-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, qEsuQtdaawUd5mhlTQH15dNrI47N3UFF69yqCXDBz3g+3n4wIzRievA9RUF5xi1h yW/KoQb5pdWAXFUE01e91g== 0000950152-95-000465.txt : 199507120000950152-95-000465.hdr.sgml : 19950711 ACCESSION NUMBER: 0000950152-95-000465 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-09518 FILM NUMBER: 95524000 BUSINESS ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 BUSINESS PHONE: 2164647471 10-K 1 PROGRESSIVE CORP. 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 [Fee Required] For the fiscal year ended December 31, 1994 --------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _________________ to _______________________ 1-9518 Commission file number_____________________________________________________ THE PROGRESSIVE CORPORATION - ---------------------------------------------------------------------------- (Exact name of registrant a 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) (216) 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 - ------------------------------------ ----------------------- 9 3/8% Serial Preferred Shares, Series A (Cumulative, Liquidation Preference $25.00 per share) 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 February 28, 1995: $2,366,844,235.38 The number of the registrant's Common Shares, $1.00 par value, outstanding as of February 28, 1995: 71,358,294 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1994 are incorporated by reference in Parts I, II and IV hereof. Portions of the registrant's Proxy Statement dated March 24, 1995, for the Annual Meeting of Shareholders to be held on April 28, 1995, are incorporated by reference in Part III hereof. 2 INTRODUCTION The Progressive Corporation and subsidiaries' (collectively, the "Company") 1994 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 24, 1995, for the Annual Meeting of Shareholders to be held on April 28, 1995 (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 Corporation, an insurance holding company formed in 1965, has 60 operating subsidiaries and one mutual insurance company affiliate. The Progressive Corporation's insurance subsidiaries (collectively, the "Insurance Group") provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States and in Canada. 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. Of the approximately 250 United States insurance company groups writing private passenger auto insurance, the Company estimates that Progressive ranks seventh in size for 1994. 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. For 1994, the estimated industry premiums written, which include personal auto insurance in the United States and Ontario, Canada, as well as insurance for commercial vehicles, were $119 billion, and Progressive's share of this market was approximately 2.0%. (b) Financial Information About Industry Segments Incorporated by reference from Note 12, SEGMENT INFORMATION, on page 47 of the Company's Annual Report. (c) Narrative Description of Business INSURANCE SEGMENT - ----------------- The Insurance Group underwrites a number of personal and commercial property-casualty insurance products primarily related to the use and operation of motor vehicles. Net premiums written were $2,457.2 million in 1994, compared to $1,819.2 million and $1,451.2 million in 1993 and 1992, respectively. The underwriting profit was 8.3% (11.5% including the elimination of the supplemental reserve; see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 12 for further discussion) in 1994, compared to 10.7% in 1993 and 3.5% in 1992, respectively. The Insurance Group's core business writes insurance for private passenger automobiles and small commercial and recreational vehicles. This business frequently has more than one program in a single state, with each targeted to a specific market segment. The core business accounted for 95% of the Company's 1994 total net premiums written. 1 3 The bulk of the Insurance Group's core business consists of nonstandard automobile insurance products for people cancelled or rejected by other insurers. The size of the nonstandard automobile insurance market changes with the insurance environment. Volume potential is influenced by the actions of direct competitors, writers of standard and preferred automobile insurance and state-mandated involuntary plans. The total 1994 nonstandard automobile insurance market was about $20 billion, compared to $18 billion in 1993 and $17 billion in 1992. Approximately 330 companies, many of which belong to the same insurance group, wrote an estimated $15 billion of nonstandard auto premiums in 1994. In this market, the Insurance Group ranked fourth in 1993 in direct premiums written and near the top in underwriting performance. Although final data has not been published, the Company estimates that its 1994 ranking and underwriting performance will be consistent with 1993. The core business is continuing its experiment of writing standard and preferred automobile risks in many states. These experiments accounted for between five and ten percent of the Company's total private passenger auto premiums in 1994. The strategy is to build towards becoming a low-cost provider of a full line of auto insurance and related services, distributed through whichever channel the customer prefers. The Insurance Group's goal is to compete in the standard and preferred market, which comprises 80% of the personal automobile insurance market. The Insurance Group's specialty personal lines' principal product is motorcycle insurance. Other products offered include recreational vehicle, mobile home and boat insurance. The Insurance Group'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 a significant participant in this market. Nonstandard commercial vehicle insurance covers commercial vehicle risks that are rejected or cancelled by other insurance companies. Based on the Company's analysis of this market, approximately 40 companies compete for this business on a nationwide basis. State assigned risk plans also provide this coverage. The core business insurance products are marketed by thirteen divisions headquartered in or near the markets served: the Florida and Southeast divisions in Tampa, Florida; the North East, New York, Central States, Ohio, Commercial Vehicle and National Accounts divisions in Cleveland, Ohio; the South Central division in Austin, Texas; the Mountain division in Colorado Springs, Colorado; the Mid-Atlantic division in Richmond, Virginia; the Canada division in Ontario, Canada; and the West division in Sacramento, California. Each division is responsible for its own marketing, sales, processing and claims. In 1994, over 90% of the core business' net premiums were written through a network of more than 30,000 independent insurance agents located throughout the United States and in Canada. Subject to compliance with certain Company-mandated procedures, these independent insurance agents have the authority to bind the Company to specified insurance coverages within prescribed underwriting guidelines. 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 Company also markets its products through intermediaries such as employers, other insurance companies and national brokerage agencies, and direct to customers through employed sales people and owned insurance agencies. The core business currently markets personal automobile insurance directly to the public by direct mail, television and radio advertising throughout Florida and in Ohio and Texas. The Insurance Group's diversified businesses - the United Financial Casualty Company (UFCC), Professional Liabilities Group (PLG) and Motor Carrier division - - accounted for 5% of total volume in 1994. These businesses, which are organized by customer group, are headquartered in Cleveland, Ohio. The choice of distribution channel is driven by each customer group's buying preference and service needs. Distribution channels include financial institutions, equipment lessors and vehicle dealers. Distribution arrangements are individually negotiated between such intermediaries and the 2 4 Company and are tailored to the specific needs of the customer group and the nature of the related financial or purchase transactions. The diversified businesses also market their products directly to their customers through company-employed sales forces. UFCC 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 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 loans, finance companies and credit unions. Based on 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. The program is sponsored by the American Bankers Association. This program represented less than 1% of total 1994 net premiums written. The Motor Carrier division primarily manages involuntary Commercial Auto Insurance Plans. See SERVICE OPERATIONS on page 6 for further discussion. 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 costs. 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 and claim adjustment are also important factors in the Company's competitive strategy. LICENSES - -------- The Insurance Group operates under licenses issued by various state or provincial insurance authorities. Such 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. One or more of the subsidiaries are licensed and subject to regulation in each of the 50 states, in each Canadian province and by Canadian federal authorities. The nature and extent of such regulation and 3 5 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 principal insurance subsidiaries are domiciled in the states of Florida, Mississippi, Missouri, New York, Ohio, Pennsylvania, 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 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 to ensure 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, 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 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 such dividend limitations. Under state insolvency and guaranty laws, regulated insurers can be assessed for, or be required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Insurers are also required by many states to provide coverage to certain risks as a condition of doing business in the state. Such programs 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 have laws and regulations that limit a company'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 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 insurance rate development, rate determination and the ability of insurers to cancel or renew insurance policies, reflecting concerns about availability, prices and alleged discriminatory pricing. In some states, such as California and Georgia, the automobile insurance industry has been under pressure in recent years from regulators, legislators or special interest groups to reduce, freeze or set rates at levels that are not necessarily related to underlying costs, including initiatives to roll back automobile and other personal lines rates. This 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. 4 6 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, the United States Congress and certain federal agencies are investigating the current condition of the insurance industry to determine whether federal regulation is necessary. STATUTORY ACCOUNTING PRINCIPLES - ------------------------------- The Insurance Group'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 deferred and amortized over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP. 2. Direct-response advertising costs, which consist primarily of direct mail, television and radio expenses, are capitalized and amortized over the estimated period of the benefits, rather than expensed as incurred, as required by SAP. 3. Certain assets are included in the consolidated balance sheets, rather than charged against retained earnings, as required by SAP. These assets consist primarily of premium receivables over 90 days old and furniture and fixtures. 4. 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. 5. 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. The differing treatment of income and expense items results in a corresponding difference in Federal income tax expense. During 1994, the insurance subsidiaries began to reduce loss reserves for anticipated salvage and subrogation recoveries in accordance with statutory accounting principles. Previously, salvage and subrogation was not reflected in the statutory financial statements until actually recovered. 5 7 SERVICE OPERATIONS - ------------------ The Motor Carrier division currently processes business for the Commercial Auto Insurance Plans (CAIP) in 28 states and the Florida Joint Underwriters Association (FAJUA), which are part of the involuntary residual market. As a CAIP servicing carrier, the division processes about one-third of the premiums in the involuntary residual market, without assuming the indemnity risk. It competes with approximately 17 other providers nationwide. In 1995, the division began processing business for the FAJUA and competes with approximately five other carriers in the state. The Company's subsidiaries also provide claim services to fleet owners and other insurance companies. Revenues from all service businesses are derived primarily from fees and commissions. Total service revenues were $41.9 million in 1994, compared to $43.7 million in 1993 and $53.3 million in 1992. Pretax operating profits were $10.0 million and $6.8 million in 1994 and 1993, respectively, compared to a pretax operating loss of $4.3 million in 1992. INVESTMENTS - ----------- The Company's approach to investing is consistent with its need to maintain capital adequate to support the insurance premiums 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 $3,186.3 million at December 31, 1994, compared to $2,805.2 million at December 31, 1993. 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 (losses) on security sales, before expenses and taxes was $182.3 million in 1994, compared to $242.4 million in 1993 and $153.5 million in 1992. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, beginning on page 12 herein for additional discussion. EMPLOYEES - --------- The number of employees, excluding temporaries, at December 31, 1994, was 7,544. 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 property-casualty and life insurance subsidiaries. The life insurance operations are in run-off. Total loss reserves are established at a level that is intended to represent the midpoint of the reasonable range of loss reserves. 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. During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 12 for further discussion. The elimination of the supplemental reserve is reflected in the Reconciliation of Net Reserves for Losses and Loss Adjustment Expenses table on page 7 and the Analysis of Loss and Loss Adjustment Expenses Development table on page 8. The accompanying tables present an analysis of property-casualty losses and LAE. The following table: (1) provides a reconciliation of beginning and ending estimated liability balances for 1994, 1993 and 1992, and (2) shows the difference between the estimated liability in accordance with GAAP and that reported in accordance with SAP. 6 8 RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1994 1993 1992 --------------------------------------------------- Balance, January 1 $1,012.4 $ 956.4 $ 861.5 Incurred losses and LAE: Current accident year 1,539.8 1,126.7 981.7 Prior accident years (142.5) (98.5) (51.5) --------------------------------------------------- 1,397.3 1,028.2 930.2 --------------------------------------------------- Paid losses and LAE: Current accident year 894.0 605.4 481.9 Prior accident years 417.0 366.8 353.4 --------------------------------------------------- 1,311.0 972.2 835.3 --------------------------------------------------- Balance, December 31 1,098.7 1,012.4 956.4 Add: Reinsurance recoverable on unpaid losses and LAE1 334.2 334.8 -- --------------------------------------------------- Balance, December 31, GAAP 1,432.9 1,347.2 956.4 Adjust: Reinsurance recoverable on unpaid losses and LAE1 (334.2) (334.8) -- Net salvage and subrogation2 -- 39.9 37.2 --------------------------------------------------- Balance, December 31, SAP $1,098.7 $1,052.3 $993.6 ===================================================
1In 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) 113, "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts"; prior years were not restated. 2During 1994, the Company changed its method of accounting for salvage and subrogation. See STATUTORY ACCOUNTING PRINCIPLES on page 5 for further discussion. The reconciliation above shows a $142.5 million redundancy, which emerged during 1994, in the 1994 liability and a $98.5 million redundancy in the 1993 liability, based on information known as of December 31, 1994 and December 31, 1993, respectively. 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. 7 9 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions) YEAR ENDED 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 LIABILITY FOR UNPAID - --------------------- LOSSES AND LAE $146.5 $215.3 $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7 - -------------- PAID (CUMULATIVE) AS OF: - ----------------------- One year later 68.6 104.7 142.7 195.0 283.1 293.1 322.4 353.4 366.8 417.0 Two years later 101.4 151.9 204.4 294.9 393.7 446.8 490.8 518.8 520.0 -- Three years later 121.3 175.4 238.9 339.5 465.0 539.8 570.4 583.2 -- -- Four years later 128.8 187.2 255.7 369.9 514.0 588.2 600.0 -- -- -- Five years later 132.8 194.1 264.3 383.5 540.7 603.1 -- -- -- -- Six years later 135.8 197.7 268.7 389.1 545.1 -- -- -- -- -- Seven years later 136.8 200.7 270.1 381.9 -- -- -- -- -- -- Eight years later 138.9 201.3 261.3 -- -- -- -- -- -- -- Nine years later 139.1 191.6 -- -- -- -- -- -- -- -- Ten years later 129.4 -- -- -- -- -- -- -- -- -- LIABILITY RE-ESTIMATED - ----------------------- AS OF: - ----- One year later 146.9 218.7 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9 Two years later 150.2 213.6 293.6 422.2 573.4 677.9 726.5 771.9 765.5 -- Three years later 144.0 205.3 282.8 402.4 581.3 668.6 712.7 718.7 -- -- Four years later 140.4 203.4 274.1 403.9 575.1 667.1 683.7 -- -- -- Five years later 139.0 200.9 275.6 399.6 578.4 654.7 -- -- -- -- Six years later 139.3 204.4 275.8 400.2 582.2 -- -- -- -- -- Seven years later 142.0 205.2 277.5 408.5 -- -- -- -- -- -- Eight years later 142.9 206.7 285.7 -- -- -- -- -- -- -- Nine years later 144.5 215.3 -- -- -- -- -- -- -- -- Ten years later 153.0 -- -- -- -- -- -- -- -- -- CUMULATIVE REDUNDANCY - --------------------- (DEFICIENCY) $ (6.5) $ -- $ 38.1 $ 62.5 $ 68.8 $ 93.9 $107.9 $142.8 $190.9 $142.5 - ------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ PERCENTAGE1 (4.4) -- 11.8 13.3 10.6 12.5 13.6 16.6 20.0 14.1 1Cumulative redundancy/(deficiency) [divided by] liability for unpaid losses and LAE.
The above table presents the development of balance sheet liabilities for 1984 through 1993. 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. Similar reserves for the life insurance subsidiary, which are immaterial, are excluded. This liability represents the estimated amount of losses and LAE for claims arising in all prior years 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 becomes known about the frequency and severity of claims for individual years. For example, as of December 31, 1994, the companies had paid $191.6 million of the currently estimated $215.3 million of losses and LAE that had been incurred through the end of 1985; thus an estimated $23.7 million of losses incurred through 1985 remain unpaid as of the current financial statement date. 8 10 The "Cumulative Redundancy (Deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1984 liability has developed a $6.5 million deficiency 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 7 as the "prior years" provision for incurred losses and LAE. In evaluating this information, note that each cumulative redundancy (deficiency) amount includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the redundancy related to losses settled in 1987, but incurred in 1984, will be included in the cumulative deficiency or redundancy amount for years 1984, 1985 and 1986. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The data in the Analysis of Loss and Loss Adjustment Expenses Development table on page 8 are constructed slightly differently than the data in the Current Estimate of Total Redundancy column in the chart on page 48 of the Company's Annual Report. The data in the former table are based on Schedule P from the 1990 through 1994 Consolidated Annual Statements, as filed with state insurance departments, and Schedules O and P filed for years prior to 1989. The reserve accuracy percentages reported in this table differ from the percentages reported in the Annual Report. The primary reason for the difference is the method of apportioning loss adjustment expenses to accident years. The Consolidated Annual Statement, Schedule P, Part-1, specifies how to distribute unallocated loss adjustment expenses to accident years. The Company disagrees with this arbitrary approach and, therefore, uses a different approach for the Annual Report. It believes that both apportionment methods give the same result when viewed over several years. A second reason is that the data reported in the Annual Report includes results for life insurance products previously sold by the Company's life insurance subsidiary. Life insurance reserves are less than 1% of total reserves. Given the uncertainty inherent in establishing life insurance loss reserves, the Company's life insurance reserves have proven to be quite accurate. In addition, the development table on page 8 differs from the development displayed in Schedule P, Part-2. Schedule P, Part-2, excludes unallocated loss adjustment expenses and reflects the change in the method of accounting for salvage and subrogation. (d) Financial Information about Foreign and Domestic Operations The Company operates throughout the United States and in Canada. The amount of Canadian revenues and assets are approximately two percent of the Company's consolidated revenues and assets. The amount of operating income (loss) generated by its Canadian operations is immaterial with respect to the Company's consolidated operating income. 9 11 ITEM 2. PROPERTIES OWNED PROPERTIES - ---------------- In 1994, the Company completed its new corporate office complex on a 42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The new facility consists of 517,800 square feet of space and replaces office space held under leases in a number of locations in the Cleveland, Ohio area. The cost of the project is $75.5 million and is being funded through operating cash flows. As of December 31, 1994, $71.7 million of the project's costs had been paid. The Company's central data processing facility occupies a modern, three-story brick building containing approximately 107,000 square feet of office space on this same parcel. The Company owns two adjacent two-story brick buildings in Highland Heights, Ohio, which contain an aggregate of 233,000 square feet of office and warehouse space. The property was purchased in August 1994 for approximately $6.7 million. The buildings are currently being leased to a third party until late 1995, at which time the buildings will be renovated to accommodate the Company's operations. The Company owns a modern three-story building containing approximately 96,700 square feet of office space in Mayfield Heights, Ohio. The property was purchased in December 1993 for approximately $6.5 million, and is occupied by the Company's Northeast Division. The Company's Florida Division is headquartered in a modern, two-story building containing approximately 60,000 square feet of office space in Tampa, Florida. The property was financed with, and is held subject to a mortgage granted in connection with, industrial development revenue bonds bearing interest equal to 79.45% of a specified prime commercial lending rate. The remaining annual principal amounts payable are $368,000 in each of 1995 through 1997 and $92,000 in 1998. The Company owns a modern, two-story building containing approximately 39,000 square feet of office space in Tampa, Florida; this building is leased to a non-affiliated tenant. The Company also owns a one-story brick building containing approximately 92,000 square feet of training facilities, office and warehouse space in Mayfield Village, Ohio. LEASED PROPERTIES - ----------------- The Company leases approximately 660,000 square feet of modern office space at various locations throughout the United States for its other business units and staff functions. In addition, the Company leases approximately 261 processing and claim offices at various locations throughout the United States. Two offices are leased in Canada. These leases are generally short-term to medium-term leases of standard commercial office space. ITEM 3. LEGAL PROCEEDINGS Incorporated by reference from Note 6, LITIGATION, on page 43 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 of this Annual Report on Form 10-K. 10 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 New York Stock Exchange.
Dividends Year Quarter High Low Per Share - -------------------------------------------------------------------------------------------------------------- 1994 1 $40 1/2 $27 3/4 $.050 2 35 5/8 28 1/2 .050 3 38 7/8 33 1/4 .055 4 38 3/8 32 1/4 .055 ------------------------------------------------------------ $40 1/2 $27 3/4 $.210 ============================================================ 1993 1 $ 36 1/8 $ 26 5/8 $ .050 2 36 1/4 27 1/2 .050 3 44 1/4 31 3/4 .050 4 46 1/8 38 3/8 .050 ------------------------------------------------------------ $46 1/8 $26 5/8 $.200 ============================================================
The closing price of the Company's Common Shares on February 28, 1995 was $38 7/8. (b) Holders There were 4,871 shareholders of record on February 28, 1995. (c) Dividends Statutory policyholders' surplus was $949.2 million and $701.9 million at December 31, 1994 and 1993, 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, 1994, $102.1 million of 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 of $177.0 million in 1995 out of statutory policyholders' surplus, without prior approval by regulatory authorities. 11 13 ITEM 6. SELECTED FINANCIAL DATA (millions - except per share amounts)
For the years ended December 31, 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------ Total revenues1 $2,415.3 $1,954.8 $1,738.9 $1,493.1 $1,376.2 Operating income 212.7 197.3 129.8 85.1 137.8 Net income2,3 274.3 267.3 153.8 32.9 93.4 Per share: Operating income4 2.76 2.61 1.72 1.19 1.73 Net income2,3,4 3.59 3.58 2.05 .41 1.19 Dividends .210 .200 .191 .172 .160 Total assets3,5 4,675.1 4,011.3 3,440.9 3,317.2 2,912.4 Funded debt outstanding 675.6 477.1 568.5 644.0 644.4 All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock split. 1Total revenues for 1992 include $106.0 million ($70.0 million after taxes), or $.97 per share, for the Company's California Proposition 103 reserve reduction. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth in Item 7 of this Annual Report on Form 10-K for further discussion. 2During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve" ($46.2 million after tax), resulting in a one-time increase in earnings of $.62 per share. See MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth in Item 7 of this Annual Report on Form 10-K for further discussion. 3Effective January 1, 1992, the Company adopted SFAS 109 and is able to demonstrate that the benefit of deferred tax assets is fully realizable. The cumulative effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per share. In 1991, the deferred tax asset writedown, as required under SFAS 96, was included in the Federal income tax provision. 4Presented on a fully diluted basis. 5Pursuant to SFAS 113, amounts for 1990 through 1992 were restated.
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 and other outstanding securities, to redeem debt and for other business purposes. In 1994, the Company sold $200.0 million of its 6.60% Notes due 2004. During 1994, the Company repurchased .1 million of its Serial Preferred Shares, Series A, at a cost of $2.3 million and 1.1 million of its Common Shares at a cost of $34.0 million. 12 14 During the three-year period ended December 31, 1994, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 3.1 million Common Shares at a total cost of $142.3 million (average cost of $24.21 per share, split adjusted) and .5 million Serial Preferred Shares at a total cost of $12.1 million (average cost $27.37 per share). The Company also sold $350 million of notes, repaid $170.0 million borrowed under its credit facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the same period, The Progressive Corporation received $299.8 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Item 5(c) on page 11 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. The Company also has available a $20.0 million revolving credit agreement. The Company believes it has sufficient borrowing capacity and other capital resources 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, 1994, operations generated a positive cash flow of $925.4 million, and cash flow is expected to be positive in both the short-term and reasonably foreseeable future. The Company's substantial investment portfolio is highly liquid, consisting almost entirely of readily marketable securities. The Company does not expect any material changes in its cash requirements and is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on its liquidity. Capital expenditures for the three years ended December 31, 1994, aggregated $130.3 million. In 1994, the Company completed its new corporate office complex in Mayfield Village, Ohio. The new facility consists of 517,800 square feet of space and replaces office space held under expiring leases in a number of locations in the Cleveland area. The cost of the project was $75.5 million and is being funded through operating cash flows. As of December 31, 1994, $71.7 million of the project's cost had been paid. In June 1992, the Company reached an agreement with the California Department of Insurance to refund approximately $50 million of premiums (including interest) on business written between November 8, 1988 and November 7, 1989 to approximately 260,000 policyholders, thereby settling all rollback and refund exposure since Proposition 103 was adopted in November 1988. As a result, the Proposition 103 premium refund and rollback reserve was reduced by $106.0 million. During 1992, the Company changed its financial arrangement with Progressive Partners Limited Partnership (Progressive Partners), its investment manager, as part of its strategy to compete more effectively for private passenger auto insurance by lowering costs. Under the new arrangement, Progressive Partners' people, now employed by a wholly-owned Progressive subsidiary, continue to provide the Company with investment and capital management. The transaction involved paying Progressive Partners a one-time fee for terminating the investment management contract, and an additional incentive fee for the period ended June 30, 1992, in the aggregate amount of $54.6 million. This transaction reduced the Company's costs for investment and capital management. In December 1992, Mr. Alfred Lerner, then Chairman of the Company, converted his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008 into 9,000,000 Common Shares and sold 5,175,000 of those Common Shares in an underwritten public offering. The public offering was completed pursuant to the registration rights provisions of the convertible debenture, under which the Company paid $5.1 million in underwriting and other expenses of the offering. These expenses were charged directly to shareholders' equity in accordance with generally accepted accounting principles. On the same date, Mr. Lerner agreed to a termination of his employment agreement with the Company, and, in connection with these transactions, the Company paid Mr. Lerner $10.0 million. 13 15 INVESTMENTS - ----------- The Company invests in fixed maturity, short-term and equity securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations. Therefore, the Company evaluates the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. The majority ($2,319.4 million, or 72.9%, in 1994 and $2,135.1 million, or 76.6%, in 1993) of the portfolio was in short-term and intermediate-term, investment-grade fixed-income securities. A relatively small portion ($476.3 million, or 15.0%, in 1994 and $453.9 million, or 16.3%, in 1993) of the investment portfolio was invested in preferred and common equity securities providing risk/reward balance and diversification. The remainder of the portfolio was invested in long-term investment-grade fixed-income securities ($245.0 million, or 7.7%, in 1994 and $77.6 million, or 2.8%, in 1993) and non-investment-grade fixed-income securities ($139.3 million, or 4.4%, in 1994 and $119.8 million, or 4.3%, in 1993). The non-investment-grade fixed-income securities, although constituting only a small portion of the portfolio, offer the Company high returns and added diversification without a significant adverse effect on the stability and quality of the investment portfolio as a whole. These securities may involve greater risks often related to creditworthiness, solvency and relative liquidity of the secondary trading market. Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration or interest rate characteristics of the portfolio, or hedging securities. 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; unless otherwise noted, collateral is not required to support the credit risk. The weighted average fully taxable equivalent book yield of the portfolio was 6.7%, 6.8%, and 7.9% for the years ended December 31, 1994, 1993 and 1992, respectively. The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at Rating December 31, 1994 December 31, 1993 ------ ----------------- ----------------- AAA 58.4% 61.8% AA 20.9 23.6 A 11.8 8.4 BBB 3.7 0.6 Non Rated/Other 5.2 5.6 ------ ------ 100.0% 100.0% ====== ======
As of December 31, 1994, the Company's portfolio had $41.1 million in unrealized losses, compared to $70.2 million in unrealized gains in 1993. This decrease was due largely to the adverse impact on the Company's fixed-income portfolio of rapidly rising interest rates throughout 1994. As of December 31, 1994, the Company held $154.6 million of Collateralized Mortgage Obligations ("CMOs"), which represented 4.9% of the total investment portfolio. There are two types of securities held in the CMO Portfolio. As of December 31, 1994, sequential bonds represented 61.3% of the portfolio ($94.8 million) and had an average life of 2.1 years. Planned Amortization Class bonds represented 38.7% of the portfolio ($59.8 million) and had an average life of 2.0 years. The portfolio contains no residual interests. CMOs held by the Company are highly liquid with readily available quotes and, at December 31, 1994, had an average life of 2.0 years. Eighty- five percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. As of December 31, 1994, the Company's total CMO portfolio had an unrealized loss of $6.6 million. The single largest unrealized loss in any CMO security was $.9 million, or only 9.2% of such position. 14 16 Investments in the Company's portfolio have varying degrees of risk. Equity securities generally have greater risks than the non-equity portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer. As of December 31, 1994, the mark-to-market net losses in the Company's equity portfolio were $4.7 million ($3.1 million, net of taxes), as compared to net gains of $20.7 million ($13.5 million, net of taxes) in 1993. The 1994 marketable equity portfolio consisted of three principal components: (i) $15.6 million, or 3.3%, of standard adjustable rate preferreds, (ii) $338.0 million, or 71.0%, of perpetual preferreds with mechanisms that may provide an opportunity to liquidate at par, and (iii) $122.7 million, or 25.7%, of common stocks. The 1993 marketable equity portfolio consisted of three principal components; (i) $73.0 million, or 16.1%, of standard adjustable rate preferreds, (ii) $283.4 million, or 62.4%, of perpetual preferreds with mechanisms that may provide an opportunity to liquidate at par, and (iii) $97.5 million, or 21.5%, of common stocks. The Company continually evaluates the creditworthiness of each issuer for all securities held in its portfolio. 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. Evidence reviewed may include the recent operating results and financial position of the issuer, information about its industry, recent announcements and other information. The Company retains a staff of experienced security analysts to compile, review and evaluate such information. 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. It is the Company's general policy to dispose of securities when the Company determines that the issuer is unable to reverse its deteriorating financial condition and the prospects for its business within a reasonable period of time. In less severe circumstances, the Company may decide to dispose of a portion of its holdings in a specific issuer when the risk profile of the investment becomes greater than its tolerance for such risk. RESULTS OF OPERATIONS Operating income, which excludes realized gains and losses and one-time items, was $212.7 million, or $2.76 per share, in 1994, $197.3 million, or $2.61 per share, in 1993 and $129.8 million, or $1.72 per share, in 1992. The GAAP combined ratio was 91.7 (88.5 including the elimination of the supplemental reserve discussed below) in 1994, 89.3 in 1993 and 96.5 in 1992. Direct premiums written increased 35% to $2,645.1 million in 1994, compared to $1,966.4 million in 1993 and $1,636.8 million in 1992. Net premiums written increased 35% to $2,457.2 million, compared to $1,819.2 million in 1993 and $1,451.2 million in 1992. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk, of $115.4 million in 1994, $98.0 million in 1993 and $142.2 million in 1992. The Company provided policy and claim processing services to 28 state CAIPs in 1994 and 1993, compared to 26 in 1992. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 31% in 1994, compared to 17% in 1993 and 11% in 1992. 15 17 The Company's core divisions' net premiums written grew 38%, 25% and 18% for 1994, 1993 and 1992, respectively, driven by an increase in unit sales, resulting from the Company's ability to keep rates relatively flat over the last three years. The Company continues to experiment with writing standard and preferred auto risks which represented between five and ten percent of total core business volume in 1994. The Company anticipates continued growth in its core business in 1995, which could result from an increase in the number of states where the Company seeks to insure all auto risks, from working with independent agents dedicated to regaining market share and from integrating other buying options. The core divisions generated underwriting profits of 7% in 1994, 10% in 1993 and 8% in 1992. The Company's strategy is to achieve a four percent underwriting margin; the Company cannot predict the timing and pace of the decrease in underwriting margins, nor the rate of growth, but monitors each program to ensure that rates are adjusted promptly and adequately. 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. Claims 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 collected. 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 64% in 1994, compared to 62% in 1993 and 65% in 1992. During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve," resulting in a one-time increase in earnings of $.62 per share, a 3.2 percentage point increase in the underwriting profit margin and a $46.2 million increase in capital. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2%. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. Even without the high level of comfort provided by the "supplemental reserve," the Company's reserves have historically been redundant by approximately 2% to 4% over the most recent 5 years. The Company believes that this change in the estimate of its reserves will place it more in line with the practices of other companies in the industry. 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, results of operations or financial condition. During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company), over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a recent study by independent actuaries. Total reserves on this business are $29.7 million, of which $9.9 million is 16 18 recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 25% in 1994, compared to 28% in 1993 and 31% in 1992. The decrease reflects cost-cutting measures, as well as process improvements, changed workflows and lower commission programs. Service businesses generated a pretax operating profit of $10.0 million in 1994, compared to a pretax profit of $6.8 million in 1993 and a pretax loss of $4.3 million in 1992. Recurring investment income (interest and dividends) increased 18% to $158.5 million in 1994, compared to $134.5 million in 1993 and $139.0 million in 1992, primarily due to an increase in the average investment portfolio. Net realized gains on security sales were $23.8 million in 1994, $107.9 million in 1993 and $14.5 million in 1992. A significant portion of the 1993 realized gains resulted from the sale of certain equity securities held in the Company's investment portfolio. President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which, among other items, increased the statutory tax rate to 35%. Effective January 1, 1992, the Company adopted SFAS 109. The cumulative effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per share. The Company is able to demonstrate that the benefit of deferred tax assets is fully realizable. 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 1994 Annual Report, pages 33 through 53. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 19 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A description of the directors, including those nominated for election as directors at the 1995 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. A description of the executive officers of the Registrant and its subsidiaries follows. These descriptions reflect the Company's termination of its officership program and consequent elimination of many officer positions, effective December 31, 1993. Unless otherwise indicated, the executive officer has held the position(s) indicated for the last five years.
Offices Held and Name Age Last Five Years Business Experience ---- --- ----------------------------------- Peter B. Lewis 61 Chairman since April 1993; President, Chief Executive Officer and a director of the Registrant and Progressive Casualty Insurance Company ("Progressive Casualty"), the principal subsidiary of the Registrant. Charles B. Chokel 41 Treasurer of the Registrant since December 15, 1994; Chief Financial Officer of the Registrant since April 1991; Senior Vice President - Finance of Progressive Casualty from April 1991 to December 1993; President of the California Division and Vice President of Progressive Casualty prior to April 1991. Allan W. Ditchfield 57 Chief Information Officer of the Registrant since March 1991; Senior Vice President - Information Services of Progressive Casualty from March 1991 to December 1993; Senior Vice President of Systems Engineering at MCI Telecommunications Corporation, Washington, D.C. (telecommunications) prior to March 1991. Bruce W. Marlow 46 Chief Operating Officer of the Registrant; Executive Vice President of Progressive Casualty prior to December 1993. Michael C. Murr 43 Chief Investment and Capital Officer of the Registrant since February 1993; President of Progressive Partners, Inc., a subsidiary of the Registrant since July 1992; President of Progressive Partners Limited Partnership prior to July 1992. David M. Schneider 57 Chief Legal Officer and Secretary of the Registrant; Senior Vice President of Progressive Casualty prior to December 1993; Tiona M. Thompson 44 Chief Human Resources Officer of the Registrant since December 1993; Vice President - Human Resources of Progressive Casualty from September 1991 to December 1993; Vice President of Progressive Casualty prior to September 1991.
18 20 SECTION 16(A) REPORTING Under the Federal securities laws, the directors and certain officers of the Company, and holders of 10% or more of the Company's Common Shares, are required to report their ownership of the Company's Common Shares, and any changes in such ownership to the Securities and Exchange Commission ("SEC") and New York Stock Exchange ("NYSE") within specified timeframes. David M. Schneider inadvertently omitted to include in his Section 16(a) reports 8,697 Common Shares that were transferred in March 1990 from his father's estate to a trust of which he is a co- trustee, and 1,500 Common Shares with respect to which he had a beneficial interest that were sold by that trust in April 1990. Corrective filings were made with the SEC and NYSE, on behalf of both Mr. Schneider and the trust, promptly after this oversight was discovered. The plan administrator of the Company's Long-Term Savings Plan furnished erroneous information to Charles B. Chokel and Jeffrey W. Basch concerning allocations of shares to their plan accounts during 1993. As a result, the allocations reported in their Form 5s for 1993 were overstated by approximately 69 shares and 224 shares, respectively. Both individuals filed amended Form 5s promptly after receiving revised information from the plan administrator. Also, Mr. Basch's wife acquired 40 shares in an intraplan transfer to her Long-Term Savings Plan account which Mr. Basch inadvertently failed to report on Form 4. This transaction was later reported on Mr. Basch's Form 5 for 1994. Tiona M. Thompson inadvertently underreported by 13,000 shares the number of shares subject to stock options granted to her on April 14, 1994 under the Company's 1989 Incentive Plan. She filed an amended Form 4 for April 1994 promptly after this oversight was discovered. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation," pages 8 through 17. 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 5 through 7. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 19 21 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 - December 31, 1994, 1993 and 1992 Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Changes in Shareholders' Equity - December 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows - December 31, 1994, 1993 and 1992 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 III - Condensed Financial Information of Registrant Schedule V - Supplementary Insurance Information Schedule VI - Reinsurance 20 22 Schedule X - 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 37 through 40. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. (10)(A) through (10)(M). (b) Reports on Form 8-K On January 3, 1995, the Company filed a Form 8-K to report the elimination of its "supplemental reserve" during the fourth quarter 1994, resulting in a one-time increase in earnings of approximately $71 million, or $.63 per share for the quarter and $.62 per share for the year. The Company's combined ratio was reduced by 11.8 points for the quarter and 3.2 points for the year. (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 27 through 36. 21 23 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 28, 1995 BY: /s/ Peter B. Lewis ------------------------------ Peter B. Lewis Chairman, President and Chief Executive Officer of the Registrant 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 Chairman, President and Chief Executive March 28, 1995 - --------------------------------- Officer of the Registrant and a Director Peter B. Lewis /s/ Charles B. Chokel Treasurer and Chief Financial Officer - --------------------------------- of the Registrant March 28, 1995 Charles B. Chokel /s/ Jeffrey W. Basch Chief Accounting Officer - --------------------------------- of the Registrant March 28, 1995 Jeffrey W. Basch Milton N. Allen* Director March 28, 1995 - --------------------------------- Milton N. Allen B. Charles Ames* Director March 28, 1995 - --------------------------------- B. Charles Ames Stephen R. Hardis* Director March 28, 1995 - --------------------------------- Stephen R. Hardis Norman S. Matthews* Director March 28, 1995 - --------------------------------- Norman S. Matthews Donald B. Shackelford* Director March 28, 1995 - --------------------------------- Donald B. Shackelford 22 24 Paul B. Sigler* Director March 28, 1995 - --------------------------------- Paul B. Sigler * DAVID M. SCHNEIDER, 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/ David M. Schneider March 28, 1995 ------------------------------ David M. Schneider Attorney-in-fact
23 25 ANNUAL REPORT ON FORM 10-K ITEM 14(D) FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1994 THE PROGRESSIVE CORPORATION MAYFIELD VILLAGE, OHIO 24 26 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 1994 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 20 and 21 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. COOPERS & LYBRAND L.L.P. Cleveland, Ohio January 26, 1995 25 27 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. 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. 33-38464) filed December 28, 1990, 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 report dated January 26, 1995, on our audits of the consolidated financial statements and financial statement schedules of The Progressive Corporation and subsidiaries as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Cleveland, Ohio March 27, 1995 26 28 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES THE PROGRESSIVE CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------- (millions)
December 31, 1994 ---------------------------------------------------------- Amount At Which Shown In The Type of Investment Cost Market Value Balance Sheet ---------------------------------------------------------- Fixed Maturities: Held-to-maturity: State, municipalities and political subdivisions $ 337.6 $ 343.8 $ 337.6 ---------------------------------------------------------- Available-for-sale: United States Government and government agencies and authorities 30.1 28.8 28.8 States, municipalities and political subdivisions 1,210.2 1,199.0 1,199.0 Asset-backed securities 634.9 616.3 616.3 Foreign government obligations 23.7 23.0 23.0 Corporate and other debt securities 180.3 170.2 170.2 Redeemable preferred stock 50.5 49.7 49.7 ---------------------------------------------------------- 2,129.7 2,087.0 2,087.0 ---------------------------------------------------------- Total fixed maturities 2,467.3 2,430.8 2,424.6 ---------------------------------------------------------- Equity securities: Common Stocks 121.1 122.7 122.7 Preferred Stocks 359.9 353.6 353.6 ---------------------------------------------------------- Total equity securities 481.0 476.3 476.3 ---------------------------------------------------------- Short-term investments 279.1 279.2 279.1 ---------------------------------------------------------- Total investments $3,227.4 $3,186.3 $3,180.0 ==========================================================
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, 1994. 27 29 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME THE PROGRESSIVE CORPORATION (PARENT COMPANY) - ------------------------------------------------------------------------------- (millions)
Years Ended December 31, 1994 1993 1992 ------------------------------------------- Revenues Dividends from subsidiaries* $ 53.0 $131.3 $ 158.5 Intercompany investment income* 29.8 6.8 3.7 ------------------------------------------- 82.8 138.1 162.2 ------------------------------------------- Expenses Interest expense 56.7 42.3 44.8 Other operating costs and expenses 3.8 3.2 2.4 Non-recurring items (1) -- 4.0 10.0 Loss on disposition of subsidiary* 5.3 -- -- ------------------------------------------- 65.8 49.5 57.2 ------------------------------------------- Operating income and income before Federal income taxes and other items below 17.0 88.6 105.0 Federal income tax benefit (12.2) (20.9) (18.2) ------------------------------------------- Income before equity in undistributed earnings of subsidiaries and cumulative effect of accounting change 29.2 109.5 123.2 Equity in undistributed net income of consolidated subsidiaries* 245.1 157.8 16.4 ------------------------------------------- Income before cumulative effect of accounting change 274.3 267.3 139.6 Cumulative effect of adopting SFAS 109 -- -- 14.2 ------------------------------------------- Net income $274.3 $267.3 $ 153.8 =========================================== *Eliminated in consolidation. (1) For 1993, represents a $4.0 million charge on extinguishment of the 8 3/4% Debentures due 2017. For 1992, represents a $10.0 million payment to Mr. Alfred Lerner, then Chairman of the Company, and Mr. Lerner agreed to convert his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008 into shares and to end his employment agreement with the Company. See "Financial Condition" section of MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 12 for further discussion. See notes to condensed financial statements.
28 30 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED BALANCE SHEETS THE PROGRESSIVE CORPORATION (PARENT COMPANY) - --------------------------------------------------------------------------------------------- (millions)
December 31, 1994 1993 ------------------------------------- ASSETS Investment in non-consolidated affiliates $ .4 $ .4 Investment in subsidiaries* 1,187.4 972.0 Receivable from subsidiary* 599.4 484.6 Intercompany receivable* 26.7 -- Federal income taxes 30.5 54.8 Other assets .9 2.1 ------------------------------------- TOTAL ASSETS $1,845.3 $1,513.9 ===================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 19.0 $ 6.1 Intercompany payable* -- 34.4 Funded debt 674.4 475.5 ------------------------------------- Total liabilities 693.4 516.0 ------------------------------------- Shareholders' equity: Preferred Shares, no par value (authorized 20.0 serial Preferred Shares and 5.0 Voting Preference Shares) 9 3/8% Serial Preferred Shares, Series A (cumulative, liquidation preference of $25 per share, issued and outstanding 3.5 and 3.6 shares) 85.8 87.9 Common Shares, $1.00 par value, authorized 200.0 shares, issued 82.4 and 82.2, including treasury shares of 11.2 and 10.1 71.2 72.1 Paid-in capital 357.1 357.6 Net unrealized appreciation (depreciation) of investment in equity securities of consolidated subsidiaries (30.7) 33.5 Retained earnings 668.5 446.8 ------------------------------------- Total shareholders' equity 1,151.9 997.9 ------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,845.3 $1,513.9 ===================================== *Eliminated in consolidation. See notes to condensed financial statements.
29 31 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS THE PROGRESSIVE CORPORATION (PARENT COMPANY) - ------------------------------------------------------------------------------------------------ (millions)
Years Ended December 31, 1994 1993 1992 ------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income before cumulative effect of accounting change $274.3 $267.3 $139.6 Adjustments to reconcile income to net cash used in operating activities: Equity in income of consolidated subsidiaries (298.1) (289.1) (174.9) Amortization 1.5 .1 .1 Changes in: Intercompany receivable or payable (61.1) (7.2) 21.9 Accounts payable and accrued expenses 12.9 (5.3) (12.3) Federal income taxes 24.3 2.8 22.4 Other, net 1.0 3.8 1.3 ------------------------------------------------- Net cash used in operating activities (45.2) (27.6) (1.9) CASH FLOWS FROM INVESTING ACTIVITIES: Additional investments in equity securities of consolidated subsidiaries (56.9) (4.7) (34.2) Return of capital from consolidated subsidiary 20.1 32.9 -- Dividends received from consolidated subsidiaries 53.0 131.3 158.5 ------------------------------------------------- Net cash provided by investing activities 16.2 159.5 124.3 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 5.1 1.8 4.2 Proceeds from issuance of stock -- 177.0 -- Proceeds from funded debt 198.4 148.2 170.0 Payments on funded debt -- (240.0) (170.0) Receivable from subsidiary (114.8) (183.6) -- Dividends paid to shareholders (23.4) (23.1) (20.8) Acquisition of treasury shares (36.3) (12.2) (105.9) ------------------------------------------------- Net cash provided by (used in) financing activities 29.0 (131.9) (122.5) ------------------------------------------------- Decrease in cash -- -- (.1) Cash, beginning of year -- -- .1 ------------------------------------------------- Cash, end of year $ -- $ -- $ -- ================================================= See notes to condensed financial statements.
30 32 SCHEDULE III -- 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 1994 Annual Report. STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Registrant paid Federal income taxes of $89.8 million, $91.0 million and $4.0 million in 1994, 1993 and 1992, respectively. Total interest paid was $49.8 million for 1994, $40.9 million for 1993 and $44.3 million for 1992. During 1992, the $75.0 million Floating Rate Convertible Subordinated Debenture due 2008 was converted into 9.0 million Common Shares. The Registrant effected a 3-for-1 stock split in the form of a dividend to shareholders on December 8, 1992. The Registrant issued its Common Shares by transferring $38.5 million from retained earnings to the common stock account. All per share and share amounts and stock prices were adjusted to give effect to the split. Treasury shares were not split. DEBT -- Funded debt at December 31 consisted of:
(millions) 1994 1993 -------------------------------------------- 6.60% Notes $198.5 --- 7% Notes 148.2 $148.2 8 3/4% Notes 29.0 28.8 10% Notes 149.4 149.3 10 1/8% Subordinated Notes 149.3 149.2 -------------------------------------------- $674.4 $475.5 ============================================
Funded debt is the amount the Registrant has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. 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 had the right to borrow up to $50.0 million. In February 1994, the Registrant reduced this revolving credit arrangement to $20.0 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. At December 31, 1994 and 1993, the Registrant had no borrowings under this arrangement. In February 1994, the Registrant terminated a four-year credit facility with Morgan Guaranty Trust Company of New York, originally entered into in May 1990, under which the Registrant had the right to borrow up to $75.0 million. In February 1994, the Registrant terminated a five-year credit facility agreement with a group of banks, originally entered into in October 1989, under which the Registrant secured the right to borrow up to $235.0 million and request an additional $235.0 million. 31 33 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS - ----------------------------------------------------------------- In January 1994, the Registrant sold $200.0 million of its 6.60% Notes due 2004. The Notes are noncallable, and interest is payable semiannually. The fair value of the Notes was $174.2 million at December 31, 1994. In October 1993, the Registrant sold $150.0 million of noncallable 7% Notes due 2013 with interest payable semiannually. The fair value of these Notes was $124.6 million and $145.3 million at December 31, 1994 and 1993, respectively. In May 1989, the Registrant issued $30.0 million of 8 3/4% Notes due 1999 in exchange for $30.0 million of the 8 3/4% Debentures due 2017. These Notes are noncallable, and interest is payable semiannually. The fair value of these Notes was $30.3 million and $33.7 million at December 31, 1994 and 1993, respectively. In December 1988, the Registrant sold $150.0 million of 10% Notes due 2000, and $150.0 million of 10 1/8% Subordinated Notes due 2000. All the Notes are noncallable. Interest is payable semiannually on both issues. The fair value of the 10% Notes and 10 1/8% Subordinated Notes were $159.8 million and $159.7 million, respectively, at December 31, 1994, and $180.6 million and $181.2 million, respectively, at December 31, 1993. In February 1987, the Registrant sold $100.0 million, $70.0 million after the May 1989 debt exchange, of 8 3/4% Debentures due 2017 with interest payable semiannually. In December 1993, the Registrant redeemed the entire $70.0 million principal amount of these Debentures. The Registrant redeemed the Debentures at 105.425% of the principal amount, plus accrued interest, with the proceeds of the sale of certain securities in its investment portfolios. A $4.0 million charge on debt extinguishment was recorded as a "non-recurring item." As of December 31, 1994, the Registrant was in compliance with its debt covenants. Aggregate principal payments on funded debt outstanding at December 31, 1994 are $0 for 1994 through 1998, $30.0 million for 1999 and $650.0 million thereafter. FEDERAL INCOME TAXES -- The Registrant files a consolidated Federal income tax return with all 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/Payable to Subsidiaries in the accompanying Condensed Balance Sheets. Effective January 1, 1992, the Registrant adopted Statement of Financial Accounting Standards (SFAS 109) "Accounting for Income Taxes", which changes the method of accounting for income taxes. Under SFAS 109, the Registrant is able to demonstrate that the benefit of deferred tax assets is fully realizable. The cumulative effect of adopting SFAS 109 was to restore the deferred tax assets and increase net income $14.2 million, or $.20 per share, in 1992. 32 34 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS - ------------------------------------------------------------------ INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its investment in consolidated subsidiaries, recognizes the changes in unrealized gains (losses) on equity securities of the subsidiaries. These amounts were:
(millions) 1994 1993 1992 ----------------------------------------------------- Unrealized gains (losses): Available-for-sale: fixed maturities $(73.4) $ 1.6 $29.1 equity securities (25.4) (67.6) 56.9 Deferred income taxes 34.6 22.0 (29.2) ----------------------------------------------------- $(64.2) $(44.0) $ 56.8 =====================================================
OTHER MATTERS -- The information relating to incentive compensation plans and related party transactions is incorporated by reference from Note 9, EMPLOYEE BENEFIT PLANS, "Incentive Compensation Plans" and Note 11, RELATED PARTY TRANSACTIONS, on pages 45 through 47 of the Registrant's 1994 Annual Report. 33 35 SCHEDULE V -- 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 expenses(1),(3) premiums(1) payable revenue Income(2) expenses(3) ------------------------------------------------------------------------------------------ Years ended December 31, 1994: Insurance Lines $161.6 $1,434.4 $1,036.7 $ -- $2,191.1 $182.3 $1,397.3 ========================================================================================== Year ended December 31, 1993: Insurance Lines $124.6 $1,348.6 $ 772.0 $ -- $1,668.7 $242.4 $1,028.0 ========================================================================================== Year ended December 31, 1992: Insurance Lines $101.3 $1,274.2 $ 614.8 $ -- $1,426.1 $153.5 $930.9 ========================================================================================== Amortization of deferred policy Other Net acquisition operating premiums Segment costs expenses written ------------------------------------------- Years ended December 31, 1994: Insurance Lines $391.5 $150.8 $2,457.2 ========================================== Year ended December 31, 1993: Insurance Lines $311.6 $151.3 $1,819.2 ========================================== Year ended December 31, 1992: Insurance Lines $304.1 $141.5 $1,451.2 ========================================== (1)Pursuant to SFAS 113, amounts for 1992 were restated. (2)Excluding investment expenses of $8.7 million in 1994, $10.2 million in 1993 and $17.0 million in 1992. (3)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 12 for further discussion.
34 36 SCHEDULE VI -- REINSURANCE THE PROGRESSIVE CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------- (millions)
Assumed Percentage Year Ended Ceded to From of Amount - ---------- Gross Amount Other Other Assumed December 31, 1994 Companies Companies Net Amount to Net - ----------------- -------------------------------------------------------------------------------- Life Insurance in force $ .7 $ .2 $ -- $ .5 -- ================================================================================ Premiums earned: Accident and health $ -- $ -- $ -- $ -- --% Property and liability 2,378.4 192.2 4.9 2,191.1 .2 Life -- -- -- -- -- ------------------------------------------------------------- Total premiums earned $2,378.4 $192.2 $ 4.9 $2,191.1 ============================================================= December 31, 1993 - ----------------- Life Insurance in force $ 1.4 $ .3 $ -- $ 1.1 -- ================================================================================ Premiums earned: Accident and health $ -- $ -- $ -- $ -- --% Property and liability 1,808.8 149.8 9.7 1,668.7 .6 Life -- -- -- -- -- ------------------------------------------------------------- Total premiums earned $1,808.8 $149.8 $ 9.7 $1,668.7 ============================================================= December 31, 1992 - ----------------- Life Insurance in force $ 3.3 $ 1.3 $ -- $ 2.0 -- ================================================================================ Premiums earned: Accident and health $ .1 $ .1 $ -- $ -- --% Property and liability 1,619.3 195.1 1.9 1,426.1 .1 Life -- -- -- -- -- ------------------------------------------------------------- Total premiums earned $1,619.4 $195.2 $ 1.9 $ 1,426.1 =============================================================
35 37 SCHEDULE X - 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, 1994(1) $1,539.8 $(142.5) $1,311.0 ================== ==================== ================== December 31, 1993 $1,126.7 $(98.5) $972.2 ================== ==================== ================== December 31, 1992 $981.7 $(51.5) $835.3 ================== ==================== ================== Pursuant to Rule 12-18 of Regulation S-X. See Schedule V, page 34, for the additional information required in Schedule X. (1)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 12 for further discussion.
36 38 EXHIBIT INDEX -------------
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ----------------------------------------------------------------------------------------------------------------------------------- (3)(i) 3(A) Amended Articles of Incorporation of The Progressive Quarterly Report on Form 10-Q Corporation ("Progressive"), as amended (Filed with SEC on April 23, 1993; see Exhibit 3 therein) (3)(ii) 3(B) Code of Regulations of Progressive Quarterly Report on Form 10-Q (Filed with SEC on May 6, 1991; see Exhibit 3(B) therein) (4) 4(A) $4,000,000 Hillsborough County Industrial Development Contained in Exhibit Binder Authority Industrial Development Revenue Bonds, Series 1982 (dated December 16, 1982); Loan and Debt Obligation Agreement; Indenture of Trust; Mortgage and Security Agreement; Unconditional Guaranty (4) 4(B) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (filed with SEC Progressive and Rhode Island Hospital Trust National Bank, on March 29, 1994; see Exhibit 4(B) therein) as Trustee ("Subordinated Indenture") (including Table of Contents and cross-reference sheet) (4) 4(C) Form of 10 1/8% Subordinated Notes due 2000 issued in the Annual Report on Form 10-K (filed with SEC aggregate principal amount of $150,000,000 under the on March 29, 1994; see Exhibit 4(C) therein) Subordinated Indenture (4) 4(D) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (filed with SEC Progressive and The First National Bank of Boston, as on March 29, 1994; see Exhibit 4(D) therein) Trustee ("1988 Senior Indenture") (including Table of Contents and cross-reference sheet) (4) 4(E) Form of 10% Notes due 2000 issued in the aggregate Annual Report on Form 10-K (filed with SEC principal amount of $150,000,000 under the 1988 Senior on March 29, 1994; see Exhibit 4(E) therein) Indenture
37 39 EXHIBIT INDEX -------------
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ----------------------------------------------------------------------------------------------------------------------------------- (4) 4(F) Form of 8 3/4% Notes due 1999 issued in the aggregate Contained in Exhibit Binder principal amount of $30,000,000 under the 1988 Senior Indenture (4) 4(G) $20,000,000 Unsecured Line of Credit with National City Annual Report on Form 10-K (filed with SEC Bank (dated May 23, 1990; renewed May 20, 1992, and on March 29, 1994; See Exhibit 4(I) therein) amended February 1, 1994) (4) 4(H) Indenture dated as of September 15, 1993 between Quarterly Report on Form 10-Q (Filed with SEC Progressive and The First National Bank of Boston, as on November 5, 1993; see Exhibit 4(A) trustee ("1993 Senior Indenture") (including Table of therein) Contents and cross-reference sheet) (4) 4(I) Form of 7% Notes due 2013 issued in the aggregate Quarterly Report on Form 10-Q (filed with principal amount of $150,000,000 under the 1993 Senior SEC on November 5, 1993; see Exhibit 4(B) Indenture therein) (4) 4(J) Form of 6.60% Notes due 2004 issued in the aggregate Annual Report on Form 10-K (filed with SEC principal amount of $200,000,000 under the 1993 Senior on March 29, 1994; see Exhibit 4(L) therein) Indenture (10)(ii) 10(A) Construction Contract dated March 2, 1993 between Annual Report on Form 10-K (Filed with SEC Progressive Casualty Insurance Company and The Whiting- on March 30, 1993; see Exhibit 10(A) Turner Contracting Company therein) (10)(iii) 10(B) The Progressive Corporation 1995 Gainsharing Plan Contained in Exhibit Binder (10)(iii) 10(C) The Progressive Corporation 1994 Gainsharing Plan Annual Report on Form 10-K (Filed with SEC on March 29, 1994; See Exhibit 10(B) therein) (10)(iii) 10(D) The Progressive Corporation 1995 Executive Bonus Plan Contained in Exhibit Binder
38 40 EXHIBIT INDEX -------------
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ---------------------------------------------------------------------------------------------------------------------------------- (10)(iii) 10(E) The Progressive 1994 Executive Bonus Plan Annual Report on Form 10-K (Filed with SEC on March 29, 1994; See Exhibit 10(C) therein) (10)(iii) 10(F) The Progressive Corporation Directors Deferral Quarterly Report on Form 10-Q (Filed with Plan (Amendment and Restatement) SEC on November 13, 1991; see Exhibit 10(B) therein) (10)(iii) 10(G) The Progressive Corporation 1989 Incentive Plan (amended Annual Report on Form 10-K (Filed with SEC on and restated as of April 24, 1992, as further amended on March 30, 1993; see Exhibit 10(G) therein) July 1, 1992 and February 5, 1993) (10)(iii) 10(H) Share Option Agreement dated March 17, 1989, between Contained in Exhibit Binder Progressive and David M. Schneider (10)(iii) 10(I) The Progressive Corporation 1990 Directors' Quarterly Report on Form 10-Q Stock Option Plan (Amended and Restated (Filed with SEC on November 12, 1992; see as of April 24, 1992 as further amended on Exhibit 10(A) therein) July 1, 1992) (10)(iii) 10(J) Share Option Agreement dated May 22, 1990 between Annual Report on Form 10-K (Filed with SEC on Progressive and Michael C. Murr March 30, 1993; see Exhibit 10(J) therein) (10)(iii) 10(K) Agreement dated February 21, 1991 with Allan W. Annual Report on Form 10-K (Filed with SEC on Ditchfield (expired January 1, 1995) March 30, 1992; see Exhibit 10(L) therein) (10)(iii) 10(L) The Progressive Corporation 1995 Incentive Plan Contained in Exhibit Binder (10)(iii) 10(M) The Progressive Corporation Executive Deferred Contained in Exhibit Binder Compensation Plan (11) 11 Computation of Earnings Per Share Contained in Exhibit Binder (13) 13 The Progressive Corporation 1994 Annual Report Contained in Exhibit Binder
39 41 EXHIBIT INDEX -------------
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ----------------------------------------------------------------------------------------------------------------------------------- (21) 21 Subsidiaries of The Progressive Corporation Contained in Exhibit Binder (23) 23 Consent of Independent Accountants Incorporated herein by reference to page 26 of this Annual Report on Form 10-K (24) 24 Powers of Attorney Contained in Exhibit Binder (27) 27 Financial Data Schedule This exhibit is contained in the EDGAR filing of the Annual Report on Form 10-K for the year ended December 31, 1994 only. (28) 28 Schedule P as Filed with State Regulatory Contained in Exhibit Binder Authorities No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.
40 EX-4.A 2 PROGRESSIVE CORP. 10-K EXHIBIT 4(A) 1 EXHIBIT NO. 4(A) $4,000,000 HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY INDUSTRIAL DEVELOPMENT REVENUE BONDS (PROGRESSIVE AMERICAN INSURANCE COMPANY PROJECT) SERIES 1982 DATED DECEMBER 16, 1982 2 LOAN AND DEBT OBLIGATION AGREEMENT HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY AND PROGRESSIVE AMERICAN INSURANCE COMPANY Dated as of December 16, 1982 This Loan and Debt Obligation Agreement (including Trustee's rights but excluding certain rights of Hillsborough County Industrial Development Authority) has been assigned to Sun Bank, N.A., as Trustee, and is subject to a security interest in favor of the Trustee under the Indenture of Trust dated as of December 16, 1982, by and between Hillsborough County Industrial Development Authority and the Trustee. 3 LOAN AND DEBT OBLIGATION AGREEMENT Table of Contents (The Table of Contents is not a part of the Loan and Debt Obligation Agreement but is for convenience of reference only) ARTICLE I Definitions Page Section 1.1. Definitions 1 "Act" 1 "Additional Bonds" 1 "Agreement" 1 "Agreement Term" 2 "Authorized Company Representative" 2 "Bondholder" 2 "Bond Registrar" 2 "Bonds" 2 "1982 Bonds" 2 "Code" 2 "Company" 2 "Completion Date" 2 "Construction Fund" 2 "Guarantor" 2 "Indenture" 2 "Issuer" 3 "Loan" 3 "Loan Installments" 3 "Mortgage" 3 "Note" 3 "Original Purchaser" 3 "Paying Agent" 3 "Permitted Encumbrances" 3 "Plans and Specifications" 3 "Prime Rate" 4 "Project" 4 "Project Manager" 4 "Project Site" 4 "Debt Service Fund" 4 "Trustee" 4 "Yield" 4 Section 1.2. Rules of Construction 4 4 ARTICLE II Representations Section 2.1. Representations by the Issuer 5 Section 2.2. Representations by the Company 6 ARTICLE III Loan; Assignment of Agreement and Note Section 3.1. Loan 9 Section 3.2. Assignment of the Issuer's Rights 9 ARTICLE IV Commencement and Completion of the Project, Issuance of the Bonds Section 4.1. Agreement to Acquire and Construct the Project 9 Section 4.2. Agreement to Issue Bonds; Application of Bond Proceeds; Additional Bonds 11 Section 4.3. Disbursements from the Construction Fund 12 Section 4.4. Obligation of the Company to Cooperate In Furnishing Documents to Trustee 16 Section 4.5. Establishment of Completion Date 16 Section 4.6. The Company Required to Pay Cost of the Project in Event Construction Fund Insufficient 16 Section 4.7. Project Manager 17 Section 4.8. Pursuit of Remedies Against Contractors and Subcontractors and Their Sureties 17 Section 4.9. Investment of Moneys in the Construction Fund and the Debt Service Fund 18 ARTICLE V Effective Date of This Agreement; Duration of Agreement Term; Repayment Provisions Section 5.1. Effective Date of this Agreement; Duration of Agreement Term 18 Section 5.2. Loan Installments and Other Amounts Payable 18 Section 5.3. Payment of Loan Installments 20 Section 5.4. Obligations Unconditional 20 ii 5 ARTICLE VI Maintenance, Modifications, Operation, Insurance and Other Covenants of the Company Section 6.1. Maintenance of Project 23 Section 6.2. Conditions to Changes in the Project 23 Section 6.3. After-Acquired Property Not Part of Project 24 Section 6.4. Removal or Disposition 24 Section 6.5. No Abatement of Loan Installments; Damages 24 Section 6.6. Covenant Against Unauthorized Removal 24 Section 6.7. Liens and Encumbrances 24 Section 6.8. Permitted Contests 25 Section 6.9. Notice of Event of Default 26 Section 6.10. Requested Information 26 Section 6.11. Inspections, Reports and Financial Statements 26 Section 6.12. Certificate of Compliance and No Default 29 Section 6.13. Insurance 29 Section 6.14. Insurance Proceeds; Condemnation Awards 29 Section 6.15. Approvals 30 Section 6.16. Covenants of Company and Issuer with Respect to Capital Expenditures 30 Section 6.17. Covenants as to Use of Bond Proceeds; Payback Provision 33 Section 6.18. Covenant as to Recordation 34 ARTICLE VII Special Covenants Section 7.1. Indemnification by the Company 34 Section 7.2. Compliance with All Laws 34 Section 7.3. Maintenance of Corporate Existence 35 Section 7.4. Nonassignability 36 Section 7.5. Payment of Loan Installments 36 Section 7.6. No Warranty of Condition or Suitability by the Issuer 36 ARTICLE VIII Obligation Continues; Redemption; Prepayment and Abatement; Mortgage and Security Interest Section 8.1. Redemption of Bonds 37 Section 8.2. Permissible Prepayment of Loan Installments 37 Section 8.3. Mandatory Prepayment of Loan Installments 37 iii 6 Section 8.4. References to Bonds Ineffective After Bonds Paid 39 Section 8.5. Vesting of Interest in Issuer 39 Section 8.6. Mortgage and Security Interest 40 ARTICLE IX Events of Default and Remedies Section 9.1. Events of Default Defined 41 Section 9.2. Remedies on Default 43 Section 9.3. Authorization to Foreclose 44 Section 9.4. No Remedy Exclusive 44 Section 9.5. Agreement to Pay Attorneys' Fees and Expenses 44 Section 9.6. No Additional Waiver Implied by One Waiver 45 Section 9.7. Issuer's Right to Advance Funds upon Default; Reimbursement of Same 45 ARTICLE X Miscellaneous Section 10.1. Notices 45 Section 10.2. Binding Effect; Controlling Law 46 Section 10.3. Severability 47 Section 10.4. Amounts Remaining in Funds 47 Section 10.5. Complete Agreement; Supplements or Amendment 47 Section 10.6. Net Contract 47 Section 10.7. Arbitrage; Preservation of Tax Exemption 47 Section 10.8. Controlling Law; Members of Issuer Not Liable 48 Section 10.9. Company Approval of Indenture 48 Section 10.10. Further Assurances 48 Section 10.11. Rights not Extinguished 49 Section 10.12. Execution of Counterparts 49 iv 7 LOAN AND DEBT OBLIGATION AGREEMENT THIS LOAN AND DEBT OBLIGATION AGREEMENT, made and entered into as of the ____ day of _______, 1982, by and between HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, a public body corporate and politic of the State of Florida, and PROGRESSIVE AMERICAN INSURANCE COMPANY, a corporation organized and existing under the laws of the State of Florida. W I T N E S S E T H: In consideration of the respective representations and agreements hereinafter contained, the parties hereto agree as follows (provided, that in the performance of the agreements of the Hillsborough County Industrial Development Authority herein contained, any obligation it may thereby incur for the payment of money shall not be a general debt, liability or obligation of said Authority, Hillsborough County or of the State of Florida or any political subdivision thereof but shall be payable solely out of the proceeds derived from or pursuant to this Loan and Debt Obligation Agreement and the sale of the Bonds referred to in Section 4.2 hereof): ARTICLE I Definitions SECTION 1.1. Definitions. As used herein unless some other meaning is plainly intended: "Act" means the Constitution of the State of Florida, Parts II and III of Chapter 159, Florida Statutes, and other applicable provisions of law. "Additional Bonds" means the additional parity Bonds authorized to be issued by the Issuer pursuant to the Indenture. "Agreement" means this Loan and Debt Obligation Agreement and any amendments and supplements hereto. 8 "Agreement Term" means the duration of this Agreement as specified in Section 5.1 hereof. "Authorized Company Representative" means the person at the time designated to act on behalf of the Company (or his duly designated alternate or alternates) by written certificate furnished to the Issuer and the Trustee containing the specimen signature of such person. "Bondholder" means the registered owner (or its authorized representative) of any Bonds at any time outstanding. "Bond Registrar" means the registrar appointed by the Issuer, from time to time, under the provisions of Section 3.05 of the Indenture. "Bonds" means the 1982 Bonds and any Additional Bonds issued and to be issued pursuant to the Indenture. "1982 Bonds" means the Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982, to be issued pursuant to Section 3.07 of the Indenture. "Code" means the Internal Revenue Code of 1954, as amended. "Company" means Progressive American Insurance Company, a Florida corporation, and its successors or assigns, including any surviving, resulting or transferee corporation as provided in Section 7.3 hereof. "Completion Date" means the date of completion of the acquisition and construction of the Project as that date shall be certified as provided in Section 4.5 hereof. "Construction Fund" means the fund created by Section 6.01 of the Indenture. "Guarantor" means The Progressive Corporation, an Ohio corporation, the indirect owner of the Company. "Indenture" means the Indenture of Trust between the Issuer and the Trustee, of even date herewith, pursuant to which (i) the Bonds are authorized to be issued and (ii) the Issuer's interest in this Agreement and the Loan Installments and other revenues received by the Issuer from 2 9 the repayment of the Loan to the Company are to be pledged and assigned, including any indenture supplemental thereto. "Issuer" means Hillsborough County Industrial Development Authority, a public body corporate and politic of the State of Florida. "Loan" shall have the meaning ascribed thereto in Section 3.1 of this Agreement. "Loan Installments" means the payments described in Article V hereof and required to be paid under the terms hereof and the terms of the Note. "Mortgage" means the Mortgage and Security Agreement of even date herewith between the Company, as mortgagor, and the Issuer, as mortgagee. "Note" means the Promissory Note of even date herewith issued by the Company to the Issuer pursuant to Section 3.1 hereof. "Original Purchaser" means Sun Bank of Tampa Bay. "Paying Agent" shall have the same meaning as provided in the Indenture. "Permitted Encumbrances" means and shall include the following: (a) liens for taxes and special assessments not delinquent or which are being contested in good faith by or on behalf of the Company in accordance with the terms and provisions of Section 6.8 hereof; (b) mechanics', workmen's, repairmen's or carriers' liens or other similar liens, provided that the same shall be discharged by the Company in the ordinary course of business and without undue delay or the validity of the same shall be contested, with any pending execution thereof appropriately stayed; and (c) this Agreement and the documents contemplated hereby, including the Mortgage and the Indenture. "Plans and Specifications" means the plans and specifications for the construction of the Project, including 3 10 any supplements, amendments and additions thereto, which shall have been approved by the Company. "Prime Rate" means the rate of interest as charged from time to time by Sun Bank, N.A., or its successors, for ninety-one day unsecured loans; provided however, if Sun Bank, N.A., does not make ninety-one day unsecured loans, the Prime Rate shall be such rate for such loans charged by Manufacturers Hanover Trust Company, New York, New York. "Project" means, collectively, the acquisition of the Project Site, and the acquisition, construction and installation thereon, in accordance with the Plans and Specifications, of structures, fixtures, facilities, equipment and machinery constituting a headquarters facility for the regional headquarters office for the Company and its related group of casualty insurers, all as more particularly described in Exhibit "A" attached hereto and to the Indenture. "Project Manager" means the project manager or managers who at the time shall have been designated as such in or pursuant to the provisions of Section 4.7 hereof. "Project Site" means the lands on which the Project is to be constructed, as more particularly described in Exhibit "B" attached hereto and to the Indenture, together with easements appurtenant thereto. "Debt Service Fund" means the Hillsborough County Industrial Development Revenue Bonds (Progressive American Insurance Company Project) Debt Service Fund, created by Section 7.02 of the Indenture. "Trustee" means Sun Bank, N.A., a duly organized national banking association having the authority to exercise corporate trust powers, and having its principal office in the City of Orlando, Florida, as the initial Trustee, and such other duly appointed trustee at any time serving as such under the Indenture. "Yield" means the yield on a particular obligation computed in accordance with Section 1.103-13(c) of the Treasury Regulations, as amended. SECTION 1.2. Rules of Construction. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders. Unless the context shall clearly indicate to the contrary: 4 11 (a) The words "Bond," "coupon," "holder," and "person" shall include the plural as well as the singular number; (b) The word "person" shall include corporations and associations, including public bodies, as well as natural persons; (c) "Herein", "hereby", "hereunder", "hereof", "hereinbefore", "hereinafter" and other equivalent words refer to this Agreement and not solely to the particular portion thereof in which any such word is used; and (d) All references herein to particular Articles or Sections are references to Articles or Sections of this Agreement. ARTICLE II Representations SECTION 2.1. Representations by the Issuer. The Issuer makes the following representations as the basis for the undertakings on its part herein contained: (a) The Issuer is duly authorized under the provisions of the Act to enter into, execute and deliver this Agreement, to undertake the transactions contemplated by this Agreement and to carry out its obligations hereunder. The Project constitutes and will constitute a "project" within the meaning of the Act. By duly adopted resolution the Issuer has duly authorized the execution and delivery of this Agreement. (b) The Issuer, by a Resolution adopted on March 10, 1982, took affirmative official action toward the issuance of the 1982 Bonds. (c) The Company proposes to acquire, construct and install the Project. The Issuer proposes to loan money to the Company for the acquisition, construction and installation of the Project pursuant to the terms and conditions expressed herein, all for the purposes of fostering the industrial and business development of and im- 5 12 proving living conditions in Hillsborough County, Florida, and otherwise contributing to the welfare of the State of Florida and its inhabitants. (d) To finance the cost of the Project the Issuer proposes to issue initially the 1982 Bonds in the principal amount of $4,000,000, which 1982 Bonds will be designated "Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982," and to loan the proceeds of the 1982 Bonds to the Company. Thereafter, Additional Bonds of the Issuer, for the purposes, under the conditions and in the principal amounts provided in Section 4.2(b) hereof, may be issued by the Issuer under the Indenture. (e) All of the Bonds will be issued under the Indenture and will mature, bear interest, be redeemable and have the other terms and provisions set forth in the Indenture, pursuant to which the Issuer's interest in this Agreement and the Note and the revenues receipts including the Loan Installments derived by the Issuer will be pledged and conveyed to the Trustee as security for payment of the principal of, premium, if any, and interest on the Bonds. SECTION 2.2. Representation by the Company. The Company makes the following representations as the basis for the undertakings on its part herein contained: (a) The Company is a Florida corporation, duly created and existing under the laws of the State of Florida, and has full power and authority to enter into this Agreement and by proper corporate action its officers have been duly authorized to execute and deliver this Agreement (b) The Company intends to operate the Project as a "project" within the meaning of the Act. (c) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not conflict with or constitute a breach of or default under the Company's articles of incorporation, bylaws or any bond, debenture, note or other evidence of indebtedness, 6 13 contract, agreement or lease to which the Company is a party or by which the Company is bound, and this Agreement will be binding upon and enforceable against the Company. (d) The Project consists of property of a character subject to the allowance for depreciation under Section 167 of the Code and all of the net proceeds received from the sale of the 1982 Bonds (after payment of the costs incurred in connection with the issuance of the 1982 Bonds) which are actually expended for the Project, will be used to pay the cost of the acquisition, construction and installation of the Project and will be or may be charged to the capital account of the Company for federal income tax purposes. (e) As of March 10, 1982, no contracts had been awarded or entered into and no purchase orders had been issued with respect to any components of the Project, none of said components or the Project Site had been acquired and no installation or fabrication had commenced with respect to any of said components. (f) Based on current facts, estimates and circumstances, it is presently expected that: (1) the acquisition, construction and installation of the Project and the expenditure of all the proceeds of the 1982 Bonds will be completed by July 1, 1983; (2) work on the Project has commenced and it is expected to proceed with due diligence to completion; (3) the net proceeds from the issuance of the 1982 Bonds are needed for the purpose of paying all or a part of the cost of the acquisition, construction and installation of the Project; and (4) the Project will not be sold or disposed of in a manner producing proceeds which, together with any accumulated proceeds or earnings thereon, would be sufficient to enable the Company to 7 14 retire substantially all of the Bonds prior to the maturity of the 1982 Bonds. (g) The Company has entered into various contracts providing for the acquisition, construction and installation of the Project and the amounts required to be paid or already paid under said contracts exceed $100,000. (h) As of the date of execution and delivery of this Agreement, there exists no event of default, as defined in Article IX hereof, or any condition or event which would constitute, or with the passage of time or the giving of notice, or both, would constitute an event of default hereunder. (i) The consolidated financial statements of the Guarantor, the Company and all of the subsidiary and affiliate corporations of the Guarantor, dated as of December 31, 1981, previously delivered to the Original Purchaser, certified by Ernst & Whinney, fairly present the financial position of the Company as of the end of such fiscal year and the results of its operations for such fiscal year, and since the closing of such fiscal year there has been no material adverse change in the financial condition and results of the operations of the Company. (j) There are no pending, or to the knowledge of the Company, threatened actions or proceedings before any court or administrative agency which are likely in any case or in the aggregate to materially adversely affect the financial condition or business or operations of the Company, nor is the Company aware of any facts or circumstances that would give rise to any such actions or proceedings. (k) The information furnished by the Company and used by the Issuer in preparing the election it filed with the Internal Revenue Service pursuant to Section 103(d)(6)(D) of the Code was true and complete as of the date of filing of said election. 8 15 ARTICLE III Loan; Assignment of Agreement and Note SECTION 3.1. Loan. Concurrently with the sale and delivery of the 1982 Bonds, the Issuer will, upon the terms and conditions of this Agreement and the Note, make a loan (the "Loan") to the Company in the amount of Four Million dollars ($4,000,000). Such Loan will be made by the Issuer by depositing said sum with the Trustee for disbursement by the Trustee as provided for in the Indenture. SECTION 3.2. Assignment of the Issuer's Rights. Concurrently with the execution of this Agreement, the Issuer will, under the terms and to the extent provided in the Indenture, assign the Issuer's rights under this Agreement, the Note and the Mortgage to the Trustee as security for the payment of the 1982 Bonds. ARTICLE IV Commencement and Completion of the Project, Issuance of the Bonds SECTION 4.1. Agreement to Acquire and Construct the Project. The Company agrees to acquire, construct and install, with the proceeds of the Note, the Project, in accordance with the Plans and Specifications, now or hereafter filed with the Trustee and in accordance with change orders approved in writing by the Company and furnished to the Trustee from time to time prior to the Completion Date; provided, however, that no supplement, amendment, addition or change order relating to the Plans and Specifications for any component of the Project shall change the nature of the Project as (i) property of a character subject to depreciation under Section 167 of the Code and (ii) a "project" within the meaning of the Act. In addition to supplementing, amending and adding to the Plans and Specifications and submitting change orders within the limits set forth in the first paragraph of this Section, it is understood and agreed that the Company shall also be authorized to omit major components of the Project or to add or substitute major new components as an addition to the Project or in substitution of major components so 9 16 omitted, provided that in the opinion of the Project Manager, such major omissions, additions or substitutions, will not materially alter or change the general character of the Project and will, in the opinion of counsel nationally recognized on the subject of municipal bonds, which opinion shall be in writing and filed with the Trustee and the Issuer, not result in the interest on the Bonds or any part thereof becoming subject to federal income taxes then in effect. In the event of an omission, addition or substitution as provided in this paragraph, the Company and the Issuer shall revise Exhibit A to this Agreement to reflect such major omission, addition or substitution and mail a copy of such revised Exhibit "A" to the Trustee. It is understood and agreed that the Company will provide to the Trustee at or prior to the delivery of the 1982 Bonds the following: (a) A survey of the Project Site, dated a recent date and satisfactory in substance and form to the Trustee, prepared and certified by an independent registered Florida civil engineer or land surveyor showing, with respect to the Project Site, (i) the location and dimensions of such lands, (ii) all means of access to such lands, and (iii) any easements, encroachments or other charges appearing with respect to such lands customarily reflected on land surveys; and (b) A mortgagee title insurance policy or a title insurance commitment naming the Trustee as mortgagee, dated the closing date, with a reputable title insuror authorized to write title insurance in the state of Florida and acceptable to the Trustee, in such form as shall be satisfactory to the Trustee, insuring the title to the real estate interests mortgaged to the Trustee in an amount not less than the value of the real estate interests, to be free and clear of all liens and encumbrances, and containing no exclusions, stipulations, exceptions or encumbrances not satisfactory to the Trustee. The Trustee shall pay or reimburse the Company and its agents for all legally permissible costs incurred in connection with the acquisition, construction and installation of the Project incurred before the sale of the 1982 Bonds as promptly as practicable after receipt of the proceeds from the sale of the 1982 Bonds. The Company shall acquire, construct and install the Project with all reasona- 10 17 ble dispatch and use best efforts to cause said acquisition, construction and installation to be completed by the Completion Date or as otherwise provided in Section 4.5 hereof, and if for any reason such acquisition, construction and installation is not completed by said date there shall be no diminution in the Loan Installments hereby required to be paid by the Company. SECTION 4.2. Agreement to Issue Bonds; Application of Bond Proceeds; Additional Bonds. (a) In order to provide funds to loan to the Company for the payment of the cost of the Project, the Issuer agrees that it will, concurrently herewith, sell and cause to be delivered to the Original Purchaser the 1982 Bonds in the principal amount of Four Million Dollars ($4,000,000), bearing interest and maturing as provided in the Indenture and it will thereupon (i) deposit in the Interest Account in the Debt Service Fund created by Section 7.02 of the Indenture a sum equal to the accrued interest on the 1982 Bonds paid by the Original Purchaser of the 1982 Bonds, if any, and (ii) deposit in the Construction Fund the balance of the proceeds received from the sale of the 1982 Bonds. (b) The Issuer may at the request of the Company authorize the issuance of Additional Bonds upon the terms and conditions provided in the Indenture. Additional Bonds may be authorized for the purpose of financing the cost of completing the Project, or the cost of all or any part of the cost of additions, extensions, improvements, relocations, alterations, enlargements, modifications or changes (herein collectively called "Improvements") in, to or on the Project Site or other properties of the Company located in Hillsborough County, Florida, or for any combination of such purposes, as the Company may deem necessary or essential, in the manner provided in Section 3.08 of the Indenture. If the Company is not in default hereunder, the Issuer may, at the request of the Company but in the sole discretion of the Issuer, from time to time, issue the amount of Additional Bonds specified by the Company (within the limits and under the conditions specified above and in the Indenture), provided that (i) the terms, manner of issuance, purchase price and disposition of 11 18 proceeds of the sale of such Additional Bonds shall have been approved in writing by the Company, (ii) the Company and the Issuer shall have entered into an amendment to this Agreement to provide for an increase in the Loan hereunder and providing for Loan Payments in an amount at least sufficient to pay the principal of, premium, if any, and interest on the Additional Bonds as the same shall mature and become due, and to make all other required payments under such amendment, and (iii) the Issuer shall have otherwise complied with the provisions of the Indenture with respect to the issuance of such Additional Bonds. Such amendment will provide that any such Improvements shall become a part of the Project and shall be included under this Agreement to the same extent as if originally included hereunder. (c) The Issuer's failure to issue Additional Bonds, whether or not such failure is the result of the Issuer's breach of its obligations under this Section, will not release the Company from the obligation to pay the Loan Installments or from any of the Company's other obligations under this Agreement. SECTION 4.3. Disbursements from the Construction Fund. The Trustee will use the moneys in the Construction Fund for the following purposes in connection with the acquisition, construction and installation of the Project (but, subject to the provisions of Section 4.9 hereof, only in accordance with the Act and for no other purpose): (a) Payment to the Company of such amounts, if any, as shall be necessary to reimburse the Company in full for all legally permissible advances and payments made or incurred by the Company at any time after March 10, 1982, in connection with the acquisition, construction and installation of the Project, including without limitation, advances and payments made by the Company in connection with the preparation of Plans and Specifications for the Project (including any preliminary study or planning of the Project or any aspect thereof), and all other advances or payments made in connection with the acquisition, construction and installation of the Project; provided that each such payment shall be made only upon receipt by the Trustee of a statement therefor approved in 12 19 writing by the Authorized Company Representative and the Project Manager. (b) Payment of the initial or acceptance fee of the Trustee, legal, accounting and financial advisory fees and expenses, title insurance premium, underwriting fees, filing fees and rating agencies' fees and printing and engraving costs incurred in connection with the authorization, validation, sale and issuance of the Bonds, the execution and filing of the Indenture, this Agreement, the Note, the Mortgage and all other documents in connection therewith, and payment of all fees, costs and expenses for the preparation of this Agreement, the Indenture, the Note, the Mortgage, the Bonds and all other documents in connection therewith; provided, that each such payment shall be made only upon receipt by the Trustee of a statement therefor approved in writing by the Authorized Company Representative. (c) Payment for labor, services, materials and supplies used or furnished for on or off-site improvements and in the acquisition, construction and installation of the Project, all as provided in the Plans and Specifications therefor, payment for the cost of the acquisition, construction and installation of utility services, drainage, paving or other facilities, and all real and personal property included in the Project and payment for the miscellaneous expenses incidental to any of the foregoing items which relate to the Project and are required to be deposited with the Trustee under any of the provisions of the Indenture, including the premium on any surety bond; provided, that each such payment shall be made only upon a written order by the Project Manager, accompanied by a contractor's estimate or bill in the amount specified in said order approved in writing by the Project Manager. (d) Payment of the fees, if any, for legal, architectural, engineering and supervisory services with respect to the Project; provided, that each such payment shall be made only upon a written order of the Project Manager, accompanied by a bill in the amount specified in said order approved in writing by the Project Manager; provided, however, that the fees of the Project Manager shall be approved by the Company. 13 20 (e) Payment to the Trustee, as such payments become due, of the fees and expenses of the Trustee, Bond Registrar and Paying Agent, if Trustee is serving as same, properly incurred under the Indenture that may become due until the Completion Date. (f) To the extent not paid by a contractor with respect to any part of the Project, payment of the premiums on all insurance required to be taken out and maintained until the Completion Date under this Agreement, or reimbursement thereof if paid by the Company under Article VI hereof. (g) Payment of expenses, including legal and expert witness fees, incurred with approval of the Company in seeking to enforce any remedy against any contractor or subcontractor in respect of any default under a contract relating to the Project. (h) Payment of any other costs and expenses relating to the acquisition and construction of the Project or the authorization, issuance and sale of the Bonds that may be approved in writing by the Authorized Company Representative and the Project Manager. (i) Payment of interest accruing on the 1982 Bonds from the date of issuance thereof through _________ 198_, or the Completion Date, whichever shall first occur, which amounts shall be deposited by the Trustee into the Interest Account in the Debt Service Fund, on each applicable interest payment date. (j) The moneys remaining in the Construction Fund after the Completion Date and after payment or provision for payment of all other items provided for in the preceding subsections (a) through (i), inclusive, of this Section, and after the Trustee with the approval of the' Authorized Company Representative has retained amounts for payment of items included in the cost of the Project but not then due and payable, shall be segregated by Trustee and used by Trustee: (i) to deposit such funds in the Redemption Account in the Debt Service Fund to be used to redeem the 1982 Bonds at the earliest redemption date permitted by the Indenture on which a premium or penalty for redemption is not required; or (ii) for any other purpose provided 14 21 that the Trustee is furnished with an opinion of nationally-recognized municipal bond counsel to the effect that such use is lawful under the Act and will not adversely affect the exclusion from federal income taxes of interest on any of the Bonds. Until used to redeem the 1982 Bonds as provided in subsection (i) above, or until use under subsection (ii) above is approved, such segregated amount may be invested as permitted by this Agreement and the Indenture but may not be invested (without an opinion of nationally-recognized municipal bond counsel to the effect that such investment will not adversely affect the exclusion from federal income taxes of interest on any of the Bonds) to produce a Yield on such amount (computed from the Completion Date and taking into account any investment of such amount from the Completion Date) greater than the Yield on the 1982 Bonds, all in accordance with Sections 103(b) and (c) of the Code. The Company and the Issuer agree to cooperate with the Trustee and take all required action necessary to redeem the 1982 Bonds or to accomplish any other purpose contemplated by this Section. Before any of the payments referred to in the preceding subsections (a), (c), (d) and (h) of this Section may be made, the Project Manager shall certify with respect to each such payment, and before any of the payments specified in the preceding subsections (b), (e), (f), (g), (h), and (i) may be made, the Authorized Company Representative shall certify with respect to each such payment that: (i) none of the items for which the payment is proposed to be made has formed the basis for any payment theretofore made from the Construction Fund, (ii) the expenditure of such disbursements, when added to all other disbursements under previous requisitions, will result in at least ninety percent (90%) of the total of such disbursements, other than disbursements for reasonable issuance expenses, having been used for payment of amounts paid or incurred after March 10, 1982, for land or property of a character subject to allowance for depreciation under Section 167 of the Code and will be or may be charged to the capital account of the Project for federal income tax purposes, (iii) each item for which the payment is proposed to be made is or was appropriate in connection with the acquisition, construction and installation of the Project; and (iv) the Company is not in default of any requirements, conditions, or covenants of this Agreement. 15 22 SECTION 4.4. Obligation of the Company to Cooperate In Furnishing Documents to Trustee. The Company agrees to cooperate in furnishing to the Trustee the documents referred to in Section 4.3 hereof that are required to effect payments out of the Construction Fund. Such obligation of the Company is subject to any provisions of the Indenture requiring additional documentation with respect to payment. SECTION 4.5. Establishment of Completion Date. The Completion Date shall be evidenced to the Trustee by a certificate signed by the Project Manager stating the cost of the Project and that, except for amounts retained by the Trustee for the cost of the Project not then due and payable as provided in Section 4.3(j) of this Article, (i) the acquisition, construction and installation of the Project has been completed substantially in accordance with the Plans and Specifications therefor and all labor, services, materials and supplies used in such construction have been paid for, and (ii) all other facilities necessary in connection with the Project have been acquired, constructed and installed in accordance with the Plans and Specifications therefor and all costs and expenses incurred in connection therewith have been paid. Notwithstanding the foregoing, such certificate shall state that it is given without prejudice to any rights against third parties which exist at the date of such certificate or which may subsequently come into being. The Company estimates that the Completion Date will be on or before July 1, 1983. SECTION 4.6. The Company Required to Pay Cost of the Project in Event Construction Fund Insufficient. If the moneys in the Construction Fund available for the payment of the cost of the Project (including the proceeds of any Additional Bonds issued for the purpose of paying the cost of completing the Project and Improvements pursuant to Section 3.08 of the Indenture) should not be sufficient to pay the cost of the Project, the Company agrees to complete the Project and to pay all that portion of the cost of the Project as may be in excess of the moneys available therefor in the Construction Fund. The Issuer does not make any warranty, either express or implied, that the moneys which will be paid into the Construction Fund and which, under the provisions of this Agreement, will be available for payment of the cost of the Project will be sufficient to pay all the costs which will be incurred in that connection. The Company agrees that if, after exhaustion of the moneys in the Construction Fund, the Company should pay any portion of 16 23 the said cost of the Project pursuant to the provisions of this Section, the Company shall not be entitled to any reimbursement therefor from the Issuer or from the Trustee or from the holders of any of the Bonds, nor shall the Company be entitled to any abatement or diminution of the Loan Installments payable under Section 5.2 hereof. SECTION 4.7. Project Manager. The Authorized Company Representative is hereby designated as the Project Manager for the purpose of taking all actions and making all certificates required to be taken and made by the Project Manager under the provisions of this Agreement; and an alternate Project Manager to take any such action or make any such certificate if the same is not taken nor made by the Project Manager shall be hereafter designated by the Company and notice of the identity of such alternate Project Manager shall be given to the Issuer and the Trustee. In the event either of said persons should be removed by the Company or should become unavailable or unable to take any action or make any certificate provided for in this Agreement, another Project Manager or alternate Project Manager shall upon notice to the Trustee thereupon be appointed by the Company. If the Company fails to make such designation within fifteen (15) days following the date when the then incumbent becomes unavailable or unable to take any of said actions, the Trustee may then appoint as a successor any engineer licensed under the laws of the State of Florida. SECTION 4.8. Pursuit of Remedies Against Contractors and Subcontractors and Their Sureties. In the event of material default of any contractor or subcontractor under any contract made by it in connection with the Project, the Company will promptly proceed, either separately or in conjunction with others, to exhaust its remedies against the contractor or subcontractor so in default and against each surety for the performance of such contract. The Company agrees forthwith to take such actions as may be necessary or required to protect the interests of all parties with respect to the Project unless directed to the contrary by the Trustee. If for any reason the Company does not act promptly with respect to any such remedies, the Trustee may take such actions as it shall deem necessary or advisable with respect to such remedies. The Company agrees to advise the Issuer and the Trustee of the steps it intends to take in connection with any such default. The Company shall, in its own name or in the name of the Issuer or the Trustee, if required, prosecute or defend any action or proceeding or take any other action involving any such con- 17 24 tractor, subcontractor or surety which shall be reasonably necessary, and in such event the Issuer and the Trustee hereby agree to cooperate fully with the Company in any such action or proceeding. Any amounts recovered by way of damages, refunds, adjustments or otherwise in connection with the foregoing that are needed to pay a portion of the cost of the Project shall be paid into the Construction Fund and, if not so needed, shall be retained by or paid to the Company as reimbursement for amounts expended for the construction of the Project by the Company. SECTION 4.9. Investment of Moneys in the Construction Fund and the Debt Service Fund. Any moneys held in the Construction Fund or the Debt Service Fund shall, upon oral instructions of the Authorized Company Representative to be confirmed thereafter in writing, or if no such instructions are given in the discretion of the Trustee, be invested or reinvested by the Trustee in Investment Obligations as defined in the Indenture and otherwise as therein permitted; provided, however, that after the Completion Date or the date three years after the issuance of the 1982 Bonds, whichever shall first occur, the Yield on the investment of moneys in the Construction Fund shall not exceed the Yield on the 1982 Bonds, or such higher Yield as may be permitted under Section 103(c) of the Code and the regulations thereunder for the 1982 Bonds not to be "arbitrage bonds". ARTICLE V Effective Date of This Agreement; Duration of Agreement Term; Repayment Provisions SECTION 5.1. Effective Date of this Agreement; Duration of Agreement Term. This Agreement shall become effective upon its delivery, and, subject to the provisions of this Agreement, shall expire on such date that all of the Bonds have been fully paid and retired (or provision for such payment shall have been made as provided in the Indenture), and all payments required to be made by the Company under Sections 5.2, 7.1, 9.5 and 9.7 hereof have been paid in full. SECTION 5.2. Loan Installments and Other Amounts Payable. The Company agrees to pay the Loan Installments 18 25 required by subsections (a), (b) and (c) of this Section and by the terms of the Note as repayment of the Loan (including interest thereon). (a) Commencing prior to the first interest payment date on the Bonds, and continuing until the principal of and interest on the Bonds shall have been fully paid or provision for the payment thereof shall have been made in accordance with the Indenture, the Company shall pay an amount equal to the sum of (i) the interest becoming due on the Bonds in accordance with their terms on the next interest payment date for which moneys have not been deposited from the Bond proceeds or investment earnings as provided by Section 4.2(a)(i) or Section 4.3(i) hereof, (ii) the principal, if any, becoming due on the Bonds in accordance with their terms on the next interest payment date, and (iii) the amounts required to be paid into the Redemption Account in the Debt Service Fund, if any, for the mandatory redemption of the Bonds in accordance with their terms. The payments mentioned in (i), (ii) and (iii) above shall be made or shall be on deposit in immediately available funds not later than the business day coinciding with each such payment date. If on any interest payment date or redemption date the balance in the Debt Service Fund is less than the sum then required to be paid therefrom pursuant to the provisions of the Indenture and the Bonds, the Company will forthwith pay any such deficiency to the Trustee for deposit in the Debt Service Fund. If at any time the amount held by the Trustee in the Debt Service Fund shall be sufficient to pay at the times required the principal of and interest on all of the Bonds then remaining unpaid together with any amounts then or to become payable under subsections (b) and (c) of this Section, the Company shall not be obligated to pay any further Loan Installments. (b) The Company agrees to pay to the Trustee (i) the reasonable fees and charges of the Trustee for all services of the Trustee and all expenses (including reasonable counsel and engineering fees) incurred under or arising directly or indirectly from services rendered pursuant to the Indenture, as and when the same become due and (ii) the reasonable fees and charges of the Trustee, as Bond 19 26 Registrar under the Indenture, and of any other bond registrars and paying agents of the Bonds as and when the same become due. (c) The Company agrees to pay to the Issuer at closing an amount equal to the reasonable costs and expenses of the Issuer at closing incurred in connection with the issuance of the Bonds, including the reasonable fees of its counsel, and fees and expenses incurred in the validation of the Bonds, and in the processing of the Company's application for financing. Thereafter, the Company shall pay to the Issuer, within 30 days of receipt of a written request for payment, the reasonable costs and expenses of Issuer incurred in administering the bond issue, including, but not limited to, the reasonable fees and expenses of Issuer's legal counsel. (d) The Company agrees to pay to the Original Purchaser at closing a transaction fee equal to one percent of the principal amount of the Bonds for the Original Purchaser's expenses incurred in connection with the issuance of the Bonds. SECTION 5.3. Payment of Loan Installments. That portion of the Loan Installments provided for in Section 5.2(a) hereof shall be paid directly to the Trustee in immediately available funds of the Trustee's locality for the account of the Issuer and shall be deposited in the Debt Service Fund. That portion of the Loan Installments to be paid to the Trustee under Section 5.2(b) hereof shall be paid directly to the Trustee for its own use or for disbursement to the Bond Registrar as provided in the Indenture. In the event such payments required by the Note or Section 5.2 hereof shall not be paid when due, the amount so in default shall bear interest from the date such payment became due until payment thereof at the Prime Rate plus two percent per annum or the maximum lawful rate, whichever shall be less. SECTION 5.4. Obligations Unconditional. Until such time as the principal of and interest on the Bonds and the other payments required hereunder shall have been fully paid or provision for the payment thereof shall have been made in accordance with the Indenture, the Company (i) will not suspend or discontinue any Loan Installments, (ii) will perform and observe in all respects all of its other 20 27 agreements contained in this Agreement, and (iii) will not terminate this Agreement prior to the expiration of the Agreement Term for any cause including, without limiting the generality of the foregoing: (a) any delay or failure of the Project to be completed, operating or operable, or any defect in the title, quality, condition, design, operation or fitness for use of, or any damage to, or loss of, or loss of use of, or destruction or theft of, all or any part of the Project from any cause whatsoever; (b) any acts or circumstances that may constitute failure of consideration; (c) commercial frustration of purpose; (d) any abatement, suspension, deferment, reduction, setoff, defense, counterclaim or recoupment whatsoever, or any right to any thereof, that the Company may now or hereafter have against the Issuer or holder of the Bonds; (e) any insolvency, composition, bankruptcy, reorganization, arrangement, liquidation or similar proceedings relating to the Issuer or the Company; (f) any change in the tax or other laws of the United States of America or of the State of Florida or any political subdivision of either thereof or any failure of the Issuer to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with this Agreement or the Note; (g) any interruption or prohibition of the use or possession by the Company of, or any ouster or dispossession by paramount title or otherwise of the Company from, all or any part of the Project, or any interference with such use or possession by any governmental agency or authority or other person or otherwise; (h) the invalidity or unenforceability or disaffirmance, in whole or in part, of this Agreement or the Note or any failure, omission, delay or inability of the Issuer to perform any of its obligations contained in this Agreement or the Note; 21 28 (i) any amendment, extension or other change of, or any assignment or encumbrance of any rights or obligations under, this Agreement or the Note, or any waiver or other action or inaction, or any exercise or non-exercise of any right or remedy, under or in respect of this Agreement or the Note; (j) any sale, release, substitution, exchange or other action or inaction with respect to the Mortgage or any security relating to this Agreement or the Note; or (k) any other circumstance, happening or event whatsoever, whether foreseeable or unforeseeable and whether similar or dissimilar to the foregoing, it being the intention of the parties hereto that all amounts payable by the Company in respect of this Agreement or the Note shall continue to be payable in all events in the manner and at the time herein provided. The Company hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which may at any time hereafter be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender any of its obligations under this Agreement or the Note and agrees that if, for any reason whatsoever, this Agreement or the Note shall be terminated in whole or in part by operation of law or otherwise, the Company will nonetheless promptly pay to the Trustee amounts equal to all such amounts which shall become due and payable in respect of this Agreement and the Note, to the same extent as if this Agreement and the Note had not been terminated in whole or in part. Nothing contained in this Section shall be construed to release the Issuer from the performance of any of the agreements on its part herein contained; and in the event the Issuer should fail to perform any such agreement on its part, the Company may institute such action against the Issuer as the Company may deem necessary to compel performance thereof (subject, however, to the limitation as to source of revenues for damages noted in the second paragraph of this Agreement) so long as such action shall not diminish the amounts required to be paid by the Company pursuant to the Note and Section 5.2 hereof. The Company may, however, at its own cost and expense and in its own name or in the name of the Issuer, prosecute or defend any action or proceeding or take any other action involving third persons which the Company deems reasonably necessary in order to secure or protect the Company's right of possession, occupancy and use of the Project hereunder, and in such event 22 29 the Issuer hereby agrees to cooperate fully with the Company and to take all action necessary to effect the substitution of the Company for the Issuer in any action or proceeding if the Company shall so request. ARTICLE VI Maintenance, Modifications, Operation, Insurance and Other Covenants of the Company SECTION 6.1. Maintenance of Project. The Issuer and the Company agree that the Company will (i) maintain, repair and operate the Project; and (ii) pay, as the same respectively become due, all taxes and governmental charges of any kind whatsoever that may at any time be lawfully assessed or levied against the Company or the Issuer with respect to the Project, the Project Site or any portion thereof or with respect to the original issuance of the Bonds, including, without limiting the generality of the foregoing, any taxes levied against the Company or the Issuer upon or with respect to the income or profits of the Issuer from the Project or any charge on the Loan Installments prior to or on a parity with the charge under the Indenture thereon and the pledge or assignment thereof to be created and made in the Indenture, and including all ad valorem taxes lawfully assessed upon the Project, all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Project, all assessments and charges lawfully made by any governmental body against the Company or the Issuer for or on account of the Project and in addition any excise tax levied against the Company or the Issuer on the Loan Installments; provided, however, that nothing in this subsection (ii) shall require the payment of any such tax or charge or require the Company to make provision for the payment thereof, so long as the validity thereof shall be contested in good faith by the Company by appropriate legal proceedings; further provided, that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Company shall be obligated to pay only such installments as are required to be paid during the Agreement Term. SECTION 6.2. Conditions to Changes in the Project. The right of the Company to make any changes in the Project in the manner hereinafter provided in this Article VI is ex- 23 30 pressly subject to the conditions set forth in Paragraph 6 of the Mortgage. SECTION 6.3. After-Acquired Property Not Part of the Project. All buildings, structures, and improvements, acquired, constructed, or installed with the proceeds of the Bonds, all substitutions and replacements of or for such property, and all fixtures now or hereafter installed in or attached to the Project or located above, upon or under the Project Site so as to preclude the removal without material injury to the Project or the Project Site, shall be deemed part of the Project and subject to the mortgage and security interest granted by Section 8.6 hereof. Except as provided in paragraph 9 of the Mortgage relating to substitutions and replacements of components of the Project, all other property of every kind or nature, whether now owned or after-acquired, shall be constructed, placed or installed in or on the Project or the Project Site shall not be deemed part of the Project or subject to the security interest granted hereunder, shall remain the property of the Company, and may be altered, removed, replaced or otherwise used by the Company at any time so long as the Company is not in default hereunder and the conditions of paragraph 6 of the Mortgage are complied with. SECTION 6.4. Removal or Disposition. The Company from time to time, at its own cost and expense, may demolish, remove or dispose of any structure, fixtures or other improvements now or hereafter existing as part of the Project only in accordance with the terms of Paragraphs 6, 8 and 9 of the Mortgage. SECTION 6.5. No Abatement of Loan Installments; Damages, The demolition, substitution or removal of any property shall not result in any abatement or diminution of Loan Installments payable under the Note or this Agreement. SECTION 6.6. Covenant Against Unauthorized Removal. Except as otherwise provided in Article VI hereof, the Company shall not remove any of the Project or any part thereof from the Project Site. SECTION 6.7. Liens and Encumbrances. The Company represents and warrants that, as of the date of execution of this Agreement, there exists no lien, charge or encumbrance, 24 31 other than Permitted Encumbrances, upon the Project or the Project Site, prior to the mortgage and security interest of the Issuer and the Trustee therein, as herein contemplated. Except as otherwise permitted by the provisions of this Agreement, the Company will not create or suffer to be created any lien, encumbrance or charge upon the Project Site other than Permitted Encumbrances, and subject to the provisions of Section 6.8 hereof relating to permitted contests, and the Company will satisfy or cause to be discharged, or will make adequate provision to satisfy and discharge, within sixty (60) days after the same shall occur, all lawful claims and demands (excepting such as may arise from or in connection with the construction of the Project and as are payable from the moneys on deposit in the Construction Fund) for labor, materials, supplies or other items which, if not satisfied, might by law become a lien upon the project as defined in the Mortgage or the Project Site. If any such lien shall be filed or asserted against the Project as defined in the mortgage or the Project Site by reason of work, labor, services or materials supplied or claimed to have been supplied the Company shall, subject to the provisions of Section 6.8 hereof relating to permitted contests, within thirty (30) days after the Company receives notice of the filing thereof or the assertion thereof, cause the same to be discharged of record, or effectively prevent the enforcement or foreclosure thereof against the Company by contest, payment, deposit, bond, order of court or otherwise. Nothing contained in this Section 6.7 shall be construed as prohibiting the Company from purchasing additional items of machinery, equipment or other personal property that do not constitute part of the Project under an installment purchase and security agreement, purchase money mortgage agreement, lease-purchase agreement or similar contractual obligation in which the seller retains a security interest. SECTION 6.8. Permitted Contests. The Company shall not be required to pay any tax, charge, assessment or imposition referred to in Section 6.1 hereof, nor to remove any lien, charge or encumbrance required to be removed under Section 6.7 hereof, so long as the Company shall contest or there shall be contested on the Company's behalf, in good faith and at the Company's own cost and expense, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall operate during the pendency thereof to prevent the collection of or other realization upon the tax, assessment, levy, fee, rent, charge, lien or encumbrance so contested, and the sale, forfeiture, or loss of the Project or the Project Site or any part thereof or 25 32 interest therein, to satisfy the same; provided, however, that no such contest shall subject the Issuer or the Trustee to the risk of any liability. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of the Company to settle any such contest), and in any event the Company will save the Issuer and the Trustee harmless against all losses, judgments, decrees and costs (including attorneys' fees and expenses in connection therewith) and will, promptly after the final determination of such contest or settlement thereof, pay and discharge the amounts which shall be levied, assessed or imposed or determined to be payable therein, together with all penalties, fines, interest, costs and expenses thereon or in connection therewith. The Company shall give the Issuer and Trustee prompt written notice of any such contest. If the Trustee shall notify the Company that, in the opinion of counsel to the Trustee, by nonpayment of any of the foregoing items, the Project, the Project Site or any substantial part thereof, will be subject to imminent loss or forfeiture or the obligations of the Company under this Agreement shall be materially impaired, then the Company shall promptly pay all such unpaid items and cause them to be satisfied and discharged, or shall promptly provide a bond sufficient to pay all such unpaid items and cause them to be satisfied and discharged from such bond upon conclusion of any contest, challenge, or dispute as to such items. SECTION 6.9. Notice of Event of Default. Immediately upon becoming aware of the existence of any condition or event which constitutes or with the passage of time or the giving of notice, or both, would constitute an event of default as defined in Section 9.1 of this Agreement, the Company shall cause to be furnished to the Trustee and to each Bondholder a written notice specifying the nature and period of existence thereof and what action the Company is taking and proposes to take with respect thereto. SECTION 6.10. Requested Information. The Company shall cause to be furnished to the Trustee and to each Bondholder, with reasonable promptness, such other data and information as the Trustee or such Bondholders may reasonably request. SECTION 6.11. Inspections, Reports and Financial Statements. The Trustee, the Issuer and any holders of twenty-five percent (25%) or more in aggregate principal 26 33 amount of Bonds outstanding, through its or their officers, employees, consultants, attorneys and other authorized representatives, shall have free and unobstructed access at all reasonable times to the Project and records of the Company with respect thereto for purposes of inspection. The Company will at any and all times, upon the written request of the Trustee, the Issuer or the holders of twenty-five percent (25%) or more in aggregate principal amount of Bonds outstanding, permit the Trustee, the Issuer or such Bondholders, by its or their officers, employees, consultants, attorneys or other authorized representatives, to inspect the books of account, records, reports and other papers of the Company with respect to the Project, and to take copies and extracts therefrom, and will afford a reasonable opportunity to such persons to make any such inspection and to discuss the affairs, finances and accounts of the Company with respect to the Project with its employees and independent accountants, and the Company will furnish to the Trustee any and all such other information as the Trustee may reasonably request, with respect to the performance by the Company of its covenants under this Agreement. The Company will supply to the Trustee, within sixty (60) days after receipt by the Company, a copy of all reports of inspections and accompanying recommendations of all regulatory, licensing and permitting agencies which inspect the Project. The Issuer, the Trustee and the Bondholders recognize that certain of the books, papers and records on the premises of the Company or supplied to the Trustee may contain confidential and proprietary information, and agree to keep all such confidential and proprietary information obtained hereunder in strictest confidence. The Company covenants that it will keep proper books of record and account in which full, true and correct entries shall be made of all dealings or transactions of or in relation to the Project, in accordance with generally accepted accounting principles consistently applied, and will furnish to the Trustee and to any requesting holder of twenty-five percent (25%) or more in aggregate principal amount of Bonds outstanding: (a) Annual Statements -- as soon as practicable after the end of each fiscal year, and in any event within 120 days thereafter, duplicate copies of: (1) a consolidated balance sheet of the Guarantor, and the Company, and (2) consolidated statements of revenue and expenses and changes in 27 34 financial position of the Guarantor, and the Company for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of independent accountants of recognized standing selected by the Company, which opinion shall state that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur) and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. (b) Quarterly Unaudited Statements -- within sixty (60) days after the end of each fiscal quarter, except the last fiscal quarter of each year, a consolidated balance sheet and statement of income of the Guarantor, and the Company as of the end of and for such period in reasonable detail, setting forth figures for that period and for the corresponding period in the preceding fiscal year, certified, by the Company or an accountant employed by it for that purpose, to have been prepared in accordance with generally accepted accounting principles, consistently applied; (c) Other Reports -- promptly upon receipt thereof and in any event within thirty (30) days thereafter any communication from any governmental authority, commission or agency having power to license or regulate the business and activities carried on with respect to the Project regarding any termination or proposed termination of, or any material adverse change or proposed change in, any license, permit or authority under which the Project is owned, used or operated; and (d) Requested Information -- with reasonable promptness, such other data and information as the Trustee or the requesting holder of twenty-five percent (25%) or more in aggregate principal amount of Bonds outstanding may reasonably request. 28 35 SECTION 6.12. Certificate of Compliance and No Default. So long as any Bonds remain outstanding, the Company shall furnish to the Trustee and to each Bondholder, as soon as practicable after the end of each calendar quarter, and in any event within one hundred twenty (120) days thereafter, a certificate of an executive officer of the Company certifying that: (a) during said period the Company was in compliance with the requirements of this Agreement and the documents contemplated hereby and the covenants of the Company contained herein and therein; and (b) the Company has reviewed the relevant terms of this Agreement and has made, or caused to be made under the Company's supervision, a review of the transactions and conditions with respect to the Project from the beginning of the accounting period covered by the statements being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes, or with the passage of time or giving of notice or both would constitute, an event of default as defined in Section 9.1 of this Agreement, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or proposes to take with respect thereto. SECTION 6.13. Insurance. The Company shall throughout the Agreement Term keep the Project continuously insured in accordance with the provisions of Paragraph 13 of the Mortgage. If the Company fails to do so, then the Trustee or the Issuer may obtain such insurance for the protection of the Trustee and the Issuer, and the Trustee and the Issuer shall be entitled to reimbursement for any expense thus incurred in accordance with the provisions of Section 9.7 hereof. SECTION 6.14. Insurance Proceeds; Condemnation Awards. If prior to the payment in full of the Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture) the Project, or any part or component thereof having a value in excess of $150,000, shall be damaged, lost or destroyed, by whatever cause, or if any public authority or entity, in the exercise 29 36 of its power of eminent domain, takes or damages the Project, or any part or component thereof having a value in excess of $150,000, all of the insurance proceeds (whether payable from the policies of insurance described in Section 6.13 hereof, Paragraph 13 of the Mortgage, or from other policies of insurance carried by the Company or third parties), and any award or compensation resulting from such taking or damage by condemnation, shall be paid to the Trustee and deposited by it in the Construction Fund established under the Indenture, and such amounts shall then be applied in accordance with Paragraph 14 of the Mortgage. SECTION 6.15. Approvals. Whenever under the provisions of this Agreement the approval of the Company is required or the Issuer or the Trustee is required to take some action at the request of the Company, such approval shall be given or such request shall be made by the Authorized Company Representative or the Project Manager unless otherwise specified in this Agreement and the Issuer or the Trustee shall be authorized to act on any such approval or request and the Company shall have no complaint or recourse against the Issuer or the Trustee as a result of any such action taken. SECTION 6.16. Covenants of Company and Issuer With Respect to Capital Expenditures. The Issuer is issuing the 1982 Bonds pursuant to an election made by it under Section 103(b)(6)(D) of the Code. It is the intention of the parties hereto that the interest on the 1982 Bonds be and remain free from federal income taxation and to that end the Issuer and the Company do hereby covenant with each other, with the Trustee and with each of the future holders of any 1982 Bonds, as follows: (a) The Company and the Issuer covenant and represent that there have never been issued any bonds with respect to "facilities" described in Section 103(b) (6) of the Code which are located in, are contiguous to or are integrated with any "facilities" located in, Hillsborough County, which bonds would be taken into account in determining the aggregate face amount of the 1982 Bonds as provided in Section 103(b)(6)(D)(ii) of the Code. (b) The Company further covenants and represents that the aggregate principal amount of 1982 Bonds being issued and capital expenditures heretofore made (other than those mentioned in Section 30 37 103(b)(6)(F) of the Code) with respect to "facilities" described in Section 103(b)(6)(E) of the Code which are located in, are contiguous to or are integrated with any "facilities" located in, Hillsborough County, have not and will not exceed $l0,000,000 (or any such larger amount as may be hereafter permitted by the Code without affecting the tax-exempt status of the interest on the 1982 Bonds) during the six-year period beginning three years before the date of issuance and delivery of the 1982 Bonds. (c) The Issuer and the Company further covenant and agree that during the three-year period following the date of the issuance and delivery of the 1982 Bonds, neither of them shall make or cause or permit to be made any capital expenditures (other than those mentioned in said Section 103(b)(6)(F) of the Code) with respect to "facilities" described in said Section 103(b)(6)(E) of the Code which are located in, are contiguous to or are integrated with any "facilities" located in, Hillsborough County, which would cause the interest on the 1982 Bonds to be subject to federal income taxation. (d) The Company further covenants and agrees that should the capital expenditures limitation set forth in said Section 103(b)(6)(D) and (E) be exceeded during the six-year period referred to therein, either through the fault of the Company or through circumstances beyond the Company's control, and there shall occur a Determination of Taxability as defined in Section 8.3(b) hereof, the Company shall promptly comply with the provisions of Section 8.3 hereof. (e) The Company further covenants and agrees that it will furnish to the Trustee a certificate of the Project Manager within ninety (90) days of the first three anniversary dates of the closing of the issuance and delivery of the 1982 Bonds stating that during the period beginning three years immediately prior to the date of the issuance and delivery of the 1982 Bonds and extending through the applicable date such certificate is to cover, capital expenditures (including as capital expenditures for this purpose the principal amount of the 1982 Bonds) in excess of $10,000,000 (or any such larger amount as may be hereafter permitted by law) 31 38 have not been paid or incurred with respect to "facilities" described in said Section 103(b)(6)(E) of the Code which are located in, are contiguous to or are integrated with any "facilities" located in, Hillsborough County, Florida. (f) The Company further covenants and agrees that, in connection with any lease, rental or other grant or use of part or all of the Project, it shall require a covenant that any lessee or user of a substantial portion of the Project such that such lessee or user will be a principal user of the Project shall also comply with the same covenants set forth in Section (a) through (e) and (g) hereof. (g) The Company further covenants that it shall take such further actions as are required of a principal user of property financed by an issue of obligations which are subject to the $10,000,000 limitation of Section 103(b)(6)(D) of the Code, which actions are set forth in Section 103(b) (6) of the Code and the regulations thereunder, whether said regulations are now or hereafter adopted, proposed or temporary, including Section 1. 103-10(b) of said regulations, including without limitation the following: (1) the Company shall attach to its income tax return for the current taxable year a copy of the statement of the Issuer electing to have the provisions of Section 103(b)(6)(D) of the Code apply to the 1982 Bonds; and (2) for each applicable taxable year which includes all or any portion of the three-year period following issuance and delivery of the 1982 Bonds, the Company shall file a supplemental statement listing by date and amount any capital expenditures paid or incurred subsequent to the date of issuance and delivery of the 1982 Bonds which are required to be taken into account by Section 103(b)(6)(D) of the Code. Each statement shall be filed with the respective Internal Revenue Service district director or director of the regional service center with whom the federal income tax 32 39 return of the Company and of any other principal user of the Project, as "principal user" is utilized in Section 103(b)(6)(D) of the Code, is required to be filed on the due date prescribed for filing such return (without regard to any extensions of time). A copy of each such statement shall also be filed at the same time with the Trustee. (h) The Issuer and the Company further covenant and agree to fully comply, during the term of this Agreement, with all effective rules, rulings or regulations promulgated by the Department of the Treasury or the Internal Revenue Service, with respect to bonds issued under Section 103(b)(6)(D) of the Code so as to maintain the tax-exempt status of the interest on the 1982 Bonds. SECTION 6.17. Covenant as to Use of Bond Proceeds; Payback Provision. The Company covenants and agrees that: (a) at all times ninety percent (90%) or more of the net proceeds received from the sale of the 1982 Bonds (after payment of the costs incurred in connection with the issuance thereof) actually disbursed from the Construction Fund, will be used for the acquisition, construction, reconstruction or improvement of land or property of a character subject to the allowance for depreciation under the Code, and will be expended for costs paid and incurred after March 10, 1982, which amounts are chargeable to the Project's capital account or would be chargeable either with a proper election by the Company (for example, under Section 266 of the Code) or but for a proper election by the Company to deduct such amounts; (b) the Company will not submit to the Trustee any requisition for a disbursement from the Construction Fund if the expenditure of such disbursement, when added to all other disbursements under previous requisitions, will result in less than ninety percent (90%) of the net proceeds received from the sale of the 1982 Bonds actually disbursed to that time being applied other than as required by subsection (a) above; and 33 40 (c) in the event a disbursement from the Construction Fund is made which results in the covenant in subsection (a) above being violated, the Company will promptly repay to the Trustee for deposit in the Construction Fund such amount as may be necessary for the Company to again be in compliance with subsection (a) above. SECTION 6.18. Covenant as to Recordation. The Company covenants that it will cause this Agreement and all supplements hereto or amendments hereof, the Indenture and all supplements thereto, the Mortgage and the Issuer's assignment of the Mortgage to the Trustee to be kept, and either recorded and filed, or notices thereof or financing statements relating thereto recorded and filed, in such manner and in such places as may be required by law in order to fully preserve and protect the security of the Bondholders and the rights of the Issuer and Trustee hereunder and under the Indenture. ARTICLE VII Special Covenants SECTION 7.1. Indemnification by the Company. The Company agrees to indemnify and hold harmless the Issuer and both the present and future members of the Issuer, the Issuer's agents, employees and attorneys individually and personally and the Trustee from any liability or loss resulting from the construction or operation of the Project, from any cause whatsoever pertaining to the Project or the use thereof, or from the issuance and sale of the Bonds, provided that the indemnity provided by this sentence shall be effective only to the extent of any loss that might be sustained in excess of the proceeds recovered by the Issuer or the Trustee from any insurance, if any, carried by the Company with respect to the loss sustained. SECTION 7.2. Compliance with All Laws. The Company will comply with all laws, ordinances, governmental rules and regulations pertaining to the ownership, use and operation of the Project and all activities associated therewith, and will not fail to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of the Project or the conduct of its 34 41 activities with respect thereto, which violation or failure to obtain might materially adversely affect the Project or the use and operation thereof. SECTION 7.3. Maintenance of Corporate Existence. The Company agrees that during the Agreement Term it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it; provided, however, that the Company may, without violating the agreements contained in this Section, consolidate with or merge into another corporation, or permit one or more other corporations to consolidate with or merge into it, or transfer to another corporation all or substantially all of its assets as an entirety if (a) the corporation surviving such merger or resulting from such consolidation or to which such transfer shall be made (such corporation being hereinafter called the "Surviving Corporation"), expressly accepts, assumes and agrees in writing to pay and perform all of the obligations of the Company and be bound by all of the agreements of the Company contained in this Agreement to the same extent as if the Surviving Corporation had originally executed this Agreement in place of the Company, and the Surviving Corporation, if not a corporation organized pursuant to the laws of the State of Florida, either files a consent to service of process with the Secretary of State of the State of Florida or other appropriate official of the State of Florida and with the Trustee, or qualifies to do business in the State of Florida, (b) the Surviving Corporation is not in default under any provision of this Agreement immediately following the consummation of such merger, consolidation or transfer (the "Transaction"), (c) the Company shall furnish to the Trustee an opinion of counsel nationally recognized on the subject of municipal bonds reasonably acceptable to the Trustee to the effect that as a result of such Transaction, the Bonds have not and will not become taxable for federal income tax purposes, and (d) in connection with any such consolidation, merger or transfer there shall be filed with the Issuer and the Trustee a letter or certificate by a firm of nationally known independent certified public accountants certifying that after the consummation of such consolidation, merger or transfer the corporation resulting from or surviving such consolidation or merger or the corporation to which such transfer is made will have a net worth after giving effect to such merger, consolidation or transfer at least equal to the net worth of the Company immediately prior to such consolidation, merger or transfer. 35 42 For purposes of this Section, the net worth of any corporation means, at any date, the tangible assets, as defined below, of such corporation which (after deducting depreciation, obsolescence, amortization, and any valuation or other reserves on account of upward revaluation of assets and without reduction for any unamortized debt discount or expense) would be shown, in accordance with generally accepted accounting principles, on its balance sheet, minus liabilities (other than capital stock and surplus but including all reserves for contingencies and other potential liabilities) which would be shown, in accordance with generally accepted accounting principles, on such balance sheet. In computing such net worth, the term "tangible assets" means total assets except: (i) that portion of deferred assets and prepaid expenses (other than prepaid insurance, prepaid payments and prepaid taxes) which do not mature or, in accordance with generally accepted accounting principles, are not amortizable within one year from the date of calculation, and (ii) trademarks, trade names, good will and other similar intangibles. SECTION 7.4. Nonassignability. The Company may not assign its rights under this Agreement without the express written consent of the holders of all of the outstanding Bonds, which consent and assignment will not relieve the Company of any obligation hereunder. SECTION 7.5. Payment of Loan Installments. The Company covenants that it will pay the Loan Installments as and when the same shall become due. SECTION 7.6. No Warranty of Condition or Suitability by the Issuer. The Issuer makes no warranty, either express or implied, as to the condition of the Project or that it will be suitable for the Company's purposes or needs. 36 43 ARTICLE VIII Obligation Continues; Redemption; Prepayment and Abatement; Mortgage and Security Interest SECTION 8.1. Redemption of Bonds. At the time the aggregate moneys in the Redemption Account in the Debt Service Fund are sufficient to redeem all Bonds or portions thereof, the Issuer has provided in the Indenture for the Trustee to forthwith take all steps that may be necessary under the applicable redemption provisions of the Indenture to effect redemption of all or such part of the outstanding Bonds as may then be subject to redemption. SECTION 8.2. Permissible Prepayment of Loan Installments. There is expressly reserved to the Company the right, and the Company is authorized and permitted, on any date, to prepay all or any part of the Loan Installments payable under Section 5.2 hereof, without premium or penalty, and the Issuer agrees that the Indenture shall require that the Trustee shall accept such prepayments when the same are tendered by the Company. If less than all of the Loan Installments are prepaid, such prepayments shall be applied in chronological order of the due dates of the Loan Installments. All portions of the Loan Installments so prepaid under Section 5.2(a) shall be deposited in the Redemption Account and shall be used for the redemption or purchase of outstanding Bonds in the manner and to the extent provided in the Indenture. SECTION 8.3. Mandatory Prepayment of Loan Installments. The Bonds shall be redeemed, in inverse order of maturity, from excess construction proceeds as provided in Section 4.02 and 7.04(c) of the Indenture, and, except as hereinafter provided, the Company shall prepay all of the Loan Installments and other amounts payable under the Note and Section 5.2 hereof, and the Issuer agrees that the Trustee may accept such prepayments of Loan Installments, when the same are tendered by the Company, upon the occurrence of any of the following events: (a) As a result of any legislative or administrative action (whether state or federal), or of any changes in the Constitution of the State of Florida or the Constitution of the United States of America, or of a final decree, judgment or order of 37 44 any court or administrative body (whether state or federal), this Agreement, the Note, the Indenture or the Bonds shall become void or unenforceable or impossible of performance in accordance with the intent and purposes of the Company and the Issuer expressed in this Agreement or as otherwise expressed in the Indenture; or (b) Final action shall have been taken by the Internal Revenue Service, the Department of the Treasury or any other governmental agency, authority or instrumentality, or an opinion of any court shall have been rendered, or other event shall have occurred, or other circumstances shall exist, any of which shall result in any part or all of the interest payable with respect to the Bonds not to be exempt from federal income taxes, other than those Bonds held by any person who, within the meaning of Section 103(b) (10) of the Internal Revenue Code of 1954, as amended (the "Code"), shall be deemed a "substantial user" of the Project or a "related person" as defined in the Code. As used in this Article VIII, the term "final action" shall mean either (i) action taken by an administrative agency of the federal government which cannot be appealed administratively or in a court of competent jurisdiction as to which the time for administrative appeal or court actions has expired; or (ii) action by any court of competent jurisdiction as to which the time to appeal has expired or as to which an appeal has been denied or dismissed without further right of appeal. Any such final action shall be referred to herein as a "Determination of Taxability"; or (c) If the Project or the Mortgaged Property described in the Mortgage, or any part thereof having a value in excess of $1,000,000, shall be damaged, lost or destroyed, or taken or damaged by any public authority in the exercise of its power of eminent domain and the Company does not elect to repair, rebuild, replace or restore such property within 120 days after the deposit of funds related thereto with the Trustee, all as provided in Section 14 of the Mortgage. Upon the occurrence of any condition described in (a), (b) or (c) above, except as hereinafter provided, all remaining Loan Installments shall immediately become due and payable in such manner as may be required by the Indenture, 38 45 and upon written notice to the Company by the Trustee. If as a consequence of the occurrence of an event described in Section 8.3(b) above, it shall be necessary for the owner of any Bond to include interest received on any prior interest payment date in its gross income for federal income tax purposes, then the Company shall be required to make payment of a Loan Installment in the amount required by Section 4.02 of the Indenture. Notwithstanding noncompliance with any covenant or agreement by the Company to the contrary, the Company may, at its election, rather than prepay the Loan Installments and other amounts payable under the Notes and Section 5.2 hereof (excluding the amounts required to be paid under the last sentence of the immediately preceding paragraph, which amounts shall be paid, in any event, by the Company), upon the occurrence of any Determination of Taxability, elect to increase the Loan Installments payable under Section 5.2 hereof in the manner provided in Section 4.03 of the Indenture by the amount necessary for the payment of the alternative interest rate as provided in the Indenture; provided, however, that if the Company makes such election, the Company shall be obligated either to register the Bonds under the Securities Act of 1933, as amended, or to obtain an opinion of counsel acceptable to the Trustee and the Issuer to the effect that such registration is not required. Notwithstanding the foregoing, if any legal or regulatory requirement applicable to any Bondholder shall prohibit said Bondholder from receiving the increased interest payments contemplated by this paragraph, Company, to the extent required by such legal or regulatory requirement, shall increase the Loan Installments by the amount necessary to redeem the Bonds held by such Bondholder. SECTION 8.4. References to Bonds Ineffective After Bonds Paid. Upon payment in full of the Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture) and all fees, charges and expenses of the Trustee and the Issuer, all references in this Agreement to the Bonds and the Trustee shall be ineffective and neither the Trustee nor the Bondholders shall thereafter have any rights hereunder, excepting those that shall have theretofore vested. SECTION 8.5. Vesting of Interest in Issuer. The Company and the Issuer agree and covenant that this Agreement, when executed and delivered, will create in and vest in the Issuer such interests, estates, rights and title 39 46 in the Project to enable the Issuer to issue the Bonds, secure the repayment of the Bonds, cause the Project to be constructed by the Company, and loan funds for the construction of the Project to the Company with repayment therefor to be made by the Company in installments, in the manner provided by, and in full compliance with, the Act. SECTION 8.6. Mortgage and Security Interest. In order to secure its performance under this Agreement and the Note, including without limitation its obligation to pay the Loan Installments, and its obligations under Sections 9.5 and 9.7 hereof, the Company hereby mortgages, grants, conveys and assigns to the Issuer or directly to the Trustee for and on behalf of the Issuer and grants the Issuer and/or the Trustee a security interest for the benefit of the Trustee and the Bondholders, equally and ratably without preference or priority as to lien or source of payment of any one Bond over any other Bond, in: (a) The Project as defined in the mortgage, and each and every component thereof; (b) The Company's fee simple interest in the Project Site and all fixtures located thereon; (c) All other property or collateral held by or assigned or pledged to the Issuer or the Trustee under this Agreement, the Indenture or the Mortgage; and (d) All proceeds (including insurance proceeds) and products of any of the foregoing. To effectuate the foregoing and simultaneously with or prior to the delivery of the Bonds, the Company will execute and deliver to the Issuer or directly to the Trustee for and on behalf of the Issuer and cause to be recorded, where appropriate, (i) appropriate UCC financing statements pertaining to the collateral described in subparagraphs (a), (b), (c) and (d) above, (ii) the Mortgage and (iii) an assignment of the Note. The Company represents and warrants that all of the collateral described above is, on the date hereof, free and clear of all liens, charges, encumbrances and restrictions, except Permitted Encumbrances, and covenants to preserve and protect the Issuer's and Trustee's rights therein against all claims, liens, charges, encumbrances and restrictions, 40 47 except Permitted Encumbrances, at all times during the Agreement Term. The Company hereby agrees to pledge and assign to the Trustee, or to authorize the Issuer to pledge and assign to the Trustee, for the benefit of the Bondholders, all of its rights and interests in and to the collateral described above and the documents contemplated hereby. ARTICLE IX Events of Default and Remedies SECTION 9.1. Events of Default Defined. The following shall be "events of default" under this Agreement, and the terms "event of default" or "default" shall mean, whenever they are used in this Agreement, any one or more of the following events: (a) Failure by the Company to pay or cause to be paid when due or within ten (10) days thereafter that portion of the Loan Installments required to be paid under Section 5.2(a) hereof and under the Note. (b) Failure by the Company to pay or cause to be paid when due or within ten (10) days thereafter that portion of the Loan Installments required to be paid under Sections 5.2(b) and 5.2(c) and its obligations under Sections 9.5 or 9.7 hereof. (c) Failure by the Company to observe and perform in any material respect any covenant, condition or agreement in this Agreement, the Mortgage or any other document contemplated hereby on the Company's part to be observed or performed or the conditions and obligations which are imposed upon the Company as contemplated by the Indenture or any other certificate or document contemplated hereby in connection with the issuance or sale of the Bonds on the Company's part to be observed or performed, other than as referred to in subsections (a) and (b) of this Section, and such failure shall continue unremedied for a period of thirty (30) days after written notice, specifying such failure and requesting that it be remedied, given to the Company by the Issuer or the Trustee, unless the 41 48 Issuer and the Trustee (with any required consent of the Bondholders under the provisions of the Indenture) shall agree in writing to an extension of such time prior to its expiration. (d) The filing by the Company or the Guarantor of a voluntary petition in bankruptcy, or failure by the Company promptly to institute judicial proceedings to lift any execution, garnishment or attachment of such consequence as will materially impair the Company' s obligations hereunder, or the adjudication of the Company as a bankrupt, or assignment by the Company for the benefit of its creditors, or the entry by the Company into an agreement of composition with its creditors. (e) The occurrence of an event of default under the Indenture, the Mortgage or the Unconditional Guaranty dated the date hereof between the Guarantor and the Trustee. (f) The Company or the Guarantor shall fail to make any payment on indebtedness for borrowed money (exclusive of the $6,500,000 principal amount of 10-5/8% senior notes due 1993 of the Guarantor) in excess of $150,000; or an event of default shall exist under any mortgage, indenture of trust or other agreement evidencing the indebtedness of the Company or the Guarantor for borrowed money (exclusive of the $6,500,000 principal amount of 10-5/8% senior notes due 1993 of the Guarantor) in excess of $150,000, the effect of which is to cause, or to permit any holder of such indebtedness to cause, such indebtedness to become due prior to its stated maturity; and, in either case, such conditions shall continue unremedied for a period of sixty (60) days after the Company shall become aware of such conditions. (g) The entry of a final judgment or judgments for the payment of money aggregating in excess of $150,000 against the Company or the Guarantor, any one of which remains outstanding for more than sixty (60) days from the date of its entry and has not been discharged in full or stayed. (h) Any material representation or warranty by the Company in this Agreement, as contemplated by the Indenture, or as provided in any other certificate, document or agreement given by the 42 49 Company in connection with the issuance or sale of the Bonds shall have been untrue in any material respect at the time such representation or warranty was given or made, the result of which would have a material adverse effect upon the ability of the Company to perform the Company's obligations under such documents. (i) In the good faith opinion of the Trustee, any material adverse change in the financial status of the Company or the Guarantor. SECTION 9.2. Remedies on Default. In the event any of the Bonds shall at the time be outstanding and unpaid and provision for the payment thereof shall not have been made in accordance with the provisions of the Indenture, whenever any event of default referred to in Section 9.1 hereof shall have happened and be subsisting, the Trustee, or the Issuer if the Trustee shall have resigned and its successor shall not then have been appointed, may take any one or more of the following remedial steps: (a) Declare all Loan Installments payable under Section 5.2 hereof and all amounts payable under the Note for the remainder of the Agreement Term to be immediately due and payable, whereupon the same shall become immediately due and payable. (b) Foreclose on the Mortgage and other collateral described in Section 8.6 above, holding the Company liable for the difference between the amounts received and the Loan Installments and other amounts payable by the Company hereunder. (c) Inspect, examine and make copies of the books and records and any and all accounts and data of the Company relating to the use and operation of the Project. (d) Take all other actions and pursue all other remedies available under any other contract or agreement or otherwise by statute, at law or in equity, whether or not inconsistent with the foregoing, that may appear necessary or appropriate to collect the sums then due and thereafter to become due from the Company by reason of this Agreement, or to enforce specific performance and observance of any obligation, agreement or covenant of the Company under this Agreement. 43 50 Any amounts collected pursuant to action taken under this Section, after subtracting all costs and expenses and other deductions herein contemplated, shall be paid into the Debt Service Fund and applied in accordance with the provisions of the Indenture. SECTION 9.3. Authorization to Foreclose. In order to further and more fully secure the payment of the principal of and interest on the Bonds upon the happening of any event of default as herein provided, the Issuer and the Company hereby authorize and permit the Trustee for and on behalf and in the name of the Issuer to foreclose the Company's and the Issuer's interest in the Mortgage by foreclosure in the manner provided by the Florida Statutes which remedy shall be in addition to the other remedies provided in any other applicable provisions of this Agreement. SECTION 9.4. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Issuer or the Trustee is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to either in this Article, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. Such rights and remedies as are given the Issuer hereunder shall also extend to the Trustee, and the Trustee and the holders of the Bonds issued under the Indenture shall be deemed third party beneficiaries of all covenants and agreements herein contained. SECTION 9.5. Agreement to Pay Attorneys' Fees and Expenses. If the Company defaults under any of the provisions of this Agreement and the Issuer and the Trustee, or either of them, should employ attorneys or incur other expenses for the collection of the Loan Installments or the enforcement of performance or observance of any obligation or agreement of the Company in the Note or herein contained, the Company agrees that the Company will on demand therefor pay to the Issuer, the Trustee, or both, as the case may be, the reasonable fees of such attorneys (including fees on ap- 44 51 peal) and such other expenses so incurred by the Issuer and the Trustee, together with interest thereon at the maximum lawful rate from the date of demand to the date of payment. SECTION 9.6. No Additional Waiver Implied by One Waiver. In the event any agreement contained in this Agreement should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. No waiver granted by the Issuer with respect to the Project or the rights or remedies hereunder or under the Indenture which would adversely affect the rights and interests of the Trustee or the Bondholders shall be effective without the written consent of the Trustee. SECTION 9.7. Issuer's Right to Advance Funds upon Default; Reimbursement of Same. Immediately upon either the Issuer's or the Trustee's obtaining knowledge of the occurrence of any event of default it shall give written notice of such occurrence to the other and to the Company. With respect to any default by the Company of the type described in Section 9.1 of this Agreement, the Issuer and the Trustee shall have the right (but may never be required) to advance from any funds legally available for such purpose the sum required to cure such default; and the Issuer and the Trustee shall be entitled to receive from the Company reimbursement of such sum upon demand, together with interest thereon from the date of such advance to the date of reimbursement at the maximum lawful rate and expenses of collecting the same, including reasonable attorneys' fees whether suit be brought or not. ARTICLE X Miscellaneous SECTION 10.1. Notices. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed given on the second day following the day on which the same has been mailed by registered mail, postage prepaid, addressed as follows: To the Bondholders, addressed to their addresses as they appear on the registration books provided for in the Indenture. 45 52 If to the Issuer: Hillsborough County Industrial Development Authority c/o Mr. Warren M. Cason Post Office Box 2150 Tampa, Florida 33601 If to the Company: Progressive American Insurance Company Suite 900 410 Ware Boulevard Tampa, Florida 33619 Attention: Jerry Shroat President with copies to: The Progressive Corporation 6300 Wilson Mills Road Mayfield Village, Ohio 44143 Attention: Howard Zelikow Treasurer If to the Trustee: Sun Bank, N.A. 200 5. Orange Avenue Orlando, Florida 32802 Attention: Corporate Trust Department A duplicate copy of each notice, certificate or other communication given hereunder by either the Issuer or the Company to the other shall also be given to the Trustee. The Issuer, the Company, and the Trustee may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. SECTION 10.2. Binding Effect; Controlling Law. This Agreement shall inure to the benefit of and shall be binding upon the Issuer, the Company and their respective successors and assigns, subject, however, to the limitations contained in Section 7.3 hereof, and shall be governed by and construed in accordance with the laws of the State of Florida. 46 53 SECTION 10.3. Severability. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. SECTION 10.4. Amounts Remaining in Funds. It is agreed by the parties hereto that any amounts remaining in the Debt Service Fund or the Construction Fund upon expiration or sooner termination of the Agreement Term, as provided in this Agreement, after payment in full of the Bonds (or provision for payment thereof having been made in accordance with the provisions of the Indenture), and the fees, charges and expenses of the Trustee, the bond registrar, the paying agents and the Issuer in accordance with the Indenture, shall belong to and be paid to the Company by the Trustee as overpayment of the Loan. SECTION 10.5. Complete Agreement; Supplements or Amendment. This Agreement, along with the Note, represent the entire agreement between the parties. This Agreement may be supplemented, modified or amended only in the manner either as provided in this Agreement or as provided by Article XVI of the Indenture, subsequent to the issuance of the Bonds and prior to the payment in full of the Bonds (or provision for the payment thereof having been made in accordance with the provisions of the Indenture), and this Agreement may not be effectively amended, changed, modified, altered or terminated without the concurring written consent of the Trustee, given in accordance with the provisions of the Indenture or this Agreement. SECTION 10.6. Net Contract. This Agreement shall be deemed and construed to be a "net contract," and the Company shall pay absolutely net all Loan Installments and all other payments required hereunder, during the Agreement Term, free of any deductions, without abatement, diminution or set-off. SECTION 10.7. Arbitrage; Preservation of Tax Exemption. The Issuer and the Company each agree and covenant that the proceeds of the Bonds and the funds held by the Trustee under the Indenture will not be used in such manner as to cause any Bond to be an "arbitrage bond" within the meaning of Section 103(c) of the Code, as implemented by such proposed, temporary and permanent regulations as have 47 54 been or may hereafter be adopted by the United States Treasury Department thereunder. The Company further agrees and covenants not to take any action, the result of which would cause or be likely to cause the interest payable with respect to the Bonds not to be exempt from federal income taxes, other than those Bonds held by any person who, within the meaning of Section 103(b) (10) of the Code, shall be deemed a "substantial user" of the Project or a "related person" as defined in the Code. SECTION 10.8. Controlling Law; Members of Issuer Not Liable. All covenants, stipulations, obligations and agreements of the Issuer contained in this Agreement shall be deemed to be covenants, stipulations, obligations and agreements of the Issuer to the full extent authorized by the Act and provided by the Constitution and laws of the State of Florida. No covenant, stipulation, obligation or agreement contained herein shall be deemed to be a covenant, stipulation, obligation or agreement of any present or future member, agent or employee of the Issuer in his individual capacity, and neither the members of the Issuer nor any official executing this Agreement shall be subject to any personal liability or accountability by reason of the execution by the Issuer or such members thereof. SECTION 10.9. Company Approval of Indenture. The Company has reviewed the Indenture and the form of the 1982 Bonds and the Company hereby approves the form of the Indenture and the 1982 Bonds and covenants that it will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in the Indenture, in the 1982 Bonds authenticated and delivered thereunder and in all proceedings of the Issuer pertaining thereto, on its part to be observed or performed, whether express or implied; provided however that no amendment or revision to the Indenture or supplemental indenture shall be effective unless approved by the Company. SECTION 10.10. Further Assurances. The Company shall, at its expense, promptly and duly execute, acknowledge and deliver to the Trustee and to the Issuer, as appropriate, such further documents, instruments, financing and similar statements and assurances and take such further action as may from time to time be reasonably required or requested by the Trustee and/or the Issuer in order more effectively to carry out the intent and purposes of this Agreement, the Note, the Mortgage, the Indenture and the 48 55 Bonds issued thereunder and other instruments contemplated thereby. SECTION 10.11. Rights not Extinguished. Any right, interest or remedy which shall have accrued during the Agreement Term shall not be terminated or extinguished the expiration or termination of this Agreement but may be enforced by the party for whose benefit such right, interest or remedy shall have accrued and may be enforceable by such party in accordance with the terms of this Agreement if it had not terminated or expired or otherwise in accordance with law. SECTION 10.12. Execution of Counterparts. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Issuer has caused this Agreement to be executed by its Chairman and the seal of the issuer to be hereunto affixed and attested by its Assistant Secretary, and the Company has duly executed this Agreement, all as of the date first above written. HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (SEAL) By /s/ Samuel I. Latimer --------------------------- Samuel I. Latimer, Chairman ATTEST: /s/ Elsworth G. Simmons - ----------------------- Elsworth G. Simmons, Assistant Secretary PROGRESSIVE AMERICAN INSURANCE COMPANY (SEAL) By /s/ Charlotte A. Jackson ------------------------- Charlotte A. Jackson Vice President 49 56 ATTEST: /s/ Robert J. Young - ------------------- Robert J. Young Assistant Secretary STATE OF FLORIDA COUNTY OF HILLSBOROUGH The foregoing instrument was acknowledged before me this 16th day of December, 1982, by Samuel I. Latimer and EIlsworth G. Simmons, Chairman and Assistant Secretary, respectively, of HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, a public body corporate and politic of the State of Florida. /s/ Gertrude Eaton ---------------------------- Notary Public My commission expires: Notary Public, State of Florida at Large My Commission Expires Mar. 8, 1986 (Affix notarial seal) 50 57 STATE OF FLORIDA COUNTY OF HILLSBOROUGH The foregoing instrument was acknowledged before me this 16th day of December, 1982, by CHARLOTTE A. JACKSON, and ROBERT L. YOUNG, as Vice President and Assistant Secretary, respectively, of PROGRESSIVE AMERICAN INSURANCE COMPANY, a Florida corporation, on behalf of the Corporation. /s/ Gertrude Eaton ------------------ Notary Public My commission expires: Notary Public, State of Florida at Large My Commission Expires Mar. 8, 1986 (Affix notarial seal) 58 INDENTURE OF TRUST HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY as Issuer AND SUN BANK, N.A. as Trustee Dated as of December 16, 1982 59 INDENTURE OF TRUST Table of Contents (The Table of Contents is not a part of the Indenture of Trust but is for convenience of reference only) ARTICLE I Definitions Page Definitions Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . 1 "Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Additional Bonds" . . . . . . . . . . . . . . . . . . . . . . . 1 "Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Assignment of Mortgage" . . . . . . . . . . . . . . . . . . . . 1 "Authorized Company Representative" . . . . . . . . . . . . . . 1 "Bondholder" . . . . . . . . . . . . . . . . . . . . . . . . . . 1 "Bond Registrar" . . . . . . . . . . . . . . . . . . . . . . . . 1 "Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "1982 Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Bond Year" . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Construction Fund" . . . . . . . . . . . . . . . . . . . . . . 2 "Cost" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Guarantor" . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 "Investment Obligations" . . . . . . . . . . . . . . . . . . . . 2 "Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Loan Installments" . . . . . . . . . . . . . . . . . . . . . . 3 "Mortgage" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Note" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Original Purchaser" . . . . . . . . . . . . . . . . . . . . . . 3 "Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Prime Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . 3 "Project" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Project Site" . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Resolution" . . . . . . . . . . . . . . . . . . . . . . . . . . 4 "Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.02. Uses of Phrases . . . . . . . . . . . . . . . . . 4 60 ARTICLE II Factual Recitals; Form of Bonds Section 2.01. Issuer's Findings . . . . . . . . . . . . . . . . . . . . 5 Section 2.02. Form of 1982 Bonds . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III Execution, Authentication, Delivery and Registration of Bonds Section 3.01. Limitation on Issuance of Bonds . . . . . . . . . . . . . 14 Section 3.02. Details of Bonds . . . . . . . . . . . . . . . . . . . . . 14 Section 3.03. Authentication of Bonds . . . . . . . . . . . . . . . . . 15 Section 3.04. Registration and Exchange of Bonds . . . . . . . . . . . . 15 Section 3.05. Transfer of Bonds . . . . . . . . . . . . . . . . . . . . 16 Section 3.06. Ownership of Bonds . . . . . . . . . . . . . . . . . . . . 16 Section 3.07. Authorization of 1982 Bonds . . . . . . . . . . . . . . . 17 Section 3.08. Issuance of Additional Bonds . . . . . . . . . . . . . . . 19 Section 3.09. Mutilated, Destroyed or Lost Bonds . . . . . . . . . . . . 22 Section 3.10. Issuance of Refunding Bonds . . . . . . . . . . . . . . . 24 ARTICLE IV Redemption of Bonds Section 4.01. Optional Redemption Without Premium . . . . . . . . . . . 25 Section 4.02. Extraordinary Mandatory Redemption of Bonds Without Premium . . . . . . . . . . . . . . . . . . . . . 25 Section 4.03. Election to Pay Additional Rate of Interest . . . . . . . 27 Section 4.04. Additional Bonds . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE V Requirements for Redemption of Bonds Section 5.01. Notice of Redemption of Bonds . . . . . . . . . . . . . . 28 Section 5.02. Effect of Notice of Redemption . . . . . . . . . . . . . . 28 Section 5.03. Redemption of Portion of Registered Bonds . . . . . . . . 29 Section 5.04. Cancellation of Redeemed Bonds . . . . . . . . . . . . . 29 Section 5.05. Bonds Called for Redemption Deemed Not Outstanding . . . . 29 ii 61 ARTICLE VI Construction Fund Section 6.01. Creation . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 6.02. Payments from Construction Fund . . . . . . . . . . . . . 30 Section 6.03. Cost of Project . . . . . . . . . . . . . . . . . . . . . 30 Section 6.04. Prerequisites to Payment . . . . . . . . . . . . . . . . . 31 Section 6.05. Reliance on Certificates . . . . . . . . . . . . . . . . . 31 Section 6.06. Establishment of Completion Date . . . . . . . . . . . . . 31 ARTICLE VII Revenues and Funds Section 7.01. Covenants of the Issuer and the Trustee . . . . . . . . . 31 Section 7.02. Creation of Debt Service Fund and Accounts Therein . . . . 32 Section 7.03. Provisions for Payment of Bonds from Interest and Principal Account . . . . . . . . . . . . . . . . . . . . 33 Section 7.04. Application of Moneys in Redemption Account . . . . . . . 34 Section 7.05. Application of Pledged Moneys . . . . . . . . . . . . . . 35 Section 7.06. Unclaimed Funds . . . . . . . . . . . . . . . . . . . . . 36 Section 7.07. Cancellation of Bonds upon Payment . . . . . . . . . . . . 36 ARTICLE VIII Depositories of Moneys, Security for Deposits and Investment of Funds Section 8.01. Deposits Constitute Trust Funds . . . . . . . . . . . . . 36 Section 8.02. Investment of Moneys . . . . . . . . . . . . . . . . . . . 37 ARTICLE IX Grant of Mortgage and Security Interest Section 9.01. Grant of Mortgage and Security Interest . . . . . . . . . 38 ARTICLE X Particular Covenants Section 10.01. Covenant of Issuer as to Performance of Obligations . . . 39 Section 10.02. Covenant to Perform Undertakings . . . . . . . . . . . . . 39 Section 10.03. Covenant to Perform Further Acts . . . . . . . . . . . . . 40 iii 62 Section 10.04. Covenant to Pay Taxes . . . . . . . . . . . . . . . . . . 40 Section 10.05. Covenant to Maintain and Operate . . . . . . . . . . . . . 40 Section 10.06. Covenant to Insure; Application of insurance Proceeds. . . 40 Section 10.07. Covenant as to Recordation . . . . . . . . . . . . . . . . 41 Section 10.08. Covenant to Enforce Rights . . . . . . . . . . . . . . . . 41 Section 10.09. Covenant as to Performance of Obligations . . . . . . . . 41 ARTICLE XI Events of Default; Remedies Section 11.01. Events of Default . . . . . . . . . . . . . . . . . . . . 42 Section 11.02. Acceleration of Maturities . . . . . . . . . . . . . . . . 43 Section 11.03. Enforcement of Remedies . . . . . . . . . . . . . . . . . 44 Section 11.04. Pro Rata Application of Funds . . . . . . . . . . . . . . 45 Section 11.05. Effect of Discontinuing Proceedings . . . . . . . . . . . 46 Section 11.06. Directions to Trustee as to Remedial Proceedings . . . . . 47 Section 11.07. Restrictions on Actions by Individual Bondholders . . . . 47 Section 11.08. Appointment of a Receiver . . . . . . . . . . . . . . . . 48 Section 11.09. Enforcement of Rights of Action . . . . . . . . . . . . . 48 Section 11.10. No Remedy Exclusive . . . . . . . . . . . . . . . . . . . 48 Section 11.11. Delay not a Waiver . . . . . . . . . . . . . . . . . . . . 48 Section 11.12. Notice of Default . . . . . . . . . . . . . . . . . . . . 49 Section 11.13. Additional Remedies . . . . . . . . . . . . . . . . . . . 49 ARTICLE XII Concerning the Trustee, Paying Agent and Bond Registrar Section 12.01. Acceptance of Trusts; Performance of Duties . . . . . . . 49 Section 12.02. Trustee Entitled to Indemnity . . . . . . . . . . . . . . 50 Section 12.03. Limitation on Obligations and Responsibilities . . . . . . 50 Section 12.04. Limitation' on Liability . . . . . . . . . . . . . . . . . 50 Section 12.05. Compensation of Trustee . . . . . . . . . . . . . . . . . 51 Section 12.06. Annual Statement . . . . . . . . . . . . . . . . . . . . . 52 Section 12.07. Reliance on Certificates . . . . . . . . . . . . . . . . . 52 Section 12.08. Notice of Defaults . . . . . . . . . . . . . . . . . . . . 53 Section 12.09. Trustee as Bondholder . . . . . . . . . . . . . . . . . . 53 Section 12.10. Trustee not Responsible for Recitals . . . . . . . . . . . 53 Section 12.11. Reliance on Certain Documents . . . . . . . . . . . . . . 53 Section 12.12. Trustee Not Required to Give Bond . . . . . . . . . . . . 54 iv 63 Section 12.13. Resignation . . . . . . . . . . . . . . . . . . . . . . . 54 Section 12.14. Removal of Trustee . . . . . . . . . . . . . . . . . . . . 54 Section 12.15. Appointment and Qualification of Successor Trustee . . . . 55 Section 12.16. Vesting of Trusts in Successor . . . . . . . . . . . . . . 56 Section 12.17. Designation and Succession of Paying Agents . . . . . . . 56 ARTICLE XIII Execution of Instruments by Bondholders and Proof of Ownership of Bonds Section 13.01. Execution of Instruments by Bondholders; Proof of Ownership of Bonds . . . . . . . . . . . . . . . 57 ARTICLE XIV Supplemental Indentures Section 14.01. Supplemental Indentures without Bondholder Consent . . . . 58 Section 14.02. Modification of Indenture with Consent of Bondholders . . 59 Section 14.03. Supplemental Indenture Deemed Part of this Indenture . . . 61 Section 14.04. Discretion of Trustee in Executing Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . 61 ARTICLE XV Defeasance Section 15.01. Release of Indenture . . . . . . . . . . . . . . . . . . . 61 ARTICLE XVI Supplemental Contracts Section 16.01. Supplemental Contracts without Bondholders' Consent . . . 62 Section 16.02. Amendment of Contract with Consent of Bondholders . . . . 63 v 64 ARTICLE XVII Miscellaneous Provisions Section 17.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 17.02. No Third-Party Beneficiaries . . . . . . . . . . . . . . . 65 Section 17.03. Effect of Partial Invalidity . . . . . . . . . . . . . . . 65 Section 17.04. Controlling Law; Members of Issuer Not Liable . . . . . . 65 Section 17.05. Binding Effect; Controlling Law . . . . . . . . . . . . . 66 Section 17.06. Counterparts . . . . . . . . . . . . . . . . . . . . . . . 66 Section 17.07. Headings not Part of Indenture . . . . . . . . . . . . . . 66 Section 17.08. Payments Due on Saturdays, Sundays and Holidays . . . . . 66 vi 65 INDENTURE OF TRUST THIS INDENTURE OF TRUST, dated as of the 16th day of December 1982, by and between the HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, a public body corporate and politic of the State of Florida, as Issuer, and Sun Bank, N.A., duly organized and existing under the laws of the United States and having the authority to exercise corporate trust powers, and having its principal office in the city of Orlando, Florida, as Trustee, W I T N E S S E T H: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. As used herein unless some other meaning is plainly intended: "Act" means the Constitution of the State of Florida, Parts II and III of Chapter 159, Florida Statutes, and other applicable provisions of law. "Additional Bonds" means Bonds of the Issuer authenticated and delivered under and pursuant to the provisions of Section 3.08 hereof. "Agreement" means the Loan and Debt Obligation Agreement dated as of the date hereof between the Issuer and the Company, as amended from time to time. "Assignment of Mortgage" means the Assignment of Mortgage dated as of the date hereof from the Issuer to the trustee. "Authorized Company Representative" means the person at the time designated to act on behalf of the Company by written certificate furnished to the Issuer and the Trustee containing the specimen signature of such person. "Bondholder" means the registered owner (or authorized representatives) of any Bonds at any time outstanding. "Bond Registrar" means the registrar appointed by Issuer, from time to time, under the provisions of Section 3.05 of this Indenture. 66 "Bonds" means the 1982 Bonds issued under this Indenture and any Additional Bonds. "1982 Bonds" means the Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982, issued hereunder in the aggregate principal amount of $4,000,000. "Bond Year" means the period commencing on the 1st day of January of any calendar year and ending on the 31st day of December of such calendar year. "Code" means the Internal Revenue Code of 1954, as amended. "Company" means Progressive American Insurance Company, a Florida corporation, and its successors and assigns, including any surviving, resulting or transferee corporation as provided in Section 7.3 of the Agreement. "Construction Fund" means the Fund so designated in and established under Section 6.01 of this Indenture. "Cost" as applied to the Project, shall embrace, without intending thereby to limit or restrict any proper definition of such word under the Act, all costs of acquisition and construction and all obligations and expenses incurred by or on behalf of the Issuer or the Company with respect to the Project, as set forth in Section 6.03 of this Indenture and Section 4.3 of the Agreement. "Depository" means the Trustee or one or more other banks or trust companies designated by the Issuer with approval of the Trustee that shall have qualified with all state and federal requirements concerning the receipt of Issuer funds. "Guarantor" means The Progressive Corporation, an Ohio corporation, the indirect owner of the Company. "Guaranty" means the Unconditional Guaranty dated the date hereof between the Guarantor, as guarantor, and the Trustee and the Issuer. "Indenture" means this Indenture of Trust, together with all indentures supplemental hereto as herein permitted. "Investment Obligations" means: (i) negotiable direct obligations of, or obligations the principal of and 2 67 interest on which are unconditionally guaranteed by, the United States of America at the then prevailing market price for such securities, or (ii) obligations of the Federal Farm Credit Banks, Federal Home Loan Mortgage Corporation, or Federal Home Loan Bank or its district banks, including Federal Home Loan Mortgage Corporation participation certificates, or obligations guaranteed by the Government National Mortgage Association, or (iii) interest-bearing time deposits or savings accounts in banks organized under the laws of the State of Florida, in national banks organized under the laws of the United States and doing business and situated in the State of Florida, in savings and loan associations, which are under state supervision, or in federal savings and loan associations located in the State of Florida and organized under federal law and federal supervision, provided that any such deposits are secured by collateral as may be prescribed by law; (iv) any investment to the extent permitted by ss. 625.07 - 625.315, Fla. Stat. (1981), as amended by ch. 82-243, Laws of Florida; or (v) any other investment to the extent permitted by the law of the State of Florida. "Issuer" means the Hillsborough County Industrial Development Authority, a public body corporate and politic of the State of Florida duly created pursuant to the Act. "Loan Installments" means the payments described in Section 5.2 of the Agreement. "Mortgage" means the Mortgage and Security Agreement dated the date hereof between the Company, as mortgagor, and the Issuer, as mortgagee. "Note" means the Promissory Note issued by the Company to the Issuer and dated the date hereof. "Original Purchaser" means Sun Bank of Tampa Bay. "Paying Agent" means the Trustee and any bank or trust company designated pursuant to this Indenture to serve in addition to Trustee as a paying agent or place of payment for the Bonds, and any successors designated pursuant to this Indenture. "Prime Rate" means the prime rate of interest as charged from time to time by Sun Bank, N.A., or its successors, for ninety-one day unsecured loans; provided however, if Sun Bank, N.A., does not make ninety-one day unsecured loans, the Prime Rate shall be such rate for such loans 3 68 charged by Manufacturers Hanover Trust Company, New York, New York. "Project" means, collectively, the acquisition of the Project Site, and the acquisition, construction and installation thereon, in accordance with the Plans and Specifications, of structures, fixtures, facilities, equipment and machinery constituting a headquarters facility for the regional headquarters office of the Company and its related group of casualty insurers, all as more particularly described in Exhibit "A" attached hereto and to the Agreement. "Project Site" means the lands on which the Project is to be constructed, as more particularly described in Exhibit "B" attached hereto and to the Agreement, together with easements appurtenant thereto. "Resolution" means a resolution adopted by the Issuer on March 10, 1982, pertaining to the 1982 Bonds, as supplemented and amended by a resolution adopted by the Issuer on September 22, 1982. "Trustee" means Sun Bank, N.A., Orlando, Florida, or its successor or successors hereafter appointed in the manner provided in this Indenture. SECTION 1.02. Uses of Phrases. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders. Unless the context shall otherwise indicate, the words "Bond," "Bondholder," "registered owner" and "person" shall include the plural as well as the singular number, and the word "person" shall include corporations and associations, including public bodies, as well as persons. "Herein," "hereby," "hereunder," hereof," hereinbefore," "hereinafter" and other equivalent words refer to this Indenture and not solely to the particular portion thereof in which any such word is used. Any percentage of Bonds, specified herein for any purpose, is to be figured on the unpaid principal amount thereof then outstanding. 4 69 ARTICLE II FACTUAL RECITALS; FORM OF BONDS SECTION 2.01. Issuer's Findings. By its Resolution, the Issuer has found and determined that: (a) The Issuer is authorized and empowered by the Act to enter into transactions such as those contemplated by the Act, and to fully perform the obligations of the Issuer to be undertaken in connection with the financing of the Project in order to promote the industrial economy of Hillsborough County (the "County") and the State of Florida (the "State"), increase opportunities for gainful employment and purchasing power, and improve living conditions and otherwise contribute to the prosperity and welfare of the County, the State and the inhabitants thereof. (b) The Project constitutes a "project" within the meaning and contemplation of the Act, shall make a significant contribution to the economic growth of the County, shall provide continued gainful employment and shall serve a public purpose by advancing the economic prosperity and the general welfare of the County and the State and the inhabitants thereof. (c) For the purpose of providing funds to pay the cost of the Project, the Issuer by Resolution has duly authorized the issuance of revenue bonds of the Issuer in the principal amount of Four Million dollars ($4,000,000) designated "Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982." The Agreement will provide for payments by the Company to the Issuer of sums sufficient to pay the 1982 Bonds together with the interest thereon and premiums, if any, and costs and expenses related thereto as the same shall become due and payable. The 1982 Bonds shall be paid from the Loan Installments paid under the terms of the Agreement. The obligations of the Issuer and the Company will be collateralized and secured by the Mortgage and by the Guaranty. 5 70 (d) Hillsborough County will be able to cope satisfactorily with the impact of the Project and will be able to provide, or cause to be provided when needed, the public facilities, including utilities and public services, that will be necessary for the construction, operation, repair and maintenance of the Project and on account of any increases in population or other circumstances resulting therefrom. (e) The Company is financially responsible and fully capable of and willing to fulfill all of the obligations under the terms and provisions of the Agreement, under which the Company will be obligated, among other things, to pay amounts sufficient to timely discharge the debt service on the Bonds, and to operate, repair and maintain the Project at the Company's expense. (f) The availability of financing by means of industrial development revenue bonds is an important inducement to the Company for the acquisition and construction of the Project. SECTION 2.02. Form of 1982 Bonds. The form of the 1982 Bonds, the Trustee's authentication certificate to be endorsed on the 1982 Bonds, the provisions for registration and the statement of validation are to be substantially in the following form with appropriate omissions and insertions or variations permitted or authorized as hereinafter provided: UNITED STATES OF AMERICA STATE OF FLORIDA HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY INDUSTRIAL DEVELOPMENT REVENUE BOND (Progressive American Insurance Company Project) Series 1982 No. $ ------- --------- HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (hereinafter referred to as the "Issuer"), for value received, hereby promises to pay to Sun Bank, N.A. (the "Original Purchaser"), or to registered assigns, but only from the revenues hereinafter referred to, on the ____ day of _______, 19__ (or earlier as hereinafter provided), upon 6 71 presentation and surrender hereof at the principal office of the Trustee (hereinafter mentioned), the principal sum of DOLLARS --------------------------------- in any coin or currency of the United States of America which on the date of payment thereof is the legal tender for the payment of public and private debts, and to pay solely from such special revenues, interest on the principal sum from the date hereof, at the rate of interest per annum set forth below until the payment of such principal sum. Interest on the principal amount of this Bond from the date hereof until this Bond is fully paid or redeemed shall be payable at an annual rate equal to sixty-five percent (65%) of the prevailing prime rate of interest as charged from time to time by Sun Bank, N.A., or its successors, for ninety-one day unsecured loans; provided however, if Sun Bank, N.A., does not make ninety-one day unsecured loans, the Prime Rate shall be such rate for such loans charged by Manufacturers Hanover Trust Company, New York, New York (the "Prime Rate"). Such interest shall be payable quarterly on the first day of each quarter, commencing January 1, 1983. The rate of interest which shall accrue on this Bond shall be adjusted daily on the basis of the Prime Rate then in effect. Any change in the interest rate hereunder due to a change in the Prime Rate shall be effective as of the opening day of business for Sun Bank, N.A., or Manufacturers Hanover Trust Company if Sun Bank, N.A., is not charging a Prime Rate, on the date of such change and the giving of written notice of a change in the Prime Rate to Progressive American Insurance Company, a Florida corporation (the "Company"), by Sun Bank, N.A., Orlando, Florida, as trustee (the "Trustee") under an Indenture of Trust dated as of December 16, 1982 (the "Indenture"), between the Issuer and the Trustee. If at any time after the date hereof there should be a change (either up or down) in the maximum rate of federal income tax applicable to corporations (currently 46%) imposed by Section II of the Internal Revenue Code of 1954, as amended (the "Tax Rate"), then the effective interest rate on the Bonds (as hereinafter defined) will be adjusted effective as of the effective date of the change in the Tax Rate in accordance with the following formula: the new interest rate shall be equal to 65/54ths of the Prime Rate multiplied by 1 minus the new Tax Rate. Any interest due hereon shall be calculated on the basis of a year containing 365 days. Interest due on any date for payment of interest hereunder shall be that in- 7 72 terest to the extent accrued as of 11:59 pm., eastern time, on the last calendar day immediately prior to that interest payment date. In no event shall the sum of all interest and all other amounts deemed or treated as interest exceed the maximum lawful interest rate allowed to be charged under applicable law, and in the event any interest is received or charged by the holder hereof in excess of that amount, the Company, through the Issuer, shall be entitled to an immediate refund thereof. Notwithstanding the foregoing, if interest on this Bond shall cease to be exempt from federal income taxes under the conditions described in Section 4.02(b) of the Indenture, the Company may elect to pay, if permitted by applicable legal or regulatory requirements applicable to any registered owner of this Bond, and the Issuer shall thereupon pay, interest on this Bond in the manner provided by Section 4.03 of the Indenture, at a rate per annum which shall be equal to the Prime Rate. In no event, however, shall interest be charged in an amount in excess of the maximum interest rate permitted to be paid under applicable law. All payments of principal and interest hereunder shall be made at the address of the registered owner hereof as it appears on the bond registration books to be kept by the registrar designated by the Issuer, or elsewhere as shall be directed by the registered owner hereof. This Bond is subject to redemption from excess construction proceeds as provided in Section 7.04(c) of the Indenture and is also subject to mandatory redemption prior to its stated date of maturity from the prepayment of the Loan Installments payable by the Company under Sections 5.2 and 8.3 of the Loan and Debt Obligation Agreement between the Issuer and the Company dated as of December 16, 1982 (the "Agreement"), at par plus accrued interest to the date fixed for redemption, upon sixty (60) days advance written notice to the Trustee and the Issuer by the registered owner of this Bond (i) as a result of changes in federal or state laws whereby the Agreement, the Indenture or this Bond shall become void or unenforceable, or (ii) where the interest payable on this Bond shall cease to be exempt from federal income tax (unless the Company shall elect to pay an alternative non-tax exempt interest rate, in accordance with the provisions of Section 4.03 of the Indenture). This Bond is also subject to redemption upon the occurrence of an event of default as defined in Section 11.01 of the Indenture, and upon the Company's election not to rebuild, repair, replace or restore the Project (hereinafter defined) upon the 8 73 damage, loss or destruction thereof or the taking of or damage to the Project or by condemnation, all as provided in Section 14 of the Mortgage and Security Agreement (the "Mortgage"), dated the date hereof and executed by the Company as Mortgagor. This Bond is also redeemable prior to its stated date of maturity, at the option of the Issuer, on any date, in whole or in part, at par plus accrued interest to the date fixed for redemption, but without premium. In the event this Bond is redeemed in part, the registered owner hereof shall surrender this Bond for payment of the principal amount so called for redemption, and the Issuer shall execute and the Trustee shall authenticate and deliver to or upon the order of such registered owner, without charge therefor, for the unredeemed portion of the Bond so surrendered, a Bond or Bonds registered as to principal and interest. A notice of redemption of this Bond shall be mailed to the registered owner of this Bond at least thirty (30) days, but not more than sixty (60) days, prior to the redemption date in the manner provided in the Indenture; provided, however, that the failure to so notify the registered owner shall not affect the validity of the proceedings for the redemption of any Bond or portion thereof with respect to which no such failure has occurred. If this Bond is called for redemption it shall become and be due and payable as provided in the Indenture, and when the necessary moneys shall have been deposited with, or shall be held by, the Trustee, interest on this Bond shall cease to accrue, and the registered owner hereof shall not have any lien, rights, benefits or security under the Indenture except to receive the payment of the redemption price on or after the designated date of redemption from moneys deposited with or held by the Trustee for such redemption. This Bond shall not be deemed to constitute a general debt, liability or obligation of the Issuer, or of the State of Florida, or of any political subdivision or agency thereof, or a pledge of the faith and credit of the Issuer or of the State of Florida or of any political subdivision thereof. The Issuer shall not be obligated to pay this Bond or any interest hereon except from the revenues and other collateral expressly provided therefor in the manner provided for or contemplated by the Indenture, and neither the faith and credit nor the taxing power of the Issuer or of the State of Florida or of any political subdivision thereof is pledged to pay the principal of or the interest on the Bond. 9 74 This Bond is one of the duly authorized issue of Bonds of the Issuer designated as "Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982" (the "Bonds"), issued in the aggregate principal amount of $4,000,000, issued by virtue of the authority contained in and conferred by the Constitution and laws of the State of Florida, including particularly Sections 159.25 to 159.53, inclusive, Florida Statutes (collectively, the "Act"), and certain resolutions of the Issuer pertaining to the issuance thereof, for the purpose of paying the cost of acquiring certain land and acquiring, constructing and installing thereon certain structures, fixtures, facilities, equipment and machinery constituting a headquarters facility for the Company (collectively, the "Project"). This Bond is also issued pursuant to and subject to the provisions, terms and conditions of Resolutions adopted by the Issuer on March 10, 1982 and September 22, 1982, respectively (the "Resolutions"), and the Indenture. Reference is hereby made to the Resolutions and the Indenture for the provisions, among others, with respect to the custody and application of the proceeds of the Bonds, the collection and disposition of the revenues derived from the Agreement relating to the loan of funds from the Issuer to the Company to finance the acquisition, construction and installation of the Project, the funds charged with and pledged to the payment of the principal and interest on the Bonds and the nature and extent of such security, the terms and conditions under which the Bonds may be issued, the rights, duties and obligations of the Issuer, the rights of the registered owners of the Bonds and the provisions regulating the manner in which the terms of this Bond and the rights of the registered owner hereof may be modified, to all of which provisions the registered owner hereby assents by acceptance hereof. In the event any payment of interest or of interest and principal on this Bond shall not be paid when due, the amount so in default shall continue to bear interest from the date such payment became due until payment thereof at the Prime Rate per annum or the maximum lawful rate, whichever shall be less. This Bond is payable as to both principal and interest solely from and is secured by a lien on certain revenues derived from the repayment of the loan from the Issuer to the Company under and pursuant to the Agreement and other monies pledged therefor (the "Pledged Funds"), a mortgage on and a security interest in the project (as defined in the Mortgage), and certain other rights, all as described in the Agreement and the Mortgage. Payment of the principal of, premium, if any, and interest on this Bond has been uncondi- 10 75 tionally guaranteed by The Progressive Corporation, an Ohio corporation, pursuant to an Unconditional Guaranty dated December 16, 1982. The Issuer agrees to pay, but only from the Pledged Funds, in addition to all other sums payable hereunder, the reasonable costs and expenses incurred by the registered owner of this Bond in connection with all actions taken to enforce collection of this Bond upon default by the Issuer, whether by legal proceedings or otherwise, including without limitation a reasonable attorney's fee and court costs. It is hereby certified, recited and declared that all acts, conditions and things required to exist, to happen and to be performed precedent to and in the issuance of this Bond exist, have happened and have been performed in regular and due form and time as required by the Constitution and laws of the State of Florida applicable thereto and that the issuance of this Bond is in full compliance with all constitutional and statutory limitations, provisions and restrictions. This Bond shall bind the Issuer and its successors and assigns, and the benefits hereof shall inure to the payee hereof and its successors and assigns. This Bond is and has all the qualities and incidents of a negotiable instrument under the law merchant and the Uniform Commercial Code-Investment Securities Law of the State of Florida. The Issuer does hereby covenant with the registered owner of this Bond that it will make no use of the proceeds of the Bonds which would cause the Bonds to be treated as "arbitrage bonds" under Section 103(c) of the Internal Revenue Code of 1954, as amended, and the Regulations prescribed and proposed thereunder. The issuance of this Bond was approved under the provisions of the Uniform Local Government Financial Management and Reporting Act, Part III, Chapter 218, Florida Statutes. This Bond shall not be valid or become obligatory for any purpose or be entitled to any security or benefit under the Indenture until the certificate of authentication endorsed hereon shall have been signed by the Trustee. This Bond is one of a series of Bonds which were validated by judgment of the Circuit Court, of the 11 76 Thirteenth Judicial Circuit, in and for Hillsborough County, Florida, rendered on October 22, 1982. IN WITNESS WHEREOF, the Hillsborough County Industrial Development Authority has issued this Bond and has caused the same to be signed by the manual signature of its Chairman, and its seal to be affixed hereon and attested and countersigned by the manual signature of its Assistant Secretary, all as of the ____ day of _______, 1982. HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY By ------------------------------ (SEAL) Chairman ATTESTED AND COUNTERSIGNED: By --------------------- Assistant Secretary CERTIFICATE OF AUTHENTICATION This Bond is one of the Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982, designated in and executed under the provisions of the within-mentioned Indenture. Sun Bank, N.A. as Trustee By -------------------------- Authorized Officer 12 77 FOR VALUE RECEIVED The undersigned hereby sells, assigns and transfers unto (PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE) - ----------------------------------- - -------------------------------------------------------------------------------- the within bond of HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY and does hereby constitute and appoint the Trustee as the initially appointed Registrar or _____________________________________ attorney to transfer the said Bond on the books of the within named Issuer, with full power of substitution in the premises. Dated: In the presence of: - ------------------------------------ --------------------------------------- Witness Registered Owner PROVISIONS FOR REGISTRATION This Bond shall be registered in the name of the initial owner as to principal and interest on the books kept by the Registrar appointed by the Issuer. Subsequent registration shall be made on the books kept by the Registrar. No transfer shall be valid unless (i) made by written assignment, (ii) noted on books of the Registrar and (iii) unless a new registered bond shall be issued, noted in the blank below. 13 78 (No writing in this blank except by the Registrar) Date of Name of Signature of Registration Registered Owner Bond Registrar - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (End of Bond Form) ARTICLE III EXECUTION, AUTHENTICATION, DELIVERY AND REGISTRATION OF BONDS SECTION 3.01. Limitation on Issuance of Bonds. No Bonds may be issued under the provisions of this Indenture except in accordance with the provisions of this Article. SECTION 3.02. Details of Bonds. The 1982 Bonds shall be registered as to principal and interest, shall be issued in the denominations as set forth in Section 3.07 hereof, and shall be substantially in the form hereinabove set forth, with such appropriate omissions and insertions or variations as are permitted or required by this Indenture and with such additional changes as may be necessary or appropriate to comply with the terms of the sale of the 1982 Bonds, and may have endorsed thereon such legends or text as may be necessary or appropriate to conform to the rules and regulations of any governmental authority or any usage or requirement of law with respect thereto. The Bonds shall be executed by the duly qualified and authorized Chairman of the Issuer, either manually or with his facsimile signature, and the official seal of the Issuer, or a facsimile thereof, shall be impressed, affixed or imprinted on the Bonds and attested by the manual or facsimile signature of the Assistant Secretary or Assistant Secretary of the Issuer; provided, however, that at least one of such signatures shall be a manual signature. If any officer whose signature appears on the Bonds ceases to hold office before the delivery of the Bonds, his signature shall nevertheless be valid and sufficient for all 14 79 purposes, and also any Bond may bear the signature of, or may be signed by, such persons as at the actual time of the execution of such Bond shall be the proper officers to sign such Bond although at the date of such Bond such persons may not have been such officers. Both the principal of and interest on the Bonds shall be payable in lawful money of the United States of America on their respective dates of payment. Payment of the interest on each Bond (except for final payment of such interest which shall be made only upon surrender of each Bond) is payable by check or draft drawn upon Sun Bank, N.A., or its successors, as Trustee, and mailed to the registered owner at his address as it appears on the bond registration books to be kept by the Bond Registrar designated by the Issuer, or by bank wire or bank transfer as the registered owner of the Bond shall specify, or as otherwise may be agreed upon by the registered owner and the Trustee. SECTION 3.03. Authentication of Bonds. Only such of the Bonds as shall have endorsed thereon a certificate of authentication substantially in the form hereinabove set forth, duly executed by the Trustee, shall be entitled to any right or benefit under this Indenture. No Bond shall be valid or obligatory for any purpose unless and until such certificate of authentication shall have been duly executed by the Trustee, and such certificate of the Trustee upon any such Bond shall be conclusive evidence that such Bond has been duly authenticated and delivered under this Indenture. The Trustee's certificate of authentication on any Bond shall be deemed to have been duly executed if signed by an authorized officer of the Trustee, but it shall not be necessary that the same officer sign the certificate of authentication on all of the Bonds that may be issued hereunder at any one time. SECTION 3.04. Registration and Exchange of Bonds. The Bonds shall be registered as to principal and interest in accordance with the provisions endorsed thereon. The 1982 Bonds are initially issued in typewritten form in the denominations set forth in Section 3.07 hereof. At the request of an Original Purchaser of the 1982 Bonds, the Issuer shall make provision for the exchange of the 1982 Bonds held by such Original Purchaser for a 1982 Bond or Bonds of different denominations but with the same maturity and interest rate, in an aggregate principal amount not exceeding the principal amount of the 1982 Bond or Bonds tend- 15 80 ered for exchange, without cost to such Original Purchaser except for costs of printing or engraving and for a sum sufficient to pay any tax, fee or governmental charge that may be imposed with respect thereto; provided, however, that with respect to any such request for an exchange of Bonds previously exchanged by any such Original Purchaser, the Trustee may recover reasonable expenses sufficient to reimburse it for expenses incurred in connection with the issuance of such new 1982 Bond or Bonds, including costs of printing or engraving and for a sum sufficient to pay any tax, fee or governmental charge that may be imposed with respect thereto. Such charge or charges shall be paid before any such new Bond or Bonds shall be delivered. SECTION 3.05. Transfer of Bonds. The Bonds may be transferred, and title thereto shall pass, only in the manner provided in the Provisions for Registration set forth in the form of the Bond in Section 2.02 of this Indenture. The Issuer has appointed the Trustee as initial Bond Registrar to keep the books for the registration and for the transfer of Bonds as provided in this Indenture. The Bond Registrar may be changed from time to time by resolution duly adopted by the Issuer and upon due notice to the Trustee. All fully registered Bonds presented for transfer, exchange, redemption or payment (if so required by the Issuer or the Trustee), shall be accompanied by a written instrument or instruments of transfer or authorization for exchange, in form and with guaranty of signature satisfactory to the Trustee, duly executed by the registered owner or by his attorney duly authorized in writing. No charge shall be made for the transfer and registration of the 1982 Bonds except for a sum sufficient to pay any tax, fee or governmental charge that may be imposed with respect thereto. Neither the Issuer nor the Trustee shall be required to register, convert or transfer any Bond during the ten (10) days next preceding an interest payment date on the Bonds or, in the case of any proposed redemption of Bonds, after notice shall have been given in accordance with Section 5.01 of this Indenture of any such proposed redemption. SECTION 3.06. Ownership of Bonds. The persons in whose names the Bonds shall be registered shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of or on account of the principal of any such Bond and the interest on any such Bond shall be made only to or upon the order of the registered owner thereof or his 16 81 legal representative, but such registration may be changed as hereinabove provided. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond, including the interest thereon to the extent of the sum or sums so paid. SECTION 3.07. Authorization of 1982 Bonds. There shall be initially issued under and secured by this Indenture, 1982 Bonds of the Issuer in the aggregate principal amount of Four Million dollars ($4,000,000) for the purpose of paying the cost of the Project. The 1982 Bonds shall be designated "Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982," and shall be dated the 16th day of December, 1982. The 1982 Bonds shall bear interest from the date thereof at an annual rate of interest equal to sixty-five percent (65%) of the Prime Rate. The rate of interest which shall accrue on each 1982 Bond shall be adjusted daily on the basis of the Prime Rate then in effect. Any change in the interest rate hereunder due to a change in the Prime Rate shall be effective as of the opening of business for Sun Bank, N.A., Orlando, Florida, or Manufacturers Hanover Trust Company, New York, New York, if Sun Bank, N.A., is not charging a Prime Rate, on the date of such change, and the giving of written notice by the Trustee to the Company and the Issuer of a change in the Prime Rate. Such interest shall be payable quarterly on the 1st day of each quarter, commencing on January 1, 1983. The 1982 Bonds shall consist of one bond and shall be in the denomination, bear the number and mature on the first day of January, 1998, as follows: Bond No. 01 shall be initially issued in the principal amount of $4,000,000. Payment of principal on Bond No. 01 shall be made in forty-eight (48) quarterly installments on the first day of each January, April, July, and October (the Payment Date), commencing April 1, 1986. The first eight (8) quarterly installments shall each be in the amount of $40,000.00. The remaining forty (40) quarterly installments shall each be in the amount of $90,000.00 In the event any payment of interest or of interest and principal on the 1982 Bonds shall not be paid when due, the amount so in default shall continue to bear interest from the date such payment became due until payment thereof at the Prime Rate plus two percent per annum or the maximum lawful rate, whichever shall be less. 17 82 After execution, the 1982 Bonds shall be deposited with the Trustee for authentication, but before authentication and delivery by the Trustee there shall be filed with the Trustee the following: (a) A copy of the Resolution adopted on September 22, 1982, by the Issuer, certified by the Assistant Secretary of the Issuer, authorizing the issuance of the 1982 Bonds; (b) An executed counterpart of the Agreement, the Note, the Mortgage, the Assignment of Mortgage, the Guaranty and this Indenture; (c) An opinion of counsel of the Issuer stating that the execution and delivery of the Agreement, the Assignment of Mortgage, the 1982 Bonds and this Indenture has been duly authorized by the Issuer, that the Agreement, the Assignment of Mortgage, the 1982 Bonds and this Indenture are in the forms so authorized and have been duly executed and delivered by the Issuer and that, assuming proper authorization and the execution and delivery of the Agreement and this Indenture by the Company and Trustee, respectively, and the proper authentication of the 1982 Bonds by the Trustee, and with certain qualifications, the Agreement, the Assignment of Mortgage, the 1982 Bonds and this Indenture, respectively, are valid and binding on the Issuer in accordance with their respective terms; (d) An opinion of counsel for the Company and the Guarantor relating to the due organization and good standing of the Company and the Guarantor, the due authorization, execution and delivery of the Agreement, the Note, the Mortgage, the Guaranty and other documents related thereto, the enforceability of such agreements, the absence to the best of their knowledge of conflict with other documents to which the Company or the Guarantor are subject, the absence to the best of their knowledge of pending or threatened litigation; and such other matters as the Issuer may require; (e) An opinion of Holland & Knight, addressed to the Issuer, the Trustee and the Original Purchaser, stating that such counsel is of the opinion that the 1982 Bonds are valid and legally binding obligations of the Issuer, and that the in- 18 83 terest on the 1982 Bonds issued under the provisions of this Section is exempt from present federal income taxes under existing law, except that such counsel need not express an opinion as to the exemption from such taxes for any period during which a 1982 Bond is held by a person who, within the meaning of Section 103(b) (10) of the Code, is a "substantial user" of the Project or a "related person"; and (f) The survey of the Project Site and the mortgage title insurance policy or binder required, respectively, by Sections 4.1(a) and 4.1(b) of the Agreement. Upon receipt of these documents, the Trustee shall authenticate, register and deliver the 1982 Bonds to or upon the direction of the Original Purchaser, but only upon payment to the Trustee of the purchase price of the 1982 Bonds together with accrued interest thereon. The proceeds from the 1982 Bonds, including accrued interest, if any, shall be applied by the Trustee, simultaneously with the delivery of said 1982 Bonds, as follows: (a) The accrued interest on the 1982 Bonds shall be deposited in the Interest Account in the Debt Service Fund hereinafter created. (b) The balance of said proceeds shall be deposited to the credit of the Construction Fund hereinafter created. SECTION 3.08. Issuance of Additional Bonds. Additional Bonds of the Issuer may be issued under and secured by this Indenture at one time or from time to time, in addition to the 1982 Bonds issued under the provisions of Section 3.07 of this Article and subject to the conditions hereinafter provided in this Section, for the purpose of paying the costs of completing the Project or additions to the Project, such total cost to be evidenced by a certificate signed by the Project Manager (as defined in the Agreement), or for the purpose of paying all or any part of the cost of any improvements thereto as described in Section 4.2 of the Agreement, or for any combination of such purposes. Before any Additional Bonds shall be issued under the provisions of this Section, the company shall request such Additional Bonds and Issuer shall adopt a resolution authorizing the issuance of such Bonds, fixing the amount 19 84 thereof and describing in brief and general terms the purpose or purposes for which such Bonds are being issued. Such Additional Bonds shall be dated, shall have the same designation, except perhaps for an identifying series year, as the 1982 Bonds issued under Section 3.07 of this Article, shall be stated to mature in such year or years, shall bear interest at such rate or rates not exceeding the maximum rate permitted by law, and may be made redeemable at such times and prices (subject to the provisions of Article IV of this Indenture), all as may be provided by the resolution authorizing the issuance of such Additional Bonds. Except as to any difference in the date, the maturity or maturities, the rate or rates of interest or the provisions for redemption, such Additional Bonds shall be on a parity with and shall be entitled to the same benefit and security of this Indenture as the 1982 Bonds originally issued under the provisions of said Section 3.07. Additional Bonds shall be issued only upon the written consent of the registered owners of not less than fifty percent (50%) in aggregate principal amount of the Bonds then outstanding, and in no event shall Additional Bonds be issued during such time as the Company shall be in default under this Indenture or the Agreement. Such Additional Bonds shall be executed substantially in the form and manner hereinabove set forth for the 1982 Bonds and shall be deposited with the Trustee for authentication, but before such Bonds shall be authenticated and delivered by the Trustee, there shall be filed with the Trustee the following: (a) A copy, certified by the Assistant Secretary of the Issuer, of the resolution adopted by the Issuer authorizing the issuance of such Additional Bonds in the amount specified therein, setting forth the description of the additions to the Project for which such Additional Bonds are to be issued; (b) A copy, certified by the Assistant Secretary of the Issuer, of the resolution adopted by the Issuer awarding such Bonds, specifying the interest rate of each of such Bonds and the other terms and conditions and directing the authentication, registration and delivery of such Bonds to or upon the direction of the purchasers therein named upon payment of the purchase price therein set forth; 20 85 (c) An opinion of counsel for the Issuer stating that the issuance of such Bonds has been duly and validly authorized, and that all conditions precedent to the delivery of such Bonds have been fulfilled and that said Additional Bonds are valid and binding obligations of the Issuer in accordance with their terms; (d) A certificate, signed by the Authorized Company Representative, stating that, in conformity with the provisions of the Agreement, the Company has approved the issuance of such Additional Bonds and the terms, manner of issuance, purchase price and disposition of the proceeds thereof; and setting forth the revised amount of the loan based on the issuance of such Additional Bonds and the additional Loan Installments to be paid by the Company under the Agreement and the respective dates on which said installments shall be payable in order to provide for payment of the principal of and the interest on the Additional Bonds then proposed to be issued under this Section; (e) An executed counterpart of the amendment to the Agreement and a new Note, providing for the revised amount of the loan based on the issuance of such Additional Bonds and the additional Loan Installments to be paid by the Company under the Agreement and the Note and the respective dates on which said installments shall be payable in order to provide for payment of the principal of, premium, if any, and interest on such Additional Bonds and providing for the payment of all other expenses and costs incurred or to be incurred by virtue of the issuance of such Additional Bonds; (f) An executed counterpart of the supplemental indenture, or a copy thereof certified by the Assistant Secretary of the Issuer, providing for the terms, sale, authentication and delivery, of Additional Bonds and the disposition of the proceeds from the sale thereof, in the manner authorized by Section 14.01(c) of this Indenture; (g) Opinion of counsel for the Issuer with respect to the supplemental indenture and the amendment to the Agreement of similar tenor to the opinion furnished pursuant to clause (c) of Section 3.07 of this Article; 21 86 (h) Opinion of counsel for the Company with respect to the amendments to the Agreement, and, if also amended, the Mortgage and the Guaranty, of similar tenor to the opinion furnished with respect to the Agreement pursuant to clause (d) of Section 3.07 of this Article; (i) If desirable, an endorsement to the title insurance policy increasing the face amount of said policy; and (j) An opinion of nationally recognized bond counsel that the issuance of such Additional Bonds and the application of the proceeds of such Bonds to the purpose or purposes described in the resolution mentioned in clause (a) of this Section will not result in the interest on any Bonds theretofore issued under this Indenture and then outstanding or any thereof becoming subject to federal income taxes then in effect and that the interest on such Additional Bonds will be exempt from federal income taxes then in effect, except that such counsel shall not be required to opine with respect to those matters excluded from his opinion under clause (e) of Section 3.07. Upon receipt of these documents, the Trustee shall authenticate, register and deliver the Additional Bonds to or upon the direction of the purchasers named in the resolution mentioned in clause (b) of this Section, but only upon payment to the Trustee of the purchase price of the Additional Bonds. The Trustee shall be entitled to rely upon such resolution as to the names of the purchasers, the amount of such purchase price and the amounts of capitalized interest, if any. The proceeds (excluding accrued interest, which shall be deposited in the Interest Account in the Debt Service Fund) of all Additional Bonds issued under the provisions of this Section shall be deposited with the Trustee to the credit of the Construction Fund, and shall be used in the manner herein provided, with such changes and modifications as may be contained in the supplemental indenture applicable to such Additional Bonds. SECTION 3.09. Mutilated, Destroyed or Lost Bonds. In case any Bonds shall become mutilated or be improperly cancelled, or be destroyed, stolen or lost, the Trustee may, in its discretion, authorize the issuance, registration and 22 87 delivery of a new Bond of like tenor as the Bond so mutilated, improperly cancelled, destroyed, stolen or lost, in exchange and substitution for such mutilated or improperly cancelled Bond or in lieu of and substitution for the Bond destroyed, stolen or lost. The Issuer or the Trustee may require the Bondholder to furnish the Issuer and the Trustee proof of his ownership thereof and proof of such mutilation, improper cancellation, destruction, theft or loss satisfactory to the Issuer and the Trustee, to give the Issuer and the Trustee an indemnity bond in such amount as either of them may require (except that the Original Purchaser may give its letter agreement of indemnity in lieu of an indemnity bond), and to comply with such other reasonable regulations and conditions as they prescribe and pay such expenses as they may incur, all as a condition precedent to the issuance, registration and authentication of such duplicate Bonds. All such Bonds shall be cancelled by the Trustee and held for the account of the Issuer. If any Bond shall have matured or be about to mature, instead of issuing a substitute Bond, the Issuer may cause the same to be paid upon being indemnified as aforesaid, and if such Bond be lost, stolen or destroyed, without surrender thereof. Any such duplicate Bonds issued pursuant to this Section shall constitute original, additional contractual obligations on the part of the Issuer, whether or not the lost, stolen or destroyed Bonds be at any time found by anyone. Such duplicate Bonds shall in all respects, except for the number, be identical with those replaced except that they shall bear on their face the following additional clause: "This Bond is issued to replace a lost, stolen, mutilated, cancelled or destroyed Bond." Such duplicate Bonds shall be signed by the same officers who signed the original Bonds, provided, however, that in the event the officers who executed the original Bonds no longer hold office, then the new Bonds shall be signed by the officers then in office. Such duplicate Bonds shall be entitled to equal proportionate benefits and rights as provided herein with all other Bonds issued hereunder, the obligations of the Issuer upon the new Bonds being identical with its obligations upon the original Bonds and the rights of the registered owner being the same as those conferred by the original Bonds. 23 88 SECTION 3.10. Issuance of Refunding Bonds. Bonds of the Issuer may be issued under and secured by this Indenture at one time or from time to time, in addition to the 1982 Bonds and Additional Bonds, subject to the conditions hereinafter provided, for the purpose of providing funds for refunding at or prior to maturity all (but not less than all) of the Bonds of any series then outstanding, including the payment of any interest to accrue to the earliest redemption date and any expenses in connection with such refunding. Before any Bonds shall be issued under the provisions of this Section, the Issuer shall adopt a resolution authorizing the issuance of such Bonds, fixing the amount thereof, describing the Bonds to be refunded and the cost thereof. Such additional Bonds shall be dated, shall have the same designation as the 1982 Bonds issued under Section 3.07 of this Article except for an identifying series year and the addition of the word "Refunding," shall be stated to mature in such year or years, shall bear interest at such rate or rates not exceeding the maximum rate permitted by law, and may be made redeemable at such times and prices (subject to the provisions of Article IV of this Indenture), all as may be provided by the resolution authorizing the issuance of such additional Bonds. Except as to any difference in the date, the maturity or maturities, the rate or rates of interest or the provisions for redemption, such additional Bonds shall be on a parity with and shall be entitled to the same benefit and security of this Indenture as the Bonds issued and outstanding under the provisions of said Section 3.07 and Section 3.08. Such additional Bonds shall be executed substantially in the form and manner hereinabove set forth for Additional Bonds and shall be deposited with the Trustee for authentication, but before such Bonds shall be authenticated, registered and delivered by the Trustee, there shall be filed with the Trustee documents, relating to the Bonds issued under this Section, similar to those mentioned in clauses (a) through (j) of Section 3.08 of this Article and such additional documents as shall be required by the Trustee to evidence that provision has been duly made in accordance with the provisions of this Indenture for the redemption of all of the Bonds to be refunded, including the sufficiency of the proceeds of the refunding Bonds for the payment of all refunded Bonds and all expenses incurred in connection therewith. When the documents mentioned above in this Section shall have been filed with the Trustee and when the Bonds described in the resolutions mentioned in clauses (a) and (b) of Section 3.08 hereof, which are incorporated by ref- 24 89 erence in the preceding paragraph, shall have been executed and authenticated as required by this Indenture, the Trustee shall deliver such Bonds at one time to or upon the direction of the purchasers named in the resolution mentioned in said clause (b), but only upon payment to the Trustee of the purchase price of such Bonds. The Trustee shall be entitled to rely upon such resolution as to the names of the purchasers, the interest rate of such Bonds and the amount of such purchase price. The proceeds (excluding accrued interest) of all Bonds issued under the provisions of this Section shall be deposited by the Trustee, after payment of all expenses incident to such financing, to the credit of a special redemption fund appropriately designated to be held in trust for the sole and exclusive purpose of paying the principal of and the interest on the Bonds to be refunded. Any balance of such proceeds shall be deposited to the credit of the Interest Account in the Debt Service Fund. ARTICLE IV REDEMPTION OF BONDS SECTION 4.01. Optional Redemption Without Premium. The 1982 Bonds are redeemable by the Issuer prior to their stated date of maturity upon the exercise by the Company of its election to prepay all or a part of the Loan Installments under the Agreement, on any date, in whole or in part, at par plus accrued interest to the date fixed for redemption, and without premium. If less than all of the 1982 Bonds shall be called for redemption, prepayments shall be applied in inverse order of maturity of the 1982 Bonds. SECTION 4.02. Extraordinary Mandatory Redemption of Bonds Without Premium. The Bonds shall be redeemed, in inverse order of maturity, from excess construction proceeds as provided in Section 7.04 of this Indenture, and the Bonds are also subject to mandatory redemption prior to their stated dates of maturity, from the prepayment of the Loan Installments payable by the Company under Section 8.3 of the Agreement, at par plus accrued interest to the date fixed for redemption, but without premium, upon the occurrence of any of the following conditions: 25 90 (a) As a result of any legislative or administrative action (whether state or federal), or of any changes in the Constitution of the State of Florida or the Constitution of the United States of America or of a final decree, judgment or order of any court or administrative body (whether state or federal), the Agreement, the Mortgage, this Indenture or the Bonds issued pursuant hereto, shall become void or unenforceable or impossible of performance in accordance with the intent and purposes of the Company and the Issuer expressed in the Agreement and this Indenture; or (b) Final action shall have been taken by the Internal Revenue Service, the Department of the Treasury or any other governmental agency, authority or instrumentality, or an opinion of any court shall have been rendered, or other event shall have occurred, or other circumstances shall exist, any of which shall result in any part or all of the interest payable with respect to the Bonds issued pursuant to this Indenture not to be exempt from federal income taxes, other than those Bonds held by any person who, within the meaning of Section 103(b) (10) of the Code, shall be deemed a "substantial user" of the Project or a "related person" as defined in the Code. As used in this Article IV, the term "final action" shall mean either: (i) action taken by an administrative agency of the federal government which cannot be appealed administratively or to a court of competent jurisdiction or as to which the time for administrative appeal or court action has expired; or (ii) action by any court of competent jurisdiction as to which the time to appeal has expired or as to which an appeal has been denied or dismissed without further right of appeal; or (c) If the Project or the Mortgaged Property described in the Mortgage, or any part thereof having a value in excess of $1,000,000, shall be damaged, lost or destroyed or taken or damaged by any public authority in the exercise of its power of eminent domain, and the Company does not elect to repair, rebuild, replace or restore such property within 120 days after the deposit of funds related thereto with the Trustee, all as provided in Section 14 of the Mortgage. 26 91 If as a consequence of the occurrence of an event described in clause (b) above, it shall be necessary for the holder of any Bond to include interest received on any prior interest payment date in its gross income for federal income tax purposes, then the Company shall be required to pay under the provisions of the Agreement on the first interest payment date following the occurrence of such event and notice thereof to the Company, or on the date of redemption of the Bonds by reason of such occurrence, whichever shall first occur, and the Issuer shall thereupon pay, additional interest on such Bond for the period during which such interest shall have been subject to federal income taxes, in an amount equal to the difference between the Prime Rate as adjusted pursuant to the provisions hereof and the interest actually paid on the Bond for such period; provided, however, that interest shall never be required to be paid on the Bonds in excess of the maximum interest rate permitted to be paid under applicable law. The Company's obligations under this paragraph shall survive the release of this Indenture pursuant to Section 15.01 below. Upon the occurrence of any condition described in this Section 4.02, except as hereinafter provided in Section 4.03, all of the Bonds remaining outstanding shall be redeemed by the Trustee upon notice as provided below. Such redemption shall take place as soon as possible after the occurrence of any such action or condition, and in any event within sixty (60) days following written notice from any Bondholder to the Trustee and the Issuer, or from the Company or the Issuer to the Trustee that any such action or condition has occurred. SECTION 4.03. Election to Pay Additional Rate of Interest. Notwithstanding the noncompliance with any covenant or agreement by the Company to the contrary, at the written direction of the Company to the Trustee within thirty (30) days after receipt by the Company from the Trustee of notice by any Bondholder of the occurrence of a condition described in Section 4.02(b) above, the Company may elect, on behalf of the Issuer, to increase the rate of interest payable on such Bonds to a rate which shall be equal to the Prime Rate adjusted daily as provided in Section 3.07 of this Indenture, and in such event the Bonds shall not be redeemed; provided, however, that the Company shall never be required to pay interest on the Bonds in excess of the maximum interest rate permitted to be paid under applicable law, and further provided that if the Company shall make such election, the Company shall be obligated either to register the Bonds under the Securities Act of 1933, as amended, or to obtain an opinion of counsel accept- 27 92 able to the Trustee and the Issuer to the effect that such registration is not required. Notwithstanding the foregoing, if any legal or regulatory requirement applicable to any Bondholder shall prohibit said Bondholder from receiving the increased interest payment contemplated by this Section 4.03, Bonds held by such Bondholder shall be redeemed, to the extent required by such legal or regulatory requirement, as provided in Section 4.02 above. SECTION 4.04. Additional Bonds. Any Additional Bonds hereafter issued pursuant to Section 3.08 hereof may be redeemed prior to their stated dates of maturity at such price or prices and under such terms and conditions as shall be provided in the proceedings which authorize the issuance of such Additional Bonds. ARTICLE V REQUIREMENTS FOR REDEMPTION OF BONDS SECTION 5.01. Notice of Redemption of Bonds. A notice of any redemption of Bonds, either in whole or in part, signed by the Trustee shall be mailed, postage prepaid, at least thirty (30) days, but not more than sixty (60) days, before the redemption date, to all registered owners of Bonds or portions of Bonds to be redeemed, at their addresses as they appear on the registration books hereinabove provided for; but failure to so mail any such notice shall not affect the validity of the proceedings for the redemption of any Bond or portion thereof with respect to which no such failure has occurred. Each such notice shall set forth the date fixed for redemption, the redemption price to be paid and, if less than all of the Bonds then outstanding shall be called for redemption, the distinctive numbers and letters, if any, of such Bonds to be redeemed and, in the case of Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed. In case any Bond is to be redeemed in part only, the notice of redemption which relates to such Bond shall state also that on or after the redemption date, upon surrender of such Bond, a new Bond or Bonds in a principal amount equal to the unredeemed portion of such Bond will be issued. SECTION 5.02. Effect of Notice of Redemption. Notice having been given in the manner and under the condi- 28 93 tions hereinabove provided, the Bonds or portions of Bonds so called for redemption shall, on the redemption date designated in such notice, become and be due and payable at the redemption price provided for redemption of such Bonds or portions of Bonds on such date. On the date so designated for redemption, moneys for payment of the redemption price being held in separate accounts by the Trustee in trust for the holders of the Bonds or portions thereof to be redeemed, all as provided in this Indenture, interest on the Bonds or portions of Bonds so called for redemption shall cease to accrue, such Bonds and portions of Bonds shall cease to be entitled to any lien, benefit or security under this Indenture, and the registered owners of such Bonds or portions of Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof and, to the extent provided in Section 5.03 of this Article, to receive Bonds for any unredeemed portions of the Bonds. SECTION 5.03. Redemption of Portion of Registered Bonds. In case part but not all of an outstanding Bond shall be selected for redemption, the registered owner(s) thereof shall present and surrender such Bond to the Trustee for payment of the principal amount thereof so called for redemption, and the Issuer shall execute and the Trustee shall authenticate and deliver to or upon the order of such registered owner(s), without charge therefor, for the unredeemed balance of the principal amount of the Bond so surrendered, a Bond or Bonds registered as to principal and interest. SECTION 5.04. Cancellation of Redeemed Bonds. All Bonds redeemed or purchased by the Trustee under the terms of this Indenture, and all Bonds delivered to the Trustee by the Company for cancellation, shall be cancelled by the Trustee upon the surrender thereof. SECTION 5.05. Bonds Called for Redemption Deemed Not Outstanding. Bonds or portions of Bonds that have been duly called for redemption under the provisions of this Article V, or with respect to which irrevocable instructions (in form satisfactory to the Trustee) have been given to the Trustee to call such Bonds for redemption, and with respect to which amounts sufficient to pay the principal of and interest on the Bonds to the date fixed for redemption, shall be delivered to and held in separate accounts by the Trustee, in trust for the registered owners of the Bonds or a portion thereof to be redeemed, as provided in this 29 94 Indenture, shall not be deemed to be outstanding under the provisions of this Indenture and shall cease to be entitled to any lien, benefit or security under this Indenture, except to receive the payment of the redemption price on or after the designated date of redemption from moneys deposited with or held by the Trustee for such redemption of the Bonds and, to the extent provided in Section 5.03 of this Article, to receive Bonds for any unredeemed portions of the Bonds. ARTICLE VI CONSTRUCTION FUND SECTION 6.01. Creation. A special fund is hereby created and designated "Hillsborough County Industrial Development Revenue Bonds (Progressive American Insurance Company Project) Construction Fund" (the "Construction Fund"), to the credit of which such deposits shall be made as are required by the provisions of Sections 3.07 and 3.08 of this Indenture and any payments made by the Company pursuant to Section 6.17(c) of the Agreement. Any moneys received by the Trustee from any other source for the acquisition, construction and installation of the Project or additions to the Project shall be deposited to the credit of the Construction Fund. The moneys in the Construction Fund shall be held by the Trustee in trust and, subject to the provisions of Section 6.04 of this Indenture, shall be applied to the payment of the cost of the Project and, pending such application, shall be subject to a lien and charge in favor of the registered owners of the Bonds issued and outstanding under this Indenture and in favor of the Trustee for the further security of such Bondholders and the Trustee until paid out or transferred as herein provided. All income earned from the investment of funds held in the Construction Fund shall be retained in the Construction Fund and expended as set forth in this Article VI. SECTION 6.02. Payments from Construction Fund. Payment of the cost of the Project shall be made from the Construction Fund. All payments from the Construction Fund shall be subject to the provisions and restrictions set forth in this Article. SECTION 6.03. Cost of Project. For the purposes of this Indenture the Cost of the Project shall include the 30 95 cost of acquiring, constructing and installing the same, and, without intending thereby to limit or restrict any proper definition of such cost under the Act, shall include all payments and disbursements from the Construction Fund permitted under Section 4.3 of the Agreement. SECTION 6.04. Prerequisites to Payment. Payments from the Construction Fund shall be made only in accordance with the provisions of the Agreement, and the Trustee is authorized and directed to apply the moneys in the Construction Fund in accordance therewith but only upon receipt of the statements, orders, certifications and other approvals required by the Agreement duly executed by the persons and in the manner provided for therein. SECTION 6.05. Reliance on Certificates. All statements, orders, certificates and other approvals received by the Trustee, as required in this Article as conditions of payment from the Construction Fund, may be relied upon by the Trustee, and shall be retained by the Trustee, subject at all reasonable times to examination by the Company, the Issuer, any Bondholder and the agents and representatives thereof, during the term of the Agreement. SECTION 6.06. Establishment of Completion Date. The establishment of the Completion Date and the disposition of moneys then held for the credit of the Construction Fund shall be in accordance with the Agreement. ARTICLE VII REVENUES AND FUNDS SECTION 7.01. Covenants of the Issuer and the Trustee. (a) The Issuer covenants and agrees that it will not suffer, permit or take any action or do anything or fail to take any action or fail to do anything which may result in the termination of the Agreement so long as any Bond is outstanding; that it will fulfill its obligations and will require the Company to perform punctually the Company's duties and obligations under the Agreement and will otherwise administer the Agreement in accordance 31 96 with its terms to assure the continued ownership, operation, management, repair and maintenance of the Project by the Company and the Company's payment of the Loan Installments thereunder and the costs and expenses of ownership, operation, management, repair and maintenance of the Project, all in accordance with the terms of the Agreement; that it will not terminate the Agreement or cause it to be terminated except in strict accordance with the terms thereof and with the concurrence of the Trustee; that it will promptly notify the Trustee of any actual or alleged event of default under or breach of the Agreement, whether by the Company or the Issuer, and will further notify the Trustee at least thirty (30) days before the proposed date of effectiveness thereof of any proposed termination or amendment of the Agreement; that it will not execute or agree to any change, amendment or modification of or supplement to the Agreement except by supplemental contract duly executed by the Company and the Issuer with the approval of the Trustee and upon the further terms and conditions set forth in Article XVI of this Indenture; and that it will not agree to any abatement, reduction, abrogation, waiver, diminution or other modification in any manner or to any extent whatsoever of the obligation of the Company or any successor under the Agreement to pay the Loan Installments and to meet its other obligations as provided in the Agreement. (b) The Trustee covenants and agrees that it will undertake to enforce to the extent reasonably practicable and necessary for and on behalf of the Issuer the obligations of the Company to the Issuer and the Trustee under the Agreement. In the event of a termination of the Agreement while any Bonds are outstanding, the Issuer shall use its best efforts to enter into new contracts or other agreements with respect to the Project in order to produce the maximum possible amount of revenues therefrom. SECTION 7.02. Creation of Debt Service Fund and Accounts Therein. A special fund is hereby created by the Trustee and designated "Hillsborough County Industrial Development Revenue Bonds (Progressive American Insurance Company Project) Debt Service Fund" (the "Debt Service Fund"). There are hereby created three separate accounts in the Debt Service Fund designated "Interest Account," "Principal Account" and "Redemption Account," respectively. 32 97 The moneys in each of the said Accounts in the Debt Service Fund shall be held by the Trustee in trust and applied as hereinafter provided with respect to each said Account and, pending such application, shall be subject to a lien and charge in favor of the holders of the Bonds issued and outstanding under this Indenture and the Trustee and for the further security of such registered owners and the Trustee until paid out or transferred as herein provided. The Issuer covenants that it will cause to be paid by the Company directly to the Trustee for deposit to the credit of the Debt Service Fund all Loan Installments payable by the Company to the Issuer in accordance with the Agreement and the Note. All moneys received by the Trustee hereunder, either from the Company or the Issuer (but only to the extent of the amounts required to make the then due payments as set forth in (a), (b) and (c) below), shall be deposited to the credit of the following Accounts in the following order: (a) To the credit of the Interest Account, such amount of the moneys so received by the Trustee (or all such moneys if less than the required amount) as may be required to make the total amount then held to the credit of the Interest Account equal to the total of the interest which is then or will be or become due and payable on the next ensuing interest payment date on all Bonds then outstanding; (b) Then to the credit of the Principal Account, such amount of the moneys so received as may be required to make the total amount then held to the credit of the Principal Account equal to the principal, if any, which is then or will be or become due and payable on the next ensuing principal payment date on all Bonds then outstanding, if any; and (c) Then to the credit of the Redemption Account, the balance, if any, of such moneys remaining after making the deposits under clauses (a) and (b) above. SECTION 7.03. Provisions for Payment of Bonds from Interest and Principal Account. The Trustee shall, on each interest and principal payment date, withdraw from the Interest and Principal Accounts and remit to the registered owner of the Bonds, the respective amounts required for pay- 33 98 ing the interest and principal on such Bonds as such payments become due and payable. SECTION 7.04. Application of Moneys in Redemption Account. Moneys held for the credit of the Redemption Account in the Debt Service Fund shall with reasonable diligence be applied to the payment of costs and expenses referred to in Section 5.2(b) and (c) of the Agreement and then to the retirement of Bonds issued under the provisions of this Indenture and then outstanding in the following order: (a) The Trustee shall first endeavor to purchase Bonds or portions of Bonds secured hereby and then outstanding, whether or not such Bonds or portions of Bonds shall then be subject to redemption, at the most advantageous price obtainable with reasonable diligence, such price not to exceed the principal of such Bonds. The Trustee shall pay the interest accrued on such Bonds or portions of Bonds to the date of redemption thereof from the Interest Account, the purchase price from the Redemption Account and all expenses in connection with such purchase from moneys deposited with it by the Company for that purpose under Section 5.2 of the Agreement or from the Redemption Account, but no such purchase shall be made by the Trustee within the period of thirty (30) days next preceding any interest payment date on which such Bonds are subject to call for redemption under the provisions of this Indenture. (b) To the extent moneys remain on deposit in the Redemption Account in the Debt Service Fund, the Trustee shall call for redemption on each interest payment date on which Bonds are subject to redemption from moneys in the Debt Service Fund such amount of Bonds or portions of Bonds then subject to redemption as will as nearly as may be possible exhaust the money then held for the credit of the Redemption Account in the Debt Service Fund. Such redemption shall be made pursuant to the provisions of Article V of this Indenture. Prior to the redemption date, the Trustee shall withdraw from the Interest Account and from the Redemption Account in the Debt Service Fund and set aside in separate accounts the respective amounts required for paying the interest on, and the principal of, the Bonds or portions of Bonds so called for 34 99 redemption, and shall pay from moneys deposited with it by the Company for that purpose under Section 5.2 of the Agreement or from the Redemption Account in the Debt Service Fund all expenses in connection with such redemption. (c) If the Bonds shall not then be subject to redemption from moneys in the Redemption Account in the Debt Service Fund and if the Trustee shall at any time be unable to exhaust the moneys in the purchase of Bonds under the provisions of paragraph (a) of this Section, such moneys or the balance of such moneys, as the case may be, shall be retained in the Redemption Account in the Debt Service Fund and, as soon as it is feasible, applied to the retirement of Bonds. Notwithstanding anything to the contrary in this Section 7.04, funds held in the Redemption Account pursuant to the provisions of Section 4.3(j) of the Agreement shall only be applied and invested as provided in said Section 4.3(j). SECTION 7.05. Application of Pledged Moneys. Subject to the terms and conditions set forth in this Indenture, moneys held for the credit of the Debt Service Fund shall be held in trust and disbursed by the Trustee for (a) the payment of interest on the Bonds issued hereunder as such interest becomes due and payable; (b) the payment of the principal of such Bonds at such time as such principal becomes due and payable; (c) the payment of the purchase or redemption price of such Bonds before their maturity in the manner and to the extent provided in Section 7.04 hereof; and (d) for the payment of all costs and expenses as described in Section 5.2(b) and (c) and Sections 9.5 and 9.7 of the Agreement, and such moneys are hereby pledged to and charged with the payments mentioned in this Article. Whenever the moneys held for the credit of the Debt Service Fund shall be sufficient for paying the principal of and the interest accrued on all Bonds then outstanding under the provisions of this Indenture, and all costs and expenses as herein described, such moneys shall be applied by the Trustee, for such payments and then to the payment, purchase or redemption of such Bonds in the manner and to the extent provided in Section 7.04 hereof. 35 100 SECTION 7.06. Unclaimed Funds. All moneys which the Trustee shall have withdrawn from the Debt Service Fund or shall have received from any other source and set aside for the purpose of paying any of the Bonds hereby secured, either at the maturity thereof or upon call for redemption, shall be held in trust for the respective registered owners of such Bonds. Any moneys which shall be so set aside or deposited by the Trustee, as Paying Agent, and which shall remain unclaimed by the registered owners of such Bonds for a period of six (6) years after the date on which such Bonds shall have become due and payable shall upon request in writing be paid to the Company or to the extent required by law, to such officer, board or body as may then be entitled by law to receive the same, and thereafter the registered owner(s) of such Bonds shall look only to the Company or to such officer, board or body, as the case may be, for payment and then only to the extent of the amount so received without any interest thereon, and the Trustee and any such party not receiving such funds shall have no responsibility with respect to such moneys. SECTION 7.07. Cancellation of Bonds upon Payment. All Bonds paid, redeemed or purchased, either at or before maturity, shall be cancelled upon the payment, redemption or purchase of such Bonds. All Bonds cancelled under any of the provisions of this Indenture shall be cremated or otherwise destroyed by shredding by the Trustee. The Trustee effecting such cremation or shredding shall execute a certificate in triplicate describing the Bonds so cremated or shredded. One executed certificate shall be filed with the Issuer, one executed certificate shall be filed with the Company and the other executed certificate shall be retained by or filed with the Trustee. ARTICLE VIII DEPOSITORIES OF MONEYS, SECURITY FOR DEPOSITS AND INVESTMENT OF FUNDS SECTION 8.01. Deposits Constitute Trust Funds. All funds or other property which at any time may be owned or held in the possession of or deposited with the Issuer under the provisions of this Indenture shall be held in trust and applied only in accordance with the provisions of this Indenture, and shall not be subject to lien or attachment by any creditor of the Issuer. 36 101 All funds or other property which at any time may be owned or held in the possession of or deposited with the Trustee under this Indenture and the Agreement shall be continuously secured, for the benefit of the Issuer and the registered owners of the Bonds either (a) by lodging with a bank or trust company approved by the Issuer and the Trustee, as custodian, with collateral security consisting of obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America having a market value (exclusive of accrued interest) not less than the amount of such deposit, or (b) in such other manner as may then be required or permitted by applicable state or federal laws and regulations regarding the security for, or granting a preference in the case of, the deposit of trust funds. But it shall not be necessary for the Trustee to lodge such collateral security with any other bank or trust company, if it lodges such collateral security with its Trust Department as custodian, nor shall it be necessary for the Trustee to give security for any moneys which shall be represented by investments in the obligations referred to in Section 8.02 hereof, purchased under the provisions of this Article as an investment of such moneys. All moneys deposited with each Depositary shall be credited to the particular Fund or Account to which such moneys belong. SECTION 8.02. Investment of Moneys. Moneys held for the credit of the Construction Fund and the Redemption Account in the Debt Service Fund, shall be invested and reinvested at the oral request of the Authorized Company Representative, to be confirmed thereafter in writing, or if there shall be no such request, at the sole discretion of the Trustee, by the Trustee in Investment Obligations. Such investments or reinvestments shall mature not later than the respective dates, as estimated by the Trustee, that the moneys held for the credit of said Funds or Accounts will be needed for the purposes of such Funds or Accounts. The written request of the Authorized Company Representative shall specify the issuer or obligor, the type, principal amount, interest rate and maturity of each such requested investment of moneys. Moneys held for more than five (5) days for the credit of the Interest Account in the Debt Service Fund shall be invested and reinvested in the same manner as provided above for the investment of funds. Obligations so purchased as an investment of moneys in any such Fund or Account shall be deemed at all times to 37 102 be a part of such Fund or Account, and shall at all times, for the purposes of this Indenture, be valued at the cost thereof at the time of purchase, without regard to fluctuation in market value. The Trustee, at the direction of the Authorized Company Representative or when required to pay debt service on the Bonds, shall sell at the best price obtainable any obligations so purchased whenever it shall be necessary so to do in order to provide moneys to meet any payment or transfer from such Funds or Accounts. Neither the Trustee nor the Issuer shall be liable or responsible for any loss resulting from any such investments or reinvestments. All income derived from the investment of moneys in such Funds and Accounts, shall be retained in such Funds or Accounts to the extent necessary to make the amount then on deposit therein equal to the maximum amount required to be on deposit in such Funds or Accounts, and any remaining balance shall be deposited in the Redemption Account in the Debt Service Fund and used as provided herein for said Account. ARTICLE IX GRANT OF MORTGAGE AND SECURITY INTEREST SECTION 9.01. Grant of Mortgage and Security Interest. The Issuer hereby pledges and assigns to the Trustee, and grants the Trustee a mortgage on and security interest in, all of the Issuer's right, title and interest in and under the Note, the Agreement (including the Trustee's rights, but excluding the Issuer's rights under Sections 5.2(c), 7.1, 9.5 and 9.7 of the Agreement), the Loan Installments, and other money, and the Mortgage, as security for the payment of the Bonds, the interest thereon and for the satisfaction of any other obligation assumed by it in connection with such Bonds. It is mutually agreed and covenanted by and between the parties hereto, that such rights and security interests are for the equal and proportionate benefit and security of all and singular, present and future owners of Bonds issued and to be issued under the Indenture, without preference, priority or distinction as to lien or otherwise, except as provided herein, of any one Bond over any other Bond, by reason of priority in the issue, sale or negotiation thereof or otherwise. 38 103 ARTICLE X PARTICULAR COVENANTS SECTION 10.01. Covenant of Issuer as to Performance of Obligations. The Issuer covenants that it will promptly pay the principal of and the interest on every Bond issued under the provisions of this Indenture at the places, on the dates and in the manner provided herein and in said Bonds according to the true intent and meaning thereof. The principal and interest on the Bonds are payable solely from the Loan Installments and any other income and other moneys to the extent provided herein, which are hereby pledged to the payment thereof in the manner and to the extent hereinabove specified. The Bonds and the interest thereon shall not be deemed to constitute a general debt, liability or obligation of the Issuer or of the State of Florida or of any political subdivision thereof, or a pledge of the faith and credit of the Issuer or of the State of Florida or of any political subdivision thereof, but the Bonds shall be payable solely from the revenues provided therefor and from the collateral pledged as security therefor, and the Issuer is not obligated to pay the Bonds or the interest thereon except from the revenues and proceeds pledged therefor and neither the faith and credit nor the taxing power of the Issuer or of the State of Florida or of any political subdivision thereof is pledged to the payment of the principal of or the interest on the Bonds. SECTION 10.02. Covenant to Perform Undertakings. The Issuer covenants that it will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in this Indenture, in any and every Bond executed, authenticated and delivered hereunder and in all proceedings of the Issuer pertaining thereto and will faithfully observe and perform at all times any and all covenants, undertakings, stipulations and provisions of the Agreement on its part to be observed or performed. The Issuer covenants that it is duly authorized under the Constitution and laws of the State of Florida, including particularly and without limitation the Act, to issue the Bonds authorized hereby and to enter into this Indenture, to pledge funds or other property which at any time may be owned or held in the possession of the Issuer, including without limitation, the Loan Installments and any other income and other moneys in the manner and to the extent herein 39 104 set forth; that all action on its part for the issuance of the Bonds initially issued hereunder and the execution and delivery of this Indenture has been duly and effectively taken; and that such Bonds in the hands of the holders and owners thereof are and will be valid and enforceable obligations of the Issuer according to the tenor and import thereof. SECTION 10.03. Covenant to Perform Further Acts. The Issuer covenants that it will do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered, such indentures supplemental hereto and such further acts, instruments and transfers as the Trustee may reasonably require for the better pledging unto the Trustee all and singular the Loan Installments and any other income, moneys, rights and properties pledged hereby to the payment of the principal of and interest and premium, if any, on the Bonds. SECTION 10.04. Covenant to Pay Taxes. Pursuant to the provisions of Article VI of the Agreement, the Company has agreed to pay all taxes, assessments and governmental charges at any time lawfully levied or assessed upon or against the Project and the Project Site or any part thereof; provided, however, that nothing contained in this Indenture shall require the payment of any such taxes, assessments or governmental charges if the same are not required to be paid under the provisions of Article VI of the Agreement. SECTION 10.05. Covenant to Maintain and Operate. Pursuant to the provisions of Article VI of the Agreement, the Company has agreed at its own expense to pay or cause to be paid all costs of maintaining, repairing and operating the Project. SECTION 10.06. Covenant to Insure; Application of Insurance Proceeds. Pursuant to Article VI of the Agreement and Section 13 of the Mortgage, the Company has agreed to keep the Project continuously insured throughout the Agreement Term (as defined in the Agreement) against such risks as are customarily insured against in connection with the operation of facilities of like size, type and location, paying as the same become due and payable all premiums in respect thereto; and the Trustee hereby agrees to apply the 40 105 proceeds of said insurance in accordance with Section 14 of the Mortgage. SECTION 10.07. Covenant as to Recordation. Pursuant to Article VI of the Agreement, the Company has agreed that it will cause this Indenture and all supplements hereto, the Agreement and all supplements thereto or amendments thereof, the Mortgage and the Assignment of Mortgage to be kept, and either recorded and filed, or notices thereof or financing statements relating thereto recorded and filed, in such manner and in such places as may be required by law in order fully to preserve and protect the security of the registered owners of the Bonds and the rights of the Issuer and Trustee hereunder. SECTION 10.08. Covenant to Enforce Rights. The Agreement sets forth the covenants and obligations of the Issuer and the Company, including a provision in Section 10.5 thereof that subsequent to the issuance of the Bonds and prior to their payment in full or provision for the payment thereof having been made in accordance with the provisions hereof, the Agreement may not be amended, changed, modified, altered or terminated (other than as provided therein) without the concurring written consent of the Trustee and otherwise as provided in Article XVI of this Indenture and reference is hereby made to the Agreement for a detailed statement of said covenants and obligations of the Company under the Agreement, and the Issuer agrees that the Trustee in its name or in the name of the Issuer may enforce all rights of the Issuer and all obligations of the Company under and pursuant to the Agreement for and on behalf of the Bondholders, whether or not the Issuer is in default hereunder. SECTION 10.09. Covenant as to Performance of Obligations. The Issuer covenants that it will faithfully perform each covenant, stipulation, obligation and agreement contained in the Agreement which is to be performed by it, and that it will diligently enforce the performance of each covenant, stipulation, obligation and agreement contained in the Agreement which is to be performed by the Company. 41 106 ARTICLE XI EVENTS OF DEFAULT; REMEDIES SECTION 11.01. Events of Default. Each of the following events is hereby declared an "event of default," provided, however, that in any case in which such event of default shall be occasioned by the action or inaction of the Issuer, such action or inaction may be cured by the Company within the time and in the manner as contemplated by the provisions of this Article XI: (a) payment of the principal or the making of any deposits into the Redemption Account in the Debt Service Fund, of or for any of the Bonds shall not be made when the same shall become due and payable, either at maturity (whether by acceleration or otherwise) or on required payment dates by proceedings for redemption or otherwise, or within ten (10) days thereafter; or (b) payment of any installment of interest shall not be made when the same shall become due and payable or within ten (10) days thereafter; or (c) the Issuer shall for any reason be rendered incapable of fulfilling its obligations hereunder to the extent that the payment of, security for, or tax exempt status of the Bonds would be materially adversely affected, and such conditions shall continue unremedied for a period of thirty (30) days after the Issuer becomes aware of such conditions; or (d) an order or decree shall be entered, with the consent or acquiescence of the Issuer, appointing a receiver or receivers of the Issuer and of the Loan Installments or any other income to be derived by the Issuer under the Agreement or such order or decree, having been entered without the consent or acquiescence of the Issuer, shall not be vacated or discharged or stayed on appeal within ninety (90) days after the entry thereof; or (e) any proceedings shall be instituted, with the consent or acquiescence of the Issuer, for the purpose of effecting a composition between the Issuer and its creditors or for the purpose of adjusting the claims of such creditors, pursuant to any federal or state statutes now or hereafter 42 107 enacted, if the claims of such creditors are under any circumstances payable from the Loan Installments or any other income to be derived from the sale of the Project; or (f) an event of default under the Agreement as defined in Section 9.1 thereof shall have occurred; or (g) an "Event of Default" as defined under the terms of the Mortgage or the Guaranty shall have occurred; or (h) the Issuer shall default in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Bonds or in this Indenture on the part of the Issuer to be performed, or the Company shall default in connection with the matters referred to in Sections 10.04, 10.05 or 10.06 of this Indenture, and such default shall continue for thirty (30) days after written notice specifying such default and requiring the same to be remedied shall have been given to the Issuer and the Company by the Trustee, which may give such notice in its discretion and shall give such notice at the written request of the registered owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding. (i) in the good faith opinion of the Trustee, there has been any material adverse change in the financial status of the Company or the Guarantor. SECTION 11.02. Acceleration of Maturities. Upon the happening and continuance of any event of default specified in Section 11.01 of this Article, then and in every such case the Trustee may, and upon the written request of the registered owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding shall, by a notice in writing to the Issuer, declare the principal of all of the Bonds then outstanding (if not then due and payable) to be due and payable immediately, without premium, and upon such declaration the same shall become and be immediately due and payable, anything contained in the Bonds or in this Indenture to the contrary notwithstanding; provided, however, that if at any time after the principal of the Bonds shall have been so declared to be due and payable, and before the entry of final judg- 43 108 ment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under this Indenture, moneys shall have accumulated in the appropriate Accounts in the Debt Service Fund sufficient to pay the principal of all matured Bonds and all arrears of interest, if any, upon all Bonds then outstanding (except the principal of any Bonds not then due and payable by their terms and the interest accrued on such Bonds since the last interest payment date), and the charges, compensation, expenses, disbursements, advances and liabilities of the Trustee and all other amounts then payable by the Issuer hereunder shall have been paid or a sum sufficient to pay the same shall have been deposited with the Trustee, and every other default known to the Trustee in the observance or performance of any covenant, condition, agreement or provision contained in the Bonds or in this Indenture (other than a default in the payment of the principal of such Bonds then due and payable only because of declaration under this Section) shall have been remedied to the satisfaction of the Trustee, then and in every such case the Trustee may, and upon the written request of the registered owners of not less than seventy-five percent (75%) in aggregate principal amount of the Bonds not then due and payable by their terms and then outstanding shall, by written notice to the Issuer, rescind and annul such declaration and its consequences, but no such rescission or annulment shall extend to or affect any subsequent default or impair any right consequent thereon. SECTION 11.03. Enforcement of Remedies. Upon the happening and continuance of any event of default specified in Section 11.01 of this Article, then and in every such case the Trustee may proceed, and upon the written request of the registered owners of not less than twenty-five percent (25%) in principal amount of the Bonds then outstanding hereunder shall proceed, subject to the provisions of Sections 11.02 and 12.02 of this Indenture, to protect and enforce its rights and the rights of the Bondholders under the laws of the State of Florida, including the Act, or under this Indenture, the Mortgage or the Guaranty, by such suits, actions or special proceedings in equity or at law, or by proceedings in the office of any board, body or officer having jurisdiction, either for the specific performance of any covenant or agreement contained herein or in aid of execution of any power herein granted or for the enforcement of any proper legal or equitable remedy, as the Trustee, being advised by counsel, shall deem most effectual to protect and enforce such rights. 44 109 In the enforcement of any remedy against the Issuer under this Indenture the Trustee shall be entitled to institute such action against the Issuer necessary to compel performance of any agreement of the Issuer hereunder and otherwise, with respect to any action against the Issuer, to recover solely from moneys in the Debt Service Fund and any other moneys available for such purposes but in no other manner shall the Issuer be deemed liable for any other damages of whatsoever kind or nature. SECTION 11.04. Pro Rata Application of Funds. Anything in this Indenture to the contrary notwithstanding, if at any time the moneys in the Debt Service Fund shall not be sufficient to pay the principal of or the interest on the Bonds as the same become due and payable (either by their terms or by acceleration of maturities under Section 11.02), such moneys, together with any moneys then available or thereafter becoming available for such purpose, whether through the exercise of the remedies provided for in this Article or otherwise, shall, subject to the provisions of Section 12.05 hereof, be applied as follows: (a) Unless the principal of all the Bonds shall have become due and payable, all such moneys shall be applied (1) to the payment of all installments of interest then due, in the order of the maturity of the installments of such interest, to the persons entitled thereto, ratably, without any discrimination or preference, and (2) to the payment of all installments into the Principal Account in the Debt Service Fund then due. (b) If the principal of all the Bonds shall have become due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due, respectively, for principal and interest, to the persons entitled thereto without any discrimination or preference except as to any difference in the respective rates of interest specified in the Bonds. (c) If the principal of all such Bonds shall have been declared due and payable and if such declaration shall thereafter have been rescinded and 45 110 annulled under the provisions of Section 11.02 of this Article, then, subject to the provisions of paragraph (b) of this Section in the event that the principal of all such Bonds shall later become due and payable or be declared due and payable, the moneys remaining in and thereafter accruing to the Debt Service Fund for such Bonds shall be applied in accordance with the provisions of paragraph (a) of this Section. Whenever moneys are to be applied by the Trustee pursuant to the provisions of this Section, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its sole discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future; the setting aside of such moneys, in trust for the proper purpose, shall constitute proper application by the Trustee; and the Trustee shall incur no liability whatsoever to the Issuer, to any Bondholder or to any other person for any delay in applying any such moneys, so long as the Trustee acts with reasonable diligence, having due regard to the circumstances and ultimately applies the same in accordance with such provisions of this Indenture as may be applicable at the time of application by the Trustee. Whenever the Trustee shall exercise such discretion in applying such moneys, it shall fix the date (which shall be an interest payment date unless the Trustee shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date, and shall not be required to make payment to the owner of any Bond unless such Bond shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid. SECTION 11.05. Effect of Discontinuing Proceedings. In case any proceeding taken by the Trustee on account of any default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, then and in every such case the Issuer, the Trustee and the Bondholders shall be restored to their former positions and rights hereunder, respectively, and all rights, remedies, powers and duties of the Trustee shall continue as though no such proceeding had been taken. 46 111 SECTION 11.06. Directions to Trustee as to Remedial Proceedings. Anything in this Indenture to the contrary notwithstanding, the registered owners of a majority in principal amount of the Bonds then outstanding hereunder shall have the right, subject to the provisions of Section 12.02 of this Indenture, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee hereunder, provided that such direction shall not be otherwise than in accordance with law or the provisions of this Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of counsel to the Trustee would be unjustly prejudicial to Bondholders not parties to such direction. SECTION 11.07. Restrictions on Actions by Individual Bondholders. No Bondholder shall have any right to institute any suit, action or proceeding in equity or at law for the execution of any trust hereunder or for any other remedy hereunder unless such Bondholder previously shall have given to the Trustee written notice of the event of default on account of which such suit, action or proceeding is to be taken, and unless the holders of not less than twenty-five percent (25%) in principal amount of the Bonds then outstanding shall have made written request of the Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers hereinabove granted or to institute such action, suit or proceeding in its or their name, and unless, also, there shall have been offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, including the reasonable fees of its attorneys (including fees on appeal), and the Trustee shall have refused or neglected to comply with such request within a reasonable time; and such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of this Indenture or for any other remedy hereunder. It is understood and intended that no one or more registered owners of the Bonds hereby secured shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of this Indenture, or to enforce any right hereunder, except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the benefit of all registered 47 112 owners of the outstanding Bonds, and that any individual rights of action or any other right given to one or more of such owners by law are restricted by this Indenture to the rights and remedies herein provided. SECTION 11.08. Appointment of a Receiver. Upon the occurrence of an event of default, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Bondholders under this Indenture, the Trustee shall be entitled, as a matter of right, without notice, and without regard to the value of the Project or the solvency of the Company or the Issuer, to the appointment of a receiver or receivers of the Loan Installments, pending such proceedings, with such powers as the court making such appointments shall confer, whether or not said Loan Installments shall be deemed sufficient ultimately to satisfy the Bonds outstanding hereunder. SECTION 11.09. Enforcement of Rights of Action. All rights of action under this Indenture or under any of the Bonds secured hereby, enforceable by the Trustee, may be enforced by it without the possession of any of the Bonds or the production thereof at the trial or other proceeding relative thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in its name or in the name of the Issuer, as appropriate, for the benefit of all the registered owners of such Bonds subject to the provisions of this Indenture. SECTION 11.10. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Trustee or to the Bondholders is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or equity or by statute. SECTION 11.11. Delay not a Waiver. No delay or omission of the Trustee or of any registered owner of the Bonds to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and every power and remedy given by this Indenture to the Trustee and Bondholders, respectively, may be exercised from time to time and as often as may be deemed expedient; provided, however, that no such power or remedy 48 113 may be exercised in the case of a default where such particular default has later been cured with or without the exercise of such power or remedy. Before the entry of final judgment or decree in any suit, action or proceeding instituted by the Trustee under the provisions of this Indenture or before the completion of the enforcement of any other remedy under this Indenture, the Trustee shall be permitted to discontinue such suit, action, proceeding, or enforcement of any remedy if in its opinion any default forming the basis of such suit, action, proceeding or enforcement of any remedy shall have been remedied. SECTION 11.12. Notice of Default. The Trustee shall mail to all Bondholders written notice of the occurrence of any event of default set forth in Section 11.01 of this Article within thirty (30) days after the Trustee shall have notice, pursuant to Section 12.08, that any such event of default shall have occurred. SECTION 11.13. Additional Remedies. The remedies conferred in this Article shall be in addition to all remedies provided for in the Agreement, which remedies are hereby incorporated herein by reference, and may be enforced by the Trustee in accordance with the terms of this Indenture. ARTICLE XII CONCERNING THE TRUSTEE, PAYING AGENT AND BOND REGISTRAR SECTION 12.01. Acceptance of Trusts; Performance of Duties. The Trustee accepts and agrees to execute the trusts imposed upon it by the express terms of this Indenture, and the obligations of the Issuer expressly assumed by the Trustee under this Indenture, but only upon the terms and conditions set forth in this Article and subject to the provisions of this Indenture, to all of which the parties hereto and the respective Bondholders agree. All funds created under this Indenture shall be held by the Trustee (except as otherwise herein provided) and administered as trust funds as herein provided. 49 114 SECTION 12.02. Trustee Entitled to Indemnity. The Trustee shall be under no obligation to institute any suit, or to take any remedial proceeding under this Indenture or under the Agreement, or to enter any appearance or in any way defend in any suit in which it may be made defendant, or to take any steps in the execution of the trust hereby created or in the enforcement of any rights and powers hereunder or under the Agreement, until it shall be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements, and against all liability; the Trustee may, nevertheless, begin suit, or appear in and defend suit, or do anything else in its judgment reasonably proper to be done by it as such Trustee, without indemnity, and in any such case the Issuer shall reimburse the Trustee from the Loan Installments, and from funds available therefor under the Agreement for all costs and expenses, outlays and attorney's fees and other reasonable disbursements properly incurred in connection therewith. The Trustee shall have a lien upon and security interest in all moneys or other assets which shall secure the payment of the Bonds, to secure repayment of such disbursements, and if the Issuer shall fail to make such reimbursement, the Trustee may reimburse itself from such moneys or other assets and shall be entitled to a preference therefor over any of the Bonds outstanding hereunder. SECTION 12.03. Limitation on Obligations and Responsibilities. The Trustee shall be under no obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the Issuer or the Company, or to report, or make or file claim or proof of loss for, any loss or damage insured against or which may occur, or to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made. The Trustee shall have no responsibility with respect to the validity or sufficiency of this Indenture or the due execution or acknowledgment thereof, or the validity or sufficiency of the security provided hereunder, or, except as to the authentication thereof by the Trustee, with respect to the validity of the Bonds or the due execution or issuance thereof or any recital therein. Trustee shall not be accountable for the use of any proceeds of Bonds authenticated or delivered hereunder. SECTION 12.04. Limitation on Liability. The Trustee shall not be liable or responsible because of the 50 115 failure of the Issuer or any of its employees or agents to make any collections or deposits or to perform any act herein required of them or because of the loss of any moneys arising through the insolvency or the act or default or omission of any other Depository other than itself in which such moneys shall have been deposited under the provisions of this Indenture. The Trustee shall not be responsible for the application of any of the proceeds of the Bonds or any other moneys deposited with it and paid out, withdrawn or transferred in accordance with the provisions of this Indenture. The immunities and exemptions from liability of the Trustee hereunder shall extend to its directors, officers, employees and agents. The Trustee may perform the duties required of it under this Indenture by or through officers, agents, employees or attorneys. None of the provisions of this Indenture shall be construed to relieve the Trustee from liability for its own gross negligence, or willful misconduct, except that (a) the Trustee shall not be liable for any error of judgment made in good faith by any one of its officers, agents or employees, unless it shall be established that the Trustee was grossly negligent in ascertaining the pertinent facts; (b) 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 registered owners of not less than twenty-five percent (25%) in principal amount of the Bonds then outstanding 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 the provisions of this Indenture; and (c) The Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any counsel, accountants or skilled persons of generally accepted competence selected by it with reasonable care. SECTION 12.05. Compensation of Trustee. Subject to the provisions of any contract between the Issuer and the Trustee, the Issuer shall cause the Company to pay to the Trustee fees and charges in accordance with Sections 5.2(b), 9.5 and 9.7 of the Agreement. The Trustee shall have a lien 51 116 upon and security interest in all moneys or other assets which shall secure the payment of the Bonds, to secure the payment of such fees and charges, and if the Issuer shall fail to make such payments, the Trustee may reimburse itself from such moneys or other assets and shall be entitled to a preference therefor over any of the Bonds outstanding hereunder. SECTION 12.06. Annual Statement. Not later than 45 days after the end of each Bond Year, the Trustee shall file with the Issuer and the Company a statement setting forth with respect to the preceding Bond Year: (a) the amount withdrawn or transferred by the Trustee and the amount deposited with it on account of each Fund and Account held by it under the provisions of this Indenture, (b) the amount on deposit with it at the end of such Bond Year to the credit of such Fund and Account, (c) a brief description of all obligations held by it as an investment of moneys in each such Fund and Account, (d) the amount applied to the purchase or redemption of Bonds under the provisions of Section 7.04 of this Indenture and a description of the Bonds or portions of Bonds so purchased or redeemed, and (e) any other information which the Issuer or the Company may reasonably request. All records and files pertaining to the Project in the custody of the Trustee shall be open at all reasonable times to the inspection of the Issuer, the Company, the Bondholders, and their agents and representatives. SECTION 12.07. Reliance on Certificates. In case at any time it shall be necessary or desirable for the Trustee to make an investigation respecting any fact preparatory to taking or not taking any action or doing or not doing anything as such Trustee, and in any case in which this Indenture permits the taking of any action, the Trustee may rely upon any certificate required or permitted to be filed with it under the provisions of this Indenture, and 52 117 any such certificate shall be evidence of such fact to protect the Trustee in any action that it may or may not take or in respect of anything it may or may not do, in good faith, by reason of the supposed existence of such fact. Except as otherwise provided in this Indenture, any request, notice or other instrument from the Issuer to the Trustee shall be deemed to have been signed by the proper party or parties if signed by the Chairman or Vice Chairman and Assistant Secretary of the Issuer and the Trustee may accept a certificate signed by said Chairman or Vice Chairman and Assistant Secretary as to any action taken by the Issuer or any resolution adopted by the Issuer. SECTION 12.08. Notice of Defaults. Except as otherwise provided in this Indenture, the Trustee shall not be deemed to have notice of any event of default hereunder except failure by the Issuer or the Company to cause to be made any of the payments required hereunder unless specifically notified in writing of such event of default by the Issuer or by the holders of at least twenty-five percent (25%) in principal amount of the Bonds. SECTION 12.09. Trustee as Bondholder. The bank or trust company acting as Trustee under this Indenture, and its directors, officers, employees or agents, may in good faith buy, sell, own, hold and deal in any of the Bonds issued under and secured by this Indenture and may join in any action that any Bondholder may be entitled to take with like effect as if such bank or trust company were not the Trustee under this Indenture and each Bondholder, by the purchase of any of the Bonds, shall be deemed to have expressly assented to the provisions hereof. SECTION 12.10. Trustee not Responsible for Recitals. The recitals, statements and representations contained herein and in the Bonds (excluding the Trustee's certificate on the Bonds) shall be taken and construed as made by and on the part of the Issuer and not by the Trustee, and the Trustee assumes, and shall be under no responsibility for, the correctness of the same. SECTION 12.11. Reliance on Certain Documents. The Trustee shall be protected and shall incur no liability in acting or proceeding, or in not acting or not proceeding, in good faith, reasonably and in accordance with the terms of this Indenture, upon any resolution, order, notice, request, 53 118 consent, waiver, certificate, statement, affidavit, requisition, bond or other paper or document that it shall in good faith reasonably believe to be genuine and to have been adopted or signed by the proper board or person, or to have been prepared and furnished pursuant to any of the provisions of this Indenture, or upon the written opinion of any attorney, engineer, consultant or accountant believed by the Trustee to be qualified in relation to the subject matter, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matter referred to therein, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee shall not be bound to recognize any person as an owner of any Bond or to take any action at his request unless proof of ownership of such Bond satisfactory to the Trustee has been exhibited to or deposited with the Trustee. The Trustee shall not be under any obligation to see to the recording or filing of this Indenture or the Agreement or any other instrument or otherwise to the giving to any person of notice of the provisions hereof or thereof. SECTION 12.12. Trustee Not Required to Give Bond. The Trustee shall not be required to give any bond or surety in respect to the execution of the said trusts and powers or otherwise in respect of the premises. SECTION 12.13. Resignation. The Trustee or the Bond Registrar may resign and thereby become discharged from the trusts and duties hereby created, by giving sixty (60) days prior written notice to the Issuer, and in the case of the Trustee only, by giving written notice to the Bondholders in the manner provided in this Indenture, not less than sixty (60) days before such resignation is to take effect, but such resignation shall take effect immediately upon the appointment of a new Trustee or Bond Registrar hereunder, if such Trustee or Bond Registrar shall be appointed before the time limited by such notice and shall then accept the trusts and duties hereof. SECTION 12.14. Removal of Trustee. The Trustee may be removed at any time by an instrument or concurrent instruments in writing, executed by the registered owners of not less than a majority in aggregate principal amount of the Bonds hereby secured and then outstanding and filed with the Issuer, and notice given in the manner provided in this Indenture not less than sixty (60) days before such removal is to take effect as stated in said instrument or instru- 54 119 ments; provided, however, that if there shall be filed with the Issuer prior to the date on which such removal is so stated to take effect an instrument or concurrent instruments in writing, executed by the registered owners of a greater aggregate principal amount of the Bonds hereby secured and then outstanding than the amount of such Bonds held by the owners signing such removal instrument or instruments, objecting to the removal of the Trustee, then such removal instrument or instruments shall be ineffective and the Trustee shall not be removed. A photographic copy of any instrument filed with the Issuer under the provisions of this paragraph shall be delivered by the Issuer to the Trustee and shall be certified to be a true and correct copy of the original. The Trustee may also be removed at any time for any breach of trust or for acting or proceeding in violation of, or for failing to act or proceed in accordance with, any provisions of this Indenture with respect to the duties and obligations of the Trustee, by any court of competent jurisdiction upon the application of the Issuer or the registered owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding under this Indenture. SECTION 12.15. Appointment and Qualification of Successor Trustee. If at any time hereafter the Trustee shall resign, be removed, be dissolved or otherwise become incapable of acting, or the bank or trust company acting as Trustee shall be taken over by any governmental official, agency, department or board, the position of Trustee shall thereupon become vacant. If at any time moneys on deposit with the Trustee shall not be secured as required in Section 8.01 of this Indenture and the Trustee shall have been given thirty (30) days advance written notice thereof without having cured the same, a vacancy in the position of Trustee may be declared by a resolution duly passed by the Issuer. If the position of Trustee shall become vacant for any of the foregoing reasons or for any other reason, the Issuer shall appoint a Trustee to fill such vacancy; provided, however, that the resignation or removal of the Trustee shall not affect the rights of the Trustee under Sections 12.02 and 12.05 of this Indenture. If no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Article, the registered owner of any Bond outstanding hereunder or any retiring Trustee may apply to any court of competent jurisdiction to appoint a successor Trustee. Such court may thereupon, after such notice, if any, as such court may deem proper and prescribe, appoint a successor Trustee. 55 120 Any Trustee hereafter appointed shall be a bank or trust company duly and legally authorized and empowered to exercise the corporate trust powers provided herein, and subject to examination by federal or state authority, of good standing and having a combined capital and surplus aggregating not less than five million dollars ($5,000,000). SECTION 12.16. Vesting of Trusts in Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the Issuer an instrument in writing accepting such appointment hereunder, and thereupon such successor Trustee, without any further act, shall become fully vested with all the rights, immunities, powers and trusts, and subject to all the duties and obligations of its predecessor; but such predecessor shall, nevertheless, on the written request of its successor or of the Issuer, and upon payment of the compensation, expenses, charges and other disbursements of such predecessor that are payable pursuant to the provisions of Sections 12.02 and 12.05 of this Article, execute and deliver an instrument transferring to such successor Trustee all the rights, immunities, powers and trusts of such predecessor hereunder; and every predecessor Trustee shall upon payment to the resigning or removed Trustee of all compensation, expenses and disbursements due and owing to such Trustee under the provisions of this Indenture, deliver all property and moneys held by it hereunder to its successor. Should any instrument in writing from the Issuer be required by any successor Trustee for more fully and certainly vesting in such Trustee the rights, immunities, powers and trusts hereby vested or intended to be vested in the predecessor Trustee, any such instrument in writing shall and will, on request, be executed, acknowledged and delivered by the Issuer. Notwithstanding any of the foregoing provisions of this Article, any bank or trust company having power to perform the duties and execute the trusts of this Indenture and otherwise qualified to act as Trustee hereunder with or into which the bank or trust company acting as Trustee may be merged or consolidated, or to which the assets and business of such bank or trust company may be sold, shall be deemed the successor of the Trustee. SECTION 12.17. Designation and Succession of Paying Agents. Trustee and any other banks or trust companies, if any, designated as Paying Agent or Paying Agents in any supplemental indenture providing for the issuance of 56 121 Additional Bonds as provided in Section 3.08 hereof, or refunding Bonds as provided in Section 3.10 hereof, shall be the Paying Agent or Paying Agents for the applicable series of Bonds. Any bank or trust company with or into which any Paying Agent may be merged or consolidated, or to which the assets and business of such Paying Agent may be sold, shall be deemed the successor of such Paying Agent for the purposes of this Indenture. If the position of Paying Agent shall become vacant for any reason, Issuer shall, within thirty (30) days thereafter, appoint such bank or trust company as shall be specified by the Company and located in the same state as such Paying Agent to fill such vacancy; provided, however, that if Issuer shall fail to appoint such Paying Agent within said period, Trustee shall make such appointment. The Paying Agents shall enjoy the same protective provisions in the performance of their duties hereunder as are specified in this Article XII with respect to Trustee insofar as such provisions may be applicable. ARTICLE XIII EXECUTION OF INSTRUMENTS BY BONDHOLDERS AND PROOF OF OWNERSHIP OF BONDS SECTION 13.01. Execution of Instruments by Bondholders; Proof of Ownership of Bonds. Any request, direction, consent or other instrument in writing required or permitted by this Indenture to be signed or executed by Bondholders may be in any number of concurrent instruments of similar tenor and may be signed or executed by such Bondholders in person or by agent appointed by an instrument in writing. Proof of the execution of any such instrument and of the ownership of Bonds shall be sufficient for any purpose of this Indenture, and shall be conclusive in favor of the Trustee with regard to any action taken by it under such instrument, if made in the following manner: (a) The fact and date of the execution by any person of any such instrument may be proved by the verification of any officer in any jurisdiction who, by the laws thereof, has power to take affidavits within such jurisdiction, to the effect that such instrument was subscribed and sworn to before 57 122 him, or by an affidavit of a witness to such execution. (b) The ownership of the Bonds shall be proved by the registration books kept by the Bond Registrar under the provisions of this Indenture. None of the provisions contained in this Article, however, shall be construed as limiting the Trustee to such proof, it being intended that the Trustee may accept any other evidence of the matters herein stated which to it may seem sufficient. Any request or consent of the registered owner of any Bond shall bind every future owner of the same Bond in respect of anything done by the Trustee in pursuance of such request or consent. ARTICLE XIV SUPPLEMENTAL INDENTURES SECTION 14.01. Supplemental Indentures without Bondholder Consent. The Issuer and the Trustee may, from time to time and at any time, with the consent of the Company, but without the consent of the Bondholders, enter into such supplemental indentures as shall not be inconsistent with the terms and provisions hereof (which supplemental indentures shall thereafter form a part hereof): (a) To cure any ambiguity, inconsistency or formal defect or omission in this Indenture or in any supplemental indenture, or (b) To grant to or confer upon the Trustee for the benefit of the Bondholders any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Bondholders or the Trustee, or (c) To provide for the sale, authentication and delivery of Additional Bonds or refunding Bonds and the disposition of the proceeds from the sale thereof, in the manner and to the extent authorized by Sections 3.08 and 3.10 above, or (d) To modify, amend or supplement this Indenture or any indenture supplemental hereto in such manner as to permit the qualification hereof 58 123 and thereof under the Trust Indenture Act of 1939 or any similar federal statute hereafter in effect or to permit the qualification, of the Bonds for sale under the securities laws of any of the states of the United States of America, and, if they so determine, to add to this Indenture or any indenture supplemental hereto such other terms, conditions and provisions as may be permitted by said Trust Indenture Act of 1939 or similar federal statute, or (e) To provide for the designation of a cotrustee who shall have the same qualifications as provided for a successor Trustee in Section 12.15 of this Indenture. SECTION 14.02. Modification of Indenture with Consent of Bondholders. Subject to the terms and provisions contained in this Section and not otherwise, the registered owners of not less than two-thirds (2/3) in aggregate principal amount of the Bonds then outstanding shall have the right, from time to time, anything contained in this Indenture to the contrary notwithstanding, to consent to and approve the execution by the Issuer and the Trustee, as the case may be, of such supplemental indentures as shall be deemed necessary or desirable by the Issuer and the Company for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in this Indenture or in any supplemental indenture; provided, however, that nothing contained herein shall permit, or be construed as permitting (a) an extension of the maturity of principal of or the interest on any Bond issued hereunder, or (b) a reduction in the principal amount of any Bond or the rate of interest thereon, or (c) the creation of a lien upon or pledge of the Issuer's rights under the Agreement or other moneys pledged herein ranking prior to the lien or pledge created by this Indenture or the Agreement for the Bonds, or (d) a preference or priority of any Bond or Bonds over any other Bond or Bonds, or (e) a reduction in the aggregate principal amount of the Bonds required for consent to such supplemental indenture. Nothing herein contained, however, shall be construed as making necessary the approval by Bondholders of the execution of any supplemental indenture as authorized in Section 14.01 of this Article. If at any time the Issuer shall request the Trustee to enter into any supplemental indenture for any of the purposes of this Section 14.02, the Trustee shall cause notice 59 124 of the proposed execution of such supplemental indenture to be mailed, postage prepaid, to the Company and to all registered owners of Bonds then outstanding at their addresses as they appear on the registration books. Such notice shall briefly set forth the nature of the proposed supplemental indenture, such notice to the Original Purchaser shall be accompanied by a copy thereof, and such notice to any other Bondholder shall state that a copy thereof is on file at the office of the Trustee for inspection by all Bondholders. Whenever, at any time within one (1) year after the date such notice shall have been given, the Issuer shall deliver to the Trustee an instrument or instruments purporting to be executed by the Company and the registered owners of not less than two-thirds (2/3) in aggregate principal amount of the Bonds then outstanding, which instrument or instruments shall refer to the proposed supplemental indenture described in such notice and shall specifically consent to and approve the execution thereof in substantially the form which accompanied such notice to the Original Purchaser, or otherwise referred to in such notice as on file with the Trustee, thereupon, but not otherwise, the Trustee may execute such supplemental indenture in substantially such form, without liability or responsibility to any Bondholder, whether or not such Bondholder shall have consented thereto. If the registered owners of not less than two-thirds (2/3) in aggregate principal amount of the Bonds outstanding at the time of the execution of such supplemental indenture shall have consented to and approved the execution thereof as herein provided, no Bondholder shall have any right to object to the execution of such supplemental indenture or to object to any of the terms and provisions contained therein or in the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Trustee or the Issuer from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any supplemental indenture pursuant to the provisions of this Section 14.02, this Indenture shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under this Indenture of the Issuer and the Trustee and the registered owners of all Bonds then outstanding, shall thereafter be determined, exercised and enforced hereunder, subject in all respects to such modifications and amendments. 60 125 SECTION 14.03. Supplemental Indenture Deemed Part of this Indenture. The Trustee is authorized to join with the Issuer in the execution of any such supplemental indenture and to make the further agreements and stipulations which may be contained therein. Any supplemental indenture executed in accordance with the provisions of this Article shall thereafter form a part of this Indenture and all of the terms and conditions contained in any such supplemental indenture as to any provisions authorized to be contained therein shall be and shall be deemed to be part of the terms and conditions of this Indenture for any and all purposes. In case of the execution and delivery of any supplemental indenture, express reference may be made thereto in the text of any Bonds issued thereafter, if deemed necessary or desirable by the Trustee or the Issuer. SECTION 14.04. Discretion of Trustee in Executing Supplemental Indentures. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, the opinion of counsel nationally recognized on the subject of municipal bonds as conclusive evidence that any such proposed supplemental indenture does or does not comply with the provisions of this Indenture, and that it is or is not proper for the Trustee, under the provisions of this Article, to join in the execution of such supplemental indenture. Subject to the foregoing, the Trustee shall enter into such supplemental indentures provided that its duties and obligations thereunder are no greater than its duties and obligations which already exist under this Indenture, unless it shall consent to such supplemental indenture. ARTICLE XV DEFEASANCE SECTION 15.01. Release of Indenture. If, at any time after the date of this Indenture (a) the Bonds secured hereby shall have become due and payable in accordance with their terms or otherwise as provided in this Indenture, or such Bonds shall have been duly called for redemption, or the Issuer gives the Trustee irrevocable instructions concerning the payment of the principal and interest on the Bonds at maturity or at any earlier redemption date scheduled by the Issuer, or any combination thereof, (b) the 61 126 whole amount of the principal and the interest so due and payable upon all of the Bonds then outstanding, at maturity or upon redemption, shall be paid, or sufficient moneys shall be held by the Trustee under this Indenture (whether or not in any accounts created hereby) which, when invested in direct obligations of the United States of America maturing not later than the maturity dates of such principal and interest will, together with the income realized on such investments, be sufficient to pay all such principal and interest on said Bonds at the maturity thereof or the date upon which such Bonds are to be called for redemption prior to maturity, and (c) provisions shall also be made for paying all other sums payable hereunder by the Issuer, then and in that case the right, title and interest of the Trustee hereunder and the pledge of and lien on the Issuer's interests under the Agreement, and all other pledges and liens created hereby and thereby or pursuant thereto, including the Mortgage, shall thereupon cease, determine and become void, and the Trustee in such case, on demand of the Issuer, shall release this Indenture and shall execute such documents to evidence such release as may be reasonably required by the Issuer or the Company, and shall turn over to the Company, any surplus in any account in the Debt Service Fund and all balances remaining in any other funds or accounts created by this Indenture other than moneys held for redemption or payment of Bonds and to pay all other sums payable by the Issuer; otherwise this Indenture, shall be, continue and remain in full force and effect. ARTICLE XVI SUPPLEMENTAL CONTRACTS SECTION 16.01. Supplemental Contracts without Bondholders' Consent. The Issuer, the Company, and the Trustee may, from time to time and at any time, consent to such contracts supplemental to the Agreement as shall not be inconsistent with the terms and provisions thereof and, in the opinion of the Issuer, Company, and the Trustee, shall not be detrimental to the interests of the Bondholders (which supplemental contracts shall thereafter form a part thereof), (a) to cure any ambiguity or formal defect or omission in the Agreement or in any supplemental contract, or 62 127 (b) to amend the Agreement for the purposes of Section 4.2(b) thereof, or (c) to grant to or confer upon the Trustee for the benefit of the Bondholders any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Bondholders or the Trustee, or (d) to amend the Agreement for the purposes of changing components of the Project as permitted by Section 4.1 thereof. At least thirty (30) days prior to the execution of any supplemental contract for any of the purposes of this Section, the Trustee shall cause a notice of the proposed execution of such supplemental contract to be mailed, postage prepaid, to all owners of registered Bonds at their addresses as they appear on the registration books. Such notice shall briefly set forth the nature of the proposed supplemental contract and shall state that a copy thereof is on file at the office of the Trustee for inspection by all Bondholders. A failure on the part of the Trustee to mail the notice and provide the copy required by this Section shall not affect the validity of such supplemental contract. SECTION 16.02. Amendment of Contract with Consent of Bondholders. Except for supplemental contracts provided for in Section 16.01 of this Article or amendments to the Agreement as therein provided for or as provided for in Section 3.08 of this Indenture, neither the Issuer nor the Trustee shall consent to any supplemental contract or amendment to the Agreement unless notice of the proposed execution of such supplemental contract or amendment shall have been given and the Company and the registered owners of not less than two-thirds (2/3) in aggregate principal amount of the Bonds then outstanding shall have consented to and approved the execution thereof all as provided for in Section 14.02 of this Indenture in the case of supplemental trust indentures; provided that the Trustee shall be entitled to exercise its discretion in consenting or not consenting to any such supplemental contract or amendment and to rely on an opinion of counsel in the same manner as provided for in Section 14.04 of this Indenture in the case of supplemental trust indentures. 63 128 ARTICLE XVII MISCELLANEOUS PROVISIONS SECTION 17.01. Notices. Any notice, demand, direction, request or other instrument authorized or required by this Indenture to be given to or filed with the Bondholders, the Issuer, the Company or the Trustee shall be deemed to have been sufficiently given or filed for all purposes of this Indenture if and when sent by registered mail, return receipt requested: To the Bondholders, addressed to their addresses as they appear on the registration books provided for in this Indenture. To the Issuer, addressed to: Hillsborough County Industrial Development Authority c/o Warren M. Cason, Esquire P. O. Box 2150 Tampa, Florida 33601 To the Company addressed to: Progressive American Insurance Company Suite 900 410 Ware Boulevard Tampa, Florida 33619 Attention: Jerry Shroat President with copies to: The Progressive Corporation 6300 Wilson Mills Road Mayfield Village, Ohio 44143 Attention: Howard Zelikow Treasurer 64 129 To the Trustee, addressed to or at its then principal office: Sun Bank, N.A. 200 S. Orange Avenue Orlando, Florida 32802 Attention: Corporate Trust Department All documents received by the Trustee under the provisions of this Indenture shall be retained in its possession, subject at all reasonable times to the inspection by the Issuer, the Company and any Bondholder, and the agents and representatives thereof. SECTION 17.02. No Third-Party Beneficiaries. Except as herein otherwise expressly provided, nothing in this Indenture expressed or implied is intended or shall be construed to confer upon any person, firm or corporation other than the parties hereto and the registered owners of the Bonds issued under and secured by this Indenture, and, to the extent provided for or contemplated herein, the Company, any right, remedy or claim, legal or equitable, under or by reason of this Indenture or any provision hereof, this Indenture and all its provisions being intended to be and being for the sole and exclusive benefit of the parties hereto and the registered owners from time to time of the Bonds issued hereunder. SECTION 17.03. Effect of Partial Invalidity. In case any one or more of the provisions of this Indenture or of the Bonds issued hereunder shall for any reason be held to be illegal or invalid, such illegality or invalidity shall not affect any other provisions of this Indenture or of said Bonds, but this Indenture and said Bonds shall be construed and enforced as if such illegal and invalid provision had not been contained therein. In case any covenant, stipulation, obligation or agreement contained in the Bonds or in this Indenture shall for any reason be held to be in violation of law, then such covenant, stipulation, obligation or agreement shall be deemed to be the covenant, stipulation, obligation or agreement of the parties thereto to the extent permitted by law. SECTION 17.04. Controlling Law; Members of Issuer Not Liable. All covenants, stipulations, obligations and 65 130 agreements of the Issuer contained in this Indenture shall be deemed to be covenants, stipulations, obligations and agreements of the Issuer to the full extent authorized by the Act and provided by the Constitution and laws of the State of Florida. No covenant, stipulation, obligation or agreement contained herein shall be deemed to be a covenant, stipulation, obligation or agreement of any present or future member, agent or employee of the Issuer in his individual capacity, and neither the members of the Issuer nor any official executing the Bonds shall be liable personally on the Bonds, the Agreement or this Indenture or shall be subject to any personal liability or accountability by reason of the issuance or the execution by the Issuer or such members thereof. SECTION 17.05. Binding Effect; Controlling Law. This Indenture shall inure to the benefit of and shall be binding upon the Issuer, the Trustee, the Bondholders and to the extent provided for or contemplated herein, the Company, and each of their respective successors and assigns, and shall be governed by and construed in accordance with the laws of the State of Florida. SECTION 17.06. Counterparts. This Indenture may be executed in multiple counterparts, each of which shall be regarded for all purposes as an original; and all such counterparts shall constitute but one and the same instrument. SECTION 17.07. Headings Not Part of Indenture. Any heading preceding the text of the several Articles hereof shall be solely for convenience of reference and shall not constitute a part of this Indenture, nor shall they affect its meaning, construction or effect. SECTION 17.08. Payments Due on Saturdays, Sundays and Holidays. In any case where the date of maturity of principal of and/or interest on the Bonds or the date filed for redemption of any Bonds shall be, in the city of payment, a Saturday, a Sunday, a legal holiday or a day on which banking institutions are authorized by law to close, then payment of principal and/or interest need not be made on such date in such city but may be made on the next succeeding business day not a Saturday, a Sunday, a legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if made on 66 131 the date of maturity or the date fixed for redemption, and interest shall accrue for the period after such date. SECTION 17.09. Trustee Approval of Loan and Debt Obligation Agreement. The Trustee has reviewed the Agreement and the form of the 1982 Bonds and the Trustee hereby approves the form of the Agreement and the 1982 Bonds and covenants that it will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in the Agreement, in the 1982 Bonds authenticated and delivered thereunder nand in all proceedings of the Issuer pertaining thereto, on its part to be observed or performed, whether express or implied; provided however that to amendment or revision to the Agreement or supplemental Agreement shall be effective unless approved by the Trustee. IN WITNESS WHEREOF, HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY has caused this Indenture to be executed by the Chairman, and the seal of said Authority to be impressed hereon and attested by the Assistant Secretary of the Authority, and Sun Bank, N.A. has caused this Indenture to be executed in its behalf, as Trustee, by its Corporate Trust Officer thereof, and its seal to be impressed hereon and attested by a Trust Officer thereof, all as of the day and year first above written. HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (Seal) By /s/ Samuel I. Latimer ---------------------------------------- Chairman ATTEST: /s/ Ellsworth G. Simmons - -------------------------------- Assistant Secretary 67 132 Sun Bank, N.A. as Trustee as aforesaid (Seal) By /s/ Geraldine P. Kail -------------------------------------- Corporate Trust Officer ATTEST: By Robert W. Andrews, Jr. ----------------------------------- ____________________, Trust Officer STATE OF FLORIDA COUNTY OF Hillsborough The foregoing instrument was acknowledged before me by Samuel I. Latimer and Ellsworth G. Simmons, Chairman and Assistant Secretary, respectively, of the HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, a public body corporate and politic of the State of Florida, this 16th day of December, 1982. /s/ Gertrude Eaton ------------------------------------------------- Notary Public My commission expires: Notary Public, State of Florida at Large My Commission Expires Mar. 8, 1986 (Affix notarial seal) 68 133 STATE OF FLORIDA COUNTY OF HILLSBOROUGH The foregoing instrument was acknowledged before me this 16th day of December, 1982, by G. P. Kail and R. W. Andrews, as Trustee and Trust Officer, respectively, of Sun Bank, N.A., a national banking corporation, on behalf of the corporation. /s/ Gertrude Eaton ------------------------------------- Notary Public My commission expires: Notary Public State of Florida at Large My commission expires Mar. 8, 1986 (Affix notarial seal) 69 134 MORTGAGE AND SECURITY AGREEMENT This is a Mortgage and Security Agreement dated as of this ____ day of _______, 1982, executed by PROGRESSIVE AMERICAN INSURANCE COMPANY, as Mortgagor, and delivered to the HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, HILLSBOROUGH COUNTY, FLORIDA, as Mortgagee. 1. Definitions. The following capitalized terms shall be used in this Mortgage and Security Agreement (the "Mortgage") for the meanings set forth adjacent to such terms: "Mortgagor" means PROGRESSIVE AMERICAN INSURANCE COMPANY, a Florida corporation. Mortgagor's address is 416 Ware Boulevard, Suite 900, Tampa, Florida 33619. "Mortgagee" means the Hillsborough County Industrial Development Authority, a public body corporate and politic of the State of Florida, and after the assignment of this Mortgage shall mean the Trustee. "Trustee" means Sun Bank, N.A., Orlando, Florida, as Trustee for the holders of the 1982 Bonds as described hereunder under the Indenture of Trust (therein and herein designated as the "Indenture") dated as of December 16, 1982, by and between the Trustee and the Hillsborough County Industrial Development Authority (therein and herein designated as the "Issuer"), and any successor trustee under the Indenture. The terms and provisions of the Indenture are hereby incorporated by reference herein. "Agreement" means the Loan and Debt Obligation Agreement dated as of December 16, 1982, between the Mortgagor (therein designated as the "Company") and the Hillsborough County Industrial Development Authority (therein and herein designated as the "Issuer"). The terms and provisions of the Agreement are hereby incorporated by reference herein. "Indebtedness" means the Indebtedness secured by this Mortgage consisting of all of the obligations of the Mortgagor pursuant to that certain Promissory Note, dated as of December 16, 1982, between the Mortgagor and the Issuer, - -------------------------------------------------------------------------------- No intangible taxes or documentary stamp taxes are due hereon, pursuant to Sections 159.31 and 159.50, Florida Statutes (1981). 135 and pursuant to the Agreement, as such Note and Agreement may be subsequently extended, renewed, supplemented, modified or amended, including without limitation, the loan repayment installments ("Loan Installments") required under the Note and under Section 5.2 of the Agreement, and the obligations under Sections 7.1, 9.5 and 9.7 thereof; and all of the Issuer's obligations under and pursuant to the Indenture, including without limitation, the Issuer's obligations for the payment of the interest, principal and redemption payments, if any, required for the payment of the $4,000,000 Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982 (designated in the Indenture and herein as the "1982 Bonds"), and for any "Additional Bonds" issued under the Indenture, and its obligation to pay the fees, charges and expenses of the Trustee under the Indenture. "Bonds" means the 1982 Bonds and any Additional Bonds issued under the Indenture. "Issuer" means the Hillsborough County Industrial Development Authority, a public body corporate and politic of the State of Florida. "Maximum Principal Indebtedness" means the principal Indebtedness required to pay the principal amount of the 1982 Bonds in the amount of $4,000,000, together with future advances that may be secured hereby that shall not exceed the aggregate principal sum of $10,000,000. "Mortgaged Property" means the fee simple interest of the Mortgagor in the lands on which the Project is located or is to be constructed, said lands being more particularly described in Exhibit "B" attached hereto, the Project as herein described, and all other property described in Section 2 below. "Project" means, the structures, fixtures, and improvements to be located in or on the lands and easements described in Exhibit A attached hereto. 2. Mortgage and Security Interest. In consideration of ten dollars and other valuable considerations received by the Mortgagor, the Mortgagor hereby, on the effective date of this Mortgage as stated above, mortgages to the Mortgagee and grants the Mortgagee a security interest in the following described real property, rights, titles, interests and estates: 2 136 (a) The Mortgaged Property, including, but not limited to, the Project, all fixtures, and all components and parts thereof, the electrical, heating, cooling, ventilating, gas distribution, compressed air, water and sewer, and sprinkler systems incorporated into the Project. (b) Any and all rights and appurtenances belonging, incident or appertaining to said real property, improvements, and fixtures or any part thereof. (c) All leases of the real property described in Exhibit "A" hereto now or hereafter entered into and all right, title and interest of the Mortgagor thereunder, including without limitation, cash or securities deposited thereunder pursuant to said leases, and all rents, issues, proceeds, and profits accruing from said real property and together with all proceeds of the conversion, voluntary or involuntary of any of the foregoing into cash or liquidated claims, including without limitation, proceeds of insurance and condemnation awards. 3. Secured Indebtedness; Future Advances; Maximum Amount and Time. This Mortgage shall secure (a) the Indebtedness as specified above, and (b) the total amount of indebtedness secured hereby may decrease or increase from time to time, but the total unpaid balance so secured at any one time shall not exceed the Maximum Principal Indebtedness, plus interest thereon, and any disbursements made for the payment of taxes, levies or insurance on the Mortgaged Property and for maintenance, repair, protection and preservation of the Mortgaged Property with interest on such disbursements, all as provided in this Mortgage and the Indenture and Agreement described herein. This Mortgage shall not secure any future advances made more than twenty (20) years from the date hereof. 4. Payment of Indebtedness. The Mortgagor shall pay all Indebtedness and perform all obligations secured hereby promptly when due. 5. Title Covenants. The Mortgagor covenants that the Mortgaged Property is free from all encumbrances (other than this Mortgage) except as may be specifically stated herein, other than Permitted Encumbrances described in Exhibit "B" hereto, that lawful seisin of and good right to encumber the Mortgaged Property are vested in the Mortgagor, and that the Mortgagor hereby fully warrants the title to 3 137 the Mortgaged Property and will defend the same against the lawful claims of all persons whomsoever. 6. Conditions to Changes in the Mortgaged Property. The right of the Mortgagor to make any changes to the Mortgaged Property in the manner hereinafter provided is expressly subject to the conditions that (i) such changes will not, in the opinion of counsel nationally recognized on the subject of municipal bonds or other counsel acceptable to the Issuer and the Trustee, result in the interest on the 1982 Bonds or any Additional Bonds becoming subject to federal income taxes then in effect; and (ii) such changes will not impair the structural soundness, usefulness or market value of the Mortgaged Property or significantly alter the character or purpose or detract from the operating efficiency of the Mortgaged Property, impair its revenue producing capacity, or otherwise affect its operation as a headquarters facility or otherwise adversely affect the purposes of this Mortgage. 7. After-Acquired Property Not Part of Mortgaged Property. All buildings, structures, improvements, and all fixtures now or hereafter installed in or attached to the Project or located above, upon or under the Mortgaged Property so as to preclude the removal without material injury to the Project or the Mortgaged Property, are subject to the terms and conditions of this Mortgage and the security interest created hereby. Except as provided in paragraph 9 below, all other property of every kind or nature, whether now owned or after-acquired, which shall be constructed, placed or installed in or on the Project or the Mortgaged Property, shall not become subject to this Mortgage or the security interest created hereby, shall remain the property of the Mortgagor and may be altered, removed, replaced or otherwise used by the Mortgage at any time so long as the Mortgagor is not in default hereunder and the conditions of paragraph 6 are complied with. 8. Removal Free of Notice. The Mortgagor may, from time to time at its own cost and expense, without notice to and without obtaining the approval of the Mortgagee and free of any obligation to make any replacement thereof, demolish, remove or dispose of any structure, fixtures, or other improvements constituting part of the Mortgaged Property, provided the fair market value thereof at the time of its demolition or removal does not exceed One Hundred Thousand Dollars ($100,000) in any one fiscal year or Three 4 138 Hundred Thousand Dollars ($300,000) in the aggregate during the term of this Mortgage, and the conditions of paragraph 6 hereof are complied with, and such property thereafter shall not constitute a part of the Mortgaged Property. The Mortgagee shall, at the Mortgagor's request, join in the execution of any instruments necessary to release the lien on such property created by this Mortgage. 9. Removal with Notice; Replacements and Substitutions Subject to Mortgage. If the Mortgagor in its sole discretion determines that any real property, structure, fixtures or other improvements constituting a part of the Mortgaged Property has become inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary, and if the conditions of paragraph 6 hereof are complied with and the value of said property exceeds the limits contained in paragraph 8 above, the Mortgagor, after giving written notice of its proposed action to the Mortgagee, may then demolish or remove such property from the Mortgaged Property and may, to the extent permitted by law, sell, trade in, exchange or otherwise dispose of same, in whole or in part, provided that the Mortgagor shall, at its own cost and expense, acquire, construct or install replacement or substitute real property, structures, fixtures or other improvements having an economic value and usefulness to the operations of the Mortgaged Property (but not necessarily the same function) at least equal to the economic value and usefulness, prior to demolition, removal or disposal, of the property demolished, removed or disposed of, and provided further, however, that all such real property, structures, fixtures or other improvements constructed or installed in replacement or substitution thereof shall be free of all liens and encumbrances, other than Permitted Encumbrances, and shall become a part of the Mortgaged Property. 10. Covenant Against Unauthorized Removal. Except as expressly authorized above, the Mortgagor shall not remove any of the Project, or any part thereof, from the Mortgaged Property. 11. No Abatement of Obligations. The demolition, substitution or removal of any property shall not result in any abatement or diminution of Loan Installments or other Indebtedness secured by this Mortgage. The Mortgagor shall pay all costs incurred or damages resulting from any demolition, substitution or removal of any property pursuant to the provisions of this Mortgage. 5 139 12. Maintenance and Repair. The Mortgagor shall permit, commit or suffer no waste, impairment or deterioration of the Mortgaged Property. The Mortgagor shall, during the term of this Mortgage at its sole cost and expense, keep and maintain the Mortgaged Property in a good state of repair and preservation, ordinary wear and tear, obsolescence in spite of repair and acts of God excepted. If the Mortgagor fails to do so, then the Mortgagee, without waiving the option to foreclose, may take some or all measures that the Mortgagee reasonably deems necessary or desirable for the maintenance, repair, preservation or protection of the Mortgaged Property, and any expenses reasonably incurred by the Mortgagee in so doing shall become part of the Indebtedness secured hereby, shall become immediately due and payable, and shall bear interest at a rate equal to the maximum lawful rate. The Mortgagee shall have no obligation to care for and maintain the Mortgaged Property or, having taken some measures therefor, to continue the same or take other measures. 13. Casualty Insurance. The Mortgagor shall, during the construction period and throughout the term of this Mortgage, keep the Mortgaged Property continuously insured against such risks as are customarily insured against in connection with the operation of similar facilities of like size, type and location, paying as the same become due and payable all premiums with respect thereto. Such insurance shall include, without intending to limit the foregoing, insurance against damage by fire and lightning with a uniform standard extended coverage endorsement on a repair or replacement basis in an amount not less than one hundred percent (100%) of the then actual cost of replacement (excluding costs of replacing excavations and foundations, but without deduction for depreciation) of the Mortgaged Property. Each insurance policy required by this section: (i) shall be issued or written by such insurer (or insurers) as is financially responsible, (ii) shall be in such form and with such provisions (including, without limitation and where applicable, loss payable clauses payable to the Mortgagee, waiver of subrogation clauses, provisions relieving the insurer of liability to the extent of minor claims and designation of the named insureds) as are generally considered standard for the type of insurance involved, and (iii) shall prohibit cancellation or substantial modification without at least thirty (30) days prior written notice to the Mortgagee and the Issuer. All insurance policies carried pursuant to the foregoing shall name the Mortgagor, the Issuer and the Mortgagee as parties insured thereunder as the respective interest of each such party may appear, 6 140 and proceeds thereunder shall be made payable and shall be applied as provided in paragraph 14 below. Copies of each such policy shall upon request be filed with the Mortgagee. The Mortgagor shall pay all premiums and charges for the maintenance and renewal of the insurance and shall furnish the Mortgagee with receipts and proofs thereof not less than ten (10) days before the expiration thereof, without notice or demand from the Mortgagee. If the Mortgagor fails to do so, then the Mortgagee, without waiving the option to foreclose or exercise any other remedy hereunder, may obtain such insurance for the protection of the Mortgagee, and any expenses reasonably incurred by the Mortgagee in so doing shall become part of the Indebtedness secured hereby, shall become immediately due and payable, and shall bear interest at the maximum lawful rate. In the event of foreclosure of this Mortgage or transfer of the Mortgaged Property in full or partial satisfaction of the Indebtedness secured hereby, all interest of the Mortgagor in the policy or policies of insurance (including any claim to proceeds attributable to losses theretofore occurring but not yet paid to Mortgagor) shall pass to the purchaser, grantee or transferee, subject, however, to the terms and provisions of this Mortgage. 14. Insurance Proceeds and Condemnation Awards. If, prior to the payment in full or satisfaction of the Indebtedness (or provisions for payment thereof having been made in accordance with the provisions of the Agreement or the Indenture) the Mortgaged Property, or any part or component thereof having a value in excess of $150,000, shall be damaged, lost or destroyed, by whatever cause, except as provided in Sections 8 and 9 hereof, or if any public authority or entity, in the exercise of its power of eminent domain, takes or damages the Mortgaged Property, or any part or component thereof having a value in excess of $150,000, there shall be no abatement or reduction in the Loan Installments payable by the Mortgagor under the Agreement, and all of the insurance proceeds (whether payable from the policies of insurance described in paragraph 13 above or from other policies of insurance carried by the Mortgagor or third parties), and any award or compensation resulting from such taking or damage by condemnation shall be paid to the Mortgagee and deposited by it in the Construction Fund, as that term is defined in the Indenture (the "Construction Fund"), held by the Mortgagee under the Indenture. The Mortgagor may then elect to repair, rebuild, restore or replace the Mortgaged Property or the portion thereof so taken or damaged, by delivering, within one hundred twenty 7 141 (120) days after the deposit of such funds with the Mortgagee, to the Mortgagee: (i) written notice of its election to repair, rebuild, replace or restore such property, and (ii) a certificate or opinion from an independent engineer of recognized standing and acceptable to the Mortgagee that, in the opinion of such engineer, the proceeds of insurance or condemnation awards deposited in the Construction Fund will be sufficient to repair, rebuild, replace or restore such property to substantially the same condition as it was in prior to condemnation or destruction, which election shall be subject to the approval of the Mortgagee, which shall not be unreasonably withheld. After delivery of the foregoing to the Mortgagee, the Mortgagor may make withdrawals from such fund held by the Mortgagee for the purpose of repairing, rebuilding, replacing or restoring such property in accordance with the conditions and procedures for withdrawals from such fund held by the Mortgagee, which conditions and procedures are contained in Section 4.3 of the Agreement. If a certificate as described in subparagraph (ii) above is not rendered, the Mortgagor may nevertheless use the moneys deposited in the Construction Fund held by the Mortgagee for such purposes if it unconditionally agrees to complete the repair, rebuilding, replacement or restoration of the Mortgaged Property substantially to its former condition at its own expense. If the Mortgagor does not elect to rebuild, repair, replace or restore such property or is unable or unwilling to comply with the other requirements set forth above within one hundred twenty (120) days after the deposit of such funds with the Mortgagee, the Mortgagee shall forthwith deposit such funds in the Redemption Account in the Debt Service Fund, as that phrase is defined in the Indenture, and shall use such funds to pay the Indebtedness secured by this Mortgage and the Mortgagor agrees to deposit into the Redemption Account in the Debt Service Fund additional funds as may be required for the payment of all principal and interest represented by the Bonds then outstanding and all costs and expenses incurred in the redemption and payment thereof and the unpaid portion of the Indebtedness. This Mortgage extends to and shall encumber any insurance proceeds payable on account of the Mortgaged Property and any judgments, awards, damages and settlements hereafter rendered or paid and resulting from condemnation proceedings with respect to the Mortgaged Property or the taking of the Mortgaged Property under the power of eminent domain, and the Mortgagee may require that any sums payable to the Mortgagor and arising out of the power of eminent domain with respect to the property and any proceeds of casualty insurance on the Mortgaged Property shall be applied to the Indebtedness secured hereby. 8 142 15. Taxes, Assessments and Liens. Subject to the provisions of this Mortgage, the Mortgagor shall pay or cause to be paid, as the same respectively come due, all fees, taxes, charges and assessments of any kind or nature whatsoever that may at any time become due or be lawfully assessed or levied against the Mortgaged Property, the Mortgagor, the Issuer or the Mortgagee, with respect to the ownership, use or operation of the Mortgaged Property or any portion thereof, or with respect to the original issuance of the Bonds, or with respect to the income or profits of the Issuer or the Mortgagee from sale of the Project or the receipt of the Loan Installments, or with respect to the mortgaging, pledging and assigning of the collateral referred to in Section 8.5 of the Agreement, pursuant to the terms of the Agreement and the Indenture, including without limitation all ad valorem taxes lawfully assessed thereon, all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep thereof, all assessments and charges lawfully made by any governmental body against the Mortgagor, the Issuer or the Mortgagee for or on account of the Mortgaged Property, all excise taxes, sales and use taxes, documentary stamp taxes, and intangible taxes levied against the Mortgagor, the Issuer or the Mortgagee on or with respect to the Agreement or the Indenture and the amounts payable by the Mortgagor hereunder or thereunder, the original issuance and delivery of the Bonds, and the assignment of and the granting of the mortgages and security interests in the aforementioned collateral, and all other lawful taxes, impositions, fees, assessments and charges of every kind or nature, ordinary or extraordinary, general or special, foreseen or unforeseen, whether similar or dissimilar to any of the foregoing, and all applicable interest and penalties thereon, if any, that shall be or become due and payable and that shall be lawfully levied, assessed or imposed, provided that with respect to special assessments or other governmental charges that may be lawfully paid in installments over a period of years, the Mortgagor shall be obligated to pay only such installments as are required to be paid during the term of this Mortgage. Nothing contained herein shall be deemed to constitute an admission by the Mortgagor to any third party other than the Issuer and the Mortgagee that the Mortgagor is liable for, or its properties are subject to, any tax, charge, fee, rate, imposition or assessment. Nothing in this section shall require the payment of any tax, fee, charge, or other obligation identified herein or require the Company to make provision for payment thereof, so long as the validity thereof shall be contested in good faith by the Company by appropriate legal proceedings. 9 143 16. Inspection. Mortgagee and Mortgagee's representatives may enter upon the Mortgaged Property for inspection at all reasonable times and in a reasonable manner, both before and after default. 17. Events of Default. Each of the following events is hereby declared an "event of default," provided, however, that in any case in which such event of default shall be occasioned by the action or inaction of the Issuer, such action or inaction may be cured by the Mortgagor within the time and in the manner as contemplated by the provisions of this Mortgage, the Agreement or the Indenture. (a) The Mortgagor shall fail to make full and punctual payment or to fully perform any of its obligations in a manner constituting an "Event of Default" as defined in Section 9.1 of the Agreement; (b) The Mortgagor shall fail to make full and punctual payment of any sum due under this Mortgage when due or within ten (10) days thereafter or the Mortgagor shall fail to fully perform any of its obligations under this Mortgage and such failure shall continue for thirty (30) days after written notice specifying such default and requiring the same to be remedied shall have been given to the Issuer and the Mortgagor by the Mortgagee; or (c) The Issuer shall default in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Bonds or in the Indenture on the part of the Issuer to be performed, or the Mortgagor shall default in connection with the matters referred to in Sections 10.04, 10.05 or 10.06 of the Indenture, and such default shall continue for thirty (30) days after written notice specifying such default and requiring the same to be remedied shall have been given to the Issuer and the Mortgagor by the Mortgagee. (d) In the good faith opinion of the Trustee, there has been any material adverse change in the financial status of the Mortgagor or the Guarantor. Before the entry of final judgment or decree in any suit, action or proceeding instituted by the Mortgagee under the provisions of this Mortgage or the Indenture or before 10 144 the completion of the enforcement of any other remedy under this Mortgage or the Indenture, the Mortgagee shall be permitted to discontinue such suit, action, proceeding or enforcement of any remedy if, in its opinion, any default forming the basis of such suit, action, proceeding or enforcement of any remedy shall have been remedied. 18. Remedies on Default. In the event any of the Indebtedness shall at the time be outstanding and unpaid and provision for the payment thereof shall not have been made in accordance with the provisions of the Indenture and the Agreement, whenever any event of default referred to in paragraph 17 above shall have happened and be subsisting, the Mortgagee may take any one or more of the following remedial steps: (a) Declare all Loan Installments and other amounts payable under the Note and Section 5.2 of the Agreement for the remainder of the term of this Mortgage to be immediately due and payable, whereupon the same shall become immediately due and payable; (b) Foreclose on this Mortgage, enter into possession of the Mortgaged Property or any part thereof without notice or demand, perform any acts the Mortgagee deems necessary or proper to preserve the security and to collect and receive all rents, issues and profits thereof, including those past due as well as those accruing thereafter, and sell or lease the Mortgaged Property or any part thereof for the account of the Mortgagor, holding the Mortgagor liable for the difference between the amounts received and the Loan Installments and other amounts payable by the Mortgagor hereunder; (c) Seek the appointment of a receiver to enter upon and take possession of the Mortgaged Property or any part thereof, as a matter of strict right, without notice and ex parte, and without regard to the value or occupancy of the security, or the solvency of the Mortgagor, or the adequacy of the Mortgaged Property as security for the obligations secured hereby, and to collect the rents, issues and profits therefrom and apply the same as the Court may direct, such receiver to have all the rights and powers permitted under the laws of Florida; 11 145 (d) Inspect, examine and make copies of the books and records and any and all accounts and data of the Mortgagor relating to the use and operation of the Mortgaged Property; and (e) Take all other actions and pursue all other remedies available under any other contract or agreement or otherwise by statute, at law or in equity, whether or not inconsistent with the foregoing, that may appear necessary or appropriate to collect the sums then due and thereafter to become due from the Mortgagor by reason of this Mortgage, the Note or the Agreement, or to enforce specific performance and observance of any obligation, agreement or covenant of the Mortgagor thereunder. 19. Power and Authority. In order to further and more fully secure the payment of the principal of and interest on the Indebtedness upon the happening of any event of default as herein provided, the Mortgagor hereby authorizes and permits the Mortgagee for and on its behalf and on behalf of and in the name of the Bondholders and the Issuer, to foreclose the Mortgagor's interest in the Mortgaged Property by foreclosure in the manner provided by the Florida Statutes, which remedy shall be in addition to the other remedies provided in any other applicable provisions of this Mortgage, the Note, the Agreement and the Indenture. The Mortgagee shall have full power and authority to deal in and with the Mortgaged Property, including the power and authority to protect, to conserve and to sell or to lease or to encumber or otherwise to manage and dispose of the Mortgaged Property, it being the intent to vest in the Mortgagee full rights of ownership in the Mortgaged Property as authorized and contemplated by Section 689.071, Florida Statutes. 20. No Remedy Exclusive; etc. No remedy herein conferred upon or reserved to the Mortgagee is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Mortgage, the Note, the Agreement or the Indenture or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Mortgagee to 12 146 exercise any remedy reserved to it, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. Such rights and remedies given hereunder shall extend fully to the Mortgagee, and the owners of the Bonds issued under the Indenture shall be deemed third party beneficiaries of all covenants and agreements herein contained, the enforcement of which is subject, however, to all of the terms and conditions set forth in this Mortgage and the Indenture. In the event any agreement contained in this Mortgage should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. 21. Agreement to Pay Attorneys' Fees and Expenses. If the Mortgagor defaults under any of the provisions of this Mortgage and the Mortgagee should employ attorneys or incur other expenses for the collection of the Loan Installments or the enforcement of performance or observance of any obligation or agreement of the Mortgagor herein contained, or enforcement of the Mortgagee's rights hereunder (including foreclosure or other litigation expenses), the amount thereof shall become part of the Indebtedness secured hereby, shall become immediately due and payable, and shall bear interest at the maximum lawful rate, and the Mortgagor agrees that it will on demand therefor pay to the Mortgagee the reasonable fees of such attorneys (including fees on appeal) and such other expenses so incurred by the Issuer, and the interest accrued thereon. 22. Extension, Leniencies and Releases. The Mortgagee may grant extensions of time for payment and other leniencies with respect to any Indebtedness secured hereby, and may waive or fail to enforce any of the Mortgagee's rights hereunder, and may release a portion or portions of the Mortgaged Property from the lien hereof, without releasing or diminishing the obligation or liability of the Mortgagor. 23. Subrogation. The Mortgagee shall be subrogated to the lien (notwithstanding its release of record) of any vendor, mortgagee or other lienholder paid or discharged by the proceeds of the Bonds or any loan or advance made by the Mortgagee to the Mortgagor and secured hereby. 13 147 24. Release or Satisfaction. Whenever there is no outstanding obligation secured hereby and no commitment to make advances, the Mortgagee shall on written demand by the Mortgagor, give a release or satisfaction hereof in recordable form. 25. Further Assurances. The Mortgagor shall, at its expense, promptly and duly execute, acknowledge and deliver to the Mortgagee such further documents, instruments, financing and similar statements and assurances and take such further action as may from time to time be reasonably required or requested by the Mortgagee in order more effectively to carry out the intent and purposes of this Mortgage, the Note, the Agreement, the Indenture and the Bonds issued thereunder and other instruments contemplated thereby or hereby. 26. General Provisions. The singular shall include the plural and any gender shall be applicable to all genders when the context permits or implies. If the Mortgagor sells or transfers the Mortgaged Property, the Mortgagee may deal with the successor or successors in interest without in any way discharging or reducing the Mortgagor's liability for the Mortgagor's obligations secured hereby. The terms Mortgagor and Mortgagee shall extend to and include their respective legal representatives, successors and assigns. Any agreement hereafter made by the Mortgagor and the Mortgagee pursuant to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance. Time is of the essence. 14 148 IN WITNESS WHEREOF, the Mortgagor has executed this Mortgage as of the 16th day of December, 1982. PROGRESSIVE AMERICAN INSURANCE COMPANY By /s/ Charlotte A. Jackson ------------------------------------------ Charlotte A. Jackson Vice President ATTEST: (SEAL) /s/ Robert J. Young - --------------------------------------- Robert J. Young Assistant Secretary STATE OF FLORIDA COUNTY OF HILLSBOROUGH The foregoing instrument was acknowledged before me this 16th day of December, 1982, by CHARLOTTE A. JACKSON, Vice President, and ROBERT J. YOUNG, Assistant Secretary, respectively of PROGRESSIVE AMERICAN INSURANCE COMPANY, a Florida corporation, on behalf of the corporation. /s/ Gertrude Eaton ----------------------------------- Notary Public Notary Public State of Florida at Large My Commission Expires Mar. 8, 1986 (Affix notarial seal) 15 149 UNCONDITIONAL GUARANTY THIS UNCONDITIONAL GUARANTY, dated as of _____ __ 1982, by and between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Guarantor"), Sun Bank, N.A., Orlando, Florida, (herein, together with any successors, called the "Trustee"), and the Hillsborough County Industrial Development Authority, Hillsborough County, Florida (the "Issuer"). WITNESSETH: WHEREAS, the Issuer has agreed by adoption of a Resolution dated March 10, 1982, as supplemented and amended by a Resolution dated September 22, 1982 (collectively, the "Resolutions"), with PROGRESSIVE AMERICAN INSURANCE COMPANY, a Florida corporation (the "Company"), to issue its Hillsborough County Industrial Development Authority Industrial Development Revenue Bonds (Progressive American Insurance Company Project), Series 1982, in the aggregate principal amount of $4,000,000 (the "Bonds"); and WHEREAS, the proceeds from the sale of the Bonds are to be deposited with the Trustee and disbursed to the Company pursuant to the terms of that certain Indenture of Trust (the "Indenture") between the Issuer and the Trustee dated as of the date hereof, for the purpose of constructing the Company's headquarters office in Hillsborough County, Florida (the "Project"); and WHEREAS, the Company has agreed to pay the principal of, interest on and redemption premium, if any, with respect to the Bonds, as and when the same become due, under and pursuant to the terms of that certain Promissory Note (the "Note") issued by the Company to the Issuer and under that certain Loan and Debt Obligation Agreement (the "Agreement") between the Issuer and the Company, both dated as of the date hereof; and WHEREAS, the Trustee has agreed in the Indenture to act for the benefit of the holders of the Bonds, and the Issuer has assigned to the Trustee under the terms of the Indenture its right, title and interest in the payments to be made by the Company under the Note and the Agreement; and WHEREAS, Guarantor is the indirect owner of all of the issued and outstanding stock of the Company and wishes to provide additional security for the payment of the Bonds as and when the same shall become due, and wishes to enter 150 into this Unconditional Guaranty for the benefit of the Issuer and for the benefit of the holders of the Bonds as represented by the Trustee; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Guarantor does hereby covenant and agree with the Issuer and the Trustee as follows: SECTION 1. All terms used herein in capitalized form and not otherwise herein defined shall have the same meaning as ascribed to them in the Resolutions or in the Agreement. SECTION 2. Guarantor hereby absolutely and unconditionally guarantees to the Issuer and to the Trustee for the benefit of the holders of the Bonds (a) the full and prompt payment of the principal of, interest on and any redemption premium with respect to the Bonds as and when the same shall become due, whether at the stated date of maturity, by acceleration or otherwise, and (b) the full and complete payment and performance by the Company of all of the provisions, conditions, covenants and agreements to be performed by the Company under the Agreement, the Note and the Mortgage and Security Agreement (the "Mortgage"), dated as of the date hereof, between the Company and the Issuer (the Bonds, the Agreement, the Note and the Mortgage sometimes being referred to herein collectively as the "Operative Documents"), without regard to the validity of the Operative Documents or the enforceability of the Operative Documents against the Company or the Issuer. Guarantor further unconditionally agrees to pay all reasonable expenses and charges, legal or otherwise (including court costs and attorneys' fees) paid or incurred by the Issuer or the Trustee in realizing upon any of the payments or enforcing any of the covenants hereby guaranteed or in enforcing this Unconditional Guaranty. Guarantor shall make all payments due hereunder in lawful money of the United States of America in federal or other immediately available funds. Guarantor further agrees that if the Issuer or the Company does not or is not able to pay or perform in accordance with the terms of the Operative Documents for any reason (including without limitation the failure of the validity of the Operative Documents or the enforceability 2 151 thereof whether by reason of waiver or otherwise, the liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or similar proceedings affecting the status, existence, assets or obligations of the Issuer or the Company or the limitation of damages for the breach, or the disaffirmance of any of, the Operative Documents, or any other circumstance that might otherwise constitute a legal or equitable discharge or defense), it will pay such amounts or cause or pay for such performance, it being the intention hereof that Guarantor pay to the Issuer or the Trustee, as appropriate, as a payment obligation directly from Guarantor to the Issuer or the Trustee, as appropriate, amounts equal to all amounts which the Issuer or the Company shall fail to faithfully and properly pay when due under the Operative Documents, and Guarantor shall otherwise provide for and bring about properly when due such payments of the Issuer or the Company under the Operative Documents. Guarantor hereby covenants that this Unconditional Guaranty will not be discharged except by complete performance of the obligations contained herein. SECTION 3. Guarantor hereby agrees to indemnify and hold harmless the Issuer from any loss suffered or occasioned by the failure of the Company to satisfy its obligations under the Operative Documents and agrees to indemnify and hold harmless the Trustee and the holders of the Bonds from any loss suffered or occasioned by the failure of the Company or the Issuer to satisfy their respective obligations under the Indenture and the Operative Documents. The obligations of Guarantor under this Section 3 shall be independent primary obligations of Guarantor hereunder. The agreement to indemnify the Issuer, the Trustee and the holders of the Bonds contained in this section shall be enforceable notwithstanding the invalidity or unenforceability of any other section or sections contained herein. SECTION 4. Guarantor further agrees to indemnify and hold harmless the Issuer and both the present and future members of the Issuer, the Issuer's agents, employees and attorneys individually and personally and the Trustee from any liability or loss resulting from the construction or operation of the Project, from any cause whatsoever pertaining to the Project or the use thereof, or from the issuance and sale of the Bonds, provided that the indemnity provided by this sentence shall be effective only to the extent of any loss that might be sustained in excess of the proceeds 3 152 recovered by the Issuer or the Trustee from any insurance, if any, carried by the Company with respect to the loss sustained. SECTION 5. Each and every default by the Issuer or the Company under the terms of the Operative Documents shall give rise to a separate cause of action hereunder against Guarantor. SECTION 6. This Unconditional Guaranty shall be a continuing, absolute and unconditional guaranty according to its terms and shall remain in full force and effect until the Issuer and the Company shall have fully satisfied and discharged all of their respective obligations under the Operative Documents, including all payments under the Operative Documents, irrespective of the lack of genuineness, invalidity, irregularity or unenforceability of the Operative Documents or any assignment, modification or termination thereof, whether with or without notice to or the consent of Guarantor, or the bankruptcy, insolvency, reorganization or dissolution of the Issuer or the Company or the assignment for the benefit of creditors of any assets by the Issuer or the Company. SECTION 7. This Unconditional Guaranty and the liability hereunder shall in no way be affected or impaired by any redelivery, repossession, surrender or destruction of the Project, in whole or in part, or by any failure, neglect or omission on the part of the Issuer, its successors or assigns or the Trustee, to realize upon any obligations or liabilities of the Company. The Issuer or the Trustee, to the extent either has knowledge thereof, shall give Guarantor prompt written notice of the occurrence of any default under the Operative Documents, specifying such default, but the failure of either or both of them to give such notice shall in no way diminish, reduce or otherwise affect Guarantor's obligations hereunder. SECTION 8. The obligations, covenants, agreements and duties of Guarantor under this Unconditional Guaranty shall not be affected or impaired by reason of the happening from time to time of any of the following with respect to the Operative Documents, this Unconditional Guaranty, or the assignment thereof, although done without notice to or the consent of Guarantor: (a) any assignment or mortgaging or the purported assignment or mortgaging of all or any part of 4 153 the interest of the Company in the Operative Documents or in the Project; (b) any assignment or purported assignment of all or any part of the interest of the Trustee in the Mortgage; (c) the waiver by the Issuer or the Trustee of the performance or observance by the Company of any of the agreements, covenants, terms or conditions contained in any of such instruments; (d) the extension of the time for payment by the Company of sums or any part thereof owing or payable under any of such instruments or of the time for performance by the Company of any other obligations under or arising out of any such instruments or the extension or the renewal of any thereof; (e) the modification or amendment (whether material or otherwise) of any duty, agreement or obligation of the Company set forth in any of such instruments; (f) the taking or the omission of any of the actions referred to in any of such instruments; (g) any failure, omission, delay or lack on the part of the Issuer or the Trustee to enforce, assert or exercise any right, power or remedy conferred on the Issuer or the Trustee in any of such instruments, or any action on the part of the Issuer or the Trustee granting indulgence or extension in any form; (h) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting the Company or any of its assets, or the disaffirmance of either the Agreement or the Mortgage in any such proceedings; (i) the release or discharge of the Company from the performance or observance of any agreement, covenant, term or condition contained in any of such instruments by operation of law; (j) the release, substitution or replacement in accordance with the terms of the Operative Documents of any property subject thereto; (k) the receipt and acceptance by the Issuer or the Trustee of notes, checks or other instruments for the payment of money made by the Company and extensions and renewals thereof; or (I) any other cause, whether similar or dissimilar to the foregoing. SECTION 9. Without limiting the foregoing, it is specifically understood that any modification, limitation, or discharge of the Issuer's or the Company's liability under the Operative Documents arising out of or by virtue of any bankruptcy arrangement, reorganization or similar proceeding for relief of debtors under federal or state law hereinafter initiated by or against the Issuer or the Company shall not affect, modify, limit, or discharge the liability of Guarantor in any manner whatsoever and this 5 154 Unconditional Guaranty shall remain and continue in full force and effect and shall be enforceable against Guarantor to the same extent and with the same force and effect as if any such proceedings had to be instituted. Guarantor does hereby waive all rights and benefits which might accrue to it by reason of any such proceeding, and it shall be liable for the full amount of the sums, including all damages imposed, payable under the terms of the Operative Documents, irrespective and without regard to any modification, limitation, or discharge of the liability of the Issuer or the Company that may result from any such proceeding. SECTION 10. This Unconditional Guaranty and every part hereof shall be binding upon Guarantor and its successors and assigns and shall inure to the benefit of the Trustee and its successors and assigns. So long as any of the obligations of the Issuer or the Company under the Operative Documents have not been satisfied or discharged, all rights against Guarantor arising under this Unconditional Guaranty shall be for the benefit of the Trustee and the Issuer; and the Trustee, in its name and for the benefit of the Issuer and the holders of the Bonds, shall be entitled to bring any suit, action or proceeding against Guarantor for the enforcement of any provision of this Unconditional Guaranty and, unless requested in writing by the Issuer, it shall not be necessary in any such suit, action or proceeding brought by the Trustee to make the Issuer a party thereto. The terms of this Unconditional Guaranty may be enforced as to any one or more breaches either separately or cumulatively. Notice of execution and delivery of this Unconditional Guaranty by the Issuer and the Trustee and notice of the execution and delivery of the Operative Documents by the Company and of the assignment thereof to the Trustee and of the execution and delivery of the Bonds are hereby waived by Guarantor. SECTION 11. The following shall be "Events of Default" under this Unconditional Guaranty, and the terms "Event of Default" or "Default" mean, whenever they are used in this Unconditional Guaranty, any one or more of the following events: (a) failure by Guarantor to observe and perform any covenant, condition or agreement on its part to be observed or performed pursuant to this Unconditional Guaranty, or (b) the filing by Guarantor of a voluntary petition in bankruptcy, or failure by Guarantor promptly to lift any execution, garnishment or attachment of such consequence as will materially impair its ability to carry out its obligations under this Unconditional Guaranty, or adju- 6 155 dication of Guarantor as bankrupt, or an assignment by Guarantor for the benefit of its creditors, or the entry by Guarantor for the benefit of its creditors into an agreement of composition with its creditors, or under any similar act which may hereafter be enacted, and such adjudication or approval shall not be vacated or set aside or dismissed within ninety (90) days of the date of entry thereof, or (c) in the opinion of the Trustee, any material adverse change in the financial status of the Company or the Guarantor, or (d) an event of default, as defined in any bond, debenture, note, mortgage, indenture, contract or instrument, under which there may be issued, or by which there may be secured or evidenced, any indebtedness of Guarantor in excess of $150,000, whether such indebtedness now exists or shall hereafter be created, shall happen and shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable. Guarantor shall give immediate notice to the Trustee, the Issuer, the Original Purchaser, and the successors or assigns thereof, of any failure by Guarantor to perform any obligation under any instrument described in this subsection (d), whether or not such failure has ripened into a default under such instrument, and of any default by the Company. SECTION 12. In the event of any default in payment by the Issuer or the Company under the Operative Documents or in the event of any Default described in Section 11 hereof, the Trustee and the Issuer, or either of them, may proceed first directly against Guarantor under this Unconditional Guaranty without proceeding against or exhausting any other remedies which it may have against the Company and without resorting to any other security held by the Issuer or the Trustee. In the collection or enforcement of the rights hereunder, the Trustee and the Issuer shall have all the remedies of a creditor and a secured party under applicable law. Without limiting the generality of the foregoing, the Trustee and the Issuer, or either of them, may, at their or its option and without notice or demand: (a) declare any liability accelerated and due and payable at once; and (b) take possession of any collateral security wherever located, and sell, resell, assign, transfer and deliver all or any part of said property of the Company, at any broker's board or exchange or at any public or probate sale, for cash or on credit or for future delivery, and in connection therewith the Trustee and the Issuer, or either of them, may grant options and may impose reasonable conditions, and the Trustee and the Issuer, or either of them, unless prohibited by law the provisions of which cannot be 7 156 waived, may purchase all or any part of said property to be sold, free from and discharged of all trusts, claims, rights of redemption and equities of Guarantor whatsoever. SECTION 13. So long as any Bonds remain outstanding, the Guarantor shall furnish to the Trustee and to each Bondholder, as soon as practicable after the end of each calendar quarter and, in any event within one hundred twenty (120) days thereafter, a certificate of an executive officer of the Guarantor certifying that: (a) during said period the Company was in compliance with the requirements of the Agreement and the documents contemplated thereby and the covenants of the Company contained therein; and (b) the Company has reviewed the relevant terms of the Agreement and has made, or caused to be made under the Company's supervision, a review of the transactions and conditions with respect to the Project from the beginning of the accounting period covered by the statements being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes, or with the passage of time or giving of notice or both would constitute, an event of default as defined in Section 9.1 of the Agreement, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or proposes to take with respect thereto. SECTION 14. This Unconditional Guaranty is made under and shall be construed and enforced in accordance with the laws of the State of Florida. If any provisions of this Unconditional Guaranty shall be held to be invalid by any court of competent jurisdiction, the invalidity of such provision shall not affect any of the remaining provisions. SECTION 15. Guarantor represents and warrants that: (a) It is a corporation duly organized and in good standing under the laws of the State of Ohio, is not in violation of any provision of its Articles of Incorporation, its Bylaws or any law in any manner material to its ability to perform its obligations under this Unconditional Guaranty, has full corporate power to enter into this Unconditional Guaranty and has duly authorized the execution 8 157 and delivery of this Unconditional Guaranty by proper corporate action; and neither this Unconditional Guaranty, the execution and delivery hereof nor the performance of the agreements herein contained is prohibited by, contravenes or constitutes a default under any agreement, instrument or indenture (which default is, individually or in the aggregate, materially adverse to the consolidated financial condition of Guarantor and its consolidated subsidiaries) or under any provision of its Articles of Incorporation or any other requirement of law; (b) The Operative Documents constitute legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, and the representations of the Company contained therein are true and correct in all material respects; (c) There is no action, suit or proceeding pending or, to the knowledge of Guarantor, threatened against Guarantor, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality which might substantially adversely affect the ability of Guarantor to perform its obligations under this Unconditional Guaranty or the ability of the Company to perform its obligations under the Operative Documents; (d) All authorizations, consents and approvals of governmental bodies or agencies, if any, required in connection with the execution and delivery of this Unconditional Guaranty or in connection with the execution, delivery and performance by Guarantor of its obligations hereunder have been obtained; and (e) The assumption by Guarantor of its obligations hereunder will result in a financial benefit to Guarantor. SECTION 16. All notices hereunder shall be sufficiently given and shall be deemed given on the second day following the day on which the same has been mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Trustee: Sun Bank, N.A. 200 S. Orange Avenue Orlando, Florida 32802 Attn.: Corporate Trust Department 9 158 If to the Issuer: Hillsborough County Industrial Development Authority c/o Warren M. Cason, Esq. Post Office Box 2150 Tampa, Florida 33601 If to Guarantor: The Progressive Corporation 6300 Wilson Mills Road Mayfield Village, Ohio 44143 Attn.: Howard Zelikow IN WITNESS WHEREOF, Guarantor has executed this instrument and the Trustee has caused this instrument to be executed and attested to by persons thereunto duly authorized, all as of the day and year first written above. THE PROGRESSIVE CORPORATION (SEAL) By /s/ Richard M. Haverland ------------------------------------- Richard M. Haverland, President ATTEST: /s/ David M. Schneider - --------------------------- David Schneider, Secretary 10 159 SUN BANK, N.A., as Trustee (SEAL) By /s/ Geraldine P. Kail ---------------------------------- ATTEST: /s/ Robert W. Andrews, Jr. - ------------------------------- Trust Officer HILLSBOROUGH COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (SEAL) By /s/ Samuel I. Latimer ---------------------------------- Chairman ATTEST: /s/ Ellsworth G. Simmons - ------------------------------- Assistant Secretary 11 EX-4.F 3 PROGRESSIVE CORP. 10-K EXHIBIT 4(F) 1 EXHIBIT 4(F) (Face of Security) REGISTERED REGISTERED No. ________ $___________ CUSIP 743315 AE 3 THE PROGRESSIVE CORPORATION 8 3/4% NOTE DUE JUNE 1, 1999 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 June 1, 1999, 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 1 and December 1 of each year, commencing December 1, 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 1 or the December 1, 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 June 1, 1989, 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 fifteenth day of May or November, as the case may be, and before the following June 1 or December 1, this Note shall bear interest from such June 1 or December 1; provided, that if the Issuer shall default in the payment of interest due on such June 1 or December 1, then this Note shall bear interest from the next preceding June 1 or December 1 to which interest has been paid or, if no interest has been paid on this Note, from June 1, 1989. The interest so payable on any June 1 or December 1 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 May 15 or November 15, as the case may be, next preceding such June 1 or December 1. 2 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] By: Peter B. Lewis ---------------------------------- President and Chief Executive Officer Attest: David M. Schneider ------------------------------- Secretary Dated: ----------- 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 -2- 3 (Back of Security) THE PROGRESSIVE CORPORATION 8 3/4 NOTE DUE JUNE 1, 1999 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 8 3/4% Notes Due June 1, 1999 of the Issuer, limited in aggregate principal amount to $30,000,000. In case an Event of Default with respect to the 8 3/4% Notes Due June 1, 1999, 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 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 -3- 4 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 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 multiple 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 -4- 5 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. -5- 6 ------------------ 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 UNIF GIFT MIN ACT - ______ Custodian _____ JT TEN - as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform Gifts to Minors Act in common ------------------------------------- (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. Dated: -------------------------- ---------------------------------------------- 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.
-6- EX-10.B 4 PROGRESSIVE CORP. 10-K EXHIBIT 10(B) 1 EXHIBIT 10(B) THE PROGRESSIVE CORPORATION 1995 GAINSHARING PLAN 1. The Progressive Corporation and its subsidiaries ("Progressive" or the "Company") have adopted The Progressive Corporation 1995 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 and Division performance meets expectations. Participants will have the opportunity to earn cash compensation in excess of the top of the market when Core Business and Division 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 or a corporate support function as of December 1 of that Plan year. The gainsharing opportunity, if any, for those executive officers who participate in The Progressive Corporation 1995 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 or the earnings replacement component of any worker's compensation award. 5. Target Percentages vary by position. Target Percentages for Plan participants typically are as follows:
POSITION TARGET % ----------------------------------------------------------------- Division Presidents, Product Leaders and Corporate Support Team Members 60% ----------------------------------------------------------------- Community Managers 50% ----------------------------------------------------------------- Senior Product Managers (PM's) and Senior Division Claims Managers 35% ----------------------------------------------------------------- Division DRG Members, Function Heads and PM's 25% -----------------------------------------------------------------
2
POSITION TARGET % ----------------------------------------------------------------- Regional Claims Managers, Finance Managers, and Group Managers 13% ----------------------------------------------------------------- Senior Professionals and Managers 10% ----------------------------------------------------------------- Professionals and Supervisors (e.g. CSR's, Claims Reps, etc.) 8% -----------------------------------------------------------------
Target Percentages may be changed with the approval of the Chief Operating Officer, Chief Human Resources Officer and the relevant process leader or product leader. Target Percentages also may be changed from year to year. 6. The Performance Factor A. General The Performance Factor shall consist of a Profitability and Growth Component and a Cost Structure Improvement Component, as described below (the "Performance Components"). 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 may be changed from year to year by or under the direction of the Committee. B. Profitability and Growth Component The Profitability and Growth Component measures overall operating performance of Progressive's core personal and commercial automobile insurance business ("Core Business"), as a whole, and the assigned Division or Product (if applicable), for the Plan year in respect of which an annual Gainsharing Payment is to be made. For purposes of computing a score for this Component, operating performance results are measured by the Gainsharing Matrix, as established by or under the direction of the Committee for the Plan year, which assigns a Profitability and Growth Score to various combinations of profitability (as measured by the GAAP combined ratio) and growth (based on year-to-year change in market share) outcomes. Market share is determined in terms of direct written premium. For the Core Business as a whole, the market means all personal auto premium and all commercial auto premium in the United States, plus personal auto premium in Ontario, Canada. For Personal Lines Divisions, the market means personal auto premium in active states. All market information shall be as published by A.M. Best Company, Inc., or other sources selected by the Committee. 2 3 C. Cost Structure Improvement Component The Cost Structure Improvement Component measures success in achieving cost structure improvement for the Core Business, as a whole, and for the assigned Division, if any. Results are reflected in a Cost Structure Improvement Score. For purposes of computing the Cost Structure Improvement Score, cost structure improvement is measured by comparing the sum of the GAAP Underwriting Expense Ratio ("Underwriting Expense Ratio") and Loss Adjustment Expense Ratio ("LAE Ratio") achieved for the Plan year (collectively, "Actual Expense Ratio") against defined expense objectives for that year, as established by or under the direction of the Committee ("Target Expense Ratio"). The Target Expense Ratio, including its individual components, may vary by Division and/or for the Core Business as a whole, and may be changed from year to year. For 1995, and for each Plan year thereafter until otherwise determined by the Committee, the Target Expense Ratio for the Core Business, as a whole, shall be 33, including a target LAE Ratio of 10 and a target Underwriting Expense Ratio of 23. The Cost Structure Improvement Score will be computed in accordance with the following formula: Cost Structure Improvement = 1+ [Target Expense Ratio-Actual Expense Ratio] Score ----------------------------------------- 4 D. Component Weighting Performance Components are weighted by Core Business and Division or Product, as applicable. The weighting factors may differ among participants and may be changed from year to year. For participants in the Core Business, the typical weighting shall be as follows:
------------------------------------------- Weighting --------------------------------------------------------------------- Performance Profitability Cost Factor and Growth Structure Total --------------------------------------------------------------------- Core Business Results 35% 15% 50% --------------------------------------------------------------------- Division Results 35% 15% 50% --------------------------------------------------------------------- Total 70% 30% 100% ---------------------------------------------------------------------
There will typically be no Division Component for participants assigned to a corporate support function (such as Finance, Human Resources, Law and Information Services) and others who are not assigned primarily to a Division. Individualized programs may be developed if and to the extent 3 4 deemed appropriate by the Company's Chief Executive Officer ("CEO") or Chief Operating Officer ("COO"). 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 pre-established objectives. In some cases, the performance score for a Performance Component may be above 2.0 or below 0. The individual scores (positive and negative, above 2.0 and below 0) are not adjusted, but go directly into the calculation of the Performance Factor, which is capped at 0 and 2.0. 7.A. Subject to Paragraph 8 below, no later than December 31 of each Plan year, each participant with a Target Percentage of 8% or 10% will receive an initial payment in respect of his or her Gainsharing Payment for such Plan year equal to 80% of an amount calculated on the basis of Paid Earnings for the first 11 months of the Plan year, performance data through such 11 month period (estimated, if necessary) and one month of forecasted operating results. No later than February 15 of the following year, each such participant shall receive the balance of his or her Gainsharing Payment, if any, for such Plan year, based on his or her Paid Earnings for the entire Plan year and performance data for the Plan year, including the Company's best estimate of Core Business market share growth. B. Subject to Paragraph 8 below, no later than February 15 of the year immediately following the Plan year for which a Gainsharing Payment is to be made, each participant with a Target Percentage of 13% or greater will receive a payment in respect of his or her Gainsharing Payment for such Plan year in an amount equal to 90% of his or her estimated Gainsharing Payment for such year ("Estimated Payment"), calculated on the basis of Paid Earnings for the entire Plan year and actual performance data for such Plan year, including the Company's best estimate of Core Business market share growth for the Plan year. The balance of the Gainsharing Payment for such Plan year, if any, will be made to each such participant no later than the following September 30 or, if later, within thirty (30) days following the Company's receipt of all market share information necessary to compute final Gainsharing Payment amounts for such Plan year. Each participant who is employed by the Company as of the date of the final Gainsharing Payment determination and who has a Target Percentage of 13% or greater is required to return to the Company no later than thirty (30) days following receipt of written notice from the Company the amount, if any, by which the Estimated Payment made to such participant for such Plan year exceeds the actual Gainsharing Payment to which such participant is entitled. If any such participant fails to return such excess payment when and as required, the Company shall have the right to setoff such obligation against any other sum then or thereafter owed by the Company to such participant, whether under this Plan or otherwise. 4 5 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 such portion of the annual Gainsharing Payment. 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 shall 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. All of the authority of the Committee hereunder (including, without limitation, the authority to administer the Plan, select the persons to participate herein, interpret the provisions thereof, waive any of the requirements specified herein and make determinations hereunder and to establish, change or modify Performance Components and their respective weighting factors, performance targets and Target Percentages) may be exercised by the CEO or the COO. 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 their job 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. 15. This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable by or due from Progressive. Without limiting the generality of the foregoing, this 5 6 Plan supersedes and replaces The Progressive Corporation 1994 Gainsharing Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1994 (the "Termination Date"); provided, that any bonuses or other sums earned under the Prior Plan 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, 1995. This Plan shall be effective for 1995 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. 6 EX-10.D 5 PROGRESSIVE CORP. 10-K EXHIBIT 10(D) 1 EXHIBIT 10(D) THE PROGRESSIVE CORPORATION 1995 EXECUTIVE BONUS PLAN 1. The Progressive Corporation and its subsidiaries ("Progressive") have designed an executive compensation program consisting of three components: salary, annual bonus and equity-based incentives in the form of non-qualified stock options. These components have been structured to reflect the market for executive compensation and to promote both the achievement of corporate goals and performance that is in the long-term interests of shareholders. The annual bonus component is performance-based and focuses on current results. 2. The 1995 Executive Bonus Plan (the "Plan") shall be administered by or under the direction of the Executive Compensation Committee (the "Committee") of the Board of Directors. Executive officers of Progressive may be selected by the Committee to participate in the Plan for one or more Plan years. Plan years shall coincide with Progressive's fiscal years. 3. The following executive officers have initially been selected for participation in the Plan: Charles B. Chokel, Peter B. Lewis, Bruce W. Marlow, Michael C. Murr, David M. Schneider and Tiona M. Thompson (the "participants"). 4. Subject to the following sentence, the amount of the annual bonus earned by any participant under the Plan ("Annual Bonus") will be determined by application of the following formula: Annual Bonus = Paid Salary x Target Percentage x Performance Factor The Annual Bonus payable to any participant with respect to any Plan year may not exceed $2,000,000.00. 5. The salary rate of each Plan participant for any Plan year shall be as established by the Committee no later than ninety (90) days after commencement of such Plan year. For purposes of the Plan, "salary" and "Paid Salary" shall include regular, vacation, sick, holiday and funeral pay received by the participant for work or services performed by the participant as an officer or employee of Progressive and the earnings replacement component of any worker's compensation award, but shall not include any (a) short-term or long-term disability payments, (b) lump sum merit adjustments or (c) discretionary bonus payments made to the participant. 2 6. The Target Percentages for the participants in the Plan are as follows:
Participant Position Target Percentage ------------------ ----------------------------- ----------------- Charles B. Chokel Chief Financial Officer 80% Peter B. Lewis Chief Executive Officer 100% Bruce W. Marlow Chief Operating Officer 100% Michael C. Murr Chief Investment Officer 167% David M. Schneider Chief Legal Officer 60% Tiona M. Thompson Chief Human Resources Officer 60%
Target Percentages may be changed from year to year by the Committee. 7. The Performance Factor A. General The Performance Factor shall be determined by the performance results achieved with respect to one or more of the following components: Core Business Gainsharing, Return on Average Equity ("ROE") and Investment Performance, as described below (the "Bonus Components"). An appropriate combination of Bonus Components will be designated for each participant, and the designated Bonus Components will be weighted, based on such participant's assigned responsibilities. The combination of Bonus Components designated for each of the participants, and the relative weighting of those Components, are as follows:
- ------------------------------------------------------------------------------------ Core Business ROE Investment Participant Gainsharing Component Performance Component Component - ------------------------------------------------------------------------------------ Chokel 70% 30% 0% - ------------------------------------------------------------------------------------ Lewis 50% 30% 20% - ------------------------------------------------------------------------------------ Marlow 80% 20% 0% - ------------------------------------------------------------------------------------ Murr 0% 50% 50% - ------------------------------------------------------------------------------------ Schneider 70% 30% 0% - ------------------------------------------------------------------------------------ Thompson 80% 20% 0% - ------------------------------------------------------------------------------------
2 3 The relative weighting of the Bonus Components may vary among Plan participants and may be changed from year to year by the Committee. Actual performance results achieved for any Plan year, as used to calculate the performance score achieved for each of the applicable Bonus Components, shall be as certified by the Committee prior to payment of the Annual Bonus. For purposes of computing the amount of the Annual Bonus, the performance score achieved for each of the designated Bonus Components will be multiplied by the applicable weighting factor to produce a Weighted Component Score. The sum of the Weighted Component Scores equals the Performance Factor. The Performance Factor can vary from 0 to 2.0, based on actual performance versus the pre-established objectives. B. Core Business Gainsharing Component The Core Business Gainsharing Component consists of the following factors: (i) Profitability and Growth Factor The Profitability and Growth Factor measures overall operating performance of Progressive's core personal and commercial automobile insurance business ("Core Business") for the Plan year in respect of which an Annual Bonus is to be paid. For purposes of computing a score for this Factor, results will be measured by the Gainsharing Matrix, as established by the Committee for the Plan year, which assigns a performance score to various combinations of profitability and growth outcomes. For this Factor, profitability is measured by the GAAP combined ratio and growth is measured by year-to-year change in market share. Change in market share is measured in terms of net written premium, based on industry data (which may be estimated), as reported by A.M. Best Company, Inc. in Best Week, or any successor publication, upon conclusion of the Plan year for which the Annual Bonus is to be paid. The Profitability and Growth Factor is weighted 70% in computing the Core Business Gainsharing Score. 3 4 (ii) Cost Structure Improvement Factor The Cost Structure Improvement Factor measures success in achieving cost structure improvement for the Core Business. Results are reflected in a Cost Structure Improvement Score. For purposes of computing the Cost Structure Improvement Score, cost structure improvement is measured by comparing the sum of the GAAP Underwriting Expense Ratio ("Underwriting Expense Ratio") and Loss Adjustment Expense Ratio ("LAE Ratio") achieved in the Core Business for the Plan year (collectively, "Actual Expense Ratio") against the defined expense objectives for that year, as established by the Committee ("Target Expense Ratio"). For 1995 and thereafter unless and until otherwise directed by the Committee, the Target Expense Ratio shall be 33, based on a target LAE Ratio of 10 and a target Underwriting Expense Ratio of 23. The Cost Structure Improvement Factor is weighted 30% in computing the Core Business Gainsharing Score. The Cost Structure Improvement Score will be computed in accordance with the following formula: Cost Structure Improvement=1+[Target Expense Ratio-Actual Expense Ratio] Score ----------------------------------------- 4 Expense targets and the relative weighting of the above Factors may be changed from year to year by the Committee. C. Return on Average Equity Component This Component is based on Progressive's Return on Average Equity ("ROE") for the Plan year. The ROE will be calculated for each month of the Plan year and such monthly results will be averaged to determine the ROE for the Plan year. For purposes of this Plan, ROE shall be calculated as follows: ROE = net income - Preferred Share dividends -------------------------------------- average common shareholders' equity 4 5 In determining the ROE Performance Score, actual performance will be compared to a scale which excludes the effect of inflation, in accordance with the following scoring table:
- -------------------------------------------------- ROE (excluding ROE Performance effect of inflation, as Score reflected in the CPI) - -------------------------------------------------- 11% or lower 0.0 - -------------------------------------------------- 12% 0.3 - -------------------------------------------------- 13% 0.5 - -------------------------------------------------- 14% 0.7 - -------------------------------------------------- 15% 1.0 - -------------------------------------------------- 16% 1.1 - -------------------------------------------------- 17% 1.2 - -------------------------------------------------- 18% 1.3 - -------------------------------------------------- 19% 1.4 - -------------------------------------------------- 20% 1.5 - -------------------------------------------------- 21% 1.6 - -------------------------------------------------- 22% 1.7 - -------------------------------------------------- 23% 1.8 - -------------------------------------------------- 24% 1.9 - -------------------------------------------------- 25% or higher 2.0 ==================================================
To achieve a given ROE Performance Score for any Plan year, Progressive's ROE for that year must equal or exceed the required ROE level set forth in the above scoring table, without rounding, and ROE Performance Scores will not be derived from or subject to an interpolative or similar process. For purposes of this Plan, CPI shall mean the Consumer Price Index for all Urban Consumers (CPI-U) for the U.S. City Average for All Items (1982-1984 equals 100) or such other index as the Committee shall designate prior to the applicable Plan year. 5 6 D. Investment Performance Component The Investment Performance Component compares investment performance against targets ("Benchmarks") established for the individual segments of Progressive's investment portfolio. Investments are marked to market in order to calculate total return, which is then compared against the designated Benchmarks to produce a Performance Score for each segment of the portfolio. The Performance Scores for the several segments are weighted, based on the actual amounts invested in each segment (valued monthly), and the weighted Performance Scores for the several segments are then combined to produce the Investment Performance Score. Investment expense is not included in determining investment performance vs. benchmark. The Portfolio Segments and Benchmark measures are as follows: --------------------------------------------------------------- Portfolio Segment Investment Benchmark --------------------------------------------------------------- Equities S&P 500 including dividends --------------------------------------------------------------- High Yield Investments 70% of the average of Merrill Lynch High Yield Index and Merrill Lynch Bankruptcy Index --------------------------------------------------------------- Short Term Fixed Income 3 Year Treasury Securities + 75 basis points, tax equivalent basis --------------------------------------------------------------- The scoring table for comparing Investment Performance against the designated Benchmarks is as follows:
----------------------------------------- Investment Investment Performance Performance Versus Score Benchmark (weighted) ----------------------------------------- below 90% 0.00 ----------------------------------------- 90 - 94.99% 0.75 ----------------------------------------- 95 - 99.99% 0.90 ----------------------------------------- 100% and above 1.00 -----------------------------------------
6 7 To achieve a given Investment Performance Score for any Plan year, Investment Performance results must equal or exceed the required performance level indicated in the above scoring table, without rounding, and Investment Performance Scores will not be derived from or subject to an interpolative or similar process. 8. The Annual Bonus for any Plan year shall be paid to participants in two installments. The first installment, in an amount equal to 90% of the Annual Bonus, determined in accordance with the formula set forth in Paragraph 4 above, will be paid as soon as practicable after the Committee has certified performance results for the Plan year, but no later than March 31 of the immediately following year. The second installment, in an amount equal to 10% of the Annual Bonus, will be paid to participants on the September 30 immediately following the end of the Plan year for which such Annual Bonus is to be paid. The provisions of this Paragraph shall be subject to Paragraph 9 hereof. 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 Bonus otherwise payable under this Plan, subject to and in accordance with the terms of the Deferral Plan. 9. Unless otherwise determined by the Committee, in order to be entitled to receive any installment of the Annual Bonus for any Plan year, the participant must be employed by Progressive on the date designated for payment thereof. Annual Bonus payments made to participants will be net of any legally required deductions for federal, state and local taxes and other items. 10. The right to any of the Annual Bonuses hereunder shall 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. 11. 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 thereunder. 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. 7 8 The Plan shall be administered by the Committee in accordance with the requirements of Section 162(m) of the Internal Revenue Code, as amended, and the rules and regulations promulgated thereunder (the "Code"). 12. The Plan shall be subject to approval by the holders of Progressive's Common Shares, $1.00 par value ("shareholders") in accordance with the requirements of Section 162(m) of the Code. 13. 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; provided that the Committee may not increase the amount of compensation payable hereunder to any participant above the amount that would otherwise be payable upon attainment of the applicable performance goals, or accelerate the payment of any portion of the Annual Bonus due to any participant under the Plan without discounting the amount of such payment in accordance with Section 162(m) of the Code, and further provided that any amendment or revision of the Plan required to be approved by shareholders pursuant to Section 162(m) of the Code shall not be effective until approved by Progressive's shareholders in accordance with the requirements of Section 162(m). 14. The Plan will be unfunded and all payments due under the Plan shall be made from Progressive's general assets. 15. 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 their job duties or compensation. 16. Progressive shall have the unrestricted right to set off against or recover out of any bonuses or other sums owed to any participant under the Plan any amounts owed by such participant to Progressive. 17. This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable or due to any participant from Progressive. Without limiting the generality of the foregoing, this Plan supersedes and replaces The Progressive Corporation 1994 Executive Bonus Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1994 (the "Termination Date"); provided, that any bonuses or other sums earned under the Prior Plan prior to the Termination Date shall be unaffected by such termination and shall be paid to the appropriate participants when and as provided thereunder. 8 9 18. This Plan is adopted and, subject to the provisions of Paragraph 12 hereof, is to be effective, as of January 1, 1995. Subject to the provisions of Paragraph 12, this Plan shall be effective for 1995 and for each year thereafter unless and until terminated by the Committee. 19. This Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 9 EX-10.H 6 PROGRESSIVE CORP. 10-K EXHIBIT 10(H) 1 SHARE OPTION AGREEMENT ---------------------- THIS SHARE OPTION AGREEMENT (this "Agreement") is made as of March 17, 1989, between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Company"), and David M. Schneider (the "Optionee"). Whereas, the Optionee is a partner in Baker & Hostetler, an Ohio general partnership, which acts as general counsel to the Company and its subsidiaries and affiliates, and Whereas, the Company desires to hire the Optionee as its Senior Vice President and Chief Legal Officer upon his resignation from such law firm and believes it to be in the best interests of the Company to provide incentives to the Optionee which are based on increases in the value of the Common Shares, $l. 00 par value ("Shares"), of the Company, and Whereas, the Optionee has agreed to resign from such law firm and to commence employment with the Company in the aforementioned capacity on or about May 1, l989, Now, therefore, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. GRANT OF OPTION. The Company hereby grants to the Optionee, subject to ratification and approval hereof by the Board of Directors of the Company, the right and option to purchase from the Company from time to time an aggregate of 75,000 Shares of the Company (the "Option") (such number being subject to adjustment as set forth in Section 10) on the terms and conditions set forth herein. 2. VESTING AND TERM OF OPTION. (a) The Option may be exercised as to 75,000 Shares at any time beginning six months after the date this agreement is ratified and approved by the Board of Directors of the Company (unless the Optionee dies or becomes disabled prior to the expiration of such six month period, in which case the Option may be exercised as to such 75,000 Shares by his legal representative 2 or guardian (his "Personal Representative") as provided in Section 7). (b) Notwithstanding the foregoing paragraph (a) of this Section 2, the Option shall expire at 5:00 p.m. Cleveland, Ohio, time on March 16, 1999 and shall not be exercisable thereafter, except as provided in Section 7. 3. OPTION PRICE. The option price for each Share subject to the Option (the "Option Price Per Share") is $29.5O (subject to adjustment as set forth in Section 9). 4. EXERCISE OF OPTION. (a) The Optionee (or his Personal Representative, in the event of his death or disability) shall exercise the Option by delivering to the Company written notice specifying the number of Shares with respect to which the Option is being exercised. Such notice shall be accompanied by payment in full for the Shares being purchased in the form of cash, a certified check, or such number of Common Shares of the Company as then have a value equal to the exercise price, as well as any amount (also payable as aforesaid) required to be withheld on the optionee's behalf by the Company under applicable tax laws, as provided in Section 8. (b) No Shares shall be issued until full payment therefor has been made, and the Optionee shall have none of the rights of a shareholder of the Company until they are so issued. (c) Upon payment in full for the Shares purchased pursuant to an exercise of the Option, the Company shall issue and deliver to the Optionee share certificates for the number of Shares purchased by the Optionee. 5. NONTRANSFERABILITY. The Option shall not be transferable other than by will or the laws of descent and distribution, and the Option may be exercised, during the lifetime of the Optionee, only by the Optionee or his Personal Representative. 6. TERMINATION OF EMPLOYMENT OR MANAGEMENT AGREEMENT. Notwithstanding the provisions of Section 2 above, in the event the Optionee's employment with the Company is terminated by the Company for cause (a termination due to Optionee's disability not being for cause) or is terminated 3 by the Optionee for any reason (other than death or disability), the Option may be exercised by the Optionee only as to any part or all of the Shares subject to the Option which were exercisable but unexercised immediately prior to such event, at any time before, and the Option shall terminate at 5:00 pm. Cleveland, Ohio, time on and may not be exercised at any time after, the date that is one month after the date of such termination, but not beyond the original term of the Option as provided in Section 2. Nothing in this Agreement shall confer upon the Optionee any right to continue in the employ of the Company or interfere in any way with any right the Company may otherwise have to terminate his employment at any time. 7. DEATH OR DISABILITY OF THE OPTIONEE. Notwithstanding the provisions of Sections 2 and 4(a) above, if the Optionee shall die or become disabled (which shall be defined as being unable to perform his duties for the Company for a period of six consecutive months, as determined by the Company in good faith) while he shall be employed by the Company, and prior to the expiration of the Option, the Option may be exercised, in case of his death, by a legatee or legatees of the Optionee under his last will or by his Personal Representative or distributees, or, in case of his disability, by the Optionee or his Personal Representative, as to any or all of the Shares subject to the Option which were exercisable but unexercised immediately prior to such event, at any time before, and the Option shall terminate at 5:00 pm. Cleveland, Ohio, time on and may not be exercised at any time after, the date that is one year after the date of the appointment of the Optionee's Personal Representative, in case of his death, or one year after the appointment of a Personal Representative for Optionee, in case of his disability. 8. TAXES. The Company shall have the right to require the Optionee (or his Personal Representative) to pay to the Company the amount of taxes, if any, which the Company is or will be required to withhold with respect to any Shares to be issued in connection with the exercise of the 4 Option before any certificates for the Shares are delivered pursuant to the Option. 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES PURCHASABLE. In the event of any change in the number of outstanding Shares by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of Shares or a similar corporate change, the Board of Directors shall determine the extent to which such change equitably requires an adjustment in the number of Shares or other securities subject to the Option and in the Option Price Per Share and such adjustment shall be made by the Company. 1O. SECURITIES LAW COMPLIANCE; REGISTRATION RIGHTS. (a) The Option may not be exercised and the Company shall not be required to issue any Shares hereunder if such issuance, in the judgment of the Company, would constitute a violation of any state or federal law, or of the rules or regulations of any governmental regulatory body or securities exchange. The Company, in its sole discretion, may require the Optionee to furnish the Company with appropriate representations and a written investment agreement prior to the exercise of the Option and the delivery of any Shares pursuant to the Option. (b) The Shares to be issued in connection with the exercise of the Option may not have been registered under the Securities Act of 1933, as amended (the "1933 Act"), at the time they are issued and, in such event, may not be offered for sale, sold or otherwise transferred or disposed of in the absence of such registration or an opinion of counsel satisfactory to the Company to the effect that such a transfer or disposition may be made without any such registration. The certificates for the Shares will, in such event, include a legend setting forth the foregoing restriction and the transfer of such Shares may be subject to a stop order on the books of the transfer agent. 5 (c) Notwithstanding the preceding paragraphs (a) and (b) of this Section 10, during such times as there is neither a registration statement in effect under the 1933 Act covering the resale by Optionee of any Shares obtained pursuant to his exercise of the Option nor any exemption from registration available to him for any sale by him of any such Shares, Optionee shall have the right to registration under the 1933 Act as set forth in Exhibit A hereto. 11. NOTICES. Notices, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given when sent by prepaid facsimile transmission, telex, cable, commercial overnight courier or certified mail, addressed to the intended recipient at the address set forth at the end of this Agreement, or at such other address as such intended recipient may hereafter have designated most recently to the other party hereto with specific reference to this Section 11. 12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement with respect to the subject matter hereof, supersedes all prior written and oral agreements with respect thereto and may be modified only by an instrument in writing signed by each of the parties hereto. 13. BINDING EFFECT. The provisions contained in this Agreement shall, upon ratification and approval hereof by the Board of Directors of the Company, be binding upon and inure to the benefit of the parties hereto, the successors and assigns of the Company, and the Optionee's Personal Representative and other successors expressly described herein. 14. APPLICABLE LAW. This Agreement and the construction and interpretation of the provisions hereof shall be governed by the laws of the State of Ohio. 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and the Optionee has hereunto set his hand, all as of the day and year first above written. 6000 Parkland Blvd. THE PROGRESSIVE CORPORATION Mayfield Heights, Ohio 44124 Attn: P. B. Lewis, President By: /s/ P. B. Lewis ---------------------- P.B. Lewis, President 2767 Belgrave Road /s/ David M. Schneider Pepper Pike, Ohio 44124 ---------------------- David M. Schneider 7 EXHIBIT A Registration of Stock --------------------- 1.1 REQUIRED REGISTRATION. If at any time, the Company receives a written request from the Optionee for the registration of any Shares obtained by the Optionee pursuant to the exercise of the Option (the "Stock"), the Company shall, at its sole expense, prepare and file a registration statement under the Securities Exchange Act of 1933, as amended (the "1933 Act"), covering the Stock which is subject to such request and shall use reasonable efforts to cause such registration statement to become effective; provided, however, that the Company shall not be required to prepare and file more than one such registration statement. In the event that the Optionee requests registration and thereafter determines for any reason not to proceed with any such registration at any time before any registration statement has been filed with the Securities and Exchange Commission (the "SEC"), then the Optionee shall not be deemed to have exercised his rights to require the Company to register Stock pursuant to this Section 1.1 if the Optionee agrees (i) to bear his own expenses incurred in connection therewith and (ii) to reimburse the Company for the expenses incurred by it attributable to the proposed registration of the Stock. 1.2 LIMITATION ON REGISTRATION. Notwithstanding the provisions of Section 1.1 hereof, the Company shall have the absolute right to delay or suspend the preparation and filing of a registration statement for up to ninety (90) days if in the reasonable judgment of the Company such preparation and filing would harm or hinder in any material fashion the ability of the Company or any subsidiary of the Company to conduct their respective affairs or would have a material adverse effect on the business, properties, financial condition or prospects of the Company or any subsidiary. 1.3 REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions hereof to effect the registration of Stock under the 1933 Act, the Company will: (a) promptly prepare and file with the SEC a registration statement with respect to such Stock, and use all reasonable efforts to cause such registration statement to become and remain effective for such period, not to exceed 90 days, as may be reasonably necessary to effect the sale of such Stock; (b) prepare and file with the SEC such amendments to any such registration statement and supplements to any prospectus contained therein as may be necessary to keep such registration statement effective for such period, not to exceed 90 days, as may be reasonably necessary to effect the sale of such Stock; (c) use all reasonable efforts to qualify the Stock for sale in the State of Ohio and in such other states as may be reasonably requested by the Optionee; (c) furnish to the Optionee and to the underwriters of the Stock being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such Stock; (d) notify the Optionee, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (e) notify the Optionee promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; 8 (f) prepare and file with the SEC, promptly upon the request of the Optionee, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for the Optionee (and concurred in by counsel for the Company) is required under the 1933 Act or the rules and regulations thereunder in connection with the distribution of the Stock by the Optionee; (g) prepare and promptly file with the SEC and promptly notify the Optionee of the filing of any amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to the Stock is required to be delivered under the 1933 Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (h) advise the Optionee, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (i) as much time as practicably possible prior to the filing of any amendment or supplement to such registration statement or prospectus, furnish copies thereof to the Optionee and refrain from filing any such amendment or supplement to which the Optionee shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the 1933 Act or the rules and regulations thereunder, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (j) At the request of the Optionee, furnish on the effective date of the registration statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) an opinion, dated each such date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Optionee, stating that such registration statement has become effective under the 1933 Act (such effective registration statement hereinafter the "Registration Statement") and that (A) to the best of such counsel's knowledge no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, (B) the Registration Statement, related prospectus at the time the Registration Statement becomes effective (the "Prospectus") and each amendment or supplement thereto comply as to form in all material respects with the requirements of the 1933 Act and the applicable rules and regulations of the Commission thereunder (except that such counsel need express no opinion as to financial data contained therein), (C) such counsel has no reason to believe that the Registration Statement, the Prospectus or any amendment or supplement thereto contain any untrue statement of a material fact or omits to statement a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no opinion as to financial data contained therein). The opinion of such counsel pursuant to subparagraphs (B) and (C) of this Section 1.3 may be based solely upon such counsel's participation in the preparation of the Registration Statement and prospectus and review and discussion of the contents thereof, but without independent check or verification, except as specified. The Company agrees to make a good faith effort to have any "comfort letter" from the independent public accountants of the Company which is addressed to the underwriters in connection with such public offering also addressed to the Optionee. 9 1.4 EXPENSES OF REGISTRATION. With respect to the registration requested pursuant to Section 1.1 hereof, the Company shall bear the following fees, costs and expenses: All registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (only in a registration pursuant to Section 1.1 and only if the Company and/or Optionee are required to bear such fees and disbursements), and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Fees and disbursements of counsel and accountants for the Optionee, underwriting discounts and commissions, transfer taxes for Optionee and any other expenses incurred by the Optionee not expressly included above shall be borne by the Optionee. 1.5 INDEMNIFICATION. (a) The Company will indemnify and hold harmless the Optionee and any underwriter (as defined in the 1933 Act) for the Optionee and each person, if any, who controls such underwriter within the meaning of the 1933 Act, from and against any and all loss, damage, liability, cost and expense (including, without limitation, attorneys fees and expenses) to which the Optionee or any such underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing by the Optionee, such underwriter or such controlling person specifically for use in the preparation of any registration statement, any prospectus or any amendment or supplement thereto. (b) The Optionee will indemnify and hold harmless the Company, any underwriter and each person, if any, who controls the Company or such underwriter, from and against any and all loss, damage, liability, cost or expense (including, without limitation, attorneys fees and expenses) to which the Company, the underwriter or any controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by the Optionee specifically for use in the preparation of such registration statement or prospectus or any amendment or supplement thereto. (c) If any party indemnified under this Section 1.5 (the "Claimant") desires to make a claim against any other (the "Indemnitor") under subsection (a) or (b) above, the Claimant shall give prompt written notice to the Indemnitor of the institution of any actions, suits, governmental investigations, other proceedings or demands at any time instituted against or made upon the Claimant in connection with which the Claimant could claim indemnification under this Section 1.5 and shall advise the Indemnitor in writing, to the extent known, of the amount and circumstances surrounding the same. The failure of the Claimant to give any notice required by this 10 subsection (c) shall not relieve the Indemnitor from any liability which may arise otherwise than pursuant to this Section 1.5. If the Indemnitor or a group of Indemnitors agrees in writing that it is responsible to indemnify (fully and completely) for a claim under this Section 1.5, the Claimant shall give such Indemnitor (at the sole expense of the Indemnitor) full authority to defend, adjust, compromise or settle the action, suit, investigation, proceeding or demand as to which notice has been given and such Indemnitor shall not be liable to such Claimant pursuant to the provisions of (a) or (b) of this Section for any legal or other expense subsequently incurred by such Claimant in connection with such action, suit, investigation, proceeding or demand (other than reasonable costs of investigation) unless (i) the parties involved in such action, suit, investigation proceeding or demand include both the Claimant and the Indemnitor in which instance the Claimant shall have the right to select separate counsel to participate in the matter on behalf of such Claimant, (ii) the Indemnitor shall not have employed counsel satisfactory to the Claimant to represent the Claimant within a reasonable time after the notice of the commencement of the proceeding, or (iii) the Indemnitor has authorized the employment of counsel for the Claimant at the expense of the Indemnitor. 1.6 LOCKUP AGREEMENT. In consideration of the Company's agreements under this Article, the Optionee agrees in connection with any registration of the Company's securities in which the Optionee is afforded an opportunity to participate that, upon the request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration statement as the Company or the underwriters may specify. 1.7 SELECTION OF UNDERWRITERS. The Optionee shall have the right to select the managing underwriter or underwriters in connection with any underwritten public offering of Stock, subject to the consent of the Company (which shall not be unreasonably withheld). 1.8 DEFINITIONS. In the event of any conflict between the meaning of the terms used in this Exhibit and in the Option to which it is attached, the definitions contained in this Exhibit shall control.1 EX-10.L 7 PROGRESSIVE CORP. 10-K EXHIBIT 10(L) 1 EXHIBIT 10(L) 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. (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. 2 3 (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. Any interpretation and administration of the Plan by the Committee, and all actions and determinations of the Commit- 3 4 tee, 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 more than 300,000 shares of Stock (subject 4 5 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 5 6 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 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 6 7 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 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 7 8 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 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 8 9 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 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. 9 10 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 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 10 11 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 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). 11 12 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. (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 12 13 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. (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. 13 14 (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. (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 14 15 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. (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. 15 16 (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 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; 16 17 (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 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. 17 18 (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. (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. 18 19 (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; 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 19 20 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 20 21 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 (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). 21 22 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 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 22 23 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 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 23 24 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. (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. 24 EX-10.M 8 PROGRESSIVE CORP. 10-K EXHIBIT 10(M) 1 EXHIBIT 10(M) THE PROGRESSIVE CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN 2 TABLE OF CONTENTS
PAGE NO. ARTICLE 1 DEFINITIONS 1.1 "Affiliated Company" 1 1.2 "Annual Deferral Account" or "Account" 1 1.3 "Beneficiary" 1 1.4 "Change in Control" 1 1.5 "Code" 1 1.6 "Committee" 1 1.7 "Company" 1 1.8 "Company Stock Fund" 1 1.9 "Deferral Agreement" 1 1.10 "Deferral" 1 1.11 "Disabled" and "Disability" 1 1.12 "Distribution Event" 2 1.13 "Eligible Executive" 2 1.14 "ERISA" 2 1.15 "Fixed Deferral Period" 2 1.16 "Fixed Income Fund" 2 1.17 "Gainsharing Award" 2 1.18 "Investment Fund" 2 1.19 "Participant" 2 1.20 "Plan" 2 1.21 "Plan Year" 2 1.22 "Termination of Employment" 2 1.23 "Stock" 2 1.24 "Trust" 2 1.25 "Trust Agreement" 2 1.26 "Trustee" 3 1.27 "Valuation Date" 3 ARTICLE 2 DEFERRAL OF GAINSHARING AWARDS 2.1 Method of Deferral 3 2.2 Deferral Agreement Provisions 3 2.3 Fixed Deferral Periods 3 ARTICLE 3 DISTRIBUTIONS 3.1 Date of Distribution 4 3.2 Method of Distribution 4 3.3 Amount of Distribution 4 3.4 Form of Distribution 4 4 ARTICLE 4 ACCOUNTS 4.1 Establishment of Annual Deferral Accounts 4 4.2 Initial Investment of Accounts 4 4.3 Valuation of Investment Funds 5
i 3 4.4 Valuation of Accounts 5 4.5 Nature of Accounts 5 4.6 Account Statements 5 ARTICLE 5 INVESTMENT FUNDS 5.1 Investment Funds 6 5.2 Investment Elections of Participants 6 5.3 Nature of Investment Funds 6 5.4 Liquidation of Investment Funds 6 ARTICLE 6 TRUST 6.1 Establishment of Trust 6 ARTICLE 7 PLAN OPERATION AND ADMINISTRATION 7.1 Powers of Committee 7 7.2 Nondiscriminatory Exercise of Authority 7 7.3 Reliance on Tables, etc 7 7.4 Indemnification 8 7.5 Notices to Committee 8 ARTICLE 8 CLAIMS PROCEDURES 8.1 Establishment of Claims Procedures 8 8.2 Claims Denials 8 8.3 Appeals of Denied Claims 8 8.4 Review of Appeals 9 ARTICLE 9 AMENDMENT AND TERMINATION OF THE PLAN 9.1 Amendment 9 9.2 Termination 9 9.3 Liquidation of the Trust 10 ARTICLE 10 MISCELLANEOUS PROVISIONS 10.1 Headings 10 10.2 Plan Not Contract of Employment 10 10.3 Severability 10 10.4 Prohibition on Assignment 10 10.5 Number and Gender 10 10.6 Governing Law 10 10.7 Satisfaction of Claims 11 10.8 No Warranties 11 10.9 Tax Withholding 11 10.10 Facility of Payment 11 10.11 Repayment of Gainsharing Awards 11 10.12 Stock Subject to the Plan 11 10.13 Conditions to Effectiveness of Plan 11
ii 4 THE PROGRESSIVE CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN The Progressive Corporation hereby establishes The Progressive Corporation Executive Deferred Compensation Plan, effective as of January 1, 1995. The Plan is established for the purposes of providing deferred compensation for a select group of management and highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. The Plan is intended to be an unfunded plan for purposes of ERISA and the Code and is not intended to satisfy the qualification requirements of Section 401 of the Code. ARTICLE 1 DEFINITIONS 1.1 "Affiliated Company" means any corporation included in the affiliated group of corporations as defined in Section 1504 of the Code (determined without regard to 1504(b)) of which the Company is the common parent corporation. 1.2 "Annual Deferral Account" or "Account" shall have the meaning set forth in Section 4.1. 1.3 "Beneficiary" means such person(s) as the Participant has designated. A Participant may change his Beneficiary designation at any time. All Beneficiary designations (including changes) shall be made in writing on such forms as the Committee shall prescribe, and shall become effective only when received and accepted by the Committee; provided, however, that a Beneficiary designation (including a change) received by the Committee after the designating Participant's death shall be disregarded. In the absence of a Beneficiary designation, or if the designated Beneficiary is no longer living or in existence at the time of the Participant's death, all distributions payable from the Plan upon the Participant's death shall be paid to the Participant's estate. 1.4 "Change in Control" means a "Change in Control" or "Potential Change in Control" within the meaning of The Progressive Corporation 1989 Incentive Plan (amended and restated as of April 24, 1992 and as further amended as of July 1, 1992 and February 5, 1993). 1.5 "Code" means the Internal Revenue Code of 1986, as amended. 1.6 "Committee" means the Executive Compensation Committee of the Board of Directors of the Company, or any successor committee. 1.7 "Company" means The Progressive Corporation, an Ohio corporation, or its successors. 1.8 "Company Stock Fund" means an Investment Fund consisting of Stock. 1.9 "Deferral Agreement" means a written agreement entered into by an Eligible Executive pursuant to Article 2. 1.10 "Deferral" means an amount credited to an Annual Deferral Account pursuant to a Deferral Agreement. 1.11 "Disabled" and "Disability" means that a Participant is expected to be unable to perform the duties of his usual occupation for at least twelve (12) consecutive months, as determined by the Committee. 1 5 1.12 "Distribution Event" means, as to each Participant, the earliest of the following events: (i) the Participant's death; (ii) the date that the Participant is determined by the Committee to be Disabled; (iii) the Participant's Termination of Employment; or (iv) Change in Control. 1.13 "Eligible Executive" means the Company's Chief Executive Officer, Chief Operating Officer, Chief Investment and Capital Officer, Chief Legal Officer, Chief Financial Officer, Chief Information Officer, Chief Human Resources Officer, Division Presidents and any other executive of the Company or any Affiliated Company who is designated in writing as an Eligible Executive by the Committee, excluding, however, any of the foregoing individuals who are not residents of the United States or are not working at a location in the United States. 1.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.15 "Fixed Deferral Period" shall have the meaning set forth in Section 2.3. 1.16 "Fixed Income Fund" means the Vanguard Investment Contract Trust or such other Investment Fund as may be designated by the Committee as the Fixed Income Fund within the meaning of the Plan. 1.17 "Gainsharing Award" means any bonus or other incentive award payable with respect to a Plan Year under The Progressive Corporation 1994 Executive Bonus Plan, The Progressive Corporation 1994 Gainsharing Plan or any other plan or program as may be designated by the Committee. 1.18 "Investment Fund" means a device established from time to time by the Committee pursuant to Section 5.1 that is used to calculate gains and losses in amounts deferred by Participants under the Plan. 1.19 "Participant" means an Eligible Executive who has deferred receipt of a portion of any Gainsharing Award pursuant to a Deferral Agreement. Participation shall begin on the date that a Deferral Account is established in the name of the Participant and shall end on the date that the Participant dies or receives a distribution of the balance of all his Deferral Accounts. 1.20 "Plan" means The Progressive Corporation Executive Deferred Compensation Plan, as set forth herein and as it may be amended from time to time. 1.21 "Plan Year" means 1995 and each subsequent calendar year. 1.22 "Termination of Employment" means the voluntary or involuntary cessation of a Participant's active employment with the Company and all Affiliated Companies as a result of any reason other than death, Disability and approved leave of absence. 1.23 "Stock" means the Common Shares, $1.00 par value, of the Company. 1.24 "Trust" shall mean the trust maintained pursuant to the Trust Agreement and known as The Progressive Corporation Executive Deferred Compensation Trust. 1.25 "Trust Agreement" shall mean the agreement of trust between the Company and the Trustee executed in furtherance of the Plan, as the same may be amended from time to time. 2 6 1.26 "Trustee" shall mean the person selected from time to time by the Company to serve as trustee under the Trust Agreement. 1.27 "Valuation Date" shall mean each day that the New York Stock Exchange is open for trading. ARTICLE 2 DEFERRAL OF GAINSHARING AWARDS 2.1 Method of Deferral. Each Eligible Executive may elect to defer receipt of all or a portion of his/her Gainsharing Award in respect of any Plan Year in excess of applicable tax withholding and other deductions required to be made in respect of the Gainsharing Award by signing a Deferral Agreement and delivering it to the Committee. If a Gainsharing Award is payable in installments, each installment, whether or not payable in the same Plan Year, shall be subject to the same Deferral Agreement. 2.2 Deferral Agreement Provisions. Each Deferral Agreement must satisfy all of the following requirements: (a) it must be in writing and be in the form specified by the Committee; (b) it must be irrevocable; (c) it must apply to only one Gainsharing Award; (d) it must be signed by the Eligible Executive making the Deferral and be delivered to the Committee prior to the Plan Year in which the applicable Gainsharing Award will be earned; (e) it must specify the percentage of the Eligible Executive's Gainsharing Award to be deferred, which percentage shall not be less than ten percent (10%). The same deferral percentage shall apply to each installment of a Gainsharing Award covered by the Deferral Agreement. However, a Deferral Agreement may provide for the deferral of a percentage of that portion of a Gainsharing Award that exceeds a specified gross dollar amount, which percentage shall not be less than ten percent (10%). Notwithstanding the preceding provisions of this Section 2.2(e), no Deferral shall be less than such dollar amount as the Committee may specify from time to time. All Deferrals shall be reduced by applicable tax withholding and other legally required deductions; (f) it must specify whether the balance of the Annual Deferral Account to be established pursuant to that Deferral Agreement will be distributed in a lump sum or in three (3) annual installments; and (g) it must contain such other provisions, conditions and limitations as may be required by the Company or the Committee. 2.3 Fixed Deferral Periods. If an Eligible Executive wishes to defer receipt of all or a portion of any Gainsharing Award for a fixed period of time ("Fixed Deferral Period"), then his/her Deferral Agreement relating to such Gainsharing Award shall specify that Fixed Deferral Period, which shall not be less than two (2) years following the end of the Plan Year in which the Gainsharing Award will be earned. 3 7 ARTICLE 3 DISTRIBUTIONS 3.1 Date of Distribution. The balance of each Annual Deferral Account of a Participant shall be distributed within thirty (30) days following the earlier of (i) the date a Distribution Event occurs, (ii) the date on which the Fixed Deferral Period, if any, applicable to such Account expires, or (iii) the date, if any, selected by the Company, in its sole discretion, pursuant to Section 9.2. 3.2 Method of Distribution. Each distribution of the balance of an Annual Deferral Account made on account of the Participant's death shall be made to the Participant's Beneficiary. Each distribution made on account of the Participant's death or Disability, termination of the Plan or a Change in Control shall be paid in a lump sum. Each distribution made on account of the Participant's Termination of Employment or expiration of a Fixed Deferral Period shall be paid in either a lump sum or installments, as specified in the applicable Deferral Agreement. If a Participant elects to receive payment in installments and dies prior to payment of all installments, the balance remaining unpaid at his/her death shall be paid to his/her Beneficiary in a lump sum. Installment payments shall be paid annually for three years. 3.3 Amount of Distribution. The amount of each lump sum payment shall be equal to the balance of the Annual Deferral Account, as of the Valuation Date immediately preceding the date of distribution. The amount of each installment payment shall be equal to the balance of the Annual Deferral Account as of the Valuation Date immediately preceding the date of payment multiplied by a fraction, the numerator of which is one and the denominator of which is the number of years remaining in the period over which installments are to be paid. Installment distributions to be made in Stock shall be rounded to the nearest whole share. 3.4 Form of Distribution. All distributions shall be made in cash, except that a distribution representing amounts invested in the Company Stock Fund shall be made in Stock. ARTICLE 4 ACCOUNTS 4.1 Establishment of Annual Deferral Accounts. The Committee shall establish an Annual Deferral Account in the name of each Participant for each Gainsharing Award, or portion thereof, that is the subject of a Deferral Agreement. Such Account shall be established as of the first date that such Gainsharing Award or portion otherwise would have been paid to the Participant. Each Annual Deferral Account shall be credited with the deferred portion of such Gainsharing Award. Thereafter, all Annual Deferral Accounts shall be valued and administered as provided in this Article. 4.2 Initial Investment of Accounts. All initial credits to an Annual Deferral Account of a Participant shall be deemed to be invested in such Investment Funds as the Participant shall elect in accordance with Article 5. The number of shares of Stock to be credited to a Participant's Account by virtue of a Participant's election to invest a portion of a Deferral in the Company Stock Fund shall be 4 8 determined on the date of the Deferral, based on the closing price of Stock on the immediately preceding Valuation Date as quoted in the New York Stock Exchange composite trading. However, the amount of a Deferral otherwise elected by the Participant to be invested in the Company Stock Fund shall be reduced to the extent necessary to insure that only whole shares of Stock are credited and an amount corresponding to any fractional shares shall be invested in the Fixed Income Fund. 4.3 Valuation of Investment Funds. As of each Valuation Date, the Trustee shall compute the value of each Investment Fund from which shall be determined the net gain or loss of such Investment Fund since the immediately preceding Valuation Date. The net gain or loss shall include any unrealized and realized profits and losses, and any dividends, interest or other income and any expenses which are due or accrued, but shall not include distributions from such Investment Fund or dividends transferred to the Fixed Income Fund pursuant to the following sentence. Notwithstanding the preceding provisions of this Section, any cash dividends paid in respect of Stock shall not be considered part of the gain of the Company Stock Fund; instead, those dividends shall be considered as having been transferred to the Fixed Income Fund as of the date such dividends are paid. In determining the value of each Investment Fund, the Trustee shall use the following values: securities listed on any nationally recognized securities exchange shall be valued at the closing price reported on any such exchange on the Valuation Date, or, if there were no sales on the Valuation Date, then at the quoted bid price on the Valuation Date. Securities not listed on a recognized securities exchange shall be valued at the quoted closing bid price on the Valuation Date. A unit of participation in a common trust fund maintained by the Trustee or a share in a mutual fund shall be valued at the unit value, or share price respectively, in effect at the close of business on the Valuation Date. Securities with respect to which there were no available sale prices or bid prices on the Valuation Date, and any other investments, shall be valued at prices deemed by the Trustee to represent the fair market value thereof on the Valuation Date. 4.4 Valuation of Accounts. As of each Valuation Date, the net gain or loss of each Investment Fund shall be allocated among the appropriate Annual Deferral Accounts in accordance with such procedures as the Committee shall establish, which procedures shall apply uniformly to all Participants. 4.5 Nature of Accounts. All credits to each Annual Deferral Account of each Participant shall be recorded as a liability on the books of the Company. However, no Participant or Beneficiary shall have any proprietary rights of any nature with respect to any Account of any Participant or with respect to any funds, securities or other property owned by the Company or any Affiliated Company that is held in the Trust or that otherwise may be represented from time to time by Investment Funds. All payments under the Plan shall be made from the Trust or from the Company's general funds and in no event shall any Participant or Beneficiary have any claims or rights to any payment hereunder that are superior to any claims or rights of any general creditor of the Company. 4.6 Account Statements. The Committee will furnish each Participant with quarterly statements of the value of each of his/her Annual Deferral Accounts. 5 9 ARTICLE 5 INVESTMENT FUNDS 5.1 Investment Funds. The Committee shall establish and maintain the Company Stock Fund and such other Investment Funds as are specified from time to time by the Company. In this regard, the Company may choose to offer as Investment Funds any investment vehicles, including without limitation: (i) securities issued by investment companies advised by affiliates of the Trustee, (ii) guaranteed investment contracts recommended by the Trustee, and (iii) collective investment trusts maintained by the Trustee. 5.2 Investment Elections of Participants. Each Participant shall make an investment election in the manner prescribed by the Committee, directing the manner in which his/her Deferrals shall be deemed to be invested. Each investment election must be made at the time the applicable Deferral Agreement is signed and may not be revoked or changed. Each Participant may make a separate investment election for each of his/her Annual Deferral Accounts. Each investment election shall specify that Deferrals shall be deemed to be deposited in one or more of the Investment Funds in percentages that are each an integral multiple of 1% and that in the aggregate equal 100% of the Deferral. Except as expressly provided in Section 4.3, amounts deemed to be invested in an Investment Fund pursuant to this Section may not be transferred to another Investment Fund. 5.3 Nature of Investment Funds. Notwithstanding anything in the Plan, Trust or any Deferral Agreement to the contrary, no Participant shall have any rights or interests in any particular funds, securities or property of the Company, any Affiliated Company or the Trust, or in any investment vehicle in which Deferrals are deemed to be invested, by virtue of any investment election made by the Participant under the Plan or any transactions engaged in by the Trust. Each Annual Deferral Account, however, shall be credited/charged in accordance with Article 4 with gains/losses as if the Participant in fact had made a corresponding actual investment. 5.4 Liquidation of Investment Funds. If any Investment Fund is liquidated or otherwise ceases to exist without a successor, then that portion of each Account balance that previously has been deemed to have been invested in that Investment Fund shall be deemed to have been transferred to an Investment Fund consisting of guaranteed investment contracts issued by banks and/or insurance companies or, if none, such other Investment Fund selected by the Committee. ARTICLE 6 TRUST 6.1 Establishment of Trust. The Company shall establish and maintain a Trust to provide a source of funds to assist the Company in meeting its liabilities under the Plan. Within thirty (30) days following the end of each Plan Year ending after the Trust has become irrevocable pursuant to the Trust Agreement, the Company shall be required to irrevocably deposit additional cash or other property to the Trust in an amount sufficient to pay each Participant or Beneficiary the benefits payable pursuant to the terms of the Plan as of the close of that Plan year. 6 10 The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan Participants and general creditors of the Company as set forth herein and in the Trust Agreement. Plan Participants and their Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and the Trust Agreement shall be mere unsecured contractual rights of Plan Participants and their Beneficiaries against Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined in the Trust Agreement. All assets deposited in the Trust shall be held, administered and distributed by the Trustee in accordance with the Trust Agreement. The Company shall pay directly, or reimburse the Trustee for, all taxes due in respect of any income or gains on Trust assets. ARTICLE 7 PLAN OPERATION AND ADMINISTRATION 7.1 Powers of Committee. The Committee will have full power to administer the Plan. Such power includes, but is not limited to, the following authority: (a) to make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; (b) to interpret the Plan and to decide all matters arising thereunder, including the right to resolve or remedy any ambiguities, inconsistencies or omissions. All such interpretations shall be final and binding on all parties; (c) to compute the amounts payable to any Participant or Beneficiary or other person in accordance with the provisions of the Plan; (d) to authorize disbursements from the Trust or the Plan; (e) to keep such records and submit such filings, elections, applications, returns or other documents or forms as may be required under ERISA, the Code or other applicable law; (f) to appoint such agents, counsel, accountants and consultants as may be desirable to assist in administering the Plan; (g) To exercise the other powers that are expressly granted to it herein, or that are impliedly necessary for it to carry out any of its responsibilities hereunder; and (h) by written instrument, to delegate any of the foregoing powers. 7.2 Nondiscriminatory Exercise of Authority. The Committee shall exercise its authority in a nondiscriminatory manner so that all persons similarly situated will receive substantially the same treatment. 7.3 Reliance on Tables, etc. The Committee will be entitled, to the extent permitted by law, to rely conclusively on all tables, valuations, certificates, opinions and reports which are furnished by any accountant, Trustee, counsel or other expert retained by the Committee to assist it in administering the Plan. 7 11 7.4 Indemnification. In addition to whatever rights of indemnification to which employees, officers and directors of the Company and the Affiliated Companies may be entitled under the articles of incorporation, regulations or bylaws of the Company or the Affiliated Companies, under any provision of law, or under any other agreement, the Company shall satisfy any liabilities actually and reasonably incurred by any such employee, officer or director, including expenses, attorneys' fees, judgments, fines and amounts paid in settlement, in connection with any threatened, pending, or completed action, suit, or proceeding which is related to the exercise or failure to exercise by such person or persons of any of the powers, authority, responsibilities, or discretion of the Company, the Affiliated Companies or the Committee provided under the Plan or the Trust Agreement, or reasonably believed by such person or persons to be provided thereunder, and any action taken by such person or persons in connection therewith. 7.5 Notices to Committee. The Committee shall designate one or more addresses to which notices and other communications to the Committee shall be sent. No notice or other communication shall be considered to have been given to or received by the Committee until it has been delivered to the Committee's attention at one of such designated addresses. ARTICLE 8 CLAIMS PROCEDURES 8.1 Establishment of Claims Procedures. The Committee shall establish reasonable procedures under which a claimant, who may be a Participant or Beneficiary, may present a claim for benefits under this Plan. 8.2 Claims Denials. Unless such claim is allowed in full by the Committee, written notice of the denial shall be furnished to the claimant within ninety (90) days (which may be extended by a period not to exceed an additional ninety (90) days if special circumstances so require and proper written notice to the claimant is given prior to the expiration of the initial ninety (90) day period) setting forth the following in a manner calculated to be understood by the claimant: (a) The specific reason(s) for the denial; (b) Specific reference(s) to any pertinent provision(s) of the Plan or rules promulgated pursuant thereto on which the denial is based; (c) A description of any additional information or material as may be necessary to perfect the claim, together with an explanation of why it is necessary; and (d) An explanation of the steps to be taken if the claimant wishes to resubmit his/her claim for review. 8.3 Appeals of Denied Claims. Within a reasonable period of time after the denial of the claim, but in any event not to be more than sixty (60) days, the claimant or his/her duly authorized representative may make written application to the Committee for a review of such denial. The claimant or his/her representative may review documents held by the Committee and pertinent to the denial of 8 12 such claim, and may submit a written statement of issues and comments together with such application for review. 8.4 Review of Appeals. If an appeal is timely filed, the Committee shall conduct a full and fair review of the claim and mail or deliver to the claimant its written decision within sixty (60) days after the claimant's request for review (which may be extended by a period not to exceed an additional sixty (60) days if special circumstances or a hearing so require and proper written notice to the claimant is given prior to the expiration of the initial sixty (60) day period). Such decision shall: (i) Be written in a manner calculated to be understandable by the claimant; (ii) State the specific reason(s) for the decision; (iii) Make specific reference to pertinent provision(s) of the Plan upon which such decision is based; and (iv) Be final and binding on all parties. ARTICLE 9 AMENDMENT AND TERMINATION OF THE PLAN 9.1 Amendment. The Company may amend the Plan and Trust Agreement in any respect at any time for any reason by action of the Committee without liability to any Participant, Beneficiary or other person for any such amendment or for any other action taken pursuant to this Section 9.1, provided that any amendment required to be approved by the Company's shareholders pursuant to Section 162(m) of the Code shall not be effective until approved by the Company's shareholders in accordance with the requirements of Section 162(m) and further provided that no such amendment shall be made retroactively in a manner that would deprive any Participant of any rights or benefits which have accrued to his/her benefit under the Plan as of the date such amendment is proposed to be effective, unless such amendment is necessary to comply with applicable law. 9.2 Termination. The Company may terminate the Plan at any time for any reason by action of the Committee without any liability to any Participant, Beneficiary or other person for any such termination or for any other action taken pursuant to this Section 9.2. Following termination of the Plan, and notwithstanding the provisions of any Deferral Agreement entered into prior to such termination, no additional Deferrals may be made hereunder, but all existing Accounts shall continue to be administered in accordance with the Plan, as in effect immediately prior to termination, and shall be distributed in accordance with such terms of the Plan and the applicable Deferral Agreements, unless and until the Company elects to accelerate distribution as provided below. At any time on or after the effective date of termination of the Plan, the Company, in its sole discretion, may elect to accelerate the distribution of the entire balance of each Participant's Accounts. Such accelerated distributions shall be made in accordance with Article 3, except that all distributions shall be made in a lump sum based on the value of the Accounts, determined as of the Valuation Date immediately preceding the date of distribution. Upon the completion of distributions to all Participants or Beneficiaries, as the case may be, no Participant, Beneficiary or person claiming under or through them, will have any claims in respect of the Plan. 9 13 9.3 Liquidation of the Trust. The Trust shall continue in existence after the termination of the Plan for such period of time as may be required to complete the liquidation thereof in accordance with the terms of this Article 9. ARTICLE 10 MISCELLANEOUS PROVISIONS 10.1 Headings. The headings of the Plan have been inserted for convenience of reference only and are not to be deemed controlling in any constructions of the provisions herein (other than with respect to defined terms). 10.2 Plan Not Contract of Employment. The existence of the Plan shall not create, evidence or change any contract of employment with any Participant. The right of the Company and all Affiliated Companies to take corrective, disciplinary or other action with respect to their employees, including terminating their respective employment at any time for any reason, shall not be affected by any provision of this Plan, and the Company and the Affiliated Companies will not be deemed responsible to provide continuing employment for any reason, at any time solely by reason of this Plan. 10.3 Severability. If any provision of the Plan shall be invalid, such provision shall be fully severable, and the remainder of the Plan and the application thereof shall not be affected thereby. 10.4 Prohibition on Assignment. No right or interest under the Plan of any Participant or Beneficiary shall be subject at any time or in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance (as security or otherwise), garnishment, levy, execution, or other legal or equitable process, and no Participant or Beneficiary shall have the power at any time or in any manner to anticipate, transfer, assign (either at law or in equity), alienate, or subject to attachment, garnishment, levy, execution or other legal or equitable process, or in any way encumber, such Participant's or Beneficiary's rights or interests under the Plan, and any attempt to do so shall be void; provided, however, that the Company shall have the unrestricted right to set off against or recover out of any payments due a Participant or Beneficiary at the time such payments would have otherwise been payable hereunder, any amounts owed the Company or any Affiliated Company by such Participant or Beneficiary. 10.5 Number and Gender. Any use of the singular shall be interpreted to include the plural and the plural the singular. Any use of the masculine, feminine or neuter shall be interpreted to include the masculine, feminine and neuter, as the context shall require. 10.6 Governing Law. To the extent not preempted by Federal law, the provisions of the Plan shall be construed, regulated and administered under the laws of the State of Ohio. 10 14 10.7 Satisfaction of Claims. Any payment to any Participant or Beneficiary in accordance with the terms of the Plan shall, to the extent thereof, be in full satisfaction of all claims hereunder, whether they be against the Company, the Committee, or the Trustee, any of whom may require the Participant or Beneficiary (or legal representative), as a condition precedent to such payment to execute a release and receipt therefor. 10.8 No Liability. Participation in the Plan is entirely at the risk of each Participant. Neither the Company, any Affiliated Company, the Committee, the Trustee nor any other person associated with the Plan shall have any liability for any loss or diminution in the value of Accounts, or for any failure of the Plan to effectively defer recognition of income or to achieve any Participant's desired tax treatment or financial results. 10.9 Tax Withholding. All payments under the Plan shall be subject to federal, state and local income tax withholding and other legally required deductions. 10.10 Facility of Payment. If the Committee determines that a Participant or Beneficiary entitled to receive a payment under this Plan is (at the time such payment is to be made) a minor or physically, mentally or legally incompetent to receive such payment and that another person or an institution has legal custody of such minor or incompetent individual, the Committee may cause payment to be made to such person or institution having custody of such Participant or Beneficiary. Such payment, to the extent made, shall operate as a complete discharge of obligation by the Committee, the Company, the Trustee and the Trust. 10.11 Repayment of Gainsharing Awards. If any amount credited to an Annual Deferral Account represents a portion of a Gainsharing Award that is subsequently found to be repayable by the Participant to the Company or any Affiliated Company pursuant to the plan pursuant to which the Gainsharing Award was made, the amount of that credit shall nevertheless remain unaffected by that repayment obligation, and the Participant shall make the required repayment out of his/her own funds. 10.12 Stock Subject to the Plan. Subject to adjustment as provided below, the total number of shares of Stock reserved and available for issuance in connection with the Plan is Three Hundred Thousand (300,000). Any Stock issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If there is a 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 as may be approved by the Committee in its sole discretion; provided that the number of shares of Stock to be issued in connection with the Plan shall always be a whole number. Any fractional shares shall be eliminated and the value of such fractional shares shall be deemed to have been transferred to the Fixed Income Fund as of the effective date of such substitution or adjustment. 11 15 10.13 Conditions to Effectiveness of Plan. Notwithstanding anything in this Plan, the Trust or any Deferral Agreement to the contrary, the effectiveness of the Plan, the Trust and all Deferral Agreements is conditioned on the Plan being approved by the Company's shareholders at the 1995 Annual Meeting of Shareholders in accordance with Section 162(m) of the Code, Rule 16b-3 under the Securities Exchange Act of 1934 and other applicable law. If the Plan is not so approved, the Plan, the Trust and all Deferral Agreements shall be considered void ab initio and all amounts previously deferred pursuant to those Deferral Agreements shall be paid forthwith to the appropriate Participants as if those Deferral Agreements had never existed. IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officers as of this _____ day of ____________________, 1994. THE PROGRESSIVE CORPORATION By: ------------------------------- Title: ---------------------------- 12 EX-11 9 PROGRESSIVE CORP. 10-K EXHIBIT 11 1 EXHIBIT 11 THE PROGRESSIVE CORPORATION COMPUTATION OF EARNINGS PER SHARE (millions - except per share amounts)
1994 1993 1992 ----------------------------------------------------------------------------- Per Per Per Amount Share Amount Share Amount Share ----------------------------------------------------------------------------- PRIMARY: Net income $274.3 $267.3 $153.8 Less: Preferred stock dividends (8.6) (9.2) (9.4) ----------------------------------------------------------------------------- $265.7 $3.59 $258.1 $3.59 $144.4 $2.32 ============================================================================= Average shares outstanding 71.6 69.3 60.7 Net effect of dilutive stock options 2.4 2.5 1.6 ----------------------------------------------------------------------------- Total 74.0 71.8 62.3 ============================================================================= FULLY DILUTED: Net income $274.3 $267.3 $153.8 Add: Interest on convertible debt instrument (net of -- -- 3.0 taxes) Less: Preferred stock dividends (8.6) (9.2) (9.4) ----------------------------------------------------------------------------- $265.7 $3.59 $258.1 $3.58 $147.4 $2.05 ============================================================================= Average shares outstanding 71.6 69.3 60.7 Net effect of dilutive stock options 2.4 2.7 2.6 Net effect of convertible debt instrument -- -- 8.6 ----------------------------------------------------------------------------- Total 74.0 72.0 71.9 =============================================================================
EX-13 10 PROGRESSIVE CORP. 10-K EXHIBIT 13 1 EXHIBIT 13 PROGRESSIVE 1994 [ARTWORK] 2 1994 Financial Highlights Vision, Core Values and Objectives Letter to Shareholders Financial Review 2 8 16 32
3 [ARTWORK] 4 Diversity reminds me of the art of pointillism: perfect individual dots up close; blurred images from five paces back; remarkable clarity of each point's purpose and value from the intended perspective. 5 Progressive's Golden Rule Core Value requires us to respect all people, value the differ- ences among them and deal with them in the way we want to be dealt with. To build on this Core Value, "Diversity" is the theme of our 1994 Annual Report. For Progressive, "Diversity" is about changing in ways that enhance and enrich our systems, and about embracing and nurturing our changing mosaic of peo- ple, customers, strategies, culture and environment. Reactions to this theme from our people, customers and agents appear as statements throughout this re- port. Artist Carter Kustera responded to "Diversity" by creating a large series of silhouette drawings with text inspired by his interest in daytime TV talk shows, and is not intended to represent any Progressive person. Kustera isolates and recognizes the in- dividual and the abstraction created when hundreds of different personalities are represented as a whole, which makes the viewer a participant in this collage of colorful identities. Kustera's drawings will be a part of Progressive's growing collection of contemporary art. 6 2 1994 Financial Highlights -----------------------------
(millions-except per share amounts) AVERAGE ANNUAL COMPOUNDED RATE OF INCREASE (DECREASE) 1994 1993 % CHANGE 1990-1994 1985-1994 FOR THE YEAR Direct premiums written $2,645.1 $1,966.4 35 15 24 Net premiums written 2,457.2 1,819.2 35 16 23 Net premiums earned 2,191.1 1,668.7 31 13 23 Total revenues 2,415.3 1,954.8 24 12 23 Operating income 212.7 197.3 8 15 28 Net income 274.3 267.3 3 29 35 Per share: Operating income 2.76 2.61 6 19 26 Net income 3.59 3.33 -- 31 33 Underwriting margin 11.5% 10.7% AT YEAR-END Consolidated shareholders' equity $1,151.9 $ 997.9 15 21 31 Common Shares outstanding 71.2 72.1 (1) (1) 1 Book value per Common Share $ 14.97 $ 12.62 19 21 29 Return on average shareholders' equity 27.4% 36.0% 1-YEAR 5-YEAR 10-YEAR STOCK PRICE APPRECIATION (DEPRECIATION)(1) Progressive (13.1)% 22.9% 26.7% S&P 500 1.3 % 8.7% 14.3% (1)Assumes dividend reinvestment
7 3 I am not expected to be like everyone else. We can bring our own gifts of individuality into the workplace. Operating income per share, which excludes real- ized gains on security sales and one-time items, increased 6 percent to $2.76. The Core business grew 38 percent with a 7 per- cent underwriting profit. The $71 million supplemental reserve was elimi- nated, increasing net income per share $.62, book value per share $.65, underwriting profit margin 3.2 percentage points and shareholders' equity $46.2 million. Underwriting profit, excluding the elimination of the supplemental reserve, was 8.3 percent, com- pared to the property-casualty industry's estimated underwriting loss of 9.4 percent. 8 4 It is important to define Progressive's understanding of the term diversity. It is difficult to embrace a concept many of us do not understand. ABOUT PROGRESSIVE The Progressive insurance organization began busi- ness in 1937. Progressive Casualty In- surance Company was founded in 1956. The Progressive Corporation, an insurance holding company formed in 1965, owns 60 operating subsidiaries and has one mutual insurance com- pany affiliate. The companies provide personal automobile insurance and other specialty property-casualty in- surance and related services sold pri- marily through independent insurance agents in the United States and Canada. The 1994 estimated industry premiums, which include personal auto insurance in the U.S. and Ontario, Canada, as well as insurance for com- mercial vehicles, were $119 billion and Progressive's share was 2.0 percent. 9 [ARTWORK] 10 [ARTWORK] 11 [ARTWORK] 12 8 Vision, Core Values and Objectives -------------------------------------- Communicating a clear picture of who we are, what we strive to achieve (Vision), what guides our behavior (Core Values), how we measure our performance (Objectives), and how we will achieve them (Strategies) permits all people associated with Progressive to understand and help us achieve our vision and objectives. VISION We seek to be an excellent, innovative, growing and enduring business by reducing the human trauma and economic costs of auto accidents in cost-effective and profitable ways that delight customers. We seek to earn a superior return on equity and to provide a positive environment to attract quality people and achieve ambitious growth plans. CORE VALUES Progressive's Core Values are pragmatic statements of what works best for us in the real world. Core Values govern our decisions and behavior. We want them understood and embraced by all Progressive people. Core Values are standards by which we measure ourselves. Growth and change provide new perspective and require regular refinement of Core Values. INTEGRITY We revere honesty. We adhere to high ethical standards, report 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 be clear and open about 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. "Quality" is Progressive's process for teaching and encouraging our people to improve performance and reduce the costs of what they do for customers. We base reward on results and promotion on ability. PROFIT The opportunity to earn a profit is how the competitive free-enterprise system motivates companies to invest to enhance human health and happiness. Our outrage about the numbers of people killed each year on U.S. roads, approximately 40,000 in 1994, leads Progressive to work hard to reduce human trauma and economic costs from automobile accidents. 13 9 Being who you are without fear of reprisal, malicious prejudice, and imposing unwanted positions on others- while affording others the same freedom. Financial Objectives ------------------------ 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 that is at least 15 percentage points greater than the rate of inflation (measured by the Consumer Price Index (CPI) which was 2.7 percent in 1994, averaged 3.5 percent over the past five years and 3.7 percent over the past ten years). Return on equity was 27.4 percent in 1994, averaged 26.8 percent over the past five years and 25.8 percent over the past ten years. PROFITABILITY Progressive is driven by the goal of producing a 4 percent underwriting profit. The core business had an underwriting profit of 7.3 percent in 1994, an underwriting profit of 6.4 percent for the past five years and 6.8 percent for the past ten years. Estimated industry results for the personal auto insurance market for the same periods were underwriting losses of 2.7 percent, 3.8 percent and 5.6 percent. GROWTH We seek increases in volume that are at least 15 percentage points greater than the rate of inflation. For the core business, volume is measured by net premiums 14 10 Inclusive rather than exclusive. Not just about race and gender. We are all different. Appreciate and nurture those differences. written, which increased 37.7 percent in 1994, 21.2 percent compounded annually over the past five years and 23.6 percent over the past ten years. Net premiums written in the personal auto insurance market for the same periods grew 4.5 percent, 5.8 percent and 8.5 percent. 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 at our first public stock offering on April 15, 1971, owned 7,689 shares on December 31, 1994, with a market value of $269,000, for a 23.7 percent annual return, compared to the 6.6 percent return achieved by investors in the Standard & Poor's 500 during the same period. In addition, the shareholder received dividends, which were $1,615 in 1994. In the ten years since December 31, 1984, Progressive shareholders have realized compound returns of 26.7 percent, compared to 14.3 percent for the S&P 500. In the five years since December 31, 1989, Progressive shareholders' returns were 22.9 percent, compared to 8.7 percent for the S&P 500. In 1994, the returns were (13.1) percent on Progressive shares and 1.3 percent for the S&P 500. The repurchase of Progressive stock is another way the Company increases shareholder value. Over the years, when we have adequate capital and Progressive's stock is attractively priced, we have repurchased our shares. Since 1971, we spent $526.2 million to repurchase shares, at an average cost of $6.49 per share. In 1994, we repurchased 1,080,300 Common Shares for $34.0 million, at an average cost of $31.44 per share. 15 11
1994 LAST 5 YEARS LAST 10 YEARS RETURN ON SHAREHOLDERS' EQUITY Goal 17.7% 18.5% 18.7% Companywide 27.4 26.8 25.8 UNDERWRITING PROFIT (LOSS) Goal 4.0 4.0 4.0 Core Business 7.3 6.4 6.8 Industry-Personal Auto Insurance Market (2.7) (3.8) (5.6) GROWTH (ANNUALIZED) Goal 17.7 18.5 18.7 Core Business 37.7 21.2 23.6 Industry-Personal Auto Insurance Market 4.5 5.8 8.5
16 [ARTWORK] 17 [ARTWORK] 18 [ARTWORK] 19 [ARTWORK] 20 Letter to Shareholders -------------------------- Progressive--Auto Insurer for All People ------------------------------------------- In 1994, we made great strides toward repositioning Progressive to offer automobile insurance to all U.S. licensed operators through independent insurance agents and other distribution methods. This customer-driven approach is increasing our rate of growth and market share, which, in turn, lets us reduce the costs of doing business and become still more competitive. We are building intrinsic value in the form of a growing customer base, and a broad array of products and services delivered when and how customers most want them. Progressive's people are responding superbly to the challenge of managing explosive growth, reaffirming how good they are, as well as the strength of Progressive's Vision, Values and Strategy. We grew in 1994 by increasing our share of the approximately $20 billion nonstandard auto insurance market and by beginning to grow in the approximately $80 billion standard and preferred auto insurance market. We work hard and invest heavily in people and processes to reduce the human trauma and economic costs of auto accidents. Our results include the cost of these investments designed to make us more competitive for all auto insurance. Progressive shareholders are best served by executing meaningful, long-term strategies. Success requires translating premium growth into commensurate earnings growth, so our stock price reflects the intrinsic value we are now creating. From its beginnings, Progressive's most important competitive advantage has been having superior people, measured by their intelligence, work ethic, ambition, creativity and demonstrated performance. Many companies pay lip service to this idea. At Progressive, it is a way of life. Our people's teamwork and esprit has never been higher. Our performance-based Gainsharing compensation lets them enjoy the benefits of competitive and productivity improvements so long as they continue to meet or exceed the Company's ambitious objectives. Progressive's evolution accelerated greatly six years ago, when Proposition 103 in California forced us to understand consumer discontent with auto insurance at the same time that Allstate's success in nonstandard auto insurance forced us to respond to consumer demand for lower prices and improved service. These events led us to redefine Progressive as a consumer-focused auto insurer offering all auto owners and operators vastly better service at lower cost. We must continue to spend less to run our enterprise, even as we work hard and creatively to enhance our customers' and agents' experience of doing business with Progressive. Future growth will come from adding to the number of states where we seek to insure all auto risks, from working with the independent agents dedicated to regaining market share and from integrating other buying options into a consumer-focused, brand experience in ways that attract customers and support the forward-looking agents who will succeed in the 21st century. When we were a nonstandard auto insurer experimenting with commercial insurance, Progressive was compared to other specialty property-casualty insurers dealing in secondary markets. The new Progressive seeks to write all auto risks, and to be continuously less involved in non-auto commercial insurance. We are now the 7th largest U.S. private passenger auto insurer with 2.2 percent market share, surpassed only by State Farm Mutual, Allstate, Farmers Group, USAA, Nationwide and GEICO, which, along with Safeco, are the companies to which we compare ourselves. 21 [ARTWORK] 22 18 An opportunity to see and solve problems from a wider variety of perspectives. Results ----------- Operating income, which excludes realized gains on security sales and one-time items, is the best measure of how well we perform in our operations. Operating income increased to $212.7 million, or $2.76 per share, compared to $197.3 million, or $2.61 per share, in 1993. Operating income excludes the $71.0 million elimination of the supplemental reserve and realized gains of $23.8 million in 1994 and $107.9 million of realized gains, primarily from the sale of equity securities, in 1993. Net income increased 3 percent to $274.3 million, or $3.59 per share, in 1994, compared to $267.3 million, or $3.58 per share, in 1993. Return on shareholders' equity was 27.4 percent, compared to 36.0 percent in 1993. We have historically established case and IBNR reserves by product, with the objective of being accurate to within +/-2 percent. Pricing has been based only on case and IBNR reserves, which have historically been redundant. To give ourselves an even higher level of comfort about loss reserve adequacy, we had set our aggregate reserves near the upper end of the reasonable range of total reserve estimates. We called the difference between total reserves and the sum of our case and IBNR reserves a "supplemental reserve." In 1994, we eliminated the $71.0 million supplemental reserve because it made our estimates of total reserves excessively conservative and was out of step with industry practices. The effects of the elimination were a one-time 1994 earnings increase of $.62 per share, a 3.2 percentage point improvement in the underwriting profit margin and a $46.2 million addition to capital. Net premiums written increased 35 percent to $2,457.2 million, compared to $1,819.2 million in 1993. We achieved an 8.3 percent underwriting profit (11.5 percent including the elimination of the supplemental reserve), compared to 10.7 percent in 1993. We reduced underwriting expenses by 3.0 percentage points, after a reduction of 3.5 percentage points in 1993. 23 19 Progressive's Core Business ------------------------------- Ninety-five percent of Progressive's net premiums written come from 13 Core divisions, which write insurance for private passenger autos and small commercial and recreational vehicles. Core business net premiums written grew 38 percent to $2,341 million, compared to $1,700 million in 1993. The underwriting profit margin was 7 percent, compared to 10 percent in 1993. Progressive's new auto insurance and management strategies make us optimistic about meeting ambitious profit and growth objectives. In 1994, we consolidated our new customer services into an emerging Progressive brand by expanding service in a number of states and testing ways to project the brand to potential customers. We also assimilated new approaches to managing into a process where more people are empowered, better focused and constantly improving the delivery of around-the-clock, immediate response, information-rich service, designed to delight customers. The principal elements of Progressive's brand were first offered in Miami, Florida, in 1991. We have continuously improved that initial offering, which is now being sold throughout Florida, in Texas and in Ohio, and will be expanded to more states in 1995. We use a combination of television commercials, direct mail and other media to urge consumers to try our unique, free Express Quote(SM) service by calling 1 800 AUTO PRO.(R) Callers spend about 15 minutes with our insurance counselors to obtain accurate auto insurance premium prices for their specific situation from State Farm, Allstate, Progressive and the third or fourth largest auto insurer in their state and to learn about the following Progressive auto insurance improvements: ASSISTANCE AFTER AN ACCIDENT, OR OTHER LOSS, is Progressive's most important service, so we implore our customers to call 1-800-274-4499 immediately after any incident. 24 hours a day, 7 days a week, a Progressive person answers the phone, takes the information, authorizes emergency measures and almost always can have a Progressive claim rep face-to-face with the customer or claimant within a few hours. CONSUMERS ABHOR BEING REJECTED, so Progressive offers a price to every licensed driver. As we became more comfortable with the test rates for the 80+ percent of the market we are serving for the first time, we allowed their volume to grow to between five 24 20 and ten percent of total 1994 volume. CONSUMERS PREFER DIFFERENT WAYS TO BUY, so we offer choices--with an independent agent, over the telephone, at a Progressive location or by mail. Many independent agents, who were threatened by multi-distribution and lower commissions, realize that by concentrating on explaining the consumers' choices at the point-of-sale, they can make good money on Progressive's new low-cost auto insurance, while regaining lost private passenger auto market share. Other agents use our commission options to match the different levels of service provided to different insureds. Independent agents accounted for over 90 percent of 1994 volume. CONSUMERS WANT TO DO BUSINESS WHEN IT'S CONVENIENT FOR THEM, so we are available 24 hours a day, 7 days a week, to deliver any service and/or answer any question. Progressive's unique approach to management continues to evolve along with its business strategy. In 1994, we were pleased to be recognized by management scholars and writers, as well as by USA Today and Fortune, for the success of our "management re-engineering," which includes the following: TOTAL QUALITY MANAGEMENT dovetails with our Excellence Core Value--doing better than we did before--and empowers Progressive people to change how they function if the change measurably improves customer service or reduces costs, and if it does not disrupt others in the work chain. Because measurement is essential to TQM, we have dramatically improved our ability to measure performance and to control quality. TEAMWORK has replaced intense internal competition as the way we work. We continue to improve the ways in which we motivate, manage and reward teams. STEADY COST REDUCTION has been, and continues to be, critical to our strategy, and, along with profit and growth, is the basis for our people's Gainsharing awards. Underwriting expenses were 24 percent of premiums in 1994, compared to 26 percent in 1993 and 31 percent in 1989. PROCESS MANAGEMENT has been added to senior line managers' profit and loss responsibilities, eliminating much staff-line friction and fostering cooperation among divisions and departments. THOROUGH TESTING of new ideas has replaced our former propensity to seize perceived opportunities and grow them as fast as possible. PERFORMANCE-BASED COMPENSATION pays our people very well for exceptional performance, makes contingent pay significant to everyone and fosters the achievement of our demanding objectives. 25 21 Adapt to the changes in the industry caused by competition, risk, investments, and government rules and regulations. Being prepared in advance, to accept changes and being able to adapt, makes you the leader and not a follower. Progressive's Diversified Businesses ---------------------------------------- Diversified divisions provide combinations of service and indemnity to businesses. In 1994, Diversified divisions' net premiums written and underwriting profits were $115 million and 21 percent, respectively, compared to $118 million and 14 percent in 1993. The Diversified divisions produced service revenue and pretax profits of $41.9 million and $10.0 million, respectively, in 1994, compared to $43.7 million and $6.8 million in 1993. 26 [ARTWORK] 27 [ARTWORK] 28 24 Investments and Capital Management -------------------------------------- The balance of revenue and profit comes from interest, dividends and capital gains produced by Progressive's assets. Progressive's investment and capital management are managed by our subsidiary, Progressive Partners, Inc., based in Rye, New York. Progressive Partners employs conservative investment and capital management philosophies, intended to preserve our focus on underwriting and to ensure that we have enough capital to support all the insurance premium we can write profitably. We believe that insurance companies create shareholder value by taking risks to improve their offering to consumers, not by generating cash to be invested aggressively. During 1994, we were neither harmed nor distracted by the speculative investment strategies that impaired many enterprises. The Company's investment portfolio increased to $3,180.0 million at December 31, 1994, from $2,786.4 million at December 31, 1993. For 1994, total investment income (interest, dividends and realized capital gains) was $182.3 million before taxes and $146.7 million after taxes, compared to $242.4 million before taxes and $177.2 million after taxes in 1993. In 1994, we realized $23.8 million in capital gains, compared to $107.9 million in 1993. The large difference was principally attributable to the $74.3 million gain recorded on the sale of our investment in MBNA in 1993. On December 31, 1994, our portfolio had $41.1 million in unrealized losses, compared to $70.2 million in unrealized gains in 1993. This decrease was due largely to the adverse impact on our fixed-income portfolio of rapidly rising interest rates throughout 1994. Progressive seeks incremental returns through active management of its assets and measures performance on a total return basis. In 1994, the taxable equivalent total return was 3.7 percent. This was 4.3 percentage points, or $134 million, better than the benchmark against which we measure performance. The most important factors accounting for this improvement were maintaining relatively short average bond maturities and investing heavily in intermediate municipal bonds that outperformed other fixed income categories. The quality of the portfolio remained exceptional with high-grade fixed-income instruments averaging about 92 percent of invested assets throughout the year. In January 1994, near the lows in interest rates for the year, we issued $200 million of 6.60 percent, 10-year notes. We expect this transaction, and the $327 million of debt and equity financing completed in 1993, will preclude the need to raise additional capital for the foreseeable future. During 1994, we repurchased 1,080,300 Progressive Common Shares at an average cost of $31.44 per share. 29 25 The diversity of humanity will always be reflective of truth, freedom, peace, love and justice. As we evolve to embrace our diversity, we learn to express these attributes of humanity. 1994 Initiatives -------------------- Progressive's total concentration on auto insurance means that every initiative is designed to improve customer product, price and service. DIVERSITY Our growth plans suggest that most new hires will be either claim or customer service representatives. Our objective is to have the demographics of the people we hire for these positions reflect the demographics of the communities where our offices are located, and ultimately the demographics of our customers. TV COMMERCIALS We produced new commercials highlighting Express Quote(SM) service, building on the theme of changing auto insurance consumers' expectations. COMMUNITY ORGANIZATION We began experimenting with moving profit and growth responsibility for high potential communities from state-focused division presidents to community managers to put us closer to customers and to manage hyper-growth better. NEW HEADQUARTERS After years of having our Cleveland people in many different buildings along the I-271 corridor east of Cleveland, we completed and moved into 517,800 square feet of new space on our Wilson Mills Road, 42-acre site, where Information Services occupies the building that was our headquarters from 1974 through 1986, improving internal communication and reducing costs. 30 26 Risks --------- Progressive faces tremendous opportunity. We point out risks to help our shareholders understand the Company better, not because our risk level is greater than that of other businesses. LEGISLATIVE AND REGULATORY RISK Insurance laws and regulations change continually. In 1994, the political climate may have improved. Consumers, enjoying a respite from inflationary price increases, have moderated their demands for reform. We rely on our division presidents and product managers to help regulators and legislators resolve issues in the way that best serves consumers. UNPREDICTABLE UNDERWRITING MARGIN AND GROWTH RATE Our strategy is to strive to achieve a four percent underwriting profit margin target in each program. We cannot predict with precision the timing and pace of the decrease in underwriting margins, nor the rate of growth. With margins now closer to four percent, we monitor each program to ensure that rates are adjusted promptly and adequately. UNPREDICTABLE INVESTMENT INCOME The average duration of our $2.9 billion fixed-income portfolio is approximately 2.5 years, meaning investment income is unusually sensitive to short-term interest rates. We continue to maintain a short average maturity to support our operating strategy, but have recently lengthened the portfolio somewhat. PRICING RISK We continue to learn how to price standard and preferred auto insurance, but have not yet conclusively proved our expertise. We minimize this risk by controlling volume in these new programs and changing rates immediately when experience dictates. HOMEOWNERS INSURANCE This type of insurance would be risky if our auto insurance market share objectives require we offer it. The current situation of having no plans to write homeowners may also present a risk because many consumers prefer to buy all their insurance from one company. In 1995, we will assess demand for homeowners and develop a plan to satisfy our customers' needs. GROWTH ITSELF Our 30 percent growth and excellent return on equity over the past two years are because our customers value Progressive's service. Our $638 million growth in 1994 was more than our total net premiums written in 1985. Although we have experience managing hyper-growth, we have never hired and trained so many people so fast. We measure quality in all operations and will slow growth if quality slips. ADVERTISED BRAND Consumer advertising and brand awareness require higher performance standards. In 1994, we increased our appreciation of the ability of consumers to make wise choices, which in turn increased our urgency to respond to their demand for improved service at lower cost. COMPETITOR RESPONSE Other insurers will react to Progressive's attempt to change consumers' auto insurance experience, but we cannot predict when and how their response will affect our growth and profitability. We monitor competitors and will promptly incorporate their product and service improvements in our consumer offering. 31 27 Diverse skills and ideas create tension. Tension catalyzes personal and organizational growth. Successful, evolving organizations embrace rather than avoid tension. The Future -------------- Progressive is leading a wave of change in the United States' system for dealing with auto accident injuries and property damage. We are reducing auto accident victims' trauma and costs, improving how consumers feel about auto insurance and being rewarded for our leadership. Success so far encourages us to expand at a pace that tests our ability to provide the service we aspire to deliver. We begin 1995 as we began all other years--excited, respectful of the challenge implicit in our objectives and strategy, humbled by our failures, proud of having responded to them and confident that our excellent people will continue to achieve superior results. Much will be required to realize our vision. At Progressive, it is always as if we are just beginning our business and so we look at a future that is brighter than ever. We deeply appreciate the customers we are privileged to serve. Thank you for your business, and thanks especially to the more than 30,000 independent insurance agents who chose to do business with Progressive in 1994. We are particularly grateful for our shareholders' continued confidence. To the men and women who make Progressive a great company, thanks for all your contributions in 1994 and the promise you bring to our future. /s/ Joy Love and Peace Peter Lewis Peter B. Lewis, Chairman, President and Chief Executive Officer 32 [ARTWORK] 33 [ARTWORK] 34 [ARTWORK] 35 [ARTWORK] 36 32 1994 Financial Review ------------------------- Consolidated Financial Statements Loss Reserves Direct Premiums Written by State 34 48 48 Quarterly Financial and Common Share Data Ten Year Summaries Management's Discussion and Analysis 49 50 54
[ARTWORK] 37 33 Report of Coopers & Lybrand L.L.P., Independent Accountants --------------------------------------------------------------- TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION: We have audited the accompanying consolidated balance sheets of The Progressive Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of The Progressive Corporation and subsidiaries' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Progressive Corporation and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Cleveland, Ohio January 26, 1995 38 34 Consolidated Statements of Income ------------------------------------- (millions-except per share amounts)
For the years ended December 31, 1994 1993 1992 NET PREMIUMS WRITTEN $2,457.2 $1,819.2 $1,451.2 ======== ======== ======== REVENUES Premiums earned $2,191.1 $1,668.7 $1,426.1 Investment income 158.5 134.5 139.0 Net realized gains on security sales 23.8 107.9 14.5 Service revenues 41.9 43.7 53.3 Proposition 103 reserve reduction -- -- 106.0 -------- -------- -------- Total revenues 2,415.3 1,954.8 1,738.9 -------- -------- -------- EXPENSES Losses and loss adjustment expenses 1,397.3 1,028.0 930.9 Policy acquisition costs 391.5 311.6 304.1 Other underwriting expenses 150.8 151.3 141.5 Investment expenses 8.7 10.2 17.0 Service expenses 31.9 36.9 57.6 Interest expense 55.3 39.7 44.5 Non-recurring items(1) -- 4.0 64.6 -------- -------- -------- Total expenses 2,035.5 1,581.7 1,560.2 -------- -------- -------- NET INCOME Income before Federal income taxes 379.8 373.1 178.7 Provision for Federal income taxes 105.5 105.8 39.1 -------- -------- -------- Income before cumulative effect of accounting change 274.3 267.3 139.6 Cumulative effect of adopting SFAS 109 -- -- 14.2 -------- -------- -------- Net income $ 274.3 $ 267.3 $ 153.8 ======== ======== ======== PER SHARE Income before cumulative effect: Primary $ 3.59 $ 3.59 $ 2.09 Fully diluted 3.59 3.58 1.85 Cumulative effect of adopting SFAS 109: Primary -- -- .23 Fully diluted -- -- .20 Net income: Primary $ 3.59 $ 3.59 $ 2.32 Fully diluted 3.59 3.58 2.05 (1)See Note 7-Debt and Note 11-Related Party Transactions for discussion. See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries
39 35 Consolidated Balance Sheets -------------------------------
(millions) December 31, 1994 1993 ASSETS Investments: Held-to-maturity: Fixed maturities, at amortized cost (market: $343.8 and $327.4) $ 337.6 $ 309.1 Available-for-sale: Fixed maturities, at market (amortized cost: $2,129.7 and $1,761.9) 2,087.0 1,792.6 Equity securities, at market (cost: $481.0 and $433.2) 476.3 453.9 Short-term investments, at amortized cost (market: $279.2 and $231.3) 279.1 230.8 ----------- ------------ Total investments 3,180.0 2,786.4 Cash 13.4 8.7 Accrued investment income 43.4 33.7 Premiums receivable, net of allowance for doubtful accounts of $15.6 and $8.7 542.4 380.6 Reinsurance recoverables 379.7 380.9 Prepaid reinsurance premiums 83.2 84.6 Deferred acquisition costs 161.6 124.6 Federal income taxes 103.2 78.5 Property and equipment, net of accumulated depreciation of $116.7 and $107.1 143.3 106.7 Other assets 24.9 26.6 ----------- ------------ Total assets $ 4,675.1 $ 4,011.3 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Unearned premiums $ 1,036.7 $ 772.0 Loss and loss adjustment expense reserves 1,434.4 1,348.6 Policy cancellation reserve 47.3 60.1 Accounts payable and accrued expenses 329.2 355.6 Funded debt 675.6 477.1 ----------- ------------ Total liabilities 3,523.2 3,013.4 ----------- ------------ Shareholders' equity: Serial Preferred Shares (authorized 20.0) 9-3/8% Serial Preferred Shares, Series A, no par value, cumulative, liquidation preference $25.00 per share (issued and outstanding 3.5 and 3.6) 85.8 87.9 Common Shares, $1.00 par value (authorized 200.0, issued 82.4 and 82.2, including treasury shares of 11.2 and 10.1) 71.2 72.1 Paid-in capital 357.1 357.6 Net unrealized appreciation (depreciation) on investment securities (30.7) 33.5 Retained earnings 668.5 446.8 ----------- ------------ Total shareholders' equity 1,151.9 997.9 ----------- ------------ Total liabilities and shareholders' equity $ 4,675.1 $ 4,011.3 =========== ============ See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries
40 Consolidated Statements of Changes in Shareholders' Equity -------------------------------------------------------------- 36
(millions-except per share amounts) For the years ended December 31, 1994 1993 1992 PREFERRED SHARES, NO PAR VALUE Balance, Beginning of year $ 87.9 $ 96.4 $ 96.4 Treasury shares purchased-cost basis (2.1) (8.5) -- ------------ ------------- ------------ Balance, End of year $ 85.8 $ 87.9 $ 96.4 ------------ ------------- ------------ COMMON SHARES, $1.00 PAR VALUE Balance, Beginning of year $ 72.1 $ 67.1 $ 21.1 Stock options exercised 0.2 .1 .5 Stock rights issued (cancelled) -- -- (.1) Sale of Common Shares -- 5.0 -- Treasury shares purchased (1.1) (.1) (1.9) Capitalization of stock split -- -- 38.5 Conversion of convertible debenture -- -- 9.0 ------------ ------------- ------------ Balance, End of year $ 71.2 $ 72.1 $ 67.1 ------------ ------------- ------------ PAID-IN CAPITAL Balance, Beginning of year $ 357.6 $ 180.7 $ 118.7 Stock options exercised 4.9 1.7 3.7 Stock rights issued -- 3.5 2.8 Sale of Common Shares -- 172.0 -- Treasury shares purchased (5.4) (.3) (10.5) Conversion of convertible debenture -- -- 66.0 ------------ ------------- ------------ Balance, End of year $ 357.1 $ 357.6 $ 180.7 ------------ ------------- ------------ NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES Balance, Beginning of year $ 33.5 $ 77.5 $ 20.7 Change in net unrealized appreciation (depreciation) (64.2) (44.0) 56.8 ------------ ------------- ------------ Balance, End of year $ (30.7) $ 33.5 $ 77.5 ------------ ------------- ------------ RETAINED EARNINGS Balance, Beginning of year $ 446.8 $ 207.3 $ 208.8 Net income 274.3 267.3 153.8 Cash dividends on Preferred Shares (9-3/8% annually) (8.5) (9.2) (9.4) Cash dividends on Common Shares ($.210, $.200 and $.191 per share) (14.9) (13.9) (11.4) Treasury shares purchased: Preferred Shares (0.2) (1.3) -- Common Shares (27.5) (2.0) (93.5) Capitalization of stock split -- -- (38.5) Other, net (1.5) (1.4) (2.5) ------------ ------------- ------------ Balance, End of year $ 668.5 $ 446.8 $ 207.3 ------------ ------------- ------------ TOTAL SHAREHOLDERS' EQUITY $ 1,151.9 $ 997.9 $ 629.0 ============ ============= ============ The 9-3/8% Serial Preferred Shares, Series A, may be redeemed at the Company's option any time on or after May 31, 1996. 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
41 Consolidated Statements of Cash Flows ----------------------------------------- 37 (millions)
For the years ended December 31, 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Income before cumulative effect of accounting change $ 274.3 $ 267.3 $ 139.6 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization 19.3 16.1 24.3 Net realized gains on security sales (23.8) (107.9) (14.5) Changes in: Unearned premiums 264.7 157.2 19.8 Loss and loss adjustment expense reserves 85.8 74.4 197.1 Accounts payable and accrued expenses 14.9 6.2 (154.9) Policy cancellation reserve (12.8) 8.0 (13.5) Prepaid reinsurance premiums 1.4 (6.6) 5.3 Reinsurance recoverables 1.2 (23.1) (103.0) Premiums receivable (161.8) (68.6) 11.3 Deferred acquisition costs (37.0) (23.3) 8.9 Federal income taxes 9.9 2.0 22.7 Other, net 15.2 21.8 7.5 ---------- ---------- ----------- Net cash provided by operating activities 451.3 323.5 150.6 CASH FLOWS FROM INVESTING ACTIVITIES Purchases: Held-to-maturity: fixed maturities (89.6) (118.1) (135.0) Available-for-sale: fixed maturities (1,463.1) (1,215.6) (1,089.6) equity securities (350.2) (358.4) (123.3) Sales: Available-for-sale: fixed maturities 731.6 325.6 419.4 equity securities 298.3 269.6 134.1 Maturities, paydowns, calls and other: Held-to-maturity: fixed maturities 58.6 59.5 262.2 Available-for-sale: fixed maturities 354.5 526.6 354.1 equity securities 17.7 56.5 -- Net (purchases) sales of short-term investments (48.3) 69.2 188.1 (Receivable) payable on securities (41.3) 55.9 (21.4) Purchase of property and equipment (58.2) (60.0) (17.5) Sale of property and equipment -- -- 5.4 ---------- ---------- ----------- Net cash used in investing activities (590.0) (389.2) (23.5) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 5.1 1.8 4.2 Proceeds from issuance of Common Shares -- 177.0 -- Proceeds from funded debt 198.4 148.2 170.0 Payments of funded debt (.4) (240.2) (170.9) Dividends paid to shareholders (23.4) (23.1) (20.8) Acquisition of treasury shares (36.3) (12.2) (105.9) ---------- ---------- ----------- Net cash provided by (used in) financing activities 143.4 51.5 (123.4) ---------- ---------- ----------- Increase (decrease) in cash 4.7 (14.2) 3.7 Cash, Beginning of year 8.7 22.9 19.2 ---------- ---------- ----------- Cash, End of year $ 13.4 $ 8.7 $ 22.9 ========== ========== =========== See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries
42 Notes to Consolidated Financial Statements ---------------------------------------------- 38 December 31, 1994, 1993 and 1992 1. REPORTING AND ACCOUNTING POLICIES BASIS OF CONSOLIDATION AND REPORTING The accompanying consolidated financial statements include the accounts of The Progressive Corporation and subsidiaries (the Company). All the subsidiaries are wholly owned. All significant intercompany accounts and transactions are eliminated in consolidation. The Company's investments in subsidiaries exceeded their underlying book value at dates of acquisition by $4.0 million, of which $1.6 million remains. INVESTMENTS Held-to-maturity: fixed maturity securities are securities which the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost with the difference between the original cost and redemption value of these securities earned over the lives of the respective issues and included in investment income. 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, reflected in shareholders' equity. 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 shareholders' equity. Financial instruments with off-balance-sheet risk include futures, options, short positions, forward positions and interest rate swap agreements, and are carried in the appropriate available-for-sale portfolio based on the nature of the instrument. Those instruments held or issued for purposes other than trading are carried at market value; changes in value of futures, options 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 shareholders' equity 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 "realized gains or losses on security sales." Those instruments entered into for the purpose of hedging are carried at market value; changes in value are deferred and 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. Trading securities are securities bought and held principally for the purpose of selling them in the near term and are reported at market value. Changes in market value are reflected in earnings. The Company had no trading securities or financial instruments with off-balance-sheet risk held or issued for trading purposes at December 31, 1994 and 1993. Short-term investments include certificates of deposit, commercial paper and other securities maturing within one year and are reported at amortized cost, which approximates market. Risk is individually evaluated for all positions, including financial instruments with off-balance-sheet risk. Realized gains and losses on sales of securities are computed based on the first-in first-out method. PROPERTY AND EQUIPMENT Property and equipment is 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. Capitalized interest costs were $1.6 million in 1994, $2.7 million in 1993 and $.3 million in 1992. 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 percent 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 in Canada, 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. 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. REINSURANCE The Company's reinsurance transactions are primarily attributable to premiums written under state-mandated involuntary plans for commercial vehicles (Commercial Auto Insurance Plans-CAIP), for which the Company retains no indemnity risk. The remaining reinsurance arises from the Company seeking to reduce its loss exposure in its non-auto businesses. Prepaid reinsurance premiums are recognized on a pro rata basis over the period of risk. EARNINGS PER SHARE Net income is reduced by Preferred Share dividends earned during the period and the excess of the fair value over the carrying amount of Preferred Shares repurchased for both the primary and fully diluted earnings per share calculations. Primary and fully diluted earnings per share are computed using the weighted number of Common 43 Shares and equivalents, including stock options, assumed outstanding during the period. For 1992, fully diluted earnings per share also assumed the conversion of the convertible debt instrument and the effects of related interest expense and income taxes. DEFERRED ACQUISITION AND OTHER 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. In 1993, the Company early adopted Statement of Position (SOP) 93-7, "Reporting on Advertising Costs," which provides guidance on financial reporting of advertising costs. Included in "other assets" for 1994 and 1993 are $2.9 million and $1.6 million, respectively, of direct-response advertising costs, which are capitalized and amortized over the estimated period of the benefits. The amounts charged to advertising expense during 1994 and 1993 were $1.0 million and $.1 million, respectively. Direct-response advertising costs consist of direct mail, television and radio expenses and are amortized over a 21- to 66-month period. SERVICE REVENUES AND EXPENSES Service revenues 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 Federal income taxes of $89.8 million, $91.0 million and $4.0 million in 1994, 1993 and 1992, respectively. Total interest paid was $48.3 million for 1994, $38.3 million for 1993 and $44.2 million for 1992. In 1992, the $75.0 million Floating Rate Convertible Subordinated Debenture due 2008 was converted into 9.0 million Common Shares. The Company effected a 3-for-1 stock split in the form of a dividend to shareholders on December 8, 1992. The Company reflected the issuance of the additional Common Shares by transferring $38.5 million from retained earnings to the common stock account. All per share, average equivalent share amounts and stock prices were adjusted to give effect to the split. Treasury shares were not split. RECLASSIFICATIONS Certain amounts in the financial statements for prior periods were reclassified to conform with the 1994 presentation. 2. INVESTMENTS As of December 31, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments." As of December 31, 1993, the Company elected to early adopt SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of SFAS 115 did not have any effect on the Company's results of operations or financial position. The components of pretax investment income at December 31 were:
(millions) 1994 1993 1992 Held-to-maturity: fixed maturities $ 18.4 $ 17.4 $ 23.2 Available-for-sale: fixed maturities 103.8 88.7 82.4 equity securities 23.2 19.8 23.4 Short-term investments 13.1 8.6 10.0 ------------ ----------- ------------- Investment income 158.5 134.5 139.0 ------------ ----------- ------------- Gross realized gains: Held-to-maturity: fixed maturities 1.1 1.0 .5 Available-for-sale: fixed maturities 49.6 20.9 14.9 equity securities 23.0 102.3 4.5 Gross realized losses: Held-to-maturity: fixed maturities (0.7) -- -- Available-for-sale: fixed maturities (40.2) (4.6) (4.2) equity securities (9.0) (11.7) (1.2) ------------ ----------- ------------- Net realized gains on security sales 23.8 107.9 14.5 ------------ ----------- ------------- $ 182.3 $ 242.4 $ 153.5 ============ =========== =============
44 40 Changes in unrealized gains (losses) on fixed maturities and equity securities were:
(millions) 1994 1993 1992 Unrealized gains (losses): Held-to-maturity: fixed maturities $ (12.1) $ (2.5) $ (28.3) ========== ========== ========== Available-for-sale: fixed maturities $ (73.4) $ 1.6 $ 29.1 equity securities (25.4) (67.6) 56.9 Deferred income taxes 34.6 22.0 (29.2) ---------- ---------- ---------- $ (64.2) $ (44.0) $ 56.8 ========== ========== ==========
The composition of the investment portfolio at December 31 was:
(millions) GROSS GROSS UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE 1994 Held-to-maturity: State and local government obligations $ 337.6 $ 8.4 $ (2.2) $ 343.8 ---------- ---------- ---------- ---------- Available-for-sale: U.S. government obligations 30.1 -- (1.3) 28.8 State and local government obligations 1,210.2 8.9 (20.1) 1,199.0 Foreign government obligations 23.7 -- (.7) 23.0 Corporate debt securities 179.8 2.7 (14.4) 168.1 Asset-backed securities 634.9 1.4 (20.0) 616.3 Other debt securities 51.0 4.4 (3.6) 51.8 ---------- ---------- ---------- ---------- 2,129.7 17.4 (60.1) 2,087.0 Equity securities 481.0 6.1 (10.8) 476.3 Short-term investments 279.1 0.1 -- 279.2 ---------- ---------- ---------- ---------- $ 3,227.4 $ 32.0 $ (73.1) $ 3,186.3 ========== ========== ========== ========== 1993 Held-to-maturity: State and local government obligations $ 309.1 $ 19.8 $ (1.5) $ 327.4 ---------- ---------- ---------- ---------- Available-for-sale: U.S. government obligations 20.5 .3 -- 20.8 State and local government obligations 819.8 18.2 (2.3) 835.7 Foreign government obligations 31.8 3.8 (1.8) 33.8 Corporate debt securities 107.5 5.4 (.2) 112.7 Asset-backed securities 732.8 8.3 (4.9) 736.2 Other debt securities 49.5 4.7 (.8) 53.4 ---------- ---------- ---------- ---------- 1,761.9 40.7 (10.0) 1,792.6 Equity securities 433.2 21.1 (.4) 453.9 Short-term investments 230.8 .5 -- 231.3 ---------- ---------- ---------- ---------- $ 2,735.0 $ 82.1 $ (11.9) $ 2,805.2 ========== ========== ========== ==========
The composition of fixed maturities by maturity at December 31, 1994 was:
(millions) HELD-TO-MATURITY AVAILABLE-FOR-SALE MARKET MARKET COST VALUE COST VALUE Less than one year $ 107.8 $ 108.6 $ 611.3 $ 605.2 One to five years 179.5 182.2 1,142.6 1,109.4 Five to ten years 20.8 21.8 160.9 156.9 More than ten years 29.5 31.2 214.9 215.5 -------------------- -------------------- $ 337.6 $ 343.8 $ 2,129.7 $ 2,087.0 ==================== ==================== Securities which do not have a single maturity date are reported at average maturity.
45 At December 31, 1994, bonds in the principal amount of $58.0 million were on deposit with various regulatory agencies to meet statutory requirements. The components of financial instruments with off-balance-sheet risk were:
(millions) MARKET VALUE (CARRYING VALUE) CONTRACT/NOTIONAL VALUE AT DECEMBER 31, AT DECEMBER 31, 1994 1993 1994 1993 Forward and future positions: Assets $ 13.3 $ 66.0 $ 755.4 $ 901.2 Liabilities -- .3 -- 26.5 Option positions-assets -- (.2) -- 64.0 Interest rate swap positions-liabilities (11.7) (62.6) 423.2 659.6 Unmatched short foreign currency positions-liabilities -- 1.9 -- 80.9 ------------------------- ---------------------- $ 1.6 $ 5.4 $ 1,178.6 $ 1,732.2 ========================= ======================
Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration or interest rate characteristics of the portfolio, or hedging securities. 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; unless otherwise noted, collateral is not required to support the credit risk. The Company had no uncollateralized lines and letters of credit as of December 31, 1994. As of December 31, 1993, the Company had committed $20.0 million in uncollateralized lines and letters of credits, of which none were outstanding and subject to credit risk as of December 31, 1993. 3. REINSURANCE In 1993, the Company adopted SFAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." SFAS 113 required amounts related to ceded reinsurance to be shown gross on the financial statements. Prior practice allowed ceding enterprises to report insurance activities net of the effects of reinsurance. The implementation of SFAS 113 resulted in the Company reporting ceded unearned premiums reserves as "prepaid reinsurance premiums" on the balance sheet and reporting ceded unpaid losses and amounts recoverable on paid losses as "reinsurance recoverables." SFAS 113 also provides risk transfer criteria and prescribes the accounting and reporting standards for reinsurance contracts. 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, 1994 and 1993, 64 percent and 69 percent, respectively, of the "prepaid reinsurance premiums" and 72 percent and 75 percent, respectively, of the "reinsurance recoverables" relate to CAIP, for which the Company retains no indemnity risk. The effect of reinsurance on premiums written and earned as of December 31 is as follows:
(millions) 1994 1993 1992 WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED Direct premiums $ 2,645.1 $ 2,378.4 $ 1,966.4 $ 1,808.8 $ 1,636 $ 1,619.4 Assumed 2.9 4.9 9.2 9.7 4.3 1.9 Ceded (190.8) (192.2) (156.4) (149.8) (189.9) (195.2) ----------------------- ----------------------- -------------------- Net premiums $ 2,457.2 $ 2,191.1 $ 1,819.2 $ 1,668.7 $ 1,451.2 $ 1,426.1 ======================= ======================= ======================
Losses and loss adjustment expenses are net of reinsurance ceded of $145.9 million in 1994, $138.8 million in 1993 and $196.7 million in 1992. 46 42 4. FEDERAL INCOME TAXES The provision for Federal income taxes in the accompanying consolidated statements of income differs from the statutory rates as follows:
(millions) 1994 1993 1992 Income before Federal income taxes $ 379.8 $ 373.1 $ 178.7 ======== ======== ======== Tax at statutory rate $ 132.9 35% 130.6 35% $ 60.8 34% Tax effect of: Exempt interest income (24.8) (6) (15.4) (4) (12.9) (7) Dividends received deduction (3.4) (1) (4.3) (1) (6.4) (4) Other items, net .8 -- (5.1) (2) (2.4) (1) ---------------- ----------------- ------------------ $ 105.5 28% $ 105.8 28% $ 39.1 22% ================ ================= ==================
The current portion of the Federal income tax provision was $113.0 million in 1994, $90.3 million in 1993 and $8.2 million in 1992. Deferred Federal income taxes reflect the impact for financial statement reporting purposes of "temporary differences" between the financial statement carrying amounts and tax bases of assets and liabilities. At December 31, 1994 and 1993, the components of the net deferred tax asset were as follows:
(millions) 1994 1993 Deferred tax assets: Unearned premium reserve $ 66.8 $ 48.1 Non-deductible accruals 25.7 25.4 Off-balance-sheet financial instruments 9.6 -- Capitalized expenditures 3.9 2.1 Loss reserve discounting .5 5.2 Unrealized losses 16.7 -- Other 1.0 -- Deferred tax liabilities: Deferred acquisition costs (56.6) (43.6) Unrealized gains -- (18.0) Other -- (5.5) ----------- ----------- Net deferred tax asset $ 67.6 $ 13.7 =========== ===========
Deferred Federal income taxes include noninterest bearing special estimated tax deposits made pursuant to Section 847 of the Internal Revenue Code of $46.6 million and $40.5 million at December 31, 1994 and 1993, respectively. As of December 31, 1994, a deferred tax asset of $9.6 million was recorded to reflect accelerated recognition of gains on off-balance-sheet financial instruments. The Omnibus Budget Reconciliation Act of 1993 increased the maximum tax rate for corporations from 34 percent to 35 percent, effective for tax years beginning after December 31, 1992. As a result of this change in rate, the Company was able to write up the value of its deferred tax asset. The effect of this write-up was to increase net deferred tax assets which increased net income by $2.1 million, or $.03 per share, in 1993. Effective January 1, 1992, the Company adopted SFAS 109, "Accounting for Income Taxes," which changed the method of accounting for income taxes. The cumulative effect of adopting SFAS 109 was to restore deferred tax assets and increase net income $14.2 million, or $.20 per share, in 1992. The Company is able to demonstrate that the benefit of deferred tax assets is fully realizable. As of December 31, 1994, the Company included in "Federal income taxes" $2.0 million of foreign tax credit carryover. Of this amount, $.9 million and $1.1 million will expire at the end of 1996 and 1997, respectively, unless previously used. 47 43 5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES In 1994, the Company adopted SOP 94-5, "Disclosures of Certain Matters in the Financial Statements of Insurance Enterprises." The adoption of SOP 94-5 had no effect on results of operations or financial condition. Activity in the loss and loss adjustment expense reserves, prepared in accordance with generally accepted accounting principles, is summarized as follows:
(millions) 1994 1993 1992 Balance at January 1 $ 1,348.6 $ 1,274.2 $ 1,077.1 Less reinsurance recoverables on unpaid losses 334.8 316.7 213.7 ----------- ------------ ----------- Net Balance at January 1 1,013.8 957.5 863.4 ----------- ------------ ----------- Incurred related to: Current year 1,539.8 1,126.5 982.4 Prior years (142.5) (98.5) (51.5) ----------- ------------ ----------- Total incurred 1,397.3 1,028.0 930.9 Paid related to: Current year 893.9 604.9 483.4 Prior years 417.0 366.8 353.4 ----------- ------------ ----------- Total paid 1,310.9 971.7 836.8 ----------- ------------ ----------- Net Balance at December 31 1,100.2 1,013.8 957.5 Plus reinsurance recoverables on unpaid losses 334.2 334.8 316.7 ----------- ------------ ----------- Balance at December 31 $ 1,434.4 $ 1,348.6 $ 1,274.2 =========== ============ ===========
During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental re serve" ($46.2 million after tax), resulting in a one-time increase in earnings of $.62 per share. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2 percent. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. Even without the high level of comfort provided by the "supplemental reserve," the Company's reserves have historically been redundant by approximately 2 percent to 4 percent over the most recent 5 years. The Company believes that this change in the estimate of its reserves will place it more in line with the practices of other companies in the industry. 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, results of operations, cash flows or financial condition. During 1994, the Company settled the dispute arising out of its 1985 acquisition of American Star Insurance Company, over the seller's refusal to pay certain losses on pre-sale business written by American Star. Total reserves on this business, which are mainly for product liability and environmental claims, are $29.7 million, of which $9.9 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. See Management's Discussion and Analysis for further discussion. 6. LITIGATION The Company, or its subsidiaries, are named as defendant in various lawsuits generally relating to their business. Numerous legal actions arise from claims made under insurance policies issued by the subsidiaries or in connection with previous reinsurance agreements. These actions were considered by the Company in establishing its loss and loss adjustment expense reserves. The Company believes that the ultimate disposition of these and other pending lawsuits will not materially impact the Company's results of operations, cash flows or financial position. 48 44 7. DEBT During 1994, the maximum amount of bank borrowings outstanding was $8.5 million, and the daily average amount outstanding was $.1 million, at an average annual interest rate of 5.0 percent. Funded debt at December 31 consisted of:
(millions) 1994 1993 6.60% Notes $ 198.5 $ -- 7% Notes 148.2 148.2 8 3/4% Notes 29.0 28.8 10% Notes 149.4 149.3 10 1/8% Subordinated Notes 149.3 149.2 Other funded debt 1.2 1.6 ----------- ----------- $ 675.6 $ 477.1 =========== ===========
Funded debt includes amounts the Company has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. 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 had the right to borrow up to $50.0 million. In February 1994, the Company reduced this revolving credit arrangement to $20.0 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. In February 1994, the Company terminated a four-year credit facility with Morgan Guaranty Trust Company of New York, originally entered into in May 1990, under which the Company had the right to borrow up to $75.0 million. In February 1994, the Company terminated a five-year credit facility agreement with a group of banks, originally entered into in October 1989, under which the Company secured the right to borrow up to $235.0 million and request an additional $235.0 million. In January 1994, the Company sold $200.0 million of its 6.60% Notes due 2004. The Notes are noncallable, and interest is payable semiannually. The fair value of these Notes was $174.2 million at December 31, 1994. In October 1993, the Company sold $150.0 million of noncallable 7% Notes due 2013 with interest payable semiannually. The fair value of these Notes was $124.6 million and $145.3 million at December 31, 1994 and 1993, respectively. In May 1989, the Company issued $30.0 million of 8-3/4% Notes due 1999 in exchange for $30.0 million of the 8-3/4% Debentures due 2017. These Notes are noncallable and interest is payable semiannually. The fair value of these Notes was $30.3 million and $33.7 million at December 31, 1994 and 1993, respectively. In December 1988, the Company sold $150.0 million of 10% Notes due 2000 and $150.0 million of 10-1/8% Subordinated Notes due 2000. All such Notes are noncallable. Interest is payable semiannually on both issues. The fair values of the 10% Notes and 10-1/8% Subordinated Notes were $159.8 million and $159.7 million, respectively, at December 31, 1994 and $180.6 million and $181.2 million, respectively, at December 31, 1993. In February 1987, the Company sold $100.0 million, $70.0 million after the May 1989 debt exchange, of 8-3/4% Debentures due 2017 with interest payable semiannually. In December 1993, the Company redeemed the entire $70.0 million principal amount of these Debentures. The Company redeemed the Debentures at 105.425 percent of the principal amount, plus accrued interest, with the proceeds of the sale of certain securities in its investment portfolios. A $4.0 million charge on debt extinguishment was recorded as a "non-recurring item." As of December 31, 1994, the Company was in compliance with its debt covenants. Aggregate principal payments on funded debt outstanding at December 31, 1994 are $.4 million for 1995 and 1996, $.3 million for 1997, $.1 million for 1998, $30.0 million for 1999, and $650.0 million thereafter. 8. LEASE COMMITMENTS The Company has operating lease commitments with terms greater than one year for equipment and office space, some with options to renew at the end of the lease periods. The minimum rental commitments under all such noncancelable leases at December 31, 1994 are as follows (in millions): 1995-$23.8; 1996-$17.1; 1997-$6.6; 1998-$2.3; 1999-$.8; and thereafter-$0. Total rental expense incurred by the Company for 1994, 1993 and 1992 was $29.1 million, $31.3 million and $35.4 million, respectively. 49 45 9. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS The Company has a two-tiered Retirement Security Program. The first tier is a self-directed defined contribution pension plan covering all employees who meet requirements as to age and length of service. Contributions vary from one percent to five percent of annual eligible compensation up to the Social Security wage base, based on years of eligible service. Prior to January 1, 1994, the defined contribution plan was Company directed, covered only eligible employees hired after December 31, 1988 and was funded at 1.3 percent of annual eligible compensation up to the Social Security wage base. Company contributions were $3.2 million in 1994, $.7 million in 1993 and $.5 million in 1992. The second tier is a long-term savings plan under which the Company matches, up to a maximum of three percent of an employee's annual contribution in Company stock. Company contributions were $4.4 million in 1994, $3.8 million in 1993 and $3.6 million in 1992. The Company has a defined benefit pension plan which covered employees hired before January 1, 1989 who meet requirements as to age and length of service. This plan and future benefit accruals were curtailed on December 31, 1993, and the Company recognized a $1.5 million gain. The benefits accruals, based on years of service and the employee's career average compensation up to the Social Security tax base, were frozen as of December 31, 1993. The Company's funding policy is to contribute annually the maximum amount that can be deducted for Federal income tax purposes. The following table sets forth the defined benefit plan information as of December 31:
(millions) 1994 1993 1992 Actuarial present value of benefit obligations: Vested benefit obligation $ 13.6 $ 15.8 $ 9.2 ============ =========== =========== Accumulated benefit obligation $ 13.6 $ 16.8 $ 12.3 ============ =========== =========== Projected benefit obligation for service rendered to date $ 13.6 $ 16.8 $ 16.6 Plan assets at fair value, primarily government and corporate taxable bonds 17.1 17.9 13.6 ------------ ----------- ----------- Plan assets net of projected benefit obligation 3.5 1.1 (3.0) Unrecognized actuarial gains (3.0) (1.9) (3.6) Unrecognized prior service cost -- -- .7 Unrecognized transition asset at January 1, 1987, recognized over 21 years (.3) (.3) (.3) ------------ ----------- ----------- Pension asset (liability) recognized in the consolidated balance sheets $ .2 $ (1.1) $ (6.2) ============ =========== =========== Net pension cost included the following components: Service cost-benefits earned during the period $ -- $ 1.9 $ 2.5 Interest cost on projected benefit obligation 1.3 1.2 1.1 Actual return on plan assets .1 (1.2) (1.3) Net amortization and deferral (1.6) (.5) (.4) ------------ ----------- ----------- Net periodic pension cost (return) $ (.2) $ 1.4 $ 1.9 ============ =========== ===========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.0 percent for 1994, 7.0 percent for 1993 and 8.0 percent for 1992. The expected long-term rate of return on assets was 8.0 percent for 1994, 1993 and 1992. The rate of increase in future compensation levels was 8.0 percent in 1992. 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. In 1993, the Company early adopted SFAS 112, "Accounting for Postemployment Benefits." The Company's obligation was $1.3 million and $.9 million at December 31, 1994 and 1993, respectively. POSTRETIREMENT BENEFITS The Company provides postretirement health and life benefits to all employees who met requirements as to age and length of service at December 31, 1988. The Company recognized its obligation of $.4 million at December 31, 1994, 1993 and 1992. As of December 31, 1994, the Company has fully funded its retirees' portion of the postretirement benefit obligation and will review this funded status annually. 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. INCENTIVE COMPENSATION PLANS The Company's 1989 Incentive Plan provides for the granting of stock options and other stock-based awards to key employees of the Company. The 6,500,000 Common Shares authorized under the Incentive Plan have been registered. Outside of the Incentive Plan, the Company registered 1,425,000 Common Shares 50 46 relating to stock options granted to key employees of the Company. 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 were granted at the fair market value at the date of grant. A summary of all stock option activity during the three years ended December 31, follows:
1994 1993 1992 Number of Option Prices Number of Option Prices Number of Option Prices Options Outstanding Shares Per Share Shares Per Share Shares Per Share Beginning of year 4,488,887 $ 7.666 to 29.625 4,123,003 $ 7.666 to 19.833 3,301,176 7.666 to 19.833 Add (deduct): Granted 1,156,450 31.000 to 38.750 693,325 29.625 1,581,750 15.458 to 18.833 Exercised (198,959) 7.666 to 19.666 (96,443) 9.250 to 19.666 (531,497) 7.666 to 18.291 Cancelled (182,556) 11.250 to 31.000 (230,998) 9.125 to 29.625 (228,426) 9.125 to 19.375 --------- ----------------- --------- ---------------- --------- ---------------- End of year 5,263,822 $ 7.666 to 38.750 4,488,887 $7.666 to 29.625 4,123,003 $7.666 to 19.833 ========= ================= ========= ================ ========= ================ Exercisable, end of year 1,128,902 $ 7.666 to 31.000 934,592 $7.666 to 19.833 759,238 $7.666 to 19.666 ========= ================= ========= ================ ========= ================ Available, end of year 1,834,279 2,808,173 1,270,500 ========= ========= =========
The Company's 1985 Restricted Stock Plan, which awarded to key employees Common Shares which vested over future employment periods, expired on December 31, 1993. The amounts charged to income for incentive compensation plans, including an executive cash bonus program for key members of management and a gainsharing payment to all other employees, were $32.0 million in 1994, $24.7 million in 1993 and $12.0 million in 1992. 10. STATUTORY FINANCIAL INFORMATION At December 31, 1994, $102.1 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 Company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the subsidiaries are licensed. During 1994, the insurance subsidiaries paid aggregate cash dividends of $52.6 million to the Company, and one subsidiary remitted $20.1 million of surplus by redeeming and subsequently retiring a portion of its shares. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $177.0 million in 1995 without prior approval from regulatory authorities. Statutory policyholders' surplus was $949.2 million and $701.9 million at December 31, 1994 and 1993, respectively. Statutory net income was $230.3 million, $188.6 million and $61.7 million for the years ended December 31, 1994, 1993 and 1992, respectively. During 1994, the insurance subsidiaries began to reduce loss reserves for anticipated salvage and subrogation recoveries in accordance with statutory accounting principles. Previously, salvage and subrogation was not reflected in the statutory financial statements until actually recovered. As a result of this change, statutory policyholders' surplus increased $39.9 million during 1994. As of December 31, 1994, the Company's insurance subsidiaries, as part of their statutory filings, are required to disclose their risk-based capital (RBC) requirements. The National Association of Insurance Commissioners developed an 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. 11. RELATED PARTY TRANSACTIONS In April 1988, the Company sold to Alfred Lerner, then Chairman of the Company's Board of Directors, a $75.0 million Floating Rate Convertible Subordinated Debenture due 2008 (convertible debenture). On December 16, 1992, the convertible debenture was converted into 9,000,000 Common Shares. On the same date, Mr. Lerner sold, in an underwritten public offering, 5,175,000 of the Common Shares received upon such conversion. In 1993, Mr. Lerner sold the remaining 3,825,000 shares. The public offering was completed pursuant to the terms of the registration rights provisions of 51 47 the convertible debenture, under which the Company paid $5.1 million in underwriting and other expenses of the offering, which were charged directly to shareholders' equity. In addition, Mr. Lerner ended his employment agreement with the Company, and the Company paid him $10.0 million. Prior to the conversion, the Company incurred interest expense on the convertible debenture of $4.5 million in 1992. As of June 30, 1992, the Company exercised its right to terminate the Investment Management Agreement with Progressive Partners Limited Partnership (Progressive Partners) as part of its strategy to compete more effectively by lowering costs. Mr. Lerner had a 50 percent interest in Progressive Partners. Upon such termination, the Company paid Progressive Partners a one-time termination fee, and an additional incentive fee for the period ended June 30, 1992, in the aggregate amount of $54.6 million, determined according to a formula contained in the Investment Management Agreement. Progressive Partners' investment staff became employed by a wholly-owned subsidiary of the Company and continues to provide the Company with investment and capital management services. Prior to the termination of the Agreement, the Company incurred investment management service fees to Progressive Partners of $10.5 million for 1992. In January 1991, the Company purchased 4,851,000 shares (adjusted for the 2-for-1 stock split paid February 12, 1993), or 4.9 percent, of MBNA Corporation in connection with its initial public offering. At the time of the transaction, Mr. Lerner was Chairman of the Board and Chief Executive Officer of MBNA Corporation and owned 10 percent of its common stock. During 1993, the Company sold its entire holding of MBNA Corporation, recognizing realized gains of $74.3 million. 12. SEGMENT INFORMATION The operating segments of the Company and subsidiaries are classified into Insurance and Service. Expense allocations are based on assumptions and estimates; stated segment operating results would change if different methods were applied. The Company does not allocate assets to segments.
For the years ended December 31, 1994 1993 1992 (millions) Pretax Pretax Pretax Revenues Profit (Loss) Revenues Profit (Loss) Revenues Profit (Loss) Insurance operations $ 2,191.1 $ 251.5 $ 1,668.7 $ 177.8 $ 1,426.1 $ 49.6 Service operations 41.9 10.0 43.7 6.8 53.3 (4.3) ---------- --------- ---------- --------- ---------- --------- Total operations 2,233.0 261.5 1,712.4 184.6 1,479.4 45.3 Proposition 103 reserve reduction -- -- -- -- 106.0 106.0 Total investment income 182.3 182.3 242.4 242.4 153.5 153.5 Interest expense and other costs -- (64.0) -- (53.9) -- (126.1) ---------- --------- ---------- --------- ---------- --------- $ 2,415.3 $ 379.8 $ 1,954.8 $ 373.1 $ 1,738.9 $ 178.7 ========== ========= ========== ========= ========== =========
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 2-Investments and Note 7-Debt. Pursuant to SFAS 119, the cost and market value of the financial instruments as of December 31 are summarized as follows:
(millions) 1994 1993 Market Market Cost Value Cost Value Investments: Held-to-maturity: fixed maturities $337.6 $343.8 $309.1 $327.4 Available-for-sale: fixed maturities 2,129.7 2,087.0 1,761.9 1,792.6 equity securities 481.0 476.3 433.2 453.9 Short-term investments 279.1 279.2 230.8 231.3 Funded debt (675.6) (649.8) (477.1) (542.4)
52 48 Loss Reserves ------------- Not covered by report of independent accountants
GAAP Combined Ratio Adjusted to Year-End Current % Year-End Reflect Reserve Estimate Reserve Amount Loss Amount of Total Unpaid at As Reserve Year (millions) Redundancy1 December 31, 1994 Reported Development 1994(2) . . . . . . . . . . . . . . . . $ 1,434 NA 100% 88.5 NA 1993 . . . . . . . . . . . . . . . . . 1,349 10% 51 89.3 91.6 1992 . . . . . . . . . . . . . . . . . 1,274 15 28 96.5 94.0 1991 . . . . . . . . . . . . . . . . . 1,077 12 18 103.7 103.1 1990 . . . . . . . . . . . . . . . . . 858 13 13 99.0 96.8 1989 . . . . . . . . . . . . . . . . . 750 10 6 101.2 98.3 1988 . . . . . . . . . . . . . . . . . 654 6 3 97.1 99.8
The chart represents what the underwriting results for prior years would have been if year-end reserves were as subsequent payments and current reserves now suggest. For example, the 89.3 GAAP combined ratio as reported for 1993 was positively impacted 2.3 points because reserve redundancy which existed at December 31, 1992 decreased by $37.7 million during 1993. 1 The percentage will change as claims unpaid at December 31, 1994 are ultimately settled or the reserves adjusted. 2 In 1994, the $71.0 million "supplemental reserve" was eliminated, resulting in a one-time favorable impact to the GAAP combined ratio of 3.2 points. See Management's Discussion and Analysis for further discussion. NA = Not applicable Direct Premiums Written ----------------------- Not covered by report of independent accountants
(millions) 1994 1993 1992 1991 1990 Florida $ 369.9 14.0% $ 265.6 13.5% $ 195.3 11.9% $173.9 11.3% $ 169.3 12.5% Texas 246.4 9.3 146.6 7.4 117.0 7.2 96.2 6.3 64.4 4.7 Ohio 232.0 8.8 175.9 8.9 140.7 8.6 137.1 8.9 116.8 8.6 New York 195.2 7.4 170.4 8.7 156.8 9.6 132.1 8.6 105.2 7.7 Pennsylvania 161.2 6.1 113.0 5.8 70.1 4.3 52.8 3.4 53.0 3.9 Georgia 129.7 4.9 120.0 6.1 114.6 7.0 122.9 8.0 106.4 7.8 California 126.8 4.8 80.2 4.1 90.6 5.5 156.1 10.2 177.8 13.1 All other 1,183.9 44.7 894.7 45.5 751.7 45.9 665.7 43.3 565.9 41.7 ---------- ------ ---------- ------ ---------- ------ -------- ------ ---------- ------ Total $ 2,645.1 100.0% $ 1,966.4 100.0% $ 1,636.8 100.0% $1,536.8 100.0% $ 1,358.8 100.0% ========== ====== ========== ====== ========== ====== ======== ====== ========== ======
The Progresive Corporation and Subsidiaries 53 49 Quarterly Financial and Common Share Data ----------------------------------------- Not covered by report of independent accountants (millions-except per share amounts)
Net Income Operating Income1 Stock Price Operating Per Per High-Low Dividends Appreciation Year Quarter Revenues Total Share2 Total3 Share2 Price4 Per Share (Depreciation)5 1994 . . . . . . . 1 $ 488.2 $ 48.1 $ .62 $ 49.8 $ .64 $40 1/2-27 3/4 $ .050 2 547.1 60.5 .79 54.7 .71 35 5/8-28 1/2 .050 3 582.3 64.8 .85 57.4 .75 38 7/8-33 1/4 .055 4 615.4 100.9 1.34(6) 50.8 .66 38 3/8-32 1/4 .055 --------- ------ ----- ------ ----- -------------- ------- ----- $ 2,233.0 $274.3 $3.59(6) $212.7 $2.76 $40 1/2-27 3/4 $ .210 (13.1)% ========= ====== ===== ====== ===== ============== ======= ===== 1993 . . . . . . . 1 $ 382.8 $ 51.6 $ .71 $39.9 $ .54 $36 1/8-26 5/8 $ .050 2 423.3 79.7 1.11 54.5 .75 36 1/4-27 1/2 .050 3 442.8 82.6 1.09 54.7 .71 44 1/4-31 3/4 .050 4 463.5 53.4 .68 49.3 .63 46 1/8-38 3/8 .050 --------- ------ ----- ------ ----- -------------- ------- ----- $ 1,712.4 $267.3 $3.58 $197.3 $2.61 $46 1/8-26 5/8 $ .200 39.8% ========= ====== ===== ====== ===== ============== ======= ===== 1992 . . . . . . . 1 $ 346.4 $ 36.1 $ .47(7) $ 18.0 $.22 $18 7/8-14 3/4 $ .047 2 365.7 40.1 .53 32.4 .41 19-15 5/8 .047 3 373.7 44.7 .62 42.0 .58 22-18 7/8 .047 4 393.6 32.9 .45(8) 37.4 .51 29 3/8-21 3/8 .050 --------- ------ ----- ------ ----- -------------- ------- ----- $ 1,479.4 $153.8 $2.05 $129.8 $1.72 $29 3/8-14 3/4 $ .191 63.3% ========= ====== ===== ====== ===== ============== ======= ===== All per share amounts and stock prices were adjusted for the December 8, 1992, 3-for-1 stock split. 1 Represents net income less realized gains and losses on security sales and one-time items. 2 Presented on a fully diluted basis. The sum does not equal the total because the average equivalent shares differ in the periods. 3 For 1993, the sum of the quarterly operating income does not equal the total due to the retroactive impact of the Omnibus Budget Reconciliation Act of 1993. 4 Prices as reported on the New York Stock Exchange. 5 Represents annual rate of return on Progressive Common Shares, including quarterly dividend reinvestment. 6 In the fourth quarter 1994, the "supplemental reserve" was eliminated, resulting in a one-time increase of $71.0 million before taxes, or $.63 per share for the quarter and $.62 per share for the year. See Management's Discussion and Analysis for further discussion. 7 For the first quarter 1992, income before cumulative effect of accounting change was $21.9 million, or $.28 per share. 8 Adjustments which adversely impacted earnings during the fourth quarter 1992 were the payment to Alfred Lerner (see Note 11-Related Party Transactions for further discussion) and reserve adjustments based on routine actuarial analysis completed during the quarter.
The Progressive Corporation and Subsidiaries 54 50 Ten Year Summary--Financial Highlights -------------------------------------- Not covered by report of independent accountants
(millions-except per share amounts and number of people employed) 1994 1993 INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION AND OPERATING STATISTICS-STATUTORY BASIS Reserves: Loss and loss adjustment expense $ 1,100.2 $ 1,053.7 Unearned premiums 954.8 688.9 Policyholders' surplus1 949.2 701.9 Ratios: Net premiums written to policyholders' surplus 2.6 2.6 Loss and loss adjustment expense reserves to policyholders' surplus 1.2 1.5 Loss and loss adjustment expense 64.2 62.6 Underwriting expense 22.4 25.4 ---------- ----------- Statutory combined ratio 86.6 88.0 SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS Total revenues $ 2,415.3 $ 1,954.8 Total assets2 4,675.1 4,011.3 Total shareholders' equity3 1,151.9 997.9 Common Shares outstanding 71.2 72.1 Book value per Common Share3 $ 14.97 $ 12.62 Return on average shareholders' equity4 27.4% 36.0% Funded debt outstanding $ 675.6 $ 477.1 Ratio of funded debt to capital 37% 32% GAAP underwriting margin3 11.5 10.7 Number of people employed 7,544 6,101 1 During 1994, the Company began accruing for salvage and subrogation recoverables. See Note 10-Statutory Financial Information. 2 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. See Note 3-Reinsurance. 3 In 1994, the $71.0 million "supplemental reserve" was eliminated, increasing book value per share $.65, underwriting profit margin 3.2 percent and shareholders' equity $46.2 million. See Management's Discussion and Analysis for further discussion. 4 Net income minus preferred share dividends divided by average common shareholders' equity. All share and per share amounts were adjusted for stock splits.
55 51
1992 1991 1990 1989 1988 1987 1986 1985 $ 994.7 $ 901.7 $ 827.4 $ 787.7 $ 685.5 $ 496.1 $ 342.0 $ 226.6 538.5 513.6 474.1 467.6 505.0 446.8 323.9 219.4 658.3 676.7 636.7 578.1 495.0 452.0 312.0 230.1 2.2 2.0 1.9 2.0 2.6 2.5 2.5 2.3 1.5 1.3 1.3 1.4 1.4 1.1 1.1 1.0 68.3 65.7 62.1 65.9 62.9 58.3 61.0 65.6 29.8 33.5 31.1 31.4 33.2 35.8 34.3 33.6 -------- -------- -------- -------- -------- -------- ------- ------- 98.1 99.2 93.2 97.3 96.1 94.1 95.3 99.2 $1,738.9 $1,493.1 $1,376.2 $1,392.7 $1,355.8 $1,066.2 $ 749.4 $ 507.1 3,440.9 3,317.2 2,912.4 2,643.7 2,316.3 1,782.5 1,259.2 810.8 629.0 465.7 408.5 435.2 417.2 395.0 311.4 118.4 67.1 63.3 69.3 76.2 80.7 86.1 84.0 65.1 $ 7.94 $ 5.83 $ 5.89 $ 5.71 $ 5.17 $ 4.59 $ 3.71 $ 1.82 34.7% 6.7% 21.5% 17.4% 25.9% 24.7% 26.9% 36.9% $ 568.5 $ 644.0 $ 644.4 $ 645.9 $ 479.2 $ 216.9 $ 100.8 $ 158.7 47% 58% 61% 60% 53% 35% 24% 57% 3.5 (3.7) 1.0 (1.2) 2.9 5.6 4.3 0.0 5,591 6,918 6,370 6,049 5,854 5,879 4,711 3,266
The Progressive Corporation and Subsidiaries 56 52 Ten Year Summary--GAAP Consolidated Operating Results ----------------------------------------------------- Not covered by report of independent accountants
(millions-except per share amounts) 1994 1993 Direct premiums written: Personal lines $ 2,181.7 $ 1,548.9 Commercial lines 463.4 417.5 ---------- ---------- Total direct premiums written 2,645.1 1,966.4 Reinsurance assumed 2.9 9.2 Reinsurance ceded (190.8) (156.4) ---------- ---------- Net premiums written 2,457.2 1,819.2 Net change in unearned premiums reserve1 (266.1) (150.5) ---------- ---------- Premiums earned 2,191.1 1,668.7 ---------- ---------- Expenses: Losses and loss adjustment expenses2 1,397.3 1,028.0 Policy acquisition costs 391.5 311.6 Other underwriting expenses 150.8 151.3 ---------- ---------- Total underwriting expenses 1,939.6 1,490.9 ---------- ---------- Underwriting profit (loss) before taxes 251.5 177.8 Provision (benefit) for Federal income taxes 88.0 62.2 ---------- ---------- Underwriting profit (loss) after taxes 163.5 115.6 Service operations profit (loss) after taxes 6.5 4.4 ---------- ---------- 170.0 120.0 Investment income after taxes 131.2 107.1 Net realized gains (losses) on security sales after taxes 15.5 70.1 Interest expense after taxes (35.9) (25.8) Proposition 103 reserve reduction after taxes -- -- Non-recurring items after taxes -- (2.6) Other expense after taxes3 (6.5) (1.5) ---------- ---------- Income before Federal tax adjustments and cumulative effect of accounting change 274.3 267.3 Federal tax adjustments4 -- -- Cumulative effect of accounting change5 -- -- ---------- ---------- Net income $ 274.3 $ 267.3 ========== =========== Per share Net income2 $ 3.59 $ 3.58 Dividends .210 .200 Average equivalent shares Primary 74.0 71.8 Fully diluted 74.0 72.0 Common Share Price High $ 40 1/2 $ 46 1/8 Low 27 3/4 26 5/8 Close6 35 40 1/2 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. See Management's Discussion and Analysis for further discussion. 3 Reflects investment expenses after taxes and other tax adjustments. 4 1991 reflects a deferred tax asset write-down; 1990 reflects a fresh start tax benefit; and 1985 reflects benefits from capital loss carry forwards. 5 1992 reflects adoption of SFAS 109, "Accounting for Income Taxes," and 1987 reflects adoption of SFAS 96, "Accounting for Income Taxes." 6 Represents the closing price at December 31. All share and per share amounts were adjusted for stock splits.
57 53
1992 1991 1990 1989 1988 1987 1986 1985 $1,214.6 $1,047.4 $ 876.0 $ 800.1 $ 817.0 $ 690.2 $ 526.2 $ 396.4 422.2 489.4 482.8 487.0 521.0 488.0 303.9 145.0 -------- -------- -------- -------- -------- -------- -------- -------- 1,636.8 1,536.8 1,358.8 1,287.1 1,338.0 1,178.2 830.1 541.4 4.3 .1 .1 7.2 9.4 19.5 9.2 1.6 (189.9) (212.3) (162.6) (134.0) (72.4) (81.2) (58.4) (20.1) -------- -------- -------- -------- -------- -------- -------- -------- 1,451.2 1,324.6 1,196.3 1,160.3 1,275.0 1,116.5 780.9 522.9 (25.1) (37.7) (5.1) 36.2 (59.6) (122.1) (103.7) (78.1) -------- -------- -------- -------- -------- -------- -------- -------- 1,426.1 1,286.9 1,191.2 1,196.5 1,215.4 994.4 677.2 444.8 -------- -------- -------- -------- -------- -------- -------- -------- 930.9 858.0 762.9 799.3 752.0 571.9 406.6 288.4 304.1 313.7 292.7 296.7 321.3 292.6 190.2 130.1 141.5 162.1 123.7 114.9 106.6 74.4 51.8 26.4 -------- -------- -------- -------- -------- -------- -------- -------- 1,376.5 1,333.8 1,179.3 1,210.9 1,179.9 938.9 648.6 444.9 -------- -------- -------- -------- -------- -------- -------- -------- 49.6 (46.9) 11.9 (14.4) 35.5 55.5 28.6 (.1) 16.9 (15.9) 4.0 (2.9) 10.0 12.2 13.1 (.7) -------- -------- -------- -------- -------- -------- -------- -------- 32.7 (31.0) 7.9 (11.5) 25.5 43.3 15.5 .6 (2.8) (1.4) 2.8 2.5 (1.3) (1.0) -- -- -------- -------- -------- -------- -------- -------- -------- -------- 29.9 (32.4) 10.7 (9.0) 24.2 4.3 15.5 .6 110.4 121.1 126.4 135.3 91.3 59.3 45.1 31.3 9.6 4.9 (8.4) (.4) 12.3 (1.9) 9.4 10.0 (29.4) (31.6) (32.0) (32.5) (10.5) (6.5) (3.3) (4.8) 70.0 -- -- -- -- -- -- -- (42.6) -- -- -- -- -- -- -- (8.3) (14.9) (13.2) (15.4) (9.2) (3.4) (2.0) (1.7) -------- -------- -------- -------- -------- -------- -------- -------- 139.6 47.1 83.5 78.0 108.1 89.8 64.7 35.4 -- (14.2) 9.9 -- -- -- -- .2 14.2 -- -- -- -- 3.7 -- -- -------- -------- -------- -------- -------- -------- -------- -------- $ 153.8 $ 32.9 $ 93.4 $ 78.0 $ 108.1 $ 93.5 $ 64.7 $ 35.6 ======== ======== ======== ======== ======== ======== ======== ======== $ 2.05 $ .41 $ 1.19 $ .94 $ 1.23 $ 1.08 $ .77 $ .52 .191 .172 .160 .147 .133 .077 .019 .017 62.3 66.6 72.9 79.8 84.0 86.7 85.5 70.5 71.9 75.6 82.5 89.1 90.9 86.7 85.5 70.5 $ 29 3/8 $ 20 5/8 $ 18 3/4 $ 14 1/2 $ 10 3/4 $ 11 7/8 $ 12 7/8 $ 7 14 3/4 15 11 7 1/2 7 1/4 8 1/2 6 3/4 3 3/8 29 1/8 18 17 1/8 12 7/8 7 5/8 10 1/8 10 3/8 6 7/8
The Progressive Corporation and Subsidiaries 58 54 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 48 through 53, should be read in conjunction with the following discussion of our 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 and other outstanding securities, to redeem debt, and for other business purposes. In 1994, the Company sold $200.0 million of its 6.60% Notes due 2004. During 1994, the Company repurchased .1 million of its Serial Preferred Shares, Series A, for a cost of $2.3 million and 1.1 million of its Common Shares for a cost of $34.0 million. During the three-year period ended December 31, 1994, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 3.1 million Common Shares at a total cost of $142.3 million (average cost of $24.21 per share, split effected) and .5 million Serial Preferred Shares at a total cost of $12.1 million (average cost of $27.37 per share). The Company also sold $350.0 million of notes, repaid $170.0 million borrowed under its credit facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the same period, The Progressive Corporation received $299.8 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Note 10 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. The Company also has available a $20.0 million revolving credit agreement. The Company believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth. The Company's insurance operations create liquidity by collecting and investing premiums written from new and renewal business in advance of paying claims. For the three years ended December 31, 1994, operations generated a positive cash flow of $925.4 million, and cash flow is expected to be positive in both the short-term and reasonably foreseeable future. The Company's substantial investment portfolio is highly liquid, consisting almost entirely of readily marketable securities. The Company does not expect any material changes in its cash requirements and is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on its liquidity. Capital expenditures for the three years ended December 31, 1994, aggregated $130.3 million. In 1994, the Company completed its new corporate office complex in Mayfield Village, Ohio. The new facility consists of 517,800 square feet of space and replaces office space held under expiring leases in a number of locations in the Cleveland area. The cost of the project was $75.5 million, and is being funded through operating cash flows. As of December 31, 1994, $71.7 million of the project's cost had been paid. In June 1992, the Company reached an agreement with the California Department of Insurance to refund approximately $50 million of premiums (including interest) on business written between November 8, 1988 and November 7, 1989 to approximately 260,000 policyholders, thereby settling all rollback and refund exposure since Proposition 103 was adopted in November 1988. As a result, the Proposition 103 premium refund and rollback reserve was reduced by $106.0 million. During 1992, the Company changed its financial arrangement with Progressive Partners Limited Partnership (Progressive Partners), its investment manager, as part of its strategy to compete more effectively for private passenger auto insurance by lowering costs. Under the new arrangement, Progressive Partners' people, now employed by a wholly-owned Progressive subsidiary, continue to provide the Company with investment and capital management. The transaction involved paying Progressive Partners a one-time fee for terminating the investment management contract, and an additional incentive fee for the period ended June 30, 1992, in the aggregate amount of $54.6 million. This transaction reduced the Company's costs for investment and capital management. In December 1992, Mr. Alfred Lerner, then Chairman of the Company, converted his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008 into 9,000,000 Common Shares and sold 5,175,000 of those Common Shares in an underwritten public offering. The public offering was completed pursuant to the registration rights provisions of the convertible debenture, under which the Company paid $5.1 million in underwriting and other expenses of the offering. These expenses were charged directly to shareholders' equity in accordance with generally accepted accounting principles. On the same date, Mr. Lerner agreed to a termination of his employment agreement with the Company, and, in connection with these transactions, the Company paid Mr. Lerner $10.0 million. INVESTMENTS The Company invests in fixed maturity, short-term and equity securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations. Therefore, the Company evaluates the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. The majority ($2,319.4 million, or 72.9% in 1994 and $2,135.1 The Progressive Corporation and Subsidiaries 59 55 million, or 76.6% in 1993) of the portfolio was in short-term and intermediate-term, investment-grade fixed-income securities. A relatively small portion ($476.3 million, or 15.0% in 1994 and $453.9 million, or 16.3% in 1993) of the investment portfolio was invested in preferred and common equity securities providing risk/reward balance and diversification. The remainder of the portfolio was invested in long-term investment-grade fixed-income securities ($245.0 million, or 7.7% in 1994 and $77.6 million, or 2.8% in 1993) and non-investment-grade fixed-income securities ($139.3 million, or 4.4% in 1994 and $119.8 million, or 4.3% in 1993). The non-investment-grade fixed-income securities, although constituting only a small portion of the portfolio, offer the Company high returns and added diversification without a significant adverse effect on the stability and quality of the investment portfolio as a whole. These securities may involve greater risks often related to creditworthiness, solvency and relative liquidity of the secondary trading market. Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration or interest rate characteristics of the portfolio, or hedging securities. 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; unless otherwise noted, collateral is not required to support the credit risk. The weighted average fully taxable equivalent book yield of the portfolio was 6.7%, 6.8% and 7.9% for the years ended December 31, 1994, 1993 and 1992, respectively. As of December 31, 1994, the Company's portfolio had $41.1 million in unrealized losses, compared to $70.2 million in unrealized gains in 1993. This decrease was due largely to the adverse impact on the Company's fixed-income portfolio of rapidly rising interest rates throughout 1994. As of December 31, 1994, the Company held $154.6 million of Collateralized Mortgage Obligations ("CMOs"), which represented 4.9% of the total investment portfolio. There are two types of securities held in the CMO Portfolio. As of December 31, 1994, sequential bonds represented 61.3% of the portfolio ($94.8 million) and had an average life of 2.1 years. Planned Amortization Class bonds represented 38.7% of the portfolio ($59.8 million) and had an average life of 2.0 years. The portfolio contains no residual interests. CMOs held by the Company are highly liquid with readily available quotes and, at December 31, 1994, had an average life of 2.0 years. Eighty- five percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. As of December 31, 1994, the Company's total CMO portfolio had an unrealized loss of $6.6 million. The single largest unrealized loss in any CMO security was $.9 million, or only 9.2% of such position. Investments in the Company's portfolio have varying degrees of risk. Equity securities generally have greater risks than the non-equity portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer. As of December 31, 1994, the mark-to-market net losses in the Company's equity portfolio were $4.7 million ($3.1 million, net of taxes), as compared to net gains of $20.7 million ($13.5 million, net of taxes) in 1993. The 1994 marketable equity portfolio consisted of three principal components: (i) $15.6 million, or 3.3%, of standard adjustable rate preferreds, (ii) $338.0 million, or 71.0%, of perpetual preferreds with mechanisms that may provide an opportunity to liquidate at par, and (iii) $122.7 million, or 25.7%, of common stocks. The 1993 marketable equity portfolio consisted of three principal components; (i) $73.0 million, or 16.1%, of standard adjustable rate preferreds, (ii) $283.4 million, or 62.4%, of perpetual preferreds with mechanisms that may provide an opportunity to liquidate at par, and (iii) $97.5 million, or 21.5%, of common stocks. The Company continually evaluates the creditworthiness of each issuer for all securities held in its portfolio. 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. Evidence reviewed may include the recent operating results and financial position of the issuer, information about its industry, recent announcements and other information. The Company retains a staff of experienced security analysts to compile, review and evaluate such information. 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. It is the Company's general policy to dispose of securities when the Company determines that the issuer is unable to reverse its deteriorating financial condition and the prospects for its business within a reasonable period of time. In less severe circumstances, the Company may decide to dispose of a portion of its holdings in a specific issuer when the risk profile of the investment becomes greater than its tolerance for such risk. RESULTS OF OPERATIONS Operating income, which excludes realized gains and losses and one-time items, was $212.7 million, or $2.76 per share, in 1994, $197.3 million, or $2.61 per share, in 1993 and $129.8 million, or $1.72 per share, in 1992. The GAAP combined ratio was 91.7 (88.5 including the elimination of the supplemental reserve discussed below) in 1994, 89.3 in 1993 and 96.5 in 1992. Direct premiums written increased 35% to $2,645.1 million in 1994, compared to $1,966.4 million in 1993 and $1,636.8 million in 1992. Net premiums written increased 35% to $2,457.2 million in 1994, compared to $1,819.2 million in 1993 and $1,451.2 million in 1992. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk, of $115.4 million in 1994, $98.0 million in 1993 and $142.2 million in 1992. The Company provided policy and claim processing services to 28 state CAIPs in 1994 and 1993, compared to 26 in 1992. Premiums earned, 60 56 which are a function of the amount of premiums written in the current and prior periods, increased 31% in 1994, compared to 17% in 1993 and 11% in 1992. The Company's Core divisions' net premiums written grew 38%, 25% and 18% for 1994, 1993 and 1992, respectively, driven by an increase in unit sales, resulting from the Company's ability to keep rates relatively flat over the last three years. The Company continues to experiment with writing standard and preferred auto risks which represented between five and ten percent of total 1994 Core business volume. The Company anticipates continued growth in its Core business in 1995, which could result from the number of states where we seek to insure all auto risks, from working with independent agents dedicated to regaining market share and from integrating other buying options. The Core divisions generated underwriting profits of 7% in 1994, 10% in 1993 and 8% in 1992. The Company's strategy is to achieve a four percent underwriting margin; the Company cannot predict the timing and pace of the decrease in underwriting margins, nor the rate of growth, but monitors each program to ensure that rates are adjusted promptly and adequately. 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. Claims 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 collected. 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 64% in 1994, compared to 62% in 1993 and 65% in 1992. During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve," resulting in a one-time increase of $.62 per share, a 3.2 percentage point increase in the underwriting profit margin and a $46.2 million increase in capital. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2%. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. Even without the high level of comfort provided by the "supplemental reserve," the Company's reserves have historically been redundant by approximately 2% to 4% over the most recent 5 years. The Company believes that this change in the estimate of its reserves will place it more in line with the practices of other companies in the industry. 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, results of operation, cash flows or financial condition. During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company), over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a recent study by independent actuaries. Total reserves on this business are $29.7 million, of which $9.9 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 25% in 1994, compared to 28% in 1993 and 31% in 1992. The decrease reflects cost-cutting measures, as well as process improvements, changed workflows and lower commission programs. Service businesses generated a pretax operating profit of $10.0 million in 1994, compared to a pretax profit of $6.8 million in 1993 and a pretax loss of $4.3 million in 1992. Recurring investment income (interest and dividends) increased 18% to $158.5 million in 1994, compared to $134.5 million in 1993 and $139.0 million in 1992, primarily due to an increase in the average investment portfolio. Net realized gains on security sales were $23.8 million in 1994, $107.9 million in 1993 and $14.5 million in 1992. A significant portion of the 1993 realized gains resulted from the sale of certain equity securities held in the Company's investment portfolio. President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which, among other items, increased the statutory tax rate to 35%. Effective January 1, 1992, the Company adopted SFAS 109. The cumulative effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per share. The Company is able to demonstrate that the benefit of deferred tax assets is fully realizable. 61 57 Directors and Officers ---------------------- DIRECTORS CORPORATE OFFICERS Milton N. Allen1,2 Director, Peter B. Lewis, various corporations Chairman, President and Chief Executive Officer B. Charles Ames1 Partner, David M. Schneider, Clayton, Dubilier & Secretary Rice, Inc. (management consulting) Charles B. Chokel, Treasurer Stephen R. Hardis1,2 Vice Chairman, CORPORATE SUPPORT TEAM Chief Financial and Administrative Officer, Charles B. Chokel Eaton Corporation Peter B. Lewis (manufacturing) Bruce W. Marlow Michael C. Murr Peter B. Lewis2 David M. Schneider Chairman of the Board, President and Tiona M. Thompson Chief Executive Officer DIVISION PRESIDENTS, Norman S. Matthews3 PRODUCT AND Consultant, PROCESS LEADERS formerly President, Federated Department Stores, Inc. Alan R. Bauer (retailing) William P. Cadden G. Edward Combs Donald B. Shackelford3 Jeffrey J. Dailey Chairman, Allan W. Ditchfield State Savings Bank W. Thomas Forrester (savings and loan) William H. Graves Michael J. Hanerty Dr. Paul B. Sigler3 Moira A. Lardakis Professor, Yale University and Investigator, Robert E. Mathe Howard Hughes Medical Institute Robert J. McMillan (medical research and education) Glenn M. Renwick Andrew W. Rogacki David L. Roush Gregory J. Trapp Robert T. Williams 1 Audit Committee member 2 Executive Committee member 3 Executive Compensation 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 28, 1995, at 10:00 a.m. There were 4,911 shareholders of record on December 31, 1994. PRINCIPAL OFFICE The principal office of The Progressive Corporation is at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143. TRANSFER AGENT AND REGISTRAR If you have questions about your Common or Preferred Shares account, write or call: Corporate Trust Customer Service, National City Bank, 1900 East Ninth Street, Cleveland, Ohio 44114. Phone: (216) 575-2498 or (800) 622-6757 COUNSEL Baker & Hostetler, Cleveland, Ohio COMMON AND PREFERRED SHARES The Progressive Corporation's Common Shares (symbol PGR) and Series A Preferred Shares (symbol PGRPrA) are traded on the New York Stock Exchange. Dividends are customarily paid on the last day of each quarter. INVESTOR RELATIONS Any shareholder wishing to receive public financial information on the Company, write or call: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box E61, Mayfield Village, Ohio 44143. Phone: (216) 446-7260 TOLL-FREE TELEPHONE NUMBERS For assistance after an accident or to report a loss, 24 hours a day, 7 days a week, call: 1-800-274-4499 For Progressive's toll-free 24-hour auto insurance shopping service, call: 1 800 AUTO PRO(R) (1-800-288-6776) For 24 Hour Policy Service, call: 1-800-888-7764 Printed on Recycled Paper Design: Nesnadny + Schwartz, Cleveland + New York + Toronto Silhouette Drawings: Carter Kustera, New York Printing: Fortran Printing, Cleveland
62 [artwork] 63 PROGRESSIVE The Progressive Corporation 6300 Wilson Mills Road Mayfield Village, Ohio 44143 216-461-5000 EX-21 11 PROGRESSIVE CORP. 10-K EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE PROGRESSIVE CORPORATION
Jurisdiction Name of Subsidiary of Incorporation - ------------------ ---------------- Airy Insurance Center, Inc. Pennsylvania Allied Insurance Agency, Inc. Ohio Classic Insurance Company Wisconsin 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 Insurance Confirmation Services, Inc. Delaware Lakeside Insurance Agency, Inc. Ohio Maryland Auto Insurance Solutions, Inc. Maryland Mountain Laurel Assurance Company Pennsylvania Mountainside Insurance Agency, Inc. Colorado National Continental Insurance Company New York Pacific Motor Club California Paloverde Insurance Company of Arizona Arizona 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 Gulf Insurance Company Mississippi Progressive American Life Insurance Company Ohio Progressive Life Insurance, Ltd. Turks & Caicos Islands Progressive Bayside Insurance Company Florida Progressive Casualty Insurance Company Ohio PC Investment Company Delaware Auto Pro Insurance Company Florida Marathon Insurance Company California Ohana Insurance Company of Hawaii, Inc. Hawaii Preferred Consumers Insurance Company Florida Progressive Express Insurance Company Florida Progressive Indemnity Insurance Company Louisiana Progressive Michigan Insurance Company Michigan Progressive Security Insurance Company Louisiana Progressive Value Insurance Company Louisiana Progressive Specialty Insurance Company Ohio Progressive Insurance Agency, Inc. Ohio Progressive Investment Company, Inc. Delaware Progressive Max Insurance Company Ohio 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 Partners, Inc. New York Progressive Preferred Insurance Company Ohio Progressive Premium Budget, Inc. Ohio Progressive Southeastern Insurance Company Florida Pro-West Insurance Company California Tampa Insurance Services, Inc. Florida The Paradyme Corporation Ohio The Progressive Agency, Inc. Virginia Transportation Recoveries, Inc. Ohio United Financial Adjusting Company Ohio United Financial Casualty Company Missouri Village Transport Corp. Delaware Wilson Mills Land Co. Ohio
Each subsidiary is wholly owned by its parent. EX-24 12 PROGRESSIVE CORP. 10-K EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint David M. Schneider, 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 1994, 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 14th day of March, 1995. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Peter B. Lewis Chairman, President, Chief - ------------------------------ Executive Officer Peter B. Lewis and Director 2 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, 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 1994, 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 15th day of March, 1995. 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, David M. Schneider, 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 1994, 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 13th day of March, 1994. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Charles B. Chokel - ---------------------------------------- Charles B. Chokel Chief Financial Officer 4 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, 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 1994, 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 14th day of March, 1995. 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, David M. Schneider, 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 1994, 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 14th day of March, 1995. 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, David M. Schneider, 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 1994, 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 14th day of March, 1995. 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, David M. Schneider, 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 1994, 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 17th day of March, 1995. 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, David M. Schneider, 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 1994, 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 14th day of March, 1995. 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, David M. Schneider, 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 1994, 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 23rd day of March, 1995. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Paul B. Sigler - --------------------------------- Paul B. Sigler Director EX-27 13 PROGRESSIVE CORP. 10-K 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 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 2,087,000 337,600 343,800 476,300 0 0 3,180,000 13,400 379,700 161,600 4,675,100 1,434,400 1,036,700 0 0 675,600 71,200 0 85,800 994,900 4,675,100 2,191,100 149,800 23,800 41,900 1,397,300 391,500 150,800 379,800 105,500 274,300 0 0 0 274,300 3.59 3.59 1,012,400 1,539,800 (142,500) 894,000 417,000 1,098,700 (142,500)
EX-28 14 PROGRESSIVE CORP. 10-K EXHIBIT 28 1 EXHIBIT 28 Form 2 ANNUAL STATEMENT FOR THE YEAR 1994 OF THE PROGRESSIVE INSURANCE GROUP SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES Notes to Schedule P 1. The Parts of Schedule P: Part 1 - Detailed information on losses and loss expenses. Part 2 - History of incurred losses and allocated expenses. Part 3 - History of loss and allocated expense payments. Part 4 - History of bulk and incurred but not reported reserves. Part 5 - History of claims. Part 6 - History of premiums earned. Schedule P Interrogatories. 2. Lines of business A through M, R and S are groupings of the lines of business used on page 14, the state page. 3. Reinsurance A, B, C, and D (lines N to Q) are: Reinsurance A = nonproportional property (1988 and subsequent) Reinsurance B = nonproportional liability (1988 and subsequent) Reinsurance C = financial lines (1988 and subsequent) Reinsurance D = old Schedule O line 30 (1987 and prior) SCHEDULE P--PART 1--SUMMARY (000 omitted) _________________________________________________________________________________________________________________ | 1 | Premiums Earned | Loss and Loss Expense Payments | | |_________________________________________|_______________________________________________________| | | 2 | 3 | 4 | | Allocated Loss | | Years In | | | | Loss Payments | Expense Payments | | Which | | | |___________________________|___________________________| |Premiums Were| | | | 5 | 6 | 7 | 8 | | Earned and | Direct | | | Direct | | Direct | | | Losses Were | and | | Net | and | | and | | | Incurred | Assumed | Ceded |(Cols. 2 - 3)| Assumed | Ceded | Assumed | Ceded | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 1. Prior...| X X X X | X X X X | X X X X | 737 | 6,022 | 804 | 5,298 | | 2. 1985....| 461,512 | 9,678 | 451,834 | 249,321 | 6,052 | 15,696 | 897 | | 3. 1986....| 726,141 | 42,619 | 683,522 | 324,139 | 14,908 | 21,574 | 1,093 | | 4. 1987....| 1,066,680 | 64,496 | 1,002,184 | 484,551 | 31,795 | 30,481 | 1,377 | | 5. 1988....| 1,292,530 | 67,431 | 1,225,099 | 650,409 | 39,898 | 37,551 | 1,195 | | 6. 1989....| 1,357,845 | 109,736 | 1,248,109 | 710,694 | 80,579 | 38,936 | 1,441 | | 7. 1990....| 1,397,185 | 144,903 | 1,252,282 | 667,191 | 85,295 | 32,791 | 1,763 | | 8. 1991....| 1,528,677 | 199,174 | 1,329,503 | 726,347 | 106,148 | 29,825 | 3,088 | | 9. 1992....| 1,579,938 | 195,139 | 1,384,799 | 751,091 | 96,880 | 27,925 | 3,071 | | 10. 1993....| 1,795,466 | 150,074 | 1,645,392 | 797,759 | 65,918 | 16,480 | 1,714 | | 11. 1994....| 2,359,681 | 191,788 | 2,167,893 | 797,807 | 37,339 | 10,815 | 1,171 | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 12. Totals | X X X X | X X X X | X X X X | 6,160,046 | 570,834 | 262,858 | 22,107 | |----------------------------------------------------------------------------------------------------------------
________________________________________________________________________ | 1 | Loss and Loss Expense Payments | | | |__________________________________________| | | | 9 | 10 | 11 | 12 | | Years In | | | | | | Which | | | | Number of | |Premiums Were| Salvage | Unallocated | Total | Claims | | Earned and | and | Loss | Net Paid | Reported- | | Losses Were | Subrogation | Expense |(Cols. 5 - 6 +| Direct and | | Incurred | Received | Payments | 7 - 8 + 10) | Assumed | |_____________|_____________|_____________|______________|______________| | 1. Prior...| 0 | 0 | (9,779) | X X X X | | 2. 1985....| 13,558 | 25,947 | 284,014 | X X X X | | 3. 1986....| 19,398 | 40,936 | 370,648 | X X X X | | 4. 1987....| 44,416 | 66,769 | 548,629 | X X X X | | 5. 1988....| 76,427 | 95,143 | 742,010 | X X X X | | 6. 1989....| 77,094 | 108,215 | 775,826 | X X X X | | 7. 1990....| 57,211 | 119,395 | 732,320 | X X X X | | 8. 1991....| 48,874 | 139,297 | 786,233 | X X X X | | 9. 1992....| 46,025 | 110,702 | 789,767 | X X X X | | 10. 1993....| 41,980 | 121,433 | 868,020 | X X X X | | 11. 1984....| 34,867 | 126,579 | 896,691 | X X X X | |_____________|_____________|_____________|______________|______________| | 12. Totals | 459,849 | 954,416 | 6,784,379 | X X X X | - -------------------------------------------------------------------------
_______________________________________________________________________________________________________________________________ | | Losses Unpaid | Allocated Loss Expenses Unpaid | | |_______________________________________________________|_______________________________________________________| | Years In | Case Basis | Bulk + IBNR | Case Basis | Bulk + IBNR | | Which |___________________________|___________________________|___________________________|___________________________| |Premiums Were| 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | | Earned and | Direct | | Direct | | Direct | | Direct | | | Losses Were | and | | and | | and | | and | | | Incurred | Assumed | Ceded | Assumed | Ceded | Assumed | Ceded | Assumed | Ceded | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 1. Prior...| 12,174 | 3,578 | 15,000 | 4,714 | 6,300 | 1,561 | 0 | 0 | | 2. 1985....| 140 | 3 | 0 | 0 | 24 | 0 | 0 | 0 | | 3. 1986....| 592 | 10 | 0 | 0 | 38 | 0 | 0 | 0 | | 4. 1987....| 1,992 | 138 | 0 | 0 | 341 | 55 | 0 | 0 | | 5. 1988....| 10,524 | 1,203 | 162 | 84 | 1,080 | 185 | 17 | 12 | | 6. 1989....| 15,697 | 4,299 | 905 | 303 | 2,337 | 162 | 95 | 42 | | 7. 1990....| 32,418 | 10,984 | 7,912 | 2,672 | 4,780 | 661 | 870 | 360 | | 8. 1991....| 64,467 | 28,593 | 10,184 | 5,379 | 8,416 | 917 | 1,118 | 503 | | 9. 1992....| 114,940 | 45,764 | 32,476 | 14,819 | 17,614 | 1,994 | 3,537 | 1,521 | | 10. 1993....| 203,844 | 66,773 | 45,894 | 16,448 | 27,842 | 3,091 | 4,207 | 1,393 | | 11. 1994....| 493,082 | 71,026 | 149,558 | 37,025 | 52,545 | 4,233 | 13,911 | 3,215 | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 12. Totals | 949,869 | 232,370 | 262,091 | 81,443 | 121,316 | 12,859 | 23,755 | 7,046 | - -------------------------------------------------------------------------------------------------------------------------------
________________________________________________________________________ | | | | | | | | 21 | 22 | 23 | 24 | | Years In | | | | | | Which | | | | Number of | |Premiums Were| Salvage | Unallocated | Total | Claims | | Earned and | and | Loss | Net Losses |Outstanding-| | Losses Were | Subrogation | Expenses | and Expenses | Direct and | | Incurred | Anticipated | Unpaid | Unpaid | Assumed | |_____________|_____________|______________|______________|____________| | 1. Prior...| 0 | 0 | 23,621 | X X X X | | 2. 1985....| 0 | 0 | 161 | X X X X | | 3. 1986....| 32 | 5 | 624 | X X X X | | 4. 1987....| 111 | 51 | 2,190 | X X X X | | 5. 1988....| 272 | 139 | 10,438 | X X X X | | 6. 1989....| 582 | 371 | 14,600 | X X X X | | 7. 1990....| 1,613 | 781 | 32,084 | X X X X | | 8. 1991....| 2,665 | 1,867 | 50,661 | X X X X | | 9. 1992....| 4,227 | 4,260 | 108,728 | X X X X | | 10. 1993....| 9,430 | 10,991 | 205,072 | X X X X | | 11. 1994....| 41,903 | 46,179 | 639,777 | X X X X | |_____________|_____________|______________|______________|____________| | 12. Totals | 60,835 | 64,643 | 1,087,956 | X X X X | - ------------------------------------------------------------------------
_______________________________________________________________________________________________________________________________ | | | Loss and Loss Expense Percentage | Discount for Time | | | Total Losses and Loss Expenses Incurred| (Incurred/Premiums Earned) | Value of Money | | Years In |_________________________________________|_________________________________________|___________________________| | Which | | | | | | | | | |Premiums Were| 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | | Earned and | Direct | | | Direct | | | | | | Losses Were | and | | | and | | | | Loss | | Incurred | Assumed | Ceded | Net | Assumed | Ceded | Net | Loss | Expense | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 1. Prior...| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 0 | 0 | | 2. 1985....| 291,128 | 6,952 | 284,176 | 63.1 | 71.8 | 62.9 | 0 | 0 | | 3. 1986....| 387,283 | 16,012 | 371,272 | 53.3 | 37.6 | 54.3 | 0 | 0 | | 4. 1987....| 584,184 | 33,365 | 550,819 | 54.8 | 51.7 | 55.0 | 0 | 0 | | 5. 1988....| 795,024 | 42,576 | 752,448 | 61.5 | 63.1 | 61.4 | 0 | 0 | | 6. 1989....| 877,251 | 86,826 | 790,425 | 64.6 | 79.1 | 63.3 | 0 | 0 | | 7. 1990....| 866,139 | 101,735 | 764,404 | 62.0 | 70.2 | 61.0 | 0 | 0 | | 8. 1991....| 981,521 | 144,627 | 836,894 | 64.2 | 72.6 | 62.9 | 0 | 0 | | 9. 1992....| 1,062,544 | 164,049 | 898,495 | 67.3 | 84.1 | 64.9 | 0 | 0 | | 10. 1993....| 1,228,429 | 155,337 | 1,073,092 | 68.4 | 103.5 | 65.2 | 0 | 0 | | 11. 1994....| 1,690,477 | 154,008 | 1,536,468 | 71.6 | 80.3 | 70.9 | 0 | 0 | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 12. Totals | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 0 | 0 | - -------------------------------------------------------------------------------------------------------------------------------
__________________________________________________________ | | | Net Balance Sheet Reserves | | | 33 | After Discount | | Years In | |_____________________________| | Which | | | | |Premiums Were|Inter-Company| 34 | 35 | | Earned and | Pooling | | Loss | | Losses Were |Participation| Losses | Expenses | | Incurred | Percentage | Unpaid | Unpaid | |_____________|_____________|______________|______________| | 1. Prior...| X X X X | 18,882 | 4,739 | | 2. 1985....| | 138 | 24 | | 3. 1986....| | 581 | 42 | | 4. 1987....| | 1,853 | 337 | | 5. 1988....| | 9,399 | 1,039 | | 6. 1989....| | 12,000 | 2,600 | | 7. 1990....| | 26,675 | 5,409 | | 8. 1991....| | 40,680 | 9,981 | | 9. 1992....| | 86,833 | 21,896 | | 10. 1993....| | 166,517 | 38,555 | | 11. 1994....| | 534,590 | 105,187 | |_____________|_____________|______________|______________| | 12. Totals | X X X X | 898,147 | 189,809 | - -----------------------------------------------------------
72 2 Form 2 ANNUAL STATEMENT FOR THE YEAR 1994 OF THE PROGRESSIVE INSURANCE GROUP SCHEDULE P - PART 2 - SUMMARY _______________________________________________________________________________________________________________________ | | | | 1 | INCURRED LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END (000 OMITTED) | | |_____________________________________________________________________________________________________| | Years | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | | in Which | | | | | | | | | | Losses Were | | | | | | | | | | Incurred | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | |________________| ____________|____________|____________|__________|____________|____________|____________|___________| | | | | | | | | | | | 1. Prior.......| 82,053 | 82,984 | 77,363 | 70,991 | 69,639 | 68,860 | 69,870 | 71,046 | | 2. 1985........| 274,757 | 269,226 | 268,315 | 262,237 | 261,392 | 258,581 | 258,380 | 258,206 | | 3. 1986........| X X X X | 382,994 | 353,616 | 351,417 | 340,706 | 334,564 | 331,385 | 330,779 | | 4. 1987........| X X X X | X X X X | 555,993 | 524,333 | 504,689 | 492,954 | 490,684 | 485,339 | | 5. 1988........| X X X X | X X X X | X X X X | 719,839 | 684,469 | 663,722 | 666,604 | 663,150 | | 6. 1989........| X X X X | X X X X | X X X X | X X X X | 786,249 | 734,190 | 710,990 | 704,871 | | 7. 1990........| X X X X | X X X X | X X X X | X X X X | X X X X | 751,597 | 692,671 | 676,616 | | 8. 1991........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 792,930 | 753,500 | | 9. 1992........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 900,892 | |10. 1993........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | |11. 1994 | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | |________________| ____________|____________|____________|__________|____________|____________|____________|___________|
______________________________________________________________________ | 1 | (cont.) INCURRED LOSSES | DEVELOPMENT | | |__________________________|__________________________| | | | | | | | Years | 10 | 11 | 12 | 13 | | in Which | | | | | | Losses Were | | | One | Two | | Incurred | 1993 | 1994 | Year | Year | |_________________|____________|_____________|_____________|____________| | | | | | | | 1. Prior.......| 72,630 | 81,663 | 9,033 | 10,617 | | 2. 1985........| 258,144 | 258,229 | 85 | 23 | | 3. 1986........| 330,825 | 330,330 | (495) | (449) | | 4. 1987........| 484,182 | 483,999 | (183) | (1,340) | | 5. 1988........| 664,095 | 657,166 | (6,929) | (5,984) | | 6. 1989........| 700,038 | 681,839 | (18,199) | (23,032) | | 7. 1990........| 663,002 | 644,228 | (18,774) | (32,388) | | 8. 1991........| 725,991 | 695,730 | (30,261) | (57,770) | | 9. 1992........| 833,470 | 783,533 | (49,937) | (117,359) | | 10. 1993........| 1,013,665 | 940,668 | (72,851) | X X X X | | 11. 1994........| X X X X | 1,363,711 | X X X X | X X X X | |_________________|____________|_____________|_____________|____________| 12. Totals | (188,511) | (227,682) | |_____________|____________|
SCHEDULE P - PART 3 - SUMMARY _____________________________________________________________________________________________________ 1 | CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) |______________________________________________________________________________________________________| | | | | | | | | | Years | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | in Which | | | | | | | | | Losses Were | | | | | | | | | Incurred | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | |____________|____________|____________|__________|____________|____________|____________|_____________| | | | | | | | | | 1. Prior.......| 000 | 31,463 | 50,460 | 57,742 | 60,827 | 63,436 | 64,860 | 66,821 | 2. 1985........| 134,374 | 202,467 | 228,629 | 243,849 | 251,045 | 255,162 | 256,497 | 257,708 | 3. 1986........| X X X X | 168,353 | 255,882 | 291,744 | 312,656 | 322,815 | 326,820 | 328,152 | 4. 1987........| X X X X | X X X X | 240,199 | 360,939 | 420,316 | 447,789 | 467,599 | 476,252 | 5. 1988........| X X X X | X X X X | X X X X | 318,747 | 482,587 | 545,480 | 582,880 | 617,027 | 6. 1989........| X X X X | X X X X | X X X X | X X X X | 362,510 | 521,039 | 595,914 | 636,386 | 7. 1990........| X X X X | X X X X | X X X X | X X X X | X X X X | 354,849 | 499,445 | 569,700 | 8. 1991........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 369,194 | 533,684 | 9. 1992........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 415,371 | 10. 1993........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 11. 1994........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | |____________|____________|____________|__________|____________|____________|____________|_____________|
______________________________________________________________________ | 1 | (cont.) CUMULATIVE PAID | | | | |_________________________| 12 | 13 | | | | | | | | Years | 10 | 11 | Number of | Number of | | in Which | | | Claims | Claims | | Losses Were | | | Closed | Closed | | Incurred | 1993 | 1994 | With Loss | Without | | | | | Payment | Loss | | | | | | Payment | |_________________|____________|____________|_____________|____________| | | | | | | | 1. Prior.......| 67,091 | 58,042 | X X X X | X X X X | | 2. 1985........| 257,991 | 258,067 | X X X X | X X X X | | 3. 1986........| 328,815 | 329,711 | X X X X | X X X X | | 4. 1987........| 480,425 | 481,860 | X X X X | X X X X | | 5. 1988........| 636,778 | 646,867 | X X X X | X X X X | | 6. 1989........| 657,870 | 667,611 | X X X X | X X X X | | 7. 1990........| 598,833 | 612,925 | X X X X | X X X X | | 8. 1991........| 614,888 | 646,936 | X X X X | X X X X | | 9. 1992........| 597,616 | 679,065 | X X X X | X X X X | | 10. 1993........| 513,910 | 746,587 | X X X X | X X X X | | 11. 1994........| X X X X | 770,113 | X X X X | X X X X | |_________________|____________|____________|_____________|____________|
SCHEDULE P - PART 4 - SUMMARY _______________________________________________________________________________________________________ 1 | BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) | |________________________________________________________________________________________________________| | | | | | | | | | Years | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | in Which | | | | | | | | | Losses Were | | | | | | | | | Incurred | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | |_____________|____________|____________|____________|____________|___________|_____________|____________| 1. Prior..... | 27,457 | 17,951 | 12,238 | 4,097 | 3,431 | 1,728 | 1,667 | 1,614 | 2. 1985...... | 52,241 | 23,471 | 15,767 | 7,600 | 4,247 | 117 | 0 | 2 | 3. 1986...... | X X X X | 83,987 | 35,929 | 23,115 | 10,239 | 3,162 | 0 | 63 | 4. 1987...... | X X X X | X X X X | 126,103 | 57,172 | 31,435 | 13,026 | 4,203 | 178 | 5. 1988...... | X X X X | X X X X | X X X X | 161,589 | 70,035 | 33,821 | 14,301 | 2,013 | 6. 1989...... | X X X X | X X X X | X X X X | X X X X | 179,116 | 62,544 | 27,935 | 15,702 | 7. 1990...... | X X X X | X X X X | X X X X | X X X X | X X X X | 146,165 | 57,375 | 28,293 | 8. 1991...... | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 155,871 | 51,534 | 9. 1992...... | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 151,702 | 10. 1993...... | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 11. 1994...... | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | |_____________|____________|____________|____________|____________|___________|_____________|____________|
___________________________________________ | 1 | (cont.) BULK AND INCURRED| | |__________________________| | | | | | Years | 10 | 11 | | in Which | | | | Losses Were | | | | Incurred | 1993 | 1994 | |_________________|____________|_____________| | 1. Prior.......| 1,263 | 10,286 | | 2. 1985........| 5 | 0 | | 3. 1986........| 36 | 0 | | 4. 1987........| 814 | 0 | | 5. 1988........| 6,663 | 83 | | 6. 1989........| 14,096 | 655 | | 7. 1990........| 17,575 | 5,750 | | 8. 1991........| 29,932 | 5,420 | | 9. 1992........| 54,711 | 19,673 | | 10. 1993........| 132,250 | 32,260 | | 11. 1994........| X X X X | 123,230 | |_________________|____________|_____________|
73 -----END PRIVACY-ENHANCED MESSAGE-----