulation and community relations for their area. The Company's other lines of business include insurance for commercial vehicles, lenders' collateral protection, directors' and officers' liability and related services, including processing business for involuntary plans and claim services to fleet owner and other insurance companies. The other businesses accounted for 7% of the Company's 1999 consolidated revenues. All revenues are generated from external customers and the Company does not have a reliance on any major customer. The Company evaluates segment profitability based on pretax operating profit. Expense allocations are based on certain assumptions and estimates; stated segment operating results would change if different methods were applied. The Company does not allocate assets, investment income, interest expense or income taxes to operating segments. In addition, the Company does not separately identify depreciation and amortization expense by segment and such disclosure would be impracticable. Companywide depreciation and amortization expense was $71.8 million in 1999, $56.1 million in 1998 and $36.6 million in 1997. The accounting policies of the operating segments are the same as those described in Note 1-Reporting and Accounting Policies. For the years ended December 31,
(millions) - -------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- PRETAX PRETAX PRETAX REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) - -------------------------------------------------------------------------------------------------------------------------- Personal Lines (1) $ 5,294.1 $ 63.2 $ 4,580.7 $ 361.5 $ 3,832.7 $ 243.0 Other (2) 442.2 47.0 405.5 61.9 402.1 36.6 Investments (3) 387.9 378.4 306.2 298.8 373.4 363.5 Interest Expense -- (76.4) -- (61.1) -- (64.6) - -------------------------------------------------------------------------------------------------------------------------- $ 6,124.2 $ 412.2 $ 5,292.4 $ 661.1 $ 4,608.2 $ 578.5 ==========================================================================================================================
(1) 94% of the Personal Lines segment is personal automobile insurance. (2) 1999 amounts include a $5.2 million gain on sale of corporate aircraft. See Note 12-Related Party Transaction for discussion. (3) Revenues represent recurring investment income and net realized gains/losses on security sales; pretax profit is net of investment expenses. 12 RELATED PARTY TRANSACTION On April 23, 1999, the Company sold its corporate aircraft to a company independently owned by Peter B. Lewis, the Company's Chairman of the Board, President and Chief Executive Officer. The airplane had a net book value of $6.9 million and was sold to Mr. Lewis for $12.1 million, the fair market value of the airplane as determined by an independent appraiser. 46 34 13 FAIR VALUE OF FINANCIAL INSTRUMENTS Information about specific valuation techniques and related fair value detail is provided in Note 1-Reporting and Accounting Policies, Note 4-Investments and Note 10-Debt. Pursuant to SFAS 119, the cost and market value of the financial instruments as of December 31 are summarized as follows:
(millions) - ------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ MARKET MARKET COST VALUE COST VALUE - ------------------------------------------------------------------------------------------------------------------------ Investments: Available-for-sale: fixed maturities $ 4,650.9 $ 4,532.7 $ 4,171.6 $ 4,219.0 preferred stocks 425.4 422.4 374.3 376.5 common stocks 1,127.8 1,243.6 512.2 636.9 Short-term investments 229.0 229.0 441.9 441.9 Debt (1,048.6) (1,001.1) (776.6) (821.6) - ------------------------------------------------------------------------------------------------------------------------
14 OTHER COMPREHENSIVE INCOME During 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," which requires disclosure of comprehensive income and its components in the financial statements. The components of other comprehensive income (loss) for the years ended December 31 were as follows:
(millions) - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- TAX TAX TAX (PROVISION) AFTER (PROVISION) AFTER (PROVISION) AFTER PRETAX BENEFIT TAX PRETAX BENEFIT TAX PRETAX BENEFIT TAX - ----------------------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) arising during period:(1) Available-for-sale: fixed maturities $(150.7) $ 52.8 $ (97.9) $ 2.8 $ (1.0) $ 1.8 $ 29.5 $ (10.3) $ 19.2 equity securities 25.7 (9.0) 16.7 64.3 (22.5) 41.8 44.8 (15.7) 29.1 Reclassification adjustment:(2) Available-for-sale: fixed maturities (14.9) 5.2 (9.7) (10.0) 3.5 (6.5) equity securities (39.8) 14.0 (25.8) (71.2) 25.1 (46.1) - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) (179.7) 63.0 (116.7) (14.1) 5.1 (9.0) 74.3 (26.0) 48.3 Other(3) .6 -- .6 (3.3) -- (3.3) -- (.7) (.7) - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) $(179.1) $ 63.0 $(116.1) $(17.4) $ 5.1 $ (12.3) $ 74.3 $ (26.7) $ 47.6 ===================================================================================================================================
(1) Amounts for 1997 reflect changes in net unrealized gains (losses). (2) Represents adjustments for gains (losses) realized in net income; reclassification adjustments for 1997 are not available. (3) Other includes foreign currency translation adjustments, which have no tax effect, and minimum pension liability, which is taxed at the statutory rate. 47 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated financial statements and the related notes on pages 34 through 47, together with the supplemental information on pages 51 through 58, should be read in conjunction with the following discussion of the consolidated financial condition and results of operations. FINANCIAL CONDITION The Progressive Corporation is a holding company and does not have any revenue producing operations of its own. It receives cash through borrowings, equity sales, subsidiary dividends and other transactions, and may use the proceeds to contribute to the capital of its insurance subsidiaries in order to support premium growth, to repurchase its Common Shares, to retire its outstanding indebtedness, to pay dividends and for other business purposes. During 1999, the Company repurchased 6,044 of its Common Shares at a total cost of $.6 million (average $93.25 per share) to satisfy obligations under the Company's benefit plans. During the three-year period ended December 31, 1999, the Company repurchased 440,316 of its Common Shares at a total cost of $46.0 million (average $104.57 per share). During the same period, The Progressive Corporation made $82.5 million of capital contributions to its subsidiaries, net of dividends received from these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Note 5 to the financial statements. The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. In March 1999, the Company issued $300 million of 6 5/8% Senior Notes due 2029 under an outstanding shelf registration, which became effective in 1998. The net proceeds of $293.7 million will be used to repay current outstanding debt upon its maturity. The Company also has available a $10.0 million revolving credit agreement. The Company's debt to total capital ratio is 28%; management believes the Company has substantial capital resources and sufficient borrowing capacity to support current and anticipated growth. The Company's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the three years ended December 31, 1999, operations generated positive cash flows of $2,127.8 million, and cash flows are expected to be positive in both the short-term and reasonably foreseeable future. The Company's investment portfolio is highly liquid and consists substantially of readily marketable securities. Total capital expenditures for the three years ended December 31, 1999, aggregated $443.6 million. In December 1997, the Company purchased approximately 72 acres in Tampa, Florida to construct a three-building, 307,000 square foot, regional call center. The final cost of the project was $45.5 million. The first two buildings were completed during 1998. The third building was completed in February 1999. In addition, in November 1997, the Company purchased 91 acres in Mayfield Village, Ohio to construct an office complex, near the site of its current corporate headquarters. This office complex is part of a five-year cooperative effort with Mayfield Village to develop over 300 acres. Progressive will serve as the anchor corporate user with additional business users and recreational facilities on the site. The Company is constructing five buildings containing a total of approximately 770,000 square feet on the site, and a parking garage, at an estimated cost of $132.5 million. As of December 31, 1999, $65.8 million has been paid. The first building was completed in May 1999. The next two buildings were completed in the first quarter of 2000. The parking garage and fourth building are scheduled to be completed in October 2000. The fifth building is scheduled to be completed in February 2001. The construction projects are being funded through operating cash flows. INVESTMENTS The Company invests in fixed-maturity, equity and short-term securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations. The Company evaluates the risk/reward tradeoffs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. At December 31, 1999, the Company's portfolio was $6,427.7 million, compared to $5,674.3 million in 1998. As of December 31, 1999, the Company's portfolio had $5.4 million in unrealized losses, compared to $174.3 million in unrealized gains in 1998. This decrease in value was the result of widening credit spreads on all non-treasury related products and the portfolio's underperformance relative to the S&P 500, due to underweighting in the technology sector. The weighted average fully taxable equivalent book yield of the portfolio was 6.3% for the years ended December 31, 1999 and 1998 and 6.6% for 1997. The majority of the portfolio is invested in high-grade, fixed-maturity securities, of which short- and intermediate-term securities represented $4,417.7 million, or 68.7% of the portfolio, at the end of 1999, compared to $4,439.4 million, or 78.3%, at the end of 1998. Long-term investment-grade securities, including those principal paydowns from asset-backed securities that are greater than 10-years, were $96.0 million, or 1.5% of the portfolio, at the end of 1999, compared to $93.5 million, or 1.6%, at the end of 1998. Non-investment-grade fixed-maturity securities were $248.0 million, or 3.9% of the portfolio, at the end of 1999, compared to $128.0 million, or 2.3%, at the end of 1998, and offer the Company higher returns and added diversification without a significant adverse effect on the stability and quality of the investment portfolio as a whole. Non-investment-grade securities may involve greater risks often related to creditworthiness, solvency and relative liquidity of the secondary trading market. The duration of the fixed-income portfolio was 3.0 years at December 31, 1999, compared to 2.8 years at December 31, 1998. As of December 31, 1999, the Company held $1,831.1 million of asset-backed securities, which represented 28.5% of the total investment portfolio. The asset-backed portfolio included collateralized mortgage obligations (CMO) and commercial mortgage-backed obligations (CMB) totaling $612.0 million and $649.7 million, respectively. The remainder of the asset-backed portfolio was invested primarily in auto loan and other asset-backed securities. As of December 31, 1999, the CMO portfolio included sequential bonds, representing 68.3% of the CMO portfolio ($417.7 million), and planned amortization class bonds, representing 31.7% of the CMO Portfolio ($194.3 million). At December 31, 1999, the CMO portfolio had an average life of 3.88 years and a weighted average Moody's or Standard & Poor's rating of AAA. The CMB portfolio had an average life of 5.75 years and a weighted average Moody's or Standard & Poor's rating of AA. At December 31, 1999, the CMO and CMB portfolios had unrealized losses of $13.0 million and $45.1 million, respectively. The single largest unrealized loss in any individual CMO security was $1.3 million and in any CMB security was $6.9 million, at December 31, 1999. The CMB portfolio includes $106.6 million of CMB interest-only certificates, which had an average life of 6.45 years and a weighted average Moody's or Standard & Poor's rating of AAA at December 31, 1999. Both the CMO and CMB portfolios are liquid with available market quotes and contain no residual interests. During 1997, the Company sold $178.4 million (proceeds of $200.8 million) of non-investment-grade CMB securities to a third-party purchaser. The purchaser subsequently transferred the securities to a trust as collateral in a resecuritized debt offering. The transaction was accounted for as a sale under SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of 48 36 Liabilities," resulting in a net gain of $22.4 million. A bankruptcy remote subsidiary of the Company acquired $22.8 million of the resecuritized debt, which was subsequently sold in 1998 for a net gain of $3.5 million. This portion of the transaction was not accounted for as a sale in 1998 in accordance with SFAS 125. A portion of the investment portfolio is invested in marketable equity securities. Common stocks represented $1,243.6 million, or 19.3% of the portfolio, at the end of 1999, compared to $636.9 million, or 11.2%, a year earlier. The majority of the common stock portfolio is invested in domestic equities traded on nationally recognized securities exchanges. The common stock portfolio also includes term trust certificates, the common shares of closed-end bond funds, which have the risk and reward characteristics of the underlying bonds and comprised $230.2 million of the common stock portfolio at the end of 1999; no term trust securities were held at the end of 1998. Foreign equities, which may include stock index futures and foreign currency forwards, comprised $84.2 million of the common stock portfolio at the end of 1999, compared to $130.7 million last year, and partnership investments comprised $104.0 million of the common stock portfolio at the end of 1999, compared to $63.7 million last year. Preferred stocks represented $422.4 million, or 6.6% of the portfolio, at the end of 1999, compared to $376.5 million, or 6.6%, a year earlier, and was comprised of over 89% of fixed-rate preferred stocks with mechanisms that are expected to provide an opportunity to liquidate at par. Investments in the Company's portfolio have varying degrees of risk. The primary market risk exposure to the fixed-income portfolio is interest rate risk, which is limited by managing duration to a defined range of 1.8 to 5 years. The distribution of maturities and convexity are monitored on a regular basis. Common stocks, excluding term trust certificates, and other risk assets, which generally have greater risk and volatility of market value, may range from 0 to 25%; at December 31, 1999, the Company held 16.5% of these securities. Market values, along with industry and sector concentrations of common stocks and similar investments, are monitored daily. Exposure to foreign currency exchange risk is limited by Company restrictions and is monitored quarterly for compliance. Exposures are evaluated individually and as a whole, considering the effects of cross correlation. For the quantitative market risk disclosures, see page 56. The Company quarterly examines its portfolio for evidence of impairment. In such cases, changes in market value are evaluated to determine the extent to which such changes are attributable to: (i) interest rates, (ii) market-related factors other than interest rates and (iii) financial conditions, business prospects and other fundamental factors specific to the issuer. Declines attributable to issuer fundamentals are reviewed in further detail. Available evidence is considered to estimate the realizable value of the investment. When a security in the Company's investment portfolio has a decline in market value which is other than temporary, the Company is required by GAAP to reduce the carrying value of such security to its net realizable value. Included in the Company's fixed-maturity and equity portfolios are $195.8 million, or 3.0%, of other risk assets. These include high yield and distressed debt, private equities and warrants, and mezzanine investments. No individual security in this category comprised more than 1% of the Company's total investment portfolio. The total return on this asset class in 1999 was 7.1% with a total net unrealized gain of $20.5 million. Trading securities and derivative instruments held or issued for trading are entered into for the purpose of near-term profit taking. During 1999, net activity in the trading portfolio was not material to the Company's financial position, cash flows or results of operations. At December 31, 1999, trading positions had a net market value of $50.2 million, compared to $(.4) million at December 31, 1998. Net gains and losses for the year ended December 31, 1999 and 1998, were $.8 million and $(1.2) million, respectively. Derivative instruments are primarily used to manage the risks and enhance the returns of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio, hedged securities or hedged cash flows. During 1998, the Company entered into two transactions, an interest rate swap hedge and a short futures position, to hedge against possible rises in interest rates prior to the issuance of debt under the $300 million shelf registration. During 1999, the $300 million debt was issued and the hedges were closed. The interest rate swap performed as expected and was recorded as a deferred asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge. The deferred asset of $4.8 million is recognized as an adjustment to interest expense over the life of the debt. During 1998, the short futures position, driven by changing economic conditions, did not meet the established criteria for hedging correlation and was discontinued as a hedge, but the Company continued to hold it for risk management of the anticipated debt offering. The Company recognized a net realized gain of $8.1 million in 1999 and a net realized loss of $9.2 million in 1998, on the short futures position. Derivative instruments may also be used for trading purposes. For all derivative positions, net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; collateral is not required to support the credit risk. RESULTS OF OPERATIONS Operating income, which excludes net realized gains and losses from security sales and one-time items, was $266.7 million, or $3.58 per share, in 1999, $449.3 million, or $6.01 per share, in 1998 and $336.0 million, or $4.46 per share, in 1997. The GAAP combined ratio was 98.3 in 1999, 91.6 in 1998 and 93.4 in 1997. Direct premiums written increased 16% to $6,305.3 million in 1999, compared to $5,451.3 million in 1998 and $4,825.2 million in 1997. Net premiums written increased 16% to $6,124.7 million in 1999, compared to $5,299.7 million in 1998 and $4,665.1 million in 1997. The difference between direct and net premiums written is attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Procedures, for which the Company retains no indemnity risk, of $49.7 million in 1999, $60.7 million in 1998 and $78.4 million in 1997, and reinsurance the Company maintains in its auto and non-auto programs and its strategic alliance relationships. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 15% in 1999, compared to 18% in 1998 and 31% in 1997. Net premiums written in the Company's Personal Lines business units, which write insurance for private passenger automobiles and recreation vehicles and currently represent 93% of the Company's total premiums written, grew 16%, 15% and 36% in 1999, 1998 and 1997, respectively, primarily reflecting an increase in unit sales. The Company decreased rates an average of 1.3% during the first six months of 1999, and increased rates 4.4% in the second half of the year, for an annual rate increase of 3.1% in 1999, compared to rate decreases of 5.3% and .9% in 1998 and 1997, respectively. The Company expects that these rate increases will likely slow volume growth in 2000 and since the majority of the policies are annual, the Company does not expect to see the full impact of these rate changes until the fourth quarter of 2000. The Personal Lines business is generated either by an Agent or written directly by the Company. The Agent channel includes business written by the Company's network of 30,000 Independent Insurance Agents and through Strategic Alliance business relationships (other insurance companies, financial institutions, employers and national brokerage agencies). Total net premiums written through Independent Agents and Strategic Alliance agency relationships were $4,746.5 million in 1999, compared to $4,390.4 million in 1998 and $4,033.8 million in 1997. The combined ratios for the Agency channel were 96.5, 90.6 and 93.2 for 1999, 1998 and 1997, respectively. Direct business includes business written through 1-800-AUTO-PRO(R), the Internet (progressive.com) and the Strategic Alliance business unit on behalf of affinity groups. Net premiums written and combined ratios on the Direct business were $955.9 million and 113.1, respectively, in 1999, compared to $531.9 million and 107.5 in 1998 and $255.0 million and 103.8 in 1997. 49 37 The sales generated via the Internet represented approximately 7% and 2% of the Direct business net premiums written for 1999 and 1998, respectively; the Company started selling insurance directly over the Internet in August 1997. Through these multiple distribution channels, the Company continues to write standard and preferred risks, which represented between 45% and 50% of total 1999 Personal Lines volume, compared to between 30% and 35% in 1998 and between 20% and 25% in 1997, as well as its traditional nonstandard auto products. Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claim costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are established. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss reserves. Claim costs, expressed as a percentage of premiums earned, were 75% in 1999, compared to 68% in 1998 and 71% in 1997. The increase in the loss ratios was driven by the factors discussed below. Four factors contributed to the Company's underwriting losses during the second half of 1999 and its inability to meet its traditional goals in 1999. The first factor was that, during 1999, the Company reduced loss reserves relating to prior accident years $29.8 million, or .5 points, compared to $184.2 million, or 3.7 points, and $103.3 million, or 2.5 points, for 1998 and 1997, respectively. The second factor was continued strong growth in the Direct business in 1999. In periods of rapid growth in the Direct business, the Company's earnings may be lower as a result of higher up-front costs and higher loss costs traditionally associated with new business. In response, the Company decided to return to profit targets based on a calendar year measure rather than over the entire retention period of a policyholder, with the intent to bring the combined ratio back to the historic goal of 96 over the next few years. The Company's profit and growth opportunities change from year to year; however, over every consecutive 5-year period, the Company strives to produce a four percent underwriting profit and to grow at 15 percentage points greater than the rate of inflation. The third factor was that the Company lowered rates in 1998 and during the first half of 1999, in an attempt to raise its combined ratio to 96 while achieving its growth target. Lastly, during 1999, loss trend accelerated at an unanticipated pace; consequently, loss costs rose faster than expected. The Company expects these loss costs trends to continue. The Company's other lines of business include writing insurance for small fleets of commercial vehicles, collateral protection and loan tracking for auto lenders and financial institutions, directors' and officers' liability and fidelity coverage for American Bankers Association member community banks and independent credit unions, and providing related claim, underwriting and system services. Revenues in these businesses were $437.0 million in 1999, compared to $405.5 million in 1998 and $402.1 million in 1997. Pretax operating profit was $41.8 million in 1999, compared to $61.9 million in 1998 and $36.6 million in 1997. The Company writes directors and officers and other professional liability coverage for community banks and credit unions and, therefore, could potentially be exposed to liability for errors made by these institutions relating to the year 2000 conversion. The Company has reinsurance to limit its potential exposure to approximately 7% of the average policy limits in the event any of the insured directors or officers are held liable for year 2000 noncompliance by their financial institutions. It is currently unknown whether these financial institutions have been able to completely avoid errors relating to year 2000 compliance and the Company is unable to predict to what extent such financial institutions will incur losses as a result of noncompliance and whether their directors and officers will be subject to individual liability for such noncompliance. In the event of a claim, applicable factual and coverage issues would have to be resolved. Based on information currently available and management's best estimate, the Company does not believe that any losses resulting from this exposure will have a material impact on the Company's liquidity, financial condition, cash flows or results of operations. Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. Management does not believe that these claims will have a material impact on the Company's liquidity, financial condition, cash flows or results of operations. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 23% in 1999, 1998 and 1997. The Company advertises locally in 35 states, plus Washington D.C. (107 markets), as compared to 32 states (83 markets) in 1998 and 19 states (40 markets) in 1997. The Company expanded its television advertising campaign on a national level during 1998. During 1999, the Company incurred advertising expenses of $124 million, compared to $70 million in 1998 and $23 million in 1997. Recurring investment income (interest and dividends) increased 16% to $340.7 million in 1999, compared to $294.8 million in 1998 and $274.9 million in 1997, primarily due to an increase in the size of the investment portfolio. Net realized gains on security sales were $47.2 million in 1999, $11.4 million in 1998 and $98.5 million in 1997. Investment expenses were $9.5 million in 1999, compared to $7.4 million in 1998 and $9.9 million in 1997. YEAR 2000 COMPLIANCE The Company's five-year effort to achieve year 2000 compliance was successful. The Company successfully operated through the rollover to year 2000 with only minor issues and has not experienced any significant business outage or incurred any significant cost due to the year 2000 failure or errors of business partners to date. The total cost to modify existing production systems, which includes both internal and external costs of programming, coding and testing, was $9.3 million, of which $9.2 million had been expensed through December 31, 1999. The Company also replaced some of its systems. In addition to being year 2000 compliant, these new systems added increased functionality to the Company. The majority of the projects were completed in 1998, with remaining parallel testing completed during the first half of 1999. As of December 31, 1999, $5.5 million, which include both internal and external costs, had been paid for these systems. All costs were funded through operating cash flows. The Company continually evaluates computer hardware and software upgrades for enhancements and, therefore, many of the costs to replace these items to be year 2000 compliant were not incremental costs to the Company. In preparing for the rollover to the 21st century, the Company's process teams and business groups identified potential year 2000 scenarios. For those scenarios deemed to be both probable and with a potentially significant business impact, the Company developed contingency plans. These plans were reviewed by the Company's chief financial and technology officers throughout 1999. It has not been necessary to execute any of the contingency plans to date. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: CERTAIN MATTERS IN THIS ANNUAL REPORT MAY BE CONSIDERED FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS AND RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, RISKS RELATED TO ESTIMATES, ASSUMPTIONS AND PROJECTIONS GENERALLY; CHANGES IN ECONOMIC CONDITIONS (INCLUDING CHANGES IN INTEREST RATES AND FINANCIAL MARKETS); PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS; LEGISLATIVE AND REGULATORY DEVELOPMENTS; WEATHER CONDITIONS (INCLUDING THE SEVERITY AND FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER CONDITIONS); DRIVING PATTERNS; COURT DECISIONS AND TRENDS IN LITIGATION AND HEALTH CARE COSTS; UNFORESEEN TECHNOLOGICAL ISSUES ASSOCIATED WITH THE YEAR 2000 COMPLIANCE EFFORTS AND THE EXTENT TO WHICH VENDORS, PUBLIC UTILITIES, GOVERNMENTAL ENTITIES AND OTHER THIRD PARTIES THAT INTERFACE WITH THE COMPANY MAY FAIL TO ACHIEVE YEAR 2000 COMPLIANCE; AND OTHER MATTERS DESCRIBED FROM TIME TO TIME BY THE COMPANY IN OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS ANNUAL REPORT. 50 38 QUARTERLY FINANCIAL AND COMMON SHARE DATA (not covered by report of independent accountants)
(millions-except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- Net Income Operating Income(1) Stock Price(2) - ----------------------------------------------------------------------------------------------------------------------------------- Operating Per Per Rate of Dividends Quarter Revenues(3) Total(4) Share(5) Total(4) Share(5) High-Low Close Return(6) Per Share - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1 $ 1,333.3 $ 105.3 $ 1.41 $ 104.0 $ 1.39 $174 1/4 - 115 7/16 $143 1/2 $ .065 2 1,416.8 112.1 1.50 98.5 1.32 152 1/8 - 12 3/8 145 .065 3 1,474.5 74.0 .99 59.5 .80 144 15/16 - 81 1/2 81 11/16 .065 4 1,506.5 3.8(7) .05(7) 4.7(7) .06(7) 97 5/8 - 68 1/2 73 1/8 .065 - ----------------------------------------------------------------------------------------------------------------------------------- $ 5,731.1 $ 295.2 $ 3.96 $ 266.7 $ 3.58 $174 1/4 - 68 1/2 $731 (56.7)% $ .260 =================================================================================================================================== 1998 1 $ 1,156.2 $ 120.1 $ 1.58 $ 102.8 $ 1.35 $135 1/2 - 106 11/16 $134 11/16 $.060 2 1,237.2 123.0 1.61 109.1 1.43 150 - 126 1/2 141 .060 3 1,290.9 135.1 1.81 134.4 1.80 156 3/4 - 95 112 3/4 .065 4 1,301.9 78.5(8) 1.05(8) 103.1 1.38 172 - 94 169 3/8 .065 - ----------------------------------------------------------------------------------------------------------------------------------- $ 4,986.2 $ 456.7 $ 6.11 $ 449.3 $ 6.01 $172 - 94 $169 3/8 41.6% $.250 =================================================================================================================================== 1997 1 $ 905.7 $ 76.5 $ 1.02 $ 78.6 $ 1.05 $ 73 5/8 - 63 7/8 $ 63 7/8 $.060 2 1,020.9 102.1 1.36 82.8 1.10 87 3/8 - 61 1/2 87 .060 3 1,090.1 116.2 1.54 89.3 1.18 111 7/8 - 86 1/2 107 1/8 .060 4 1,218.1 105.3 1.39 85.3 1.13 120 7/8 - 99 119 7/8 .060 - ----------------------------------------------------------------------------------------------------------------------------------- $ 4,234.8 $ 400.0 $ 5.31 $ 336.0 $ 4.46 $120 7/8 - 61 1/2 $119 7/8 78.4% $.240 ===================================================================================================================================
(1) Represents net income less realized gains and losses on security sales and one-time items. (2) Prices as reported on the consolidated transaction reporting system. The Company's Common Shares are listed on the New York Stock Exchange. (3) Represents premiums earned plus service revenues. (4) The sum may not equal the total due to rounding in the individual periods. Each period is properly stated. (5) Presented on a diluted basis. The sum may not equal the total because the average equivalent shares differ in the periods. (6) Represents annual rate of return, including quarterly dividend reinvestment. (7) During the fourth quarter 1999, the Company increased loss reserves $33 million, $.29 per share, primarily relating to the 1999 accident year and recognized $7 million, $.06 per share, of losses related to Hurricane Irene. The remainder of the decline was primarily attributable to increased loss severity. (8) During the fourth quarter 1998, the Company wrote down $24.5 million, $.21 per share, on investment securities considered to have other than temporary declines in market value and realized a $9.2 million, $.08 per share, net loss on an anticipatory hedge. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 51 39 TEN YEAR SUMMARY--FINANCIAL HIGHLIGHTS (not covered by report of independent accountants)
(millions--except per share amounts and number of people employed) - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION AND OPERATING STATISTICS--STATUTORY BASIS Reserves: Loss and loss adjustment expense(1) $ 2,200.2 $ 1,945.8 Unearned premiums 2,694.5 2,253.3 Policyholders' surplus(1) 2,258.9 2,029.9 Ratios: Net premiums written to policyholders' surplus 2.7 2.6 Loss and loss adjustment expense reserves to policyholders' surplus 1.0 1.0 Loss and loss adjustment expense 75.0 68.5 Underwriting expense 22.1 22.4 - ------------------------------------------------------------------------------------------------------------------------- Statutory combined ratio 97.1 90.9 SELECTED CONSOLIDATED FINANCIAL INFORMATION--GAAP BASIS Total revenues $ 6,124.2 $ 5,292.4 Total assets 9,704.7 8,463.1 Total shareholders' equity(2) 2,752.8 2,557.1 Common Shares outstanding 73.1 72.5 Common Share price High $ 174 1/4 $ 172 Low 68 1/2 94 Close(3) 73 1/8 169 3/8 Market capitalization $ 5,345.4 $ 12,279.7 Book value per Common Share(2) $ 37.66 $ 35.27 Return on average common shareholders' equity(4) 10.9% 19.3% Debt outstanding $ 1,048.6 $ 776.6 Ratios: Debt to total capital 28% 23% Price to earnings(5) 20 28 Price to book 1.9 4.8 GAAP underwriting margin(2) 1.7 8.4 Number of people employed 18,753 15,735 - -------------------------------------------------------------------------------------------------------------------------
(1) During 1994, the Company began accruing salvage and subrogation recoverables. (2) In 1994, the $71.0 million "supplemental reserve" was eliminated, increasing book value per share $.65, underwriting profit margin 3.2% and shareholders' equity $46.2 million. (3) Represents the closing price at December 31. (4) Net income minus preferred share dividends divided by average common shareholders' equity. (5) Represents the closing stock price divided by operating earnings per share. All share and per share amounts were adjusted for the December 1992, 3 for 1 stock split. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 52 40
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------------- $ 1,867.5 $ 1,532.9 $ 1,314.4 $ 1,100.2 $ 1,053.7 $ 994.7 $ 901.7 $ 827.4 1,901.9 1,382.9 1,140.4 954.8 688.9 538.5 513.6 474.1 1,722.9 1,292.4 1,055.1 945.1 701.9 658.3 676.7 636.7 2.7 2.7 2.8 2.6 2.6 2.2 2.0 1.9 1.1 1.2 1.2 1.2 1.5 1.5 1.3 1.3 71.1 70.2 71.6 64.2 62.6 68.3 65.7 62.1 20.7 19.8 21.4 22.4 25.4 29.8 33.5 31.1 - ----------------------------------------------------------------------------------------------------------------------------------- 91.8 90.0 93.0 86.6 88.0 98.1 99.2 93.2 $ 4,608.2 $ 3,478.4 $ 3,011.9 $ 2,415.3 $ 1,954.8 $ 1,738.9 $ 1,493.1 $ 1,376.2 7,559.6 6,183.9 5,352.5 4,675.1 4,011.3 3,440.9 3,317.2 2,912.4 2,135.9 1,676.9 1,475.8 1,151.9 997.9 629.0 465.7 408.5 72.3 71.5 72.1 71.2 72.1 67.1 63.3 69.3 $ 120 7/8 $ 72 1/4 $ 49 1/2 $ 40 1/2 $ 46 1/8 $ 29 3/8 $ 20 5/8 $ 18 3/4 61 1/2 40 3/8 34 3/4 27 3/4 26 5/8 14 3/4 15 11 119 7/8 67 3/8 48 7/8 35 40 1/2 29 1/8 18 17 1/8 $ 8,667.0 $ 4,817.3 $ 3,523.9 $ 2,492.0 $ 2,920.1 $ 1,954.3 $ 1,139.4 $ 1,186.8 $ 29.54 $ 23.45 $ 19.31 $ 14.97 $ 12.62 $ 7.94 $ 5.83 $ 5.89 20.9% 20.5% 19.6% 27.4% 36.0% 34.7% 6.7% 21.5% $ 775.9 $ 775.7 $ 675.9 $ 675.6 $ 477.1 $ 568.5 $ 644.0 $ 644.4 27% 32% 31% 37% 32% 47% 58% 61% 27 16 17 13 15 17 15 11 4.1 2.9 2.5 2.3 3.2 3.7 3.1 2.9 6.6 8.5 5.7 11.5 10.7 3.5 (3.7) 1.0 14,126 9,557 8,025 7,544 6,101 5,591 6,918 6,370 - -----------------------------------------------------------------------------------------------------------------------------------
53 41 TEN YEAR SUMMARY--GAAP CONSOLIDATED OPERATING RESULTS (not covered by report of independent accountants)
(millions-except per share amounts) - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Direct premiums written: Personal lines $ 5,799.4 $ 4,987.1 All other lines 505.9 464.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total direct premiums written 6,305.3 5,451.3 Reinsurance assumed -- -- Reinsurance ceded (180.6) (151.6) - ----------------------------------------------------------------------------------------------------------------------------------- Net premiums written 6,124.7 5,299.7 Net change in unearned premiums reserve(1) (441.1) (351.7) - ----------------------------------------------------------------------------------------------------------------------------------- Premiums earned 5,683.6 4,948.0 - ----------------------------------------------------------------------------------------------------------------------------------- Expenses: Losses and loss adjustment expenses(2) 4,256.4 3,376.3 Policy acquisition costs 745.0 659.9 Other underwriting expenses 583.8 495.8 - ----------------------------------------------------------------------------------------------------------------------------------- Total underwriting expenses 5,585.2 4,532.0 - ----------------------------------------------------------------------------------------------------------------------------------- Underwriting profit (loss) before taxes 98.4 416.0 Provision (benefit) for income taxes 34.4 145.6 - ----------------------------------------------------------------------------------------------------------------------------------- Underwriting profit (loss) after taxes 64.0 270.4 Service operations profit (loss) after taxes 4.3 4.8 - ----------------------------------------------------------------------------------------------------------------------------------- 68.3 275.2 Investment income after taxes 249.6 221.3 Net realized gains (losses) on security sales after taxes 30.7 7.4 Interest expense after taxes (49.7) (39.7) Proposition 103 reserve reduction after taxes -- -- Non-recurring items after taxes -- -- Other income (expenses) after taxes(3) (3.7) (7.5) - ----------------------------------------------------------------------------------------------------------------------------------- Income before tax adjustments and cumulative effect of accounting change 295.2 456.7 Tax adjustments(4) -- -- Cumulative effect of accounting change(5) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 295.2 $ 456.7 =================================================================================================================================== Operating income $ 266.7 $ 449.3 =================================================================================================================================== Per share(6) Net income(2) $ 3.96 $ 6.11 Operating income 3.58 6.01 Dividends .260 .250 Average equivalent shares Basic 72.9 72.5 Diluted 74.6 74.7 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Amount represents change in unearned premiums reserve less change in prepaid reinsurance premiums. (2) In 1994, the "supplemental reserve" was eliminated, resulting in a one-time decrease to losses and loss adjustment expenses of $71.0 million, or $.62 per share. (3) Reflects other income and investment expenses after taxes and other tax adjustments. (4) 1991 reflects a deferred tax asset write-down and 1990 reflects a fresh start tax benefit. (5) Reflects adoption of SFAS 109, "Accounting for Income Taxes." (6) Presented on diluted basis. In 1997, the Company adopted SFAS 128, "Earnings Per Share," and, as a result, restated prior periods per share amounts, if applicable. All share and per share amounts were adjusted for the December 1992, 3 for 1 stock split. THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 54 42
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- $ 4,355.9 $ 3,165.4 $ 2,644.6 $ 2,181.7 $ 1,548.9 $ 1,214.6 $ 1,047.4 $ 876.0 469.3 473.0 424.3 463.4 417.5 422.2 489.4 482.8 - ---------------------------------------------------------------------------------------------------------------------------------- 4,825.2 3,638.4 3,068.9 2,645.1 1,966.4 1,636.8 1,536.8 1,358.8 -- 3.8 .1 2.9 9.2 4.3 .1 .1 (160.1) (200.5) (156.2) (190.8) (156.4) (189.9) (212.3) (162.6) - ---------------------------------------------------------------------------------------------------------------------------------- 4,665.1 3,441.7 2,912.8 2,457.2 1,819.2 1,451.2 1,324.6 1,196.3 (475.6) (242.4) (185.6) (266.1) (150.5) (25.1) (37.7) (5.1) - ---------------------------------------------------------------------------------------------------------------------------------- 4,189.5 3,199.3 2,727.2 2,191.1 1,668.7 1,426.1 1,286.9 1,191.2 2,967.5 2,236.1 1,943.8 1,397.3 1,028.0 930.9 858.0 762.9 607.8 482.6 459.6 391.5 311.6 304.1 313.7 292.7 336.0 208.5 167.2 150.8 151.3 141.5 162.1 123.7 - ---------------------------------------------------------------------------------------------------------------------------------- 3,911.3 2,927.2 2,570.6 1,939.6 1,490.9 1,376.5 1,333.8 1,179.3 - ---------------------------------------------------------------------------------------------------------------------------------- 278.2 272.1 156.6 251.5 177.8 49.6 (46.9) 11.9 97.4 95.2 54.8 88.0 62.2 16.9 (15.9) 4.0 - ---------------------------------------------------------------------------------------------------------------------------------- 180.8 176.9 101.8 163.5 115.6 32.7 (31.0) 7.9 .9 2.8 5.6 6.5 4.4 (2.8) (1.4) 2.8 - ---------------------------------------------------------------------------------------------------------------------------------- 181.7 179.7 107.4 170.0 120.0 29.9 (32.4) 10.7 205.3 175.6 156.2 131.2 107.1 110.4 121.1 126.4 64.0 4.6 30.4 15.5 70.1 9.6 4.9 (8.4) (42.0) (40.0) (37.1) (35.9) (25.8) (29.4) (31.6) (32.0) -- -- -- -- -- 70.0 -- -- -- -- -- -- (2.6) (42.6) -- -- (9.0) (6.2) (6.4) (6.5) (1.5) (8.3) (14.9) (13.2) - ---------------------------------------------------------------------------------------------------------------------------------- 400.0 313.7 250.5 274.3 267.3 139.6 47.1 83.5 -- -- -- -- -- -- (14.2) 9.9 -- -- -- -- -- 14.2 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- $ 400.0 $ 313.7 $ 250.5 $ 274.3 $ 267.3 $ 153.8 $ 32.9 $ 93.4 ================================================================================================================================== $ 336.0 $ 309.1 $ 220.1 $ 212.7 $ 197.3 $ 129.8 $ 85.1 $ 127.9 ================================================================================================================================== $ 5.31 $ 4.14 $ 3.26 $ 3.59 $ 3.59 $ 2.08 $ .41 $ 1.20 4.46 4.12 2.85 2.76 2.62 1.74 1.19 1.62 .240 .230 .220 .210 .200 .191 .172 .160 72.0 71.6 71.8 71.6 69.3 60.7 65.4 72.3 75.3 74.2 74.2 74.0 71.8 70.9 66.6 81.9 - ----------------------------------------------------------------------------------------------------------------------------------
55 43 QUANTITATIVE MARKET RISK DISCLOSURES (not covered by report of independent accountants) Quantitative market risk disclosures are only presented for market risk categories when risk is considered material. Materiality is determined based on the fair value of the financial instruments at December 31, 1999, and the potential for near term losses from reasonably possible near term changes in market rates or prices. OTHER THAN TRADING FINANCIAL INSTRUMENTS Financial instruments subject to interest rate risk as of December 31, 1999 were:
(millions) - ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------------------- -200 BPS -100 BPS +100 BPS +200 BPS CHANGE CHANGE ACTUAL CHANGE CHANGE - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Government obligations $ 346.0 $ 331.3 $ 316.5 $ 301.8 $ 287.0 State and local government obligations 1,371.3 1,351.8 1,332.2 1,312.6 1,293.0 Asset-backed securities 1,927.3 1,883.7 1,831.1 1,771.8 1,721.4 Other debt securities 1,121.2 1,086.4 1,052.9 1,020.6 989.3 Preferred stocks 417.3 407.6 397.9 387.3 376.7 Term trust certificates 234.8 232.5 230.2 227.9 225.6 Short-term investments 229.5 229.3 229.0 228.8 228.6 - ---------------------------------------------------------------------------------------------------------------------------------- $ 5,647.4 $ 5,522.6 $ 5,389.8 $ 5,250.8 $ 5,121.6 ==================================================================================================================================
Exposure to risk is represented in terms of changes in fair value due to selected hypothetical movements in market rates. Bonds and preferred stocks are individually priced to yield to the worst case scenario. State and local government obligations, including lease deals and super sinkers, are assumed to hold their prepayment patterns. Asset-backed securities are priced assuming deal specific prepayment scenarios, considering the deal structure, prepayment penalties, yield maintenance agreements and the underlying collateral. Over 89% of the preferred stocks have mechanisms that are expected to provide an opportunity to liquidate at par. Financial instruments subject to equity market risk as of December 31, 1999 were:
(millions) - ---------------------------------------------------------------------------------------------------------------------------------- HYPOTHETICAL MARKET CHANGES - ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE +10% -10% - ---------------------------------------------------------------------------------------------------------------------------------- Common stocks $ 987.7 $ 1,079.7 $ 898.8 - ----------------------------------------------------------------------------------------------------------------------------------
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES 56 44 The model represents the estimated value of the Company's common stock portfolio given a + (-) 10% change in the market, based on the common stock portfolio's weighted average beta of .89. The beta is derived from recent historical experience, using the S&P 500 as the market surrogate. The historical relationship of the common stock portfolio's beta to the S&P 500 is not necessarily indicative of future correlation, as individual company or industry factors may affect price movement. Betas are not available for all securities. In such cases, the change in market value reflects a direct + (-) 10% change; the number of securities without betas is less than 25%. The common stock portfolio includes stock index futures with a market value of $1.3 million. The model does not include term trust certificates, which comprised $230.2 million of the common stock portfolio at the end of 1999, as these securities are subject to interest rate risk rather than equity market risk. Financial instruments subject to foreign currency risk as of December 31, 1999 were:
(millions) MARKET NOTIONAL HYPOTHETICAL VALUE VALUE GAIN (LOSS) - ---------------------------------------------------------------------------------------------------------------------- Canadian fixed income investments $ 71.0 N/A $ 7.1 Other foreign fixed income investments 11.8 N/A 1.2 Foreign equity investments 79.7 N/A 8.0 Foreign currency forwards-liabilities (.8) (13.7) (.1) - ---------------------------------------------------------------------------------------------------------------------- $ 161.7 N/A $ 16.2 ======================================================================================================================
N/A = not applicable; notional value pertains only to derivative instruments The foreign equity portfolio, which may include stock index futures, foreign currency forwards and foreign preferred stocks, is comprised of numerous currencies, none of which are individually material. Therefore, sensitivity results are presented by class of financial instrument. The model calculates a gain or loss in market value if the U.S. dollar depreciates by 10% to the respective currency. The model does not attempt to reflect the correlation of multiple currencies to changes in the U.S. dollar. At December 31, 1999, the Company did not have any cross currency exposures. TRADING FINANCIAL INSTRUMENTS At December 31, 1999, the Company had trading positions with a net market value of $50.2 million. During 1999, net activity in the trading portfolio was not material to the Company's financial position, cash flows or results of operations and exposure to loss from open trading positions was not material individually or in the aggregate. 57 45 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) DEVELOPMENT (not covered by report of independent accountants)
(millions) - ----------------------------------------------------------------------------------------------------------------------------------- For the years ended 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998 1999 December 31, - ----------------------------------------------------------------------------------------------------------------------------------- Loss and LAE reserves(1) $ 748.6 $ 791.6 $ 861.5 $ 956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9 $1,867.5 $1,945.8 $2,200.2 Re-estimated reserves as of: One year later 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6 1,683.3 1,916.0 Two years later 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5 1,364.5 1,668.5 Three years later 668.6 712.7 718.7 737.4 811.3 961.2 1,118.6 1,432.3 Four years later 667.1 683.7 700.1 725.2 794.6 940.6 1,137.7 Five years later 654.7 666.3 695.1 717.3 782.9 945.5 Six years later 647.1 664.8 692.6 711.1 780.1 Seven years later 645.7 664.5 688.2 709.2 Eight years later 645.4 661.4 687.9 Nine years later 641.9 660.4 Ten years later 641.5 Cumulative redundancy $ 107.1 $ 131.2 $ 173.6 $ 247.2 $ 232.3 $ 153.2 $ 176.7 $ 100.6 $ 199.0 $ 29.8 Percentage(2) 14.3 16.6 20.2 25.8 22.9 13.9 13.4 6.6 10.7 1.5 - -----------------------------------------------------------------------------------------------------------------------------------
The chart represents the development of the property-casualty loss and LAE reserves for 1989 through 1998. The reserves are re-estimated based on experience as of the end of each succeeding year and are increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The cumulative redundancy represents the aggregate change in the estimates over all prior years. (1) Represents loss and LAE reserves net of reinsurance recoverables on unpaid losses at the balance sheet date. (2) Cumulative redundancy divided by loss and LAE reserves. (3) In 1994, based on a review of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." DIRECT PREMIUMS WRITTEN BY STATE (not covered by report of independent accountants)
(millions) - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Florida $ 895.6 14.2% $ 784.4 14.4% $ 663.0 13.7% $ 467.4 12.9% $ 421.9 13.7% New York 600.4 9.5 522.2 9.6 446.3 9.2 358.0 9.8 225.6 7.4 Texas 557.6 8.8 518.6 9.5 509.4 10.6 349.9 9.6 313.2 10.2 Ohio 528.1 8.4 447.7 8.2 404.3 8.4 340.8 9.4 284.1 9.3 California 416.0 6.6 343.2 6.3 291.7 6.0 171.6 4.7 126.6 4.1 Pennsylvania 322.3 5.1 292.3 5.4 248.3 5.1 201.3 5.5 184.9 6.0 Georgia 301.9 4.8 277.8 5.1 261.9 5.4 212.1 5.8 155.1 5.1 All other 2,683.4 42.6 2,265.1 41.5 2,000.3 41.6 1,537.3 42.3 1,357.5 44.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 6,305.3 100.0% $5,451.3 100.0% $ 4,825.2 100.0% $ 3,638.4 100.0% $ 3,068.9 100.0% ==================================================================================================================================
58 46 DIRECTORS CORPORATE OFFICERS Milton N. Allen(1),(2) Peter B. Lewis Director, Chairman, President and various companies Chief Executive Officer B. Charles Ames(1) Charles B. Chokel Partner, Chief Executive Officer - Clayton, Dubilier & Rice, Inc. Investments and (investment banking) Capital Management James E. Bennett III(3) Glenn M. Renwick Senior Executive Vice President Chief Executive Officer - KeyCorp Insurance Operations (banking) R. Steven Kestner Charles B. Chokel Secretary Chief Executive Officer - Investments and Capital W. Thomas Forrester Management Treasurer Charles A. Davis(4) Jeffrey W. Basch President and Vice President Chief Executive Officer Marsh & McLennan Capital, Inc. Janet A. Dolohanty (investment banking) Vice President Stephen R. Hardis(2),(4) Thomas A. King Chairman of the Board and Vice President Chief Executive Officer Eaton Corporation (manufacturing) Janet Hill(1) Vice President Alexander & Associates, Inc. (management consulting) and President, Staubach Alexander Hill, LLC (commercial real estate consulting) Peter B. Lewis(2),(4) Chairman of the Board, President and Chief Executive Officer Norman S. Matthews(3) Consultant, formerly President, Federated Department Stores, Inc. (retailing) Glenn M. Renwick Chief Executive Officer - Insurance Operations Donald B. Shackelford(3) Chairman, Fifth Third Bank of Central Ohio (commercial bank) (1) Audit Committee member (2) Executive Committee member (3) Executive Compensation Committee member (4) Investment and Capital Committee member ANNUAL MEETING The Annual Meeting of Shareholders will be held at the offices of The Progressive Corporation, 6671 Beta Drive, Mayfield Village, Ohio 44143 on April 21, 2000, at 10:00 a.m. There were 3,877 shareholders of record on December 31, 1999. PRINCIPAL OFFICE The principal office of the Progressive Corporation is at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 TOLL-FREE TELEPHONE NUMBERS For assistance after an accident or to report a claim, 24 hours a day, 7 days a week, call: 1-800-274-4499 To check rates available to you from Progressive and up to three other leading auto insurance companies, call: 1-800-AUTO-PRO(R)(1-800-288-6776) or visit: progressive.com For 24 Hour Policy Service, call: 1-800-888-7764 COUNSEL Baker & Hostetler LLP, Cleveland, Ohio TRANSFER AGENT AND REGISTRAR If you have questions about a specific stock ownership account, write or call: Corporate Trust Customer Service, National City Bank, 1900 East Ninth Street, Cleveland, Ohio 44114. Phone: 1-800-622-6757 COMMON SHARES The Progressive Corporation's Common Shares (symbol PGR) are traded on the New York Stock Exchange. Dividends are customarily paid on the last day of each quarter. SHAREHOLDER/INVESTOR RELATIONS The Progressive Corporation does not maintain a mailing list for distribution of shareholders' reports. To hear the text of the latest earnings release, receive key financial information for the past several quarters, receive dividend and other information, shareholders can call 1-800-879-PROG. This toll-free shareholder services line is available 24 hours a day, 7 days a week. Such information is also available from the Company's Web site: progressive.com. To request copies of public financial information on the Company, shareholders and potential investors may call the Company's shareholders services line at 1-800-879-PROG or write to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143. For specific questions on financial or other Company information call: 440-446-2851. 59 47 (C)2000 The Progressive Corporation Design: Nesnadny + Schwartz, Cleveland + New York + Toronto Artwork: All pieces are untitled.(C)1999 Gregory Crewdson Printing: Fortran Printing, Cleveland Printed on Recycled Paper EX-21 14 EXHIBIT 21 1 EXHIBIT NO. 21 SUBSIDIARIES OF THE PROGRESSIVE CORPORATION Jurisdiction of Name of Subsidiary Incorporation - ------------------ -------------- 1890 Insurance Agency, Inc. Wyoming Airy Insurance Center, Inc. Pennsylvania Allied Insurance Agency, Inc. Ohio Express Quote Services, Inc. Florida Garden Sun Insurance Services, Inc. Hawaii Gold Key Insurance Agency California Greenberg Financial Insurance Services, Inc. California Halcyon Insurance Company Ohio Husky Sun Insurance Services, Inc. Washington Insurance Confirmation Services, Inc. Delaware Lakeside Insurance Agency, Inc. Ohio Maryland Auto Insurance Solutions, Inc. Maryland Midland Financial Group, Inc. Tennessee Agents Financial Services - Tennessee, Inc. Tennessee Agents Financial Services - Illinois, Inc. (90% owned) Illinois Agents Financial Services, Inc. (40% owned) Florida AutoSurance of America, Inc. Arizona Progressive Home Insurance Agency Tennessee Specialty Risk Insurance Company Tennessee Midland Risk Services, Inc. Tennessee Midland Risk Services - Arizona, Inc. Arizona Midland Risk Services - Nevada, Inc. Nevada Midland Risk Insurance Services - California, Inc. California Midland Risk Services - Illinois, Inc. (85% owned) Illinois Midland Risk Services - Tennessee, Inc. Tennessee Mountain Laurel Assurance Company Pennsylvania Mountainside Insurance Agency, Inc. Colorado National Continental Insurance Company New York Pacific Motor Club California PCIC Canada Holdings, Ltd. Canada Progressive Casualty Insurance Company of Canada Canada Progny Agency, Inc. New York Progressive Adjusting Company, Inc. Ohio Progressive American Insurance Company Florida Bayside Underwriters Insurance Agency, Inc. Florida Progressive American Life Insurance Company Ohio Progressive Life Insurance, Ltd. Turks & Caicos Islands Progressive Auto Pro Insurance Agency, Inc. Florida Progressive Auto Pro Insurance Company Florida Progressive Bayside Insurance Company Florida Progressive Capital Management Corp. New York Progressive Casualty Insurance Company Ohio PC Investment Company Delaware Progressive Gulf Insurance Agency Mississippi Progressive Specialty Insurance Company Ohio 2 Progressive Classic Insurance Company Wisconsin Progressive Consumers Insurance Company Florida Progressive DirecTrac Service Corp. Texas Progressive Express Insurance Company Florida Progressive Hawaii Insurance Corp. Hawaii Progressive Insurance Agency, Inc. Ohio Progressive Agency Holdings Corp. Ohio Barry Scott Companies, Inc. Delaware Barry Scott Agency, Inc. New York Baron Cycle, Inc. New York Barry Scott Acquisition Corp. New York Aard Vark Agency, Ltd. New York Progressive Investment Company, Inc. Delaware RRM Holdings, Inc. Delaware Progressive Marathon Insurance Company California Progressive Max Insurance Company Ohio Progressive Michigan Insurance Company Michigan Progressive Mountain Insurance Company Colorado Progressive Northeastern Insurance Company New York Progressive Northern Insurance Company Wisconsin Progressive Premier Insurance Company of Illinois Illinois Progressive Universal Insurance Company of Illinois Illinois Progressive Northwestern Insurance Company Washington Progressive Paloverde Insurance Company Arizona Progressive Preferred Insurance Company Ohio Progressive Premium Budget, Inc. Ohio Progressive Resources Services Company Ohio Progressive Security Insurance Company Louisiana Progressive Southeastern Insurance Company Florida Progressive West Insurance Company California Silver Key Insurance Agency, Inc. Nevada The Progressive Agency, Inc. Virginia United Financial Casualty Company Missouri United Financial Insurance Agency, Inc. Ohio United Financial Insurance Agency, Inc. Washington Village Transport Corp. Delaware Wilson Mills Land Co. Ohio Except as indicated, each subsidiary is wholly owned by its parent EX-24 15 EXHIBIT 24 1 EXHIBIT NO. 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 8th day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Peter B. Lewis Director, Chairman, President and CEO - ------------------------------------ Peter B. Lewis 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 28th day of February, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Jeffrey W. Basch - ------------------------------------ Jeffrey W. Basch Chief Accounting Officer 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 2nd day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Charles B. Chokel Director and CEO - Investments and Capital - ------------------------------------ Management Charles B. Chokel 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 29th day of February, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Milton N. Allen - ------------------------------------ Milton N. Allen Director 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 6th day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ B. Charles Ames - ------------------------------------ B. Charles Ames Director 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 3rd day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Stephen R. Hardis - ------------------------------------ Stephen R. Hardis Director 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 29th day of February, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Norman S. Matthews - ------------------------------------ Norman S. Matthews Director 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 29th day of February, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Donald B. Shackelford - ------------------------------------ Donald B. Shackelford Director 9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 3rd day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Glenn M. Renwick Director and Ceo - Insurance Operations - ------------------------------------ Glenn M. Renwick 10 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 1st day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Janet Hill - ------------------------------------ Janet Hill Director 11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 2nd day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ Charles A. Davis - ------------------------------------ Charles A. Davis Director 12 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 29th day of February, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ James E. Bennett, III - ------------------------------------ James E. Bennett, III Director 13 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, R. Steven Kestner, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1999, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 1st day of March, 2000. Position(s) with Signature the Progressive Corporation - --------- --------------------------- /S/ W. Thomas Forrester - ------------------------------------ W. Thomas Forrester Treasurer and Chief Financial Officer EX-27 16 EXHIBIT 27
7 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income and is qualified in its entirety by reference to such financial statements. 1,000 US $ YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 4,532,700 0 0 1,666,000 0 0 6,427,700 14,200 254,700 343,400 9,704,700 2,416,200 2,781,400 0 0 1,048,600 0 0 73,100 2,679,700 9,704,700 5,683,600 331,200 47,200 52,700 4,256,400 745,000 583,800 412,200 117,000 295,200 0 0 0 295,200 4.05 3.96 1,945,800 4,286,200 (29,800) 2,919,200 1,082,800 2,200,200 (29,800)
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